Why have half of India’s payments banks shut shop?

Payments banks are predominantly digital companies and were formed by the RBI to promote financial inclusion

With the regulatory cloud hanging over Paytm Payments Bank, the larger payments bank industry witnessed a roller-coaster ride of changes in its short history of eight years. Starting from 2016, 11 entities received payment bank licences from the Reserve Bank of India (RBI). These are Aditya Birla Nuvo, Airtel M Commerce Services, Cholamandalam Distribution Services, Department of Posts, FINO PayTech, National Securities Depository, Reliance Industries (Jio), Dilip Shantilal Shanghvi (Sun Pharmaceuticals), Paytm Payments Bank, Tech Mahindra, and Vodafone m-pesa.

In the context of Paytm Payments Bank receiving regulatory instructions, Moneycontrol looks at how the payments bank industry fared so far.

Also read: Paytm in talks with other banks to transfer PPBL business, says Vijay Shekhar Sharma

Firstly, what is a payments bank?

These are banks which cannot issue credit but can accept cash deposits of up to Rs 2 lakh per customer. These are predominantly digital companies and were formed by the RBI to promote financial inclusion. In Budget 2014-2015 presented on July 10, 2014, then Finance Minister Arun Jaitley announced the formation of a new structure for licensing different types of banks including payments banks.

“After making suitable changes to the current framework, a structure will be put in place for continuous authorisation of universal banks in the private sector in the current financial year. RBI will create a framework for licensing small banks and other differentiated banks,” Jaitley said.

Accordingly, the RBI released draft guidelines, which said: “The objectives of setting up of payments banks will be to further financial inclusion by providing small savings accounts and payments/remittance services to migrant labour workforce, low-income households, small businesses, other unorