05/11/2015 8:31 AM IST | Updated 15/07/2016 8:25 AM IST

What Payment Banks Must Do To Realise The Dream Of Financial Inclusion

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Golden piggy bank on indian 1000 rupee isolated on white

The Reserve Bank of India has given in-principle approval to 11 entities to set up payment banks. The objectives of such banks are (a) to further financial inclusion by providing small savings accounts; and (b) to provide payment/remittance services to the migrant labour force, low-income households, small businesses and other organised sectors.

These payment banks can accept demand deposits up to Rs 1 lakh, issue debit cards and distribute third party financial products like mutual funds and insurance. However, they are prohibited from lending or issuing credit cards. The underlying objective is to push for greater financial inclusion and move towards a less-cash society.

Previous efforts at universal financial inclusion included measures like bank nationalisation (1969 and 1980), the creation of regional rural banks (1975) and local area banks (1996). However, the level of success has been modest as the branch-based banking model is constrained by physical limitations.

"Commercial banks have a lounge for their privilege banking customers where they have single-point delivery of all services. New payment banks have to replicate the same spirit and experience for unprivileged banking...

In the last decade or so, the telecom sector has been growing exponentially, reaching the farthest nooks and corners of the country. Digital banking platforms, including "wallets", have been making rapid strides. Telecom operators have been making deep inroads into the rural hinterland, outpacing the reach of the banking system - this explains the preponderance of service providers of mobile/mobile money in the list of selected 11 applicants to start payment banks. The RBI statement said so in as many words: "[The Committee of Central Board of the RBI] did ensure that selected applicants have the reach and technological and financial strength to service hitherto customers across the country."

These payment banks now must meet the unenviable challenge to deliver banking products and open accounts for those who have not yet accessed formal banking channels. While it is true that the Jan Dhan Yojana has succeeded in the opening of a massive 18.6 crore new accounts recently, as many as 40% of these are reported as inactive. It will be up to the payment banks to ensure that they transact in existing accounts. For this they need to deploy cost-effective, efficient technology with a user interface that is easy to understand even for the lowest common denominator. Payment banks have thankfully been permitted to service accounts of other banks too, as "business correspondents".

Various studies in the past have highlighted that traditional banking initiatives for financial inclusion have been unremunerative. The biggest challenge for payment banks is to substantially lower transaction costs by technological innovation and provide user-friendly interface across channels to the end user at the bottom of the pyramid. However, banking is not only about products; it is also about the trust. This is where existing banks, many of them with a history of more than 100 years, enjoy a huge advantage. It will be a while before the new entrants enjoy that level of trust that brings in walk-in customers.

The new players in banking have to display out-of-the-box thinking in the following areas to make a distinct mark.

1. Customer acquisition process and on boarding experience.

2. Innovative product design to cater to the underprivileged segments.

3. Last-mile distribution network.

4. Transaction security.

5. Governance and compliance standards.

6. Efforts at brand-building and gaining trust of customers.

One veteran in the field mentioned recently on a lighter note that the financial inclusion drive has made a hole in the pockets of public sector banks (PSB) to the tune of thousands of crores. They have given up. And so RBI has brought another set of 11 players, some of them with deep pockets with net worth greater than the PSBs, who can continue the drive and absorb the losses without a murmur.

It is hoped that the new players will prove sceptics wrong. For that to happen, one thing is certain. Commercial banks have a lounge for their privilege banking customers where they have single-point delivery of all services. New payment banks have to replicate the same spirit and experience for unprivileged banking at their Customer Service Points (CSP). A pleasant experience at CSP by an unprivileged customer will hold the key to a successful business model in financial inclusion.

This post first appeared in Business Today.

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