Payment Bank - An Innovative Idea

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The Payment Bank news of today is quite revolutionary. Payment Banks could do to banking what mobile telephony we did to telecom in India - make it accessible and affordable to all.

Payment banks are different from traditional banks as they will offer services on the deposit side including debit cards, savings accounts, online banking, and transfers but will not lend money or issue credit cards.

PayTM was one of the biggest in this segment before the announcement. They accepted Rs 2000 deposit which could be used for small payments like mobile bill, power bill, et cetera.

Someone told me PayTM had Rs One Thousand crore deposit even with these Rs 2,000 deposits. They would have needed 50,000 customers to reach the 1,000 crore number and the figure could be incorrect. The main point is, it is big money.

Before announcement of Payment Bank, this money had to be necessarily deposited at a commercial bank where it stayed in an escrow and earned zero interest. Now this regulation will change the game completely because PayTM type of companies will be able to accept deposit up to Rs.1 lakh. This money can be used to buy government bonds which will earn interest. Naturally, the type of payments that can be made with one lakh deposit is far different and far bigger in range than those tiny sub 2000 payments.

The biggest beneficiaries should be the unbanked segment which is about 60% of Indian population. Hopefully, granting payment bank licenses to tech companies might speed up financial inclusion.

The bit which is not clear to me is how this will be used for things like remittances by the labourers and security guards type of migrants working thousands of kilometres away from their home. The time and effort that goes into sending remittance by a poor immigrant like a security guard is not funny. He could end up wasting one full working day and spend 5% as commission for remittance. If someone could collect that money from where the security guard stays or works without him having to go anywhere and at a reasonable commission of even up to 1%, it will revolutionise the life of these people. These companies will have to innovate not just on technology but also on the process side.

Jan Dhan Yojana also tries to achieve this. However, a bank account doesn’t guarantee its holder access to financial services. The attitude of banking staff, the paperwork required, and the cost structure of the existing formal banking channel cannot support the bottom end of the pyramid. Fact is, it is yet charity for the existing commercial banks which they call priority sector banking.

Every possibility that these Payment Banks will be profitable on their own. Therefore, these will be providing better and sustainable service.

Nachiket More should be complimented for thinking up this extremely innovative idea.

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