The challenge of reaching the unbanked is no simple task. In India, where Prime Minister Modi has encouraged more citizens to open bank accounts through the country’s ambitious yet successful financial inclusion initiative, there is still work to be done. While the number of bank accounts opened is at an all-time high, the usage of these accounts by low-income earners is still extremely low.
This may be about to change, as the Reserve Bank of India (RBI) has granted in-principle approval for 11 new payments banks to be established. A payments bank is a new type of bank that will offer all of the services of a regular bank except for loans. Another key difference is that payments banks will offer low-fee savings accounts and remittance services to target low-income families, migrant workers, and small businesses.
What are some of the opportunities and challenges for payments banks?
Opportunities for Payments Banks
“Last mile” connectivity
The number of rural branches for Indian banks has dropped sharply from 54 percent of all branches in 1994 to just 37 percent in 2013. This gap between remote villages and access to financial services increasingly found mainly in urban centers is often referred to as the “last mile,” a term borrowed from telecommunications and technology. Payments banks can bridge the gap, since they are focused primarily on serving those in areas like these.
Convenient bill payment
Due to the lack of local branches, rural residents have to travel long distances to the nearest town or city with a bank branch to pay utility bills. With the advent of payments banks, bill payment is fast and easy using mobile wallets from home, eliminating the need for long trips.
Reduced dependency on cash
India is a very cash-dependent society, so much so that even eCommerce giant Amazon offers cash on delivery as a payment option. Carrying around large amounts of cash to make in-person payments can be a dangerous proposition, as the bearer risks losing all of their money by being robbed. Greater use of payments banks will decrease the need to carry cash thanks to the availability of safe and affordable digital payment.
Challenges for Payments Banks
Exposure to fraud
As with any kind of money transaction, payments banks and digital payments can be targets for fraud. Mobile money fraud is already well-documented as are the methods available to manage the risk. Payments banks need to ensure that adequate controls are put in place from the beginning to maintain an environment that can be trusted by both businesses and consumers.
Existing mobile money service providers in India needed to partner with an existing traditional bank in order to operate because of financial services regulations. Because the RBI regards mobile money as a banking service, it has placed the same regulatory expectations on service providers as banks. This also means that users that wish to create a mobile wallet must go through the same arduous KYC process that is required by those who wish to open traditional bank accounts. As a result, fewer telecommunications companies are interested in entering this market, and fewer customers are interested in signing up for mobile wallets. This compliance burden can be lessened by using electronic identity verification solutions available online, including a KYC registry that is being set up by the Indian government.
Overcoming cash dependency
One of the biggest challenges that payments banks face in gaining popular support is weaning Indians off their reliance upon physical cash. Eighty-two percent of those asked in a recent survey still believe that cash is the best tool for small to medium transactions. Interestingly, most of those surveyed did not know about mobile money, pointing to a lack of awareness as the most probably cause for low adoption. That will soon change as more digital payment options are becoming available, as even Uber is reportedly applying for a license from the RBI to create its own mobile wallet that will allow its riders to pay drivers using its own system.
What It Will Take to Succeed
Offering incentives to cash-based customers, such as extremely low fees for peer-to-peer payments, can make having a payments bank account more attractive. In Somaliland and Pakistan, mobile money operators eliminated fees for digital payments, resulting in a tremendous uptake by consumers.
Most importantly, the new players entering the payments bank space must be ready and willing to invest in their businesses for the long haul. According to the mobile industry association GSMA, it may take four to five years for mobile money operators to begin seeing high rates of growth and profit. The first two years will most certainly be a lean period, as operators build their customer base. These new companies will need a solid long-term plan and remain committed beyond the first 24 months.
Can Other Countries Benefit?
Many African nations are already benefitting from the growing adoption of mobile money. In Kenya, Tanzania, and Nigeria, mobile money users are already making digital payments for utilities. M-Shwari from Safaricom in Kenya offers bank accounts that can be used for both savings and loans in connection with immensely popular M-PESA mobile money service.
All countries that lack the necessary infrastructure to support a traditional banking system for all citizens make good candidates for payments banks. With global mobile phone penetration constantly on the rise, soon every unbanked or underserved person will have the potential to access basic banking services and more from the palm of their hand.
What do you think it will take for payments banks to succeed?