Why payment banks in India are struggling?

After the policy for digital payment and Financial inclusion has introduced by RBI in 2014, about 41 entities had applied for Payment Bank(PB). In 2015 there were 11, seven Payment Banks including Aditya Birla Payments Bank, Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank and Paytm Payments Bank - have launched operations.

Payments bank is just like depositing account, a micro-savings product which allows one to securely store money for a specific purpose or for an unexpected event in one’s life. Payments bank could facilitate money deposit of upto one lakh rupees, further offering remittance service, mobile payments, ATM/debit card facility and third-party fund transfer but as a policy the Payment Banks are not allowed to lend.

The primary objective of the PBs was to harness technology to increase the financial access of customers at the bottom of the pyramid, not many in the segment are aware of financial technology and such initiatives will take time to show results but the PBs, which were supposed to be a game-changer in furthering the agenda of financial inclusion for all, have been not able to break even.

Whereas, the small finance banks, which were converted to full-fledged scheduled banks from their earlier model as micro finance institutions, slipped into the red in FY18 from posting a small profit last year.

March 2019 witness, Paytm account for over 19% of all mobile-banking transactions while Airtel’s Payments Bank contributed more than 5% to the 867 million transactions made during the month. In contrast, State Bank of India (SBI), the largest lender in the country by assets, recorded 145 million transactions, accounting for under 17%.

The only banks ahead of Airtel Payments Bank are SBI and the three largest private-sector banks – HDFC Bank, ICICI Bank and Axis Bank. Indeed, ICICI Bank saw close to 60 million mobile-banking transactions in March 2019 though it was just a whisker ahead of Airtel, with under 7% of the market.

For payments banks, 2018-19 is supposed to be an important milestone. The Payment Banks are earning revenues from interest gained through deposits in government-approved securities, which offer lesser returns compared to other avenues such as mutual funds. Paytm Payments Bank is the market leader in the segment of digital transactions, Airtel Payments Bank climbed up the table, followed by Airtel Payments Bank and the growing competition among Paytm, Fino and IndiaPost, leaving behind Bank of India and Kotak Mahindra Bank with the concept of New–age players. A question is on how a sustainable business model can be planned to save the investments made by the companies into the Payment Banks(PB).

The main issue is with the PB is they are only allowed to accept savings and current deposits of up to Rs 1 lakh per customer but are not allowed to lend. The losses have been attributed to the high operating expenses, as many of these banks had to set up the initial infrastructure. The expenses have gone up by five times to acquire new customers.

Right now payments banks seem to be struggling to evolve a robust revenue-generating business model and to differentiate themselves from full-service banks. Bankers point out that while new-age players are getting more share in the digital payments market, the legacy banks have a bigger share of transaction values. Besides Paytm, Airtel, Fino and India Posts are the other fully operational payment banks. Paytm Payments Bank and Airtel Payments Bank together command over 88% of the deposits in payment banks in India in 2018.

ABIPBL is a joint venture between Aditya Birla Nuvo Ltd (51% stake) and Ideal Cellular (49% stake) commenced operations as a payments bank in 2018.Aditya Birla Idea Payments Bank Ltd (ABIPBL), which commenced its operation 17 months ago, is now shutting down its operations and Sudhakar Ramasubramanian, CEO has asked its employees to leave. Already 160 employees have left the organisations and some have been shifted within Aditya Birla Group.

The bank’s customers have been informed that they can transfer the balance in their accounts to any other bank account and that the bank would restrict any further credits (add money) from July 26, 2019. The payment banks (PBs) is getting shut down operations due to not being able to find a viable business model around it and struggling to garner deposits. Hence, the Government need a relook on the current business model and supplementary policy initiatives.

Lastly, the reason of PB choosing to shut shops, could be with the lack of proper awareness about it amongst people and whatever little awareness is there has not been able to translate people into customers.