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Payment Banks - Finally

The introduction of payments banks could be a game-changer, provided regulatory and security concerns are resolved

In February 2015, RBI received over 40 applications for setting up 'payment banks'. A new kind of restricted bank, payment banks are expected to widen the availability of payment networks and increase financial inclusion. Most cellular companies have applied to become payment banks, with equity partnerships with other full-function banks. Mobile payments will be an integral part of the new payment infrastructure.

Defining mobile payments
The components of mobile payments are described in the figure. The 'wallet' is software that stores information as well as provides authenticated access to payment services. Payment services are typically of three types: those involving payments on the web, payments and receipts using the cell phone as a payment device and person-to-person (P2P) payments. Payment instruments can be debit or credit cards, stored value cards or other variants.

Over time as mobile payments become more ubiquitous, it is possible that they will include other services, including direct benefit transfers from the government, remittances, bill payments, etc.

Mobile payments ecosystem
Industry wisdom suggests that mobile payment systems are most successful in environments where (a) financial inclusion is weak, (b) financial services infrastructure is limited, while (c) mobile penetration is high. In the case of India, while (a) is improving rapidly with the government's thrust on the Jan Dhan Yojana, financial services infrastructure will take time to catch up. Mobile payments also have the advantage of lower cost through the use of agents that are already engaged in mobile top-up services or in selling handsets and data cards.

A study by Imperial College says the following about the broader economic benefits of digital money: "A 10% increase in digital money readiness... can help an estimated 220m individuals enter the formal financial sector. This translates to an additional $1tn moving from the informal economy to the formal economy, which in turn can allow governments to collect in excess of $100bn in incremental taxes. Further as these individuals enter the formal economy, access to affordable credit could lower their cost of financing by ~$600 annually. This amounts to a direct positive impact to consumer spending of approximately $150bn. The overall impact to GDP can be substantial due to the multiplier effect of this incremental spending."

Payment Banks - Finally

Favourable regulatory regime
Thus far Indian mobile payments have been restricted due to cash-out limits imposed by the central bank or the bank partner of mobile service providers. Mobile payments typically become popular due to transfer of money nationally. Migrant workers remit money to their families in rural India and payment solutions have to allow cash withdrawal on receipt. Under 'payment bank' licenses, operators will be able to transfer money and payments to the widest possible market, without having to deal with restrictions of partner banks.

With the proliferation of Aadhaar cards (75 crore in Jan 2015 - 62 per cent of the population), know-your-client requirements are easier to comply with, allowing mobile company payment banks to target even inbound international remittances.

Mobile payments - more than just a payment
A significant difference in the way a traditional payment is made versus a mobile payment is through the power of cell phones to combine both information and e-commerce. For example, targeted offers to consumers are now possible through customer identification using near-field technologies. This is already changing the way loyalty programs are being administered, with instant redemption being an obvious advantage. This also offers benefits to merchants by being able to increase the probability of a successful transaction.

Payment banks - disruptive developments
The introduction of mobile banking through payment banks threatens to be disruptive to the payments industry. Card companies - Visa, MasterCard, American Express - are all trying to work out ways to offer mobile payment solutions using their own payment backbones. In addition, there are cloud-based solutions such as PayPal in the US or its clones in India. All these could potentially be licensed to operate as a payment bank. As more purchases are made electronically, data on consumer behaviour becomes available to consumer companies, allowing more targeted advertising and promotion. Product selling is likely to be customised like never before.

These scenarios need a system that users can trust, requiring country-wide and then perhaps global standards for security and inter-operability. Current rules are different for credit and debit cards. Similarly, banks and non-banks have different rules. The regulatory environment for the payment industry is currently complex. Besides security of transactions, fraud and money laundering regulations will now have to cover software application developers and mobile operators as well. Hopefully, some of these issues will be ironed out through the creation of payment banks.

Anand Tandon is an independent analyst.