NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, June 14, 2016

It is widely believed that India is on the cusp of a financial services revolution. Perhaps no move has generated as much excitement as the licensing of payments banks, a new class of differentiated financial providers announced by the Reserve Bank of India (RBI) last year.

Of the 11 players who were issued in-principle approvals for payments bank licences, one (Airtel M Commerce Services Ltd) has received the final licence, and others have announced high-profile launches and recruitments. Recently though, three payments banks (Cholamandalam Investment, Dilip Shanghvi-Telenor Financial-IDFC Bank and Tech Mahindra) have withdrawn their applications, reviving questions about the viability of the business model.

We believe that the success of these new entities will depend to a great extent on their ability to go beyond serving the well-banked smartphone-carrying consumers, such as the readers of Mint, who have been the focus of digital payments in India so far. Payments banks will need to creatively reach the low-income and financially underserved—the so-called base of pyramid (BOP) consumers. Indeed, universal financial inclusion was a driving motivation behind RBI’s issuance of these payments bank (and small finance bank) licences.

However, as traditional banks can testify, developing a model that is both effective in reaching the BOP consumer and commercially profitable, is far from easy. It will require a paradigm shift. Leveraging technology to reduce cost-to-serve will of course be important, but much more will be needed. In this series, we will explore three key factors that we think are critical to successfully serving BOP consumers.