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Last Updated : Dec 04, 2019 07:51 PM IST | Source:

Explained | From payments banks to neo banks -- how India's fintech ecosystem has evolved

From digital wallets to payment gateways to the so-called “neo-banks”, the choices available to today's tech-savvy users are many.

The Reserve Bank of India (RBI) granted in-principle approvals to 11 entities for setting up payments banks (PBs) in August 2015 and 10 for Small Finance Bank (SFB) in September 2015.

The RBI grants two kinds of banking licences- Universal Bank Licences (the ones given to regular banks) and Differentiated Bank Licences (for niche banks). These niche banks cater to the needs of a certain demographic segment of the population. SFBs and PBs are examples of such niche banks.

However, new financial companies, which tend to target the more ‘tech-savvy’ audience, are also gaining ground. From digital wallets to payment gateways to the so-called “neo-banks”, the choices available are many.


Most of these digital payment facilities do not function like regular banks and hence do not require banking licences. There are certain overlaps in the services that are provided by these niche banks and payment facilities. Then what is it that makes them different?


A payments bank is like any other regular bank, but operating on a smaller scale and without involving any credit risk. It can carry out most banking operations but can’t advance loans or issue credit cards. It can, however, accept demand deposits (up to Rs 1 lakh), offer remittance services, mobile payments/transactions and other banking services like ATM and debit cards, net banking and third-party fund transfers (more like deposit-taking companies).

The main objective of payments bank is to extend payment and financial services to small business, low-income households, migrant workforce, but in a secured, technology-powered environment.

Aditya Birla Payments Bank, Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank, Paytm Payments Bank and NSDL Payments Bank are some PBs that are functional in India.

However, there are several restrictions imposed on the deposit portfolio of PBs. They can accept deposits of up to Rs 1 lakh only. In addition to this, they also have to maintain Cash Reserve Ratio on their deposits with the RBI and also have to invest a minimum of 75 percent of their “demand deposit balances” in government securities. As if this wasn’t enough, an additional 25 percent of their deposits must be held with other scheduled commercial banks for operational purposes and liquidity management.

Hence, some of these payments banks are also considering a conversion to small finance banks.


A small finance bank undertakes basic banking activities like accepting deposits and lending to unserved and underserved sections of the population. The key difference between SFBs and regular banks is scale. SFBs mainly provide services to small business units, small and marginal farmers, micro and small industries, with their USP being high technology coupled with low-cost operations.

However, in a financial year, SFBs are required to open at least 25 percent of their branches in unbanked rural areas, similar to scheduled commercial banks.

The central bank mandates small finance banks to lend 75 percent of their credit to priority sector borrowers. Priority sector includes those working in agriculture and small enterprises as well as people with low-income. This limit is higher as compared to that prescribe by the RBI for commercial banks, which have to lend only 40 percent of their credit to such sectors.

Additionally, 50 percent of their loan portfolio must be made up of advances of up to Rs 25 lakh. These banks are also allowed to distribute simple financial products such as mutual funds, insurance and pension products.


Payment gateways are like bridges- they connect a user's bank account to platforms to which money transfers are to be made. It allows one to make online transactions by means of various payment modes like net banking, credit or debit cards, UPI and digital wallets like Paytm, PhonePe or Google Pay. It plays the third-party role in facilitating money transfer from the user's bank account to the platform.


Digital wallets, on the other hand, are basically secure storage systems for user information used for various payment methods and platforms. These mostly work through apps on users’ smartphones.


Neo-banks are fully digital entities without any physical network. What they offer- accounts credits payments and other such services. They usually don't have licences of their own but rely on bank partners to provide bank licensed services. So these are basically fintech firms that provide digital and mobile-first financial solutions. However, regulatory norms in India restrict such entities that are 100 percent digital. Payment gateways and payments banks are the existing models that are closest to such "neo-banks".

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First Published on Dec 4, 2019 07:51 pm
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