Understanding Payment Banks: Revolutionizing Financial Inclusion in India

In recent years, India has made great strides in the area of digital payments and banking. With a vast population, including many people in rural and remote areas, traditional banking systems faced challenges in reaching everyone. This is where payment banks came into the picture, making banking simpler, more accessible, and inclusive. Payment banks aim to bridge the gap between traditional banks and people who were previously excluded from the formal banking system, especially in rural India. In addition, the role of NBFCs (Non-Banking Financial Companies) in financial inclusion has also been significant, with services ranging from lending to account aggregation for various sectors.

This blog will walk you through what payment banks are, how they work, how they are regulated under the RBI license for payment banks, and how they’re contributing to financial inclusion in India. We’ll also touch on related concepts, including the NBFC account aggregator license and NBFCs registered with RBI.

What Are Payment Banks?

Payment banks are a new category of banks, first introduced in India by the Reserve Bank of India (RBI) in 2014. These banks are set up to cater to people who don’t have access to regular banking services, particularly those in rural areas and low-income groups. The primary focus of payment banks is to enable financial inclusion by providing basic banking services to the unbanked population.

Unlike regular banks, payment banks cannot offer loans or credit cards. Instead, they are designed to provide basic services like deposits, remittances, and mobile-based banking solutions. Just like traditional banks and NBFCs registered with RBI, payment banks also need an RBI license to operate in India.

Why Were Payment Banks Introduced?

India has millions of people who lack access to formal banking services. Many of these individuals live in rural areas where traditional banks have limited branches, making it difficult for them to access banking facilities. Payment banks were introduced to address this gap by offering accessible, low-cost banking services to everyone, regardless of location or financial background.

Some of the main objectives behind launching payment banks in India are:

1. Financial Inclusion: Bringing banking services to the unbanked population, particularly in rural areas.
2. Digital India: Supporting the government’s initiative to create a digital economy by encouraging digital payments.
3. Boosting Cashless Transactions: Reducing dependence on cash by promoting online and mobile transactions.
4. Easy and Quick Transfers: Providing a faster way to transfer funds, especially for low-income individuals who rely on remittances.

Key Features of Payment Banks

Payment banks are unique and different from regular banks in many ways. Here are some of their main features:

1. Limited Deposit Cap: Payment banks can only accept deposits up to a certain limit. Currently, the limit is ₹2 lakh per customer.
2. No Lending Services: Payment banks are not allowed to lend money or issue credit cards. They can only provide basic services such as deposits and remittances.
3. Simplified Banking: Payment banks primarily operate digitally, which allows for easy access through mobile apps and online platforms. Many also offer services through SMS and USSD (for feature phones without internet).
4. Interest on Deposits: Similar to traditional savings accounts, payment banks also offer interest on deposits, though the rates may vary.
5. Focus on Digital Transactions: Payment banks promote digital transactions, allowing customers to pay bills, transfer funds, and even purchase insurance through mobile platforms.

Services Offered by Payment Banks

Payment banks are limited in what they can offer compared to traditional banks, but they still provide a range of valuable services:

1. Savings Accounts: Individuals can open savings accounts with payment banks and earn interest on their deposits.
2. Mobile and Online Banking: Payment banks offer mobile-based banking, making it easy for customers to perform transactions from their phones.
3. Fund Transfers: Payment banks allow easy transfers between accounts, making it convenient for people to send money to family members, pay bills, or make other payments.
4. Bill Payments: Customers can pay utility bills, phone bills, and other recurring expenses through payment bank apps.
5. Remittances: One of the core functions of payment banks is to facilitate quick and low-cost remittances, especially beneficial for migrant workers who want to send money back home.
6. ATM and Debit Card Facilities: Some payment banks provide ATM or debit cards, allowing customers to withdraw cash when needed.

How Do Payment Banks Operate?

Most payment banks in India operate digitally, relying on mobile apps and online platforms to provide services. Here’s a look at how these banks typically operate:

1. Digital Platforms: Payment banks have mobile applications where customers can open accounts, check balances, transfer funds, and pay bills. This digital-first approach reduces the need for physical branches.
2. Partnering with Retailers: Many payment banks partner with local retail shops or merchants to act as banking correspondents, helping customers deposit or withdraw cash even in remote areas.
3. Simplified KYC Process: Payment banks have a simpler Know Your Customer (KYC) process compared to traditional banks. Many allow eKYC, where customers can complete verification online, making it faster and more convenient.

Advantages of Payment Banks in India

Payment banks have brought numerous benefits to India’s banking system, especially in the context of financial inclusion. Here are some key advantages:

1. Increased Accessibility: Payment banks reach rural and underserved areas where regular banks are scarce. People can now access banking services from their phones without needing to travel far.
2. Promotes Digital Payments: Payment banks are helping to move India towards a cashless society by promoting digital payments and online transactions.
3. Affordable Banking: Since payment banks don’t need large physical infrastructure, they keep operational costs low, making their services more affordable for low-income groups.
4. Faster Fund Transfers: With mobile banking and digital transfers, customers can quickly send money to their families or pay for goods and services without delay.
5. Supporting Financial Inclusion: By serving the unbanked population, payment banks help integrate more people into the financial system, giving them access to formal financial services.

Limitations of Payment Banks

While payment banks offer numerous benefits, they also come with certain limitations:

1. No Credit or Loans: Since payment banks can’t lend money, customers looking for loans or credit facilities still need to approach traditional banks or an NBFC registered with RBI.
2. Limited Deposit Cap: The deposit cap of ₹2 lakh per customer limits the amount people can keep in these accounts, which may be insufficient for some users.
3. Dependency on Technology: Payment banks primarily operate through digital platforms, which can be a drawback for people in areas with poor internet connectivity or those unfamiliar with smartphones.
4. Limited Product Offering: Compared to traditional banks, payment banks have a limited range of services, which may be less appealing to some customers.

Examples of Payment Banks in India

Some well-known payment banks in India include:

• Airtel Payments Bank: Launched by Bharti Airtel, this payment bank was the first to receive approval from the RBI. It offers mobile-based banking services, allowing easy transfers, bill payments, and more.
• India Post Payments Bank (IPPB): Operated by India Post, this bank leverages the extensive network of post offices across India to reach rural and remote areas.
• Paytm Payments Bank: Known for its digital wallet, Paytm also launched a payment bank, providing users with savings accounts, fund transfers, and other basic services.
• Fino Payments Bank: This bank focuses on rural and semi-urban areas, offering simple banking solutions through digital platforms and partnerships with local merchants.

The Future of Payment Banks in India

The future of payment banks in India looks promising, especially with the ongoing digital revolution and government initiatives supporting financial inclusion. However, for payment banks to fully thrive, they may need to expand their offerings or partner with NBFCs registered with RBI. There is also potential for RBI takeover of NBFC entities or mergers with payment banks to provide a more comprehensive range of services. With the RBI license for payment banks being a strict regulatory requirement, it ensures that these banks continue to operate within the legal framework, maintaining consumer trust.

Conclusion

Payment banks are making significant contributions to financial inclusion in India. By focusing on the underserved population, especially those in rural and remote areas, payment banks are helping more people access essential banking services. With the convenience of mobile banking, affordable services, and widespread reach, payment banks are gradually changing the face of India’s banking sector.

While there are some limitations, the impact of payment banks on financial inclusion is evident. By making banking more accessible and promoting digital transactions, they are contributing to the government’s vision of a Digital India and bringing millions of people into the financial fold. Alongside NBFC account aggregator licenses, NBFCs registered with RBI, and the possible RBI takeover of NBFC entities, payment banks are paving the way for a more inclusive financial ecosystem in India.