The new set of payments banks, which will start operations in the next year or so, will change the way banking transactions are done. With mobile technology leapfrogging, the core of this change will be the mobile phone that can be used to make and receive payments, and carry out other financial transactions.

But payments banks will serve various other purposes and impact different people in different ways.

One, taking the Centre’s financial-inclusion drive a step further, these banks will help payment services reach those living in the hinterlands. For this, technology will act as an enabler.

And, two, the digital payment systems will help make the transition to a cash-less economy. This means that over the long run, the mobile phone will perform the same role as credit and debit cards.

Cash to digital Simply put, the payments industry will be split between players facilitating cash to digital and digital to digital. Given that more than half the population in India are still unable to access basic banking services, the former presents a greater challenge. This is where telcos and others payments bank licensees can bring the unbanked people into the digital system.

“In India, there are only around one lakh bank branches, of which 5 per cent are in rural areas. Sending money through banks becomes impossible for the millions of villagers who migrate to big cities for work,” says Suresh Sethi, Business Head, M-pesa, Vodafone.

“With over 95,000 agents and more than 3.5 million customers, we are already the largest business banking correspondent in the country and are providing people in remote areas a convenient way to transfer money and make payments in a safe and secure manner,” he adds.

Many bankers argue that opening more accounts in rural areas under the Pradhan Mantri Jan Dhan Yojana (PMJDY) has also brought more people within the banking system. So far, banks have opened more than 18 crore accounts and the government’s plan of routing subsidies through the Jan Dhan account has helped address the dormancy issue in rural accounts to some extent. 

“The regulator and the government have taken logical steps. The first step was to open Jan Dhan accounts to bring more people under banking. Then they started tracking these accounts to see if they are being used.

“The beauty of this country is that people know how to operate a smart phone but do not have a bank account. So, it had to be turned around on its head,” says Ravi Narayanan, Senior Executive Vice-President, Branch Banking Head (West), HDFC Bank.

Digital to digital The market for digital to digital is confined to people who use debit/credit card or Internet banking. The challenge here is to get people to move away from cash. While credit/debit card has enabled cashless transactions, the actual usage has been very low.

But the advent of smart phones has opened up a new delivery channel for banking services. Many banks have been investing heavily in new digital initiatives to prepare themselves better for the new competition.

“In the digital space, the existing players have narrowed the gap significantly by kick-starting a lot of digital initiatives, such as mobile banking apps, in recent times. So new players will have to build in a lot of differentiation to compete with us,” says Rajiv Anand, Group Executive & Head - Retail Banking, Axis Bank.

The banking transactions that were done through the banking channel in the past — checking balance, transferring funds, paying utility bills, and recharging mobiles, among others — can now be done through the various mobile banking apps.

“We realised about 18 months back that the proliferation of smart phones will bring about a revolutionary change in the way customers transact with banks. So we realigned our offerings. To start with, we began working on our Net banking offering. The next step was to offer all the services seamlessly on the handset, because one cannot go to the website for every operation. So, today customers can do over 75 transactions on our mobile app, and on the go,” says HDFC Bank’s Ravi Narayanan.

Many existing banks believe that while there will be areas where they will compete with new players, there would be others where they would want to collaborate to widen their reach.

For instance, SBI will collaborate with Reliance Industries, which was granted a payments bank licence. While Reliance Industries is the promoter, SBI is looking to be a joint venture partner with 30 per cent stake. The new bank will leverage Reliance Jio’s telecom network, while SBI will bring in product capabilities and strong distribution network, according to B Sriram, Managing Director and Group Executive for National Banking, SBI.

Cost, the disruptor While domestic banks have been early adopters of technology, the cost savings from going digital haven’t been fully passed on to customers. There is wide expectation that with intense competition from payments banks, banking costs will come down drastically. This can nudge customers to finally go cashless.

But many incumbent players believe that cost is a function of the quality of offering and reach.

“As far as HDFC Bank is concerned, we have an established footprint and loyalty of customers — which is not easy to earn. At the end of the day, the level of engagement with the customer will determine whether the network is advantageous or not, whether the cost can be managed or not. Even if another player has the same number of service points, but lacks the integrity of the brand name or diligence of customer engagement, the costs will shoot up and the distribution network will be of no use,” says Ravi Narayanan.

Others believe that most bank transactions to customers are in any case free. “We are able to provide payment capabilities free. So that is what a payments bank has to compete against,” says Axis Bank’s Rajiv Anand.

Vodafone’s Suresh Sethi however, believes that theirs is a cheap and transparent proposition. “We charge almost like a bank. We are charging a total of 3 per cent commission. Banks are lower at 1.5-2 per cent but there are other costs like travelling 30 km to the bank branch,” says Sethi.

But given that a diverse set of applicants from varying sectors have been granted payments bank licence, many players believe that there are chances that some of these players could disrupt the marketplace through innovation, and that is something the existing players are watching out for.

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