Jan 292017

Banks Vs. Payments Banks

Of late, we have been hearing a lot about Payments Banks. There’s Paytm Payments Bank, there is Airtel Payments Bank, there is India Post Payments Bank and more…What are they? How are they different from commercial banks or mainstream banks as we know? In this article, we are going to find out those differences and understand how Payments Banks and Commercial Banks or simply banks are different from each other.

Banks Vs. Payments Banks

Banks vs. Payments Banks – the differences you should be aware of

Payments Banks are a new breed of bank that have evolved in the fast-changing financial ecosystem of India. The concept of Payments Banks evolved from the need of increasing financial inclusion in India. RBI approved several companies to set up Payments Banks simply because the mainstream banks or commercial banks were not providing enough coverage to the most remote parts of India. Thus, the objective of financial inclusion was not getting enough traction. Payments Banks are expected to fill in the gap and provide a medium for people to get included in the banking world. So, how are Payments Banks different from Banks? Let us take a look at the differences in a tabular format.

Sl. No. Difference point Commercial Banks Payments Banks
1. Lending Commercial banks are known for their lending operations like home loans, automotive loans, etc. Payments banks did not get clearance from RBI to venture into lending world. Simply put, they cannot lend money to anyone.
2. Deposits Commercial banks can take large amounts of deposits from customers. A single customer can deposit crores of rupees in a single account. Payments banks are not allowed to take deposits exceeding INR 1,00,000 (that is, 1 lakh rupees).
3. Investment Commercial banks are allowed to invest the money they collect in form of deposits in open market – shares, equities, debt instruments etc. Payments banks are allowed to invest the deposits they collect but they can deposit only in government bonds. If they don’t want to invest, they can give the money to commercial banks for investing.
4. Minimum balance Commercial banks put a restriction of minimum balance on accounts. This means that if you want to deposit money with a commercial bank, you will have to maintain a minimum monthly or quarterly balance in your account. The minimum balance requirement is totally non-existent in case of Payments Banks. All accounts are basically zero-balance accounts. Unlike commercial banks which earn revenue by interest spread between loans and deposits, Payments banks will earn revenue from transaction charges.
5. Credit card Commercial banks are allowed to issue credit cards (lending business). Payments banks cannot issue credit cards because they are not allowed to venture in credit business.
6. Service catering Commercial banks primarily cater in the urban sectors. Those who cater in semi-urban as well as rural areas have the problem of insufficient bank branches and hence, they cannot penetrate deep. Payments banks are designed to specifically cater to unorganized sectors, small business, migrant workforce, households with low income etc. Their primary focus is on semi-urban areas and rural areas.
7. Technology Commercial banks are gradually adopting technology. They are coming up with mobile banking, internet banking and even wallets. Still, they are yet to embrace technology properly. Payments banks are totally technology driven right from the beginning. They need to use technology for increased penetration of banking facilities in India’s unbanked sectors. They will rely mostly on mobile phones to extend banking services in areas where mainstream banks do not set up branches because doing so will not be very economical for them.
8. Forex Commercial banks have forex services. Different commercial banks have different rates and they are usually pretty high. Banks make a lot of profit by rendering forex services. Payments banks are allowed to offer forex services however, they need to charge less than commercial banks for those forex services.
9. Capital requirement Commercial banks have enormous amounts of capital. Their balance sheets are also extremely enormous. Payments banks on the other hand need only INR 100 crore as capital. Of these 100 crores, 40 percent need to come from promoters themselves.  This means that the minimum capital they will have is INR 40 crores.
10. Financial products Banks are allowed to offer a lot financial products like insurances, mutual funds etc. Payments banks have also bagged approval from RBI to distribute such financial products. However, unlike commercial banks which can actually create (sometimes in association with other companies) and distribute products, Payments banks can only distribute products but cannot create them.

The table above lists the 10 major differences between Banks and Payments Banks. But now, there are two questions that you may have. These two questions are:

  • Will Payments Banks be really helpful?
  • Will Payments Banks have physical branches?

We will start with the second question first.

Yes! Payments Banks can actually open up branch offices if they want to. They can however decide not to open branches and use small merchants and even Kirana stores as their business correspondents and points of sale. Because Payments Banks are heavily technology dependent and rely heavily on mobile phones, setting branch offices is not really necessary.

Coming to the first question…

Yes, Payments Banks are actually seen as game changers in Indian banking space. The two primary services that will be offered by Payments Banks are:

  • Savings account
  • Remittance services

As most of the Payments Banks already own and operate mobile wallets, remittance problem is solved. Even, using NEFT and IMPS services, these Payments Banks can even serve those who do not have smartphones (basically people from rural and semi-urban areas). Talking of savings accounts, Payments Banks will allow opening such accounts through mobile phones and even through point of sale terminals. Now, since Payments Banks will also issue debit cards, which will be accepted at all bank ATMs they will also allow easy access to cash, instead of keeping people restricted to digital form of banking.

It is never economical for commercial banks to set up branches in every single village in India. On the other hand, mobile penetration in Indian rural sector is increasing. This gives Payments Banks the necessary route to enter far and deep in Indian rural sector. So yes, Payments Banks can actually help to achieve near 100% financial inclusion very quickly.

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