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

Thursday, June 2, 2016

The withdrawal of three licencees should not be read as a doomsday omen for the idea and underlying rationale.

With three of the 11 payments banks licencees dropping their plans to start the banks recently, the fundamental premise and economics of payments banks have been questioned. While these decisions are understandably based on sound specific reasoning, they should not be read as a doomsday omen for the idea and rationale of payments banks.

It is too early to write off a well-intentioned idea that puts change and innovation before incumbency. Rather, these withdrawals should be seen as signaling the need for introspection and course-correction to adapt to the fast-changing, competitive landscape of India’s banking and payments sector.

Payments banks came into being thanks to the Reserve Bank of India’s (RBI) push to ensure that the banking sector deliver a comprehensive set of financial services to the poor and the unbanked. With full-service banks clearly finding it uneconomical to deliver to low-income and rural India, the Nachiket Mor committee conceptualized new models under a differentiated banking system.

Unlike small finance banks, payments banks are an untested model. The RBI’s intention was clear from day one—focus on purely payments and deposits, targeting the bottom of the pyramid and underserved segments. The RBI has also clearly made the point that lean and mean business models are the way forward. In opening a new narrow bank model, it has told its biggest constituency—the incumbent scheduled commercial banks—that they are not protected when it comes to future spoils, and will need to get their retail footprint together on competitive terms.