Payment Banks vs Traditional Bank

My Guru Mr SOMA SUNDARAM suggest me for given things regarding PAYMENT banks which is not a perfect competitor for traditional banking system.

The below points concentrate based in what RBI panel suggest and USSD code for transfer.

1. Payment Banking System - Recommanded by Nachhiket,

2. Target audience: small businessmen and poor people. (low income households).

3. Potential candidates to run Payment banks: mobile phone companies, consumer goods companies, post office system, agri/dairy type cooperatives and Corporate Business correspondents.

4. Scheduled commercial banks can open payment banks as their subsidiaries.

5. Payment bank will have to keep CRR (Cash reserve ratio) just like other Scheduled commercial banks (SBI, ICICI etc).

6. Payment banks cannot hold more than Rs.50,000 per customer. (This is similar to PPI- Pre-Paid Instrument Providers.)

7. Payment bank cannot involve in any credit risk. (similar to PPI),

*_Characteristics of Payment banks_*

a) Payment bank will enjoy all the rights and responsibilities of a Scheduled commercial banks (SCB- like SBI, ICICI, etc).

b) Entry capital requirement will be Rs.50 crore.

c) Payment bank cannot assume credit risk (they cannot sanction loans). So there is no danger of loan default/NPA.

d) Payment bank can invest money in SLR securities, but they are safe investments, customers can recover money.

e) Payment bank faces near-zero risk of default. so, they don’t need a large capital for emergency backup.

f) Nachiket recommended wholesale investment banks and wholesale consumer banks too.

M-Pesa is Kenya’s Payment bank. (Fundamentally, it is a Mobile payment service, just like our Airtel Money.)
M=mobile; Pesa=swahili word for money.
M-Pesa is the brainchild of Vodafone (=enemy#1 of our Income tax department) + Kenya’s local mobile company called Safaricom +IBM.

2006: M-Pesa launched. At this time, more than 70% of Kenya’s Juntaa didnot have bank accounts.

We can go to an M-Pesa outlet (local kiranawalla, shopping center, petrol pump, paan-ki-dukaan etc.)
Give him cash, he fills up our M-pesa electronic account with that money. (just like how you recharge your prepaid mobile).

This M-pesa Account is tied up with your mobile phone. Wherever you go, money goes.

M-pesa helps in money transfer between one person to another, international remittances (e.g. Kenyan worker from USA can send money home), utility bill payments and so on.
We can even borrow money from Microfinance Institutions (MFI) via mobile phone (and later repay the loans, via same mobile phone).
M-Pesa size and Success:

More than 75% of Kenya’s juntaa uses M-Pesa system
More than 25% of Kenya’s GDP flows through M-Pesa system.

M-Pesa also offers a separate model called “M-Shwari” to give 2-5% interest rate on your money saved in that M-Pesa account.

If Payment bank model can succeed in Kenya, it can also succeed in India. (Atleast that’s what Mr.Nachiket believes).

M-Pesa model you saw above- it is nothing “radically new”- SBI, ICICI and all other big banks already offering such services via mobile banking platform, instead of opening new Payment banks, better just let those existing banks to give these banking-investment-insurance services through their branches, mobile banking, internet-kiosks, business correspondents and bancasurrance model.

OR
Mr.Nachiket could have simply recommended “all PPIs like Airtel money should pay interest on the money held in digital wallets.” instead of coming with a new type of “payment banks”, that is not 100% financial inclusion

Financial inclusion is a bigger thing than mere “payment/money transfer”- Financial inclusion means access to complete bouquet of financial services —banking, investment, insurance, pension – everything.
But that’s very difficult to achieve through Payment bank system. (Because Nachi himself said, bank cannot assume “Credit risk”).

Schedule commercial banks also permitted to run Payment banks through their subsidiaries. That defeats the whole purpose because SBI is a giant elephant with large resources and manpower.

If it starts a payment bank then other small player’s payment banks cannot compete, and they’ll bleed in price wars.

Instead of allowing NBFCs and private companies to open “Payment banks” and compete with regular (commercial) banks, Nachiket should better suggest a model where they all can work in synergy to achieve 100% financial inclusion.

USSD and Conflict of Interest.

Suppose both Airtel and Idea got Payment bank license. We open a payment bank account with Idea but keep airtel phone number.

Then what if airtel charges more money per SMS when we want to do some net banking /balance inquiry about my Idea BANK account?
And airtel walla also promises me that if I open Payment bank account in Airtel, they’ll give free services.

To solve this problem, All mobile companies must be ordered:

to provide USSD connectivity as per recent TRAI regulations (Rs 1.5 per 5 interactive sessions.)
to categories all SMSs related to banking and financial transactions as Priority SMS services (with reasonable rates)
USSD connectivity for Banking
USSD=unstructured supplementary service data

USSD can be used for prepaid call-back service, location-based content services and menu-based information services.

Unlike SMSs, USSD messages create a real-time connection during a USSD session.

The connection remains open, allowing a two-way exchange of a sequence of data making USSD more responsive than services that use SMS.

TRAI cameout with guidelines on USSD that:
For banking related USSD, the mobile company can charge only Rs.1.50 per session.

This money will be charged on subscribers account (i.e. “balance” in your mobile phone).

ICICI and SBI have already launched their USSD Based mobile banking services.

My sincere thanks to
My Guru