Editorial

Tech-ready

| Updated on January 23, 2018 Published on May 22, 2015

Along with providing new digital platforms, banks will have to offer payment services in a cost-effective manner

Indian banks, already facing competition from non-banking finance companies, now have a new set of rivals to contend with. Entities that provide payment services through prepaid cards, mobile wallets and online platforms are likely to infringe on their turf with the RBI set to issue payments bank licences to some of them. These new banks will be allowed to accept deposits of up to ₹1 lakh an account, provide payments services through various channels, and issue debit cards. It is no surprise then that many large banks, particularly private ones, have been innovating on their own and collaborating with new players to take on competition from digitised platforms. ICICI Bank’s Facebook Pockets and Axis Bank’s recently launched Ping Pay are significant leaps into the digital arena. A third of the funding for traditional banks comes from low-cost current and savings deposits, and the new payments banks can eat into their share in such deposits. Having a far lower operating cost structure than traditional banks, they could offer higher interest on deposits. Older banks may also lose out on fee income. It is hence imperative that traditional banks make significant investments in technology to defend their turf.

The core of digital initiatives lies in offering services to customers in a cost-effective manner. Technology should not only make banking convenient but also bring down transaction costs. The challenge for new payments banks will lie in scaling up fast, which will require substantial investments in a distribution network. While the usage of mobile wallets has grown at a scorching pace — the value of transactions through m-wallets at about ₹8,100 crore in 2014-15 was almost three times that in the previous year — many providers are still not profitable. Existing banks, on the other hand, may be faced with the challenge of investing in new platforms while also continuing with their existing channels. While digital channels will help banks trim costs on physical infrastructure, the savings are likely to be back-ended, as it may take time for customers to migrate online. To encourage the migration, cost-saving from technology should be passed on to customers.

The biggest contribution that technology and digital channels can make to the overall economy is to deepen the reach of banks. Experience has shown that accounts opened in rural branches have been unviable, owing to high transaction costs and operating expenses. Crisil Research estimates that the cost per transaction for rural branches is around ₹110. The same conducted through banking correspondents is about ₹7 while it is less than a rupee via internet or mobile. Payments systems are an important piece of any financial inclusion initiative, as they make it easier for people in farflung areas or migrant workers in cities, to hold funds in banks accounts rather than in cash. With the opening of 7.5 crore rural accounts under the Jan Dhan Yojana there is now a need for an integrated payments system to fill the gaps in the Centre’s financial inclusion drive.

Published on May 22, 2015
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