Over the last year, payment banks in India have gone from attracting much attention to becoming a source of debate. Using technology to reach out to the underserved while expanding the formal financial system, payment banks are expected to offer deposit and payment facilities to its customers, but cannot offer credit.
The Reserve Bank of India (RBI) has issued dedicated guidelines for payment banks and has clarified that relevant guidelines issued for universal banks from time to time will also be applicable to them.
Eleven entities were originally granted in-principle approval for launch as payment banks. Since then, three licensees have surrendered their license. While much ink has been spent on the viability of the payment bank business model and the challenges that the service providers will have to overcome, not many are asking the important question: How beneficial are payment banks from a customer’s perspective?
To open a bank account, customers are required to furnish documents verifying their identity and address. The Aadhaar card is one such document and it has achieved near universal coverage in recent years. If a customer is not carrying their Aadhaar card, they could give their consent biometrically to the Unique Identification Authority of India (UIDAI) to share their Aadhaar details with the bank. Sharing of identity and address details through such electronic know your customer (e-KYC) process is recognised for the opening of a bank account.
However, the e-KYC process is often marred by slow internet connectivity and inadequate technology to capture biometric details efficiently. The rejection of biometric information by the UIDAI results in customer inconvenience. For low value transactions, other financial sector regulators such as the Securities and Exchange Board of India, Pension Fund Regulatory and Development Authority, offer to provide express consent through entering a one-time password (OTP) or permanent identification number received on the registered mobile number of the customer.
However, the RBI has not yet allowed providing consent through the OTP route, owing to the risks involved. Taking a cue from other regulators, and considering limited internet connectivity and equipment quality in the country, it might consider allowing consent for sharing Aadhaar details through the OTP route for small value accounts, in the interest of customer convenience. Payment bank regulations have already capped the end-of-day balance that customer can have in their accounts. Consequently, the risk involved in the use of OTPs in case of payment bank customers is limited. Thus, allowing payment bank customers to give their consent for the sharing of identity and address information through the OTP route by could be a good start.
As Aadhaar cards are only issued to individuals, the e-KYC route is only available to individuals for opening savings accounts. Unregistered merchants operating small businesses will not be able to open current accounts through the e-KYC route, since for the opening of current accounts, customers are required to furnish details of respective businesses, in addition to the details of the individual customer. Owing to the unregistered nature of the business, customers are not able to provide relevant documents that verify identity or address, and thus are unable to open current accounts.
Small merchants are expected to be the key target customers for payment banks. Regulators should consider allowing them to open current accounts on the basis of individual e-KYC, and verifying the identity and address of the business on the basis of transaction details, which the payments banks will have access to. This will help in linking small merchants with the formal financial system and also act as a stepping stone for the registration of small businesses.
No payment bank customer can have a closing balance at the end of day of more than Rs 1,00,000; deposits of more than Rs 1,00,000 are allowed during the day but withdrawals should happen during the day only. This is to ensure payment banks pursue low income and underserved customers, and do not restrict their reach to middle and high income groups. What happens when a customer approaches a payment bank at the end of the day with a deposit that could breach the Rs 1,00,000 cap? There may also be situations where the limit is breached by a refund into the customer’s account due to failed transactions. The situation would only worsen if a public holiday follows the day of transaction.
In such situations, are payment banks expected to refuse the transaction and request the customer to return on next working day? Similarly, are digital transfers required to be blocked until the next working day? Are payment banks expected to levy penalties or fines on the customers to make arrangements to keep funds in pool or mirror accounts to prevent the daily limit from being breached? Should the responses to these questions be positive, the resulting cost and inconvenience for customers to transact with payment banks is expected to rise significantly. This is expected to discourage them from using the services of payment banks.
It could be argued that these are hypothetical situations and payment banks are expected to target low income segments and migrants, who are unlikely to breach the limit. However, it is unlikely that payment banks will limit their customer base to these segments. Payment banks could cross-subsidise such segments by targeting merchants and middle income customers, who are likely to be disincentivised in case the end-of-day cap is strictly enforced.
