The payment bank model in India has gained attention due to the Reserve Bank of India’s (RBI) recent regulatory action against Paytm Payments Bank, the fintech company Paytm’s digital lending branch.
Eleven payment banks were initially awarded licenses by the RBI in 2015. Only five of them are still in business after eight years, with Paytm Payment Bank being the biggest to shut down with 30 million bank accounts and 300 million wallets. In order to assess candidates for payment bank licenses, the RBI established an external advisory group in 2015. Due to the huge influence of telecom corporations, the committee gave special consideration to them.
Telecom providers were granted preference since it was thought that their large customer base would make it simpler for the payment bank to onboard new users. However, individuals who are currently clients of the telecom service providers already have an operational bank account, according to Sanjay Agarwal, head of BFSI and senior director at rating agency CARE Ratings.
The payment bank model used in India has its roots in the prosperous experiences of comparable African endeavors. The underbanked population was the main target of payment bank launches in India. However, a number of other financial products, including the Unified Payments Interface (UPI), traditional banks’ digital banking services, wallet services, and other digital banking options from fintech firms and non-banking financial institutions, posed fierce competition for these payment banks. Consequently, Indian payment institutions found it more and more difficult to grow their businesses and turn a healthy profit.
Payments Bank In India Vs Other Countries
India’s payment bank concept, especially in mobile banking, is modeled after its prosperous African equivalents. With the 2007 debut of M-PESA by telecom giants Vodafone and Safaricom in Kenya, Sub-Saharan Africa is the world leader in mobile banking.
“India granted telecom carriers licenses to establish payment banks, much as African nations did. The reasoning behind the notion was that the payments banks would find it easier to onboard new clients given the enormous customer base that telecom operators now have. This strategy did not function well in India, but it was a great success in African countries, according to Agarwal.
Although M-Pesa Payment Bank was a shining example of Africa’s digital payments ecosystem, sectoral pressures and regulatory limitations forced the bank to close on July 15, 2019, just a few years after it opened in India.
The goal of establishing payment banks was to serve the underbanked population in both India and Africa, but the methods used differed. A household is considered “underbanked” if it has savings accounts but often uses other financial services. In the past, vendors, daily laborers, and migrant laborers in India were severely underbanked and mostly relied on cash for daily transactions.
But this picture changed with the introduction of UPI, particularly after demonetisation. Savings account usage expanded as UPI spread to the local level, being adopted for transactions by auto drivers and local merchants. Payment banks made remittance procedures even simpler by facilitating the simple transfer of money put through UPI to other bank accounts. In this regard, Paytm led the way around 2017.
According to a report by Boston Consulting Group (BCG), payment banks in Africa, which are relatively new to the banking ecosystem, concentrate on specific services like wealth management, where the bank can innovate and leverage its customer insight, cater to a particular segment of customers, and grow their business. However, it was not possible to duplicate the same for the Indian client.
“The markets in Kenya and India differ greatly in their structural makeup. Since the emergence of additional fintechs, the Indian financial transaction market has become extremely competitive, making it challenging for Indian businesses to turn a profit on every transaction. However, Rohan Lakhaiyar, partner in charge of financial services at consulting firm Grant Thornton Bharat, noted that Kenya does not face such institutional obstacle.
UPI was a significant obstacle for payment banks in India. India has a free UPI, however Kenya does not have such a system. Accordingly, all Indian payment companies are having trouble turning a profit, so they are branching out into value-added services like loans, according to Lakhaiyar.
Payment Banks, A Failed Experiment?
In 2016, Airtel Payments Bank became the first organization in India to obtain a payment bank licence from the central bank, since the RBI was focused on telecom corporations spearheading the payment bank ecosystem due to their reach. Nevertheless, a number of obstacles hindered the industry’s expansion. Before business started, Dilip Sanghvi of Sun Pharma, a large pharmaceutical company, and Cholamandalam Investment and Finance Company Limited, a financial services provider, turned in their payment bank licenses. In the same year, information technology company Tech Mahindra also gave up their license, despite having both technological and financial support.
While Indian telecom service providers did not fare well in the payment bank industry, one fintech pioneer stood out as a success. And so Paytm Payments Bank got its start.
According to Celent, a global financial research and advisory business, Paytm’s success can be attributed mostly to its successful integration of financial services, which involved utilizing its current client base to onboard people for newly released products. After demonetization in November 2016, the company’s fortunes took a sharp turn around as Paytm QR code payments gained enormous traction overnight, leading to a sharp rise in registered users—320 million in just a few months. For Paytm Payments Bank, this spike resulted in the opening of approximately 42 million savings accounts. The digital debit card service offered by Paytm, which carries little to no transaction fees, has further increased its allure. Paytm transactions were free for small merchants, in contrast to the usual 2% card interchange cost. However, larger “organised” retailers had to pay a fee ranging from 1.0 to 1.5%. Underbanked retailers were also able to improve their access to credit facilities by using this platform to create transaction histories.
In response to Paytm’s success, one of the most recent entrants into the payment bank market, Jio Payments Bank, owned by Reliance, made its debut in 2018 in a partnership with State Bank of India (SBI), with SBI initially holding a 30% ownership. But by FY23, SBI’s stake had dropped to 23%, indicating a loss of interest in Jio Payments Bank’s business strategy. Since Jio Payments Bank is now a part of Jio Financial Service, detailed performance data is not immediately available. However, according to data from the National Payment Corporation of India (NPCI), Jio Payment Bank had just 11.33 million transactions in February 2024. Jio Payments Bank declined to respond when The Core contacted them to learn more about their business model.
“The government was attempting to promote financial inclusion, so this [the launch of payment banks] was just a financial experiment.” Many technological developments and experimentation took place during the time. However, after realizing in a matter of quarters that they were not making enough money to support a viable business model, many of the payment banks willingly renounced their licenses, according to a senior representative of the Federation of Indian Chambers of Commerce and Industry. This official had close ties to the government, fintech, and telecom companies in the early years of the payment banks.
The same points have been made by other bankers. Rajnish Kumar, a former chairman of the State Bank of India, once stated that payment banks in India are an unsound business model that need more examination.
Why It Failed?
India’s payment banks have had financial difficulties ever since they opened for business. Payment banks are not allowed to lend money or issue credit cards due to their “differentiated” licence from the RBI, in contrast to ordinary banks, which make money from interest earned on loans. They’ve also had trouble drawing in depositors because Indian customers still favor universal banks for their savings. The payment bank industry has continuously lost money since 2018, hitting an all-time high with losses of more than Rs 930 crore in that year, according to RBI data.
“The payment bank model is not self-sustaining, and perception plays a role as well. When consumers need to park money, scheduled commercial banks or universal banks are significantly more appealing. For the same reason, even small finance banks have trouble growing their deposit bases, according to Anand Dama, senior analyst at Emkay Global Financial Services’ BFSI. Additionally, he stated that although payments banks do not have these alternatives, small financing banks may still be able to draw in some business due to their higher lending rates and greater interest rates on deposits.
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