Loan Singh Explains – The Concept of Payments Bank in India



On 17th September 2017, Airtel Payments Bank announced its integration with United Payments Interface (UPI). This made Airtel Payments Bank, the first of its kind, to integrate with UPI.

This collaboration gives us an opportunity to learn about payments bank and its purpose.

Loan Singh is a digital lending platform with a mission to serve the underserved, and salaried, individuals – who face personal loan rejections from banks. Similar to Airtel Payments Bank helping the underserved individuals in opening bank accounts and making digital payments, Loan Singh helps to move beyond traditional banking practices – which involve heaps of paperwork and lengthy documentation.


The Beginning

The Reserve Bank of India (RBI) wanted to provide an impetus to the financial inclusion in India. Keeping this in mind, RBI decided to create new niches in the finance industry by introducing ‘Payments Bank’ and ‘Small Bank’.  While Small Banks provide all banking services in a limited operational area, Payments Bank provide a limited range of banking products in rural areas. As per statistics, close to 40% of India’s total population has little or no access to traditional banking services. To combat this hurdle, in the path towards financial inclusion, the licensing of Payments Bank was important.

In February 2015, RBI released a list of entities who had applied for a Payments Bank Licence. Around 41 applicants were evaluated. On 19th August 2015, the RBI gave ‘In-Principle’ Licence to 11 entities for launching Payment Banks. These were

  • Airtel M Commerce Services
  • Paytm
  • Department of Posts
  • FINO PayTech
  • Aditya Birla Nuvo
  • Cholamandalam Distribution Services
  • National Securities Depository
  • Reliance Industries
  • Sun Pharmaceuticals
  • Tech Mahindra
  • Vodafone M-Pesa

Out of these, Cholamandalam Distribution Services, Sun Pharmaceuticals and Tech Mahindra have surrendered their licences.

As per RBI guidelines, the Payments Bank should be registered as a public limited company under the Companies Act of 2013 and licensed under Section 22 of the Banking Regulation Act of 1949.


Scope of Payments Bank

The scope for a Payments Bank would be restricted to activities which further the objectives of financial inclusion in India. The primary role of a Payments Bank is to provide payment and remittance services to the people – belonging to the areas which they service. They can accept demand deposit, issue prepaid payment instruments, enable internet banking, etc. Payments Bank, however, cannot indulge in lending credit activities, and will need to distinguish themselves from other banks by using ‘PAYMENTS’ in their names. They will be initially restricted to hold a maximum balance of Rs.1,00,000 per customer for both – current and savings account. This will be raised only once RBI gauges the Payments Bank’s performance. A Payments Bank can issue ATM or debit cards, but are not allowed to issue credit cards. They can distribute financial products like mutual funds and insurance. The documentation required to open an account is the same as for normal banks. Payments Banks are expected to change the ‘one-size-fits-all’ approach in commercial banking. They will cater to the lower income group.

The first payments bank was launched by Bharti Airtel. Paytm succeeded them, and were followed by India Post Payments Bank. With such a variety of applicants, the competition in the payments banking sector is expected to increase. This will only benefit the consumers in terms of policies, products and technology. Payments Bank is expected to reach customers mainly through their mobile phones. The operations of the bank would be fully networked and technology driven from the outset. Proper grievance cell would be set-up to handle consumer complaints.

A virtual account will be opened on the basis of the consumer’s unique mobile number. The consumer can then perform transactions or make remittances, to a registered merchant or user, through a web based mobile application or through a USSD gateway. The user can withdraw cash or top-up their accounts from retail points (vendor, ATM, agent, etc.) – recognized by their Payments Bank service provider.


Benefits of Payments Bank

Along with the benefits of allowing transfers and remittances through a mobile phone, a Payments Bank also provides many benefits to the account holder. Some of these benefits are

  • Automatic payment of bills
  • Cashless and chequeless purchases through phone
  • Issue debit cards and ATM cards which can be used to withdraw cash from any Banks’ ATM
  • Transfer money directly from your account to others, at nearly no cost
  • Provide Forex cards to travelers which can be used as a debit card
  • Forex services – at charges lower than banks
  • Card acceptance mechanism with third parties, such as ‘Apple Pay’
  • Raise deposits to up to Rs.1,00,000 and pay interest on savings account


Payments Bank – A Game Changer

Payments Bank will redefine banking in India. Payments Bank will mainly target migrant labor, young professionals, low income households and small businesses – to aid in the upward booming of GDP. With Payments Bank, for the first time in the history of Indian banking, RBI has given out differentiated licences for specific activities. Low earning citizens of India, who transact only in cash, will be able to take a step towards formal banking. It could have been non-profitable for traditional banks to open branches in every village in India, but mobile phone coverage can help scale to remote parts of India. This will also accelerate India’s stride towards a cashless economy. Subsidies, on health care, education and gas, can be paid directly to the beneficiaries’ account. With money transfers being made possible through mobile phones, a big chunk of India’s migrant labor population could shift to this platform.

UPI can help merge several banking features, including seamless fund routing and merchant payments, under one roof. In other developing countries, Payments Bank has proved to be beneficial. For Eg: In Kenya, Vodafone M-Pesa has witnessed success; making purchases and transferring of funds between friends and relatives, easier.


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