Services offered by payment banks
Payment banks can provide deposit and payment services to customers. Within the broad spectrum of deposit services, they can offer only saving and current account services. Payment banks cannot offer recurring or fixed deposit services. The unavailability of a full set of deposit services at payment banks might discourage customers from using their services.
Payment banks cannot directly offer credit facilities to its customers. To offer these services, payment banks will have to enter into arrangements with other service providers like universal banks. While payment banks can act as the business correspondents (BCs) of universal banks and offer a complete set of banking services, it is not clear if they can act as agents of non-banking finance companies to offer customised credit products.
Banks usually reach out to the last mile by employing BCs. However, BCs usually do not represent more than one bank at the point of customer interface, especially for account opening, cash-in and deposit services. As a result, the BC of a payment bank might not be in a position to offer the entire set of banking services to its customers, who will have to approach other BCs to access such services. This will increase the cost of banking and inconvenience among customers. Perhaps the regulator could revisit the requirement to allow only one bank to be represented at the point of customer interface.
Issuance of cheque books and ATM cards
A customer can make payments through cheques or ATM cards. However, it is not clear if payment banks will be mandatorily required to issue physical cheque books or ATM cards to its customers.
The issuance of cheque books comes with associated costs of putting in place cheque acceptance infrastructure, back-end technology and retaining the wet signature of customers for verification purposes. This is expensive for banks and the cost is usually passed on to the customers. Even if payment banks do not offer cheque book facilities to the customers, they may still be required to put in place the cheque acceptance infrastructure to deal with situations when customers presents a cheque of other banks. Alternatively, payment banks might be required to enter into arrangements with universal banks to enable cheque processing, albeit with a lag.
In case of ATM cards, banks are required to offer minimum free transactions to its customers. Such costs are usually passed on to the customers. In case payment banks are required to offer ATM cards, they must comply with the minimum free transactions directive.
While the use of cheque books and ATM cards increase the convenience for customers, they are usually used for the withdrawal of cash and thus increases the physical currency in circulation. Typically, the customers are unaware of the cost of handling cash and hence find no reason to move to less cash or more digital transactions. Cash is perceived as free.
Payment banks should have the freedom to decide whether they would like to offer physical cheque books or ATM cards. However, they must be mandated to clearly disclose to the customers the cost of using such means. They should also explain how such costs are eventually passed on to the customers. In addition, the payment banks should disclose the cost of undertaking digital transactions and highlight the savings which customers could make on preferring cash-lite modes of banking.
The launch of payment banks will witness small shopkeepers and phone recharge vendors becoming physical access points for customers. Such outlets are expected to help customers open payment bank accounts, navigate its digital application and conduct transactions. Being the first point of customer interface, physical access points will also have to deal with customer grievances.
Over a cluster of physical access points, payment banks are required to set up controlling offices to supervise operations of the physical access points and redress customer grievances.
Payment banks are expected to build online, telephonic and similar impersonal means of recording and redressing customer grievances. Such grievance redressal channels must be customer friendly. Payment bank agents at physical access points and employees at controlling offices must be in a position to aid customers to access such grievance redressal channels.
Data recording, sharing and monetisation
Payment banks will be in a position to keep track of customer transactions, be aware of their spending behaviour and sources of income. While this will help in identifying suspicious transactions, payment banks should not be in a position to record, use or share customer transaction data without the consent of the customer.
Customers should be made aware of the information to which payment banks will have access, and the need for such access and related risks, especially at the time of downloading the payment bank mobile application. A customer consent should not be for unlimited time and payment banks should be required to renew the consent periodically.
Need for customer-centric payment bank regime
No business model can sustain for a long term without putting the customers at the centre. Similarly, regulations will not be able to achieve their objectives without taking into account customer concerns and the manner in which customers react to regulatory requirements.
Payment banks is a long term game and the entities do not expect to break even or become profitable in short term. Consequently, payment banks and regulatory agencies will have to review the payment bank model from the customers’ perspective and make necessary adjustments to achieve its ultimate objective.
Pradeep S Mehta and Amol Kulkarni work with CUTS International.