India Post Payments Bank: Right Letter in the Wrong Envelope?

India Post Payments Bank launches at a time when enthusiasm about the payments banking service is low.

India Post Payments Bank (IPPB) was hailed as a “game changer” in January 2017 during the launch of its pilot branches. Twenty months later, as Prime Minister Narendra Modi formally launches its operations on 1 September, it appears that the game itself has changed.

India Post’s plans to leverage its network of three lakh postmen and 1.55 lakh branches and double up as a technology aided banking platform. The postman to banker transformation, however, has occurred under a digital model that appears to have fizzled in its appeal.

Of the 11 in-principal payments bank licenses granted by the Reserve Bank of India three years ago, three have surrendered their payments bank approvals, three have been penalised for malpractices while two others have postponed their rollouts. Doubts surrounding revenue models, restrictions on lending, stringent KYC norms and the evolving digital payments ecosystem have collectively punctured some of the initial enthusiasm.

What are Payments Banks?

Payments banks offer a differentiated banking system and operate on a narrower scale. They function like regular banks but without the credit risk. Payment banks can accept demand deposits up to Rs 1 lakh but are not allowed to lend to customers. They also offer remittances, money transfer, direct benefit transfers, bill and utility payments, and enterprise and merchant payments.

In India, payments banks were set up as a result of the recommendations of the Nachiket Mor Committee on financial inclusion in 2014. This special category of banks was conceptualised in the interest of financial inclusion to provide formal banking services to “unbanked and the under-banked” population of the country.

A Turbulent Journey

Since August 2015, when the RBI granted in-principle licenses to 11 of the 41 applicants, the new model has struggled to come into its own. At a time when enthusiasm towards digital payments and financial technology (fintech) is high, why have payments banks failed to fire the imagination of the masses?

In the months following the licenses, Cholamandalam Distribution Services Ltd, Dilip Shantilal Shanghvi and Tech Mahindra Ltd returned their approvals to the RBI, much to the central bank’s displeasure. Why would a company go through the ordeals of a stringent application process only to withdraw upon selection?

A number of reasons have been at work here. Former SBI chairperson Arundhati Bhattacharya has on multiple occasions asserted that payments banks do not have a viable business model.

First, payment banks are required to park most of their deposits in government securities. This has raised questions about the ability to make the business profitable. As per RBI’s operating guidelines, customers can deposit a maximum of Rs 1 lakh into a PB savings account.

Second, unlike regular banks, payments banks are not allowed to advance loans and earn revenue from interest. Moreover, the interest rates offered by these banks on savings accounts may not be attractive enough for customers in comparison to other retail banks. While Airtel Payments Bank had initially offered 7.25 percent in 2017, it will be offering 4 percent from 1 September. This brings them at par with PayTm. IPPB has announced that it will be offering 4.5-5 percent.

Third, examining a payments bank on the basis of deposits it holds is not a useful method to ascertain their success. Instead of quantum of deposits, it is the rate of transactions that provide a more accurate picture. Companies investing in this model of banking would rather generate data through high transaction and use that to sell third party products in order to generate revenues.

Scarred by Regular Penalties

The turbulent journey of payments banks can be further understood through the penalties imposed on a number of license holders for alleged malpractices. There have been allegations of non-consensual opening of accounts, violating deposit ceiling and the KYC process. These practices have revealed a tendency to bypass the rules imposed by the RBI in favour of greater viability of the new banking model.

Airtel Payments Bank

In March 2018, the RBI temporarily suspended Airtel PB’s license and fined the company Rs 5 crore for opening accounts without the informed consent of its customers. Between June and October 2017, Rs 47 crore worth of subsidies were deposited into 23 lakh Airtel PB accounts instead of the customers’ regular accounts without their knowledge. Bank CEO Shashi Arora had to tender his resignation in the aftermath of what the RBI termed as violation of "Operating Guidelines for Payments Banks".

PayTM Payments Bank

The RBI had also reportedly issued a notice to PayTm to stop enrolling new customers with immediate effect after discrepancies with its KYC (Know Your Customer) were discovered. According to reports, PayTm was creating bank accounts through e-KYC instead of a full KYC which requires the submission of valid identity documents such as passport, driver’s license and Aadhaar card.

Fino Payments Bank

Soon after PayTM, reports emerged about an RBI notice to Fino Payments Bank as well directing it to immediately stop onboarding new customers. According to reports, Fino had accepted deposits in excess of Rs 1 lakh, thereby violating RBI operating guidelines.

What India Post is trying to Achieve

According to India Post, its payments bank has been set up us a 100 percent Government of India-owned Public Limited Company under the Department of Posts. India boasts the highest number of post offices in the world at 1.55 lakh and the government plans to leverage this extensive country-wide network to provide formal banking channels at the doorsteps of rural India. IPPB will launch with 650 branches and 3,250 access points.

While payments bank can have different reasons for setting up operations, India Posts Payments Bank aims to focus on public service and work towards financial inclusion. Unlike Airtel, Jio, Vodafone and Idea, IPPB will have an offline presence as well and utilise its postal employee base to get customers to sign onto their banking platform.

It will be an agent-led model, and agents will largely be postman, but it is open for anyone to be agent. In this regard, their primary competitor will be Fino Payments Bank.

Since IPPB has been mandated with getting the unbanked population into the formal banking network, it will have to align its core services with the fact that the Jan Dhan Yojana has already embarked on the same mission. It will have to work alongside the scheme in streamlining services for existing account holders.

Concerns About India Post Payments Bank

• KYC: Given that other payments banks have struggled to comply with the RBI’s full KYC norms, it remains to be seen how IPPB scales its services. While telecom-based payments banks had sought to use internal eKYC to enroll its existing customers into the banks, this was rejected by RBI. This meant additional cost for fresh KYC. While the network presence might save IPPB cost of adding agents, the cost of eKYC will be significant to IPPB if it chooses to open new accounts at scale.
• Revenue Model: Doubts about the commercial viability and profit-making have led to the surrender of licenses. Given the restrictions on lending, investment of deposits and data driven revenue channels, it remains to be seen how IPPB sustains itself on the revue generated.
• Last Mile Agents: According to field studies conducted by IFMR LEAD and CFI Accion, awareness about digital banking remains low. This is compounded by the fact that agents have responded to the survey describing a lack of administrative and technical support from their organisations. A lack of awareness and limited understanding by both customers as well as last mile agents will pose a challenge in bringing formal banking to rural India.