What Is A Payments Bank?
A payments bank operates like a leaner, digital-first version of a traditional bank, focussing specifically on facilitating payment transactions. They are also a unique regulatory innovation established by the Reserve Bank of India (RBI) to expand financial inclusion. As more Indians open a bank account, payments banks have gained popularity rapidly.
An end user can deposit up to INR 2 Lakh in their payments bank account. India currently has six active payments banks, including the beleaguered Paytm Payments Bank, Airtel Payment Bank, India Post Payment Bank, Fino Payment Bank, NSDL Payment Bank and Jio Payment Bank.
How Does A Payments Bank Work?
The following is a simple technical description of how a payments bank works:
- Core Banking Systems (CBS): Indian payments banks utilise CBS platforms designed for their specific needs. These platforms, often cloud-based, handle account management, transaction processing, and real-time settlements through the Immediate Payment Service (IMPS) network.
- Payment Channels: Unlike traditional banks, payments banks are all about mobile. They heavily integrate UPI (Unified Payments Interface) for instant mobile payments and rely on USSD for basic services on feature phones. Debit cards with lower transaction limits are also offered, and Open APIs might be available for integration with fintech apps.
- Account Types: Payments banks can provide basic savings accounts with a maximum deposit limit set by the RBI. These accounts may not offer interest but prioritise faster and cheaper digital transactions than traditional bank accounts.
- Regulatory Compliance: Know Your Customer (KYC) and Prevention of Money Laundering (PML) regulations are paramount. Payments banks implement robust Aadhaar-based eKYC (electronic KYC) and transaction monitoring systems to ensure security and compliance with RBI guidelines.
- Strategic Partnerships: To reach the vast underbanked population in India, payments banks often partner with entities like India Post, telecom companies (like Airtel or Jio), or large business houses. This leverages existing distribution networks, particularly in rural areas.
How Is A Payments Bank Different From A Regular Bank?
In India, payments banks and regular banks serve similar purposes, but their approaches differ significantly in terms of technology, user experience, and regulations:
Technology
- Core Systems: Regular banks utilise robust core banking systems to handle a wider range of financial products and services, including loans, investments, and wealth management. Payments banks, on the other hand, leverage CBS platforms designed for simpler account management, transaction processing, and settlements via IMPS.
- Payment Channels: Traditional banks offer a spectrum of payment channels, including debit and credit cards, online banking, and physical branches. Payments banks heavily integrate UPI for instant mobile payments and rely on USSD for basic functionalities on feature phones.
Debit cards with lower spending limits might be offered, but physical branches are typically absent. Open APIs are available in both cases, but payments banks might leverage them more readily for integration with fintech apps.
- Focus: Regular banks prioritise security and stability for various financial transactions. Payments banks prioritise speed, affordability, and accessibility for basic digital transactions.
User Experience
- Account Types: Traditional banks offer various account types like savings, current, and fixed deposits, catering to different needs. Payments banks primarily provide basic savings accounts with deposit limits set by the RBI. These accounts may not offer interest but prioritise faster and more affordable digital transactions than traditional savings accounts.
- Convenience: Regular banks offer online and physical branch access, catering to diverse preferences. Payments banks prioritise a mobile-first experience, making them ideal for tech-savvy users, especially in rural areas with limited branch access.
- Onboarding: Traditional banks might have stricter KYC (Know Your Customer) procedures, sometimes requiring physical document verification. Payments banks often leverage Aadhaar-based eKYC) for faster and more convenient account opening.
Regulations
- Scope Of Services: Regular banks are subject to stricter regulations due to their complex financial products and services. Payments banks have a lighter regulatory burden as they focus on a limited set of services.
- Deposit Limits: The RBI imposes a maximum deposit limit on payments bank accounts, currently at INR 2 Lakh. Traditional banks have no such restrictions.
- Loan Products: Traditional banks can offer loans, credit cards, and other credit products. Payments banks are not permitted to offer any lending services.
What Are The Challenges While Setting Up A Payments Bank?
Setting up a payments bank in India is a complex undertaking with several hurdles. The following is a list of some of the key challenges:
- Regulatory Maze: Navigating RBI regulations for payments banks is a challenge. These regulations are relatively new and intricate, demanding meticulous planning and compliance expertise to ensure a smooth launch. Additionally, payments banks face limitations on the financial products they can offer compared to traditional banks. This restricted scope can hinder profitability, making them less attractive to potential customers.
- Tech Hurdles & Reaching The Underserved: Establishing a robust core banking system, even with cloud-based platforms, requires significant investment in technology and skilled personnel to ensure security and efficiency. Reaching the vast underbanked population, often concentrated in rural areas with limited internet access, presents another challenge.
- Building Trust & Standing Out: Since payments banks are a relatively new concept in India, earning the trust of potential customers, particularly those unfamiliar with digital banking, is critical. Payments banks also face competition from established players like traditional banks and mobile wallets in the digital payments space.
- Security & Profitability Concerns: As payments banks handle financial data, robust cybersecurity measures are vital to prevent fraud and data breaches. This necessitates ongoing investment in security infrastructure and personnel. Finally, with limitations on deposit amounts and the inability to offer credit products, generating sustainable profits can be challenging.
