Are payment banks a threat to regular banks or are they allies in the business of

financial inclusion?

At an economic conclave on 20 August, the Reserve Bank governor and the State
Bank chairman disagreed on the issue. While Raghuram Rajan said payment banks
could be allies to regular banks in reaching banking to remote areas where there
can be no branches, SBI chief Arundhati Bhattacharya thought they could intensify
competition to the deposits sphere and eat into their margins.

According to BusinessLine, Rajan, who gave licences to 11 payment banks on 19

August, had this to day: "I don’t think these 11 new banks are a threat to the
existing banks. These new banks will complement the existing system by
traversing the last mile. The reason for this is that there is nothing the universal
banks cannot do that the payments banks can do. But there are some…..things that
the payments banks can’t do which the universal banks can."

To which Bhattacharya offered a counter. Since payment banks are allowed to

raise savings deposits, "if they go for poaching rates, then many of the commercial
banks could lose a portion of the deposits which are relatively lower priced." This
may affect their “ability to transmit rates and give further loans at lower rates.”

Actually, both Rajan and Arundhati are right – and wrong. The SBI chief is more
right than Rajan.

First, the new payment banks are already big players, and they are not entering the
game only to serve the last mile beyond where banks can’t reach. Players like
Airtel, the Birlas, Reliance, and PayTM (a wallet company) are not in the game
only to serve inaccessible rural customers through mobile banking. They will go
for a large share of the low-cost deposits in urban areas in order to make their
operations in rural areas viable. So the competitive threat is real, and payment
banks and universal banks will be real competitors in serving the urban customer.

Second, while Rajan is right to point out that there is nothing payment banks can
do that universal banks can’t, this statement is misleading. The fact is the cost
structures of universal banks will be higher than that of payment banks. The latter
will opt for a minimum number of branches, and maximise customer-reach through
technology, especially mobile technology. The cost structure is more skewed in the
case of public sector banks, which have a huge kitty of bad loans and wide branch
networks and excessive manpower. Payment banks are thus a direct threat to
nationalised banks which are both short of capital and excessively burdened with
costs. So Bhattacharya knows what is at stake.

To sum up, mobile wallet companies and financial companies are fast reaching out
to underbanked people by leveraging disruptions to capitalize on new
opportunities. After stepping into mobile payment and payment bank, they are now
shifting their strategies to tap into the insurance business with new technologies.
As India’s wealth management services market have so far mainly focused on the
urban segments leaving a huge chunk of market untapped. Banks really need to up
their ante to beat fintech companies at their own game. Just like the multi-faceted
companies that are venturing into avenues like insurance, lending etc. banks need
to give themselves a technological boost. With Narendra Modi-led Government’s
cashless drive, there has been a boom in e-wallet companies such as Paytm,
Mobikwik, PhonePe, Ola Money and others, thereby causing an increasing worry
about the businesses of a bank being hampered. People walking into branches have
dwindled as e-wallets and other payment mechanisms have made payments much
easier with these cutting-edge technologies. Tech giants such as Apple, Google and
Facebook have also entered the financial offering space. “Today the risk is the
disruption that is caused by the technology,” SBI chief Rajnish Kumar said in
a report. “We have to be very alert to this challenge. Protecting the turf and
meeting the challenges from all the new fintech companies is the priority. Even if it
is a small player challenging you, you should not underestimate it, because it can
become a big player.”

Digitization has also given rise to payments like Paytm Payment Bank, Airtel
Payment Bank, India Post Payments Bank that performs almost all banking
operation but doesn’t engage in any credit providing service and functions on a
smaller business scale compared to normal banks.