Chanakya IAS Academy Blog

Introduction :The article talks about the challenges which Payment Banks have to tackle in order to achieve its objective of universal financial inclusion.

  • It is widely believed that India is on the cusp of a financial services revolution. Recently, RBI gave licences to a new class of differentiated financial provider i.e. Payment Banks.
  • Of the 11 players who were issued in-principle approvals for payments bank licences, one (Airtel M Commerce Services Ltd) has received the final licence, and others have announced high-profile launches and recruitments.
  • Recently though, three payments banks (Cholamandalam Investment, Dilip Shanghvi-Telenor Financial-IDFC Bank and Tech Mahindra) have withdrawn their applications, reviving questions about the viability of the business model.
  • The success of these new entities will depend to a great extent on their ability to go beyond serving the well-banked smartphone-carrying consumers who have been the focus of digital payments in India so far.
  • Payments banks will need to creatively reach the low-income and financially underserved the so-called base of pyramid (BOP) consumers.
  • However, developing a model that is both effective in reaching the BOP consumer and commercially profitable, is far from easy. It will require a paradigm shift.
  • Leveraging technology to reduce cost-to-serve will of course be important, but much more will be needed. In this series, three key factors can be critical to successfully serving BOP consumers.
  • First, players will need to deepen their understanding of the unique needs of BOP consumers and develop products and customer experiences tailored to these needs.
    1. For example, income at the BOP tends to be more irregular and unpredictable, often cobbled together from various sources.
    2. Savings are limited, often taking the form of small amounts saved daily that need to be banked quickly to prevent them from being spent.
    3. Formal credit histories are virtually non-existent. There is heavy reliance on informal networks like friends and family for financing big-ticket needs.
    4. Providers will need to develop new products that are better suited to the financial lives of BOP consumers, for example, daily micro-saving products and micro-loans that rely on non-traditional data.
    5. They will need to develop partnerships with other financial institutions to meet the full scope of customer needs.
    6. More fundamentally they will need to orient themselves to become truly customer-centric.

Second, reaching out to this new target user group will require combining ‘high-tech’ with ‘high-touch’. Technology is, of course, going to be key to keeping costs low.

  1. The use of Aadhaar-linked authentication, know-your-customer and e-sign (elements of the so-called IndiaStack) and the proliferation of mobile/online payment systems hold special promise for reducing the cost of delivery.
  2. However, smartphone penetration is still low and digital literacy is a major challenge among the BOP. So, payments banks will need to rely on physical agent networks, at least in the foreseeable future, to serve this segment.

Finally, players will need to harness the potential of the ubiquitous kirana (neighbourhood) store, by making it worth their while to accept digital payments.

  1. This is particularly true for payments banks, which will need to rely heavily on small-ticket transactions for revenues, given limitations to their net interest income.
  2. Today, ~95% of retail in India is unorganized, and only 6% of these retail establishments accept digital payments. Clearly, cash is still king and digitizing small merchant payments is a herculean task.

Question:Payment Bank is another financial provider announced by RBI to achieve the target of universal financial inclusion in India. Do you think this initiative will be able to provide services to the ‘base of pyramid’ (BOP) consumers. Highlight the major challenges and give suggestions.

Suggested approach:

  1. Features of Payment banks.
  2. Major challenges.
  3. Suggestions.


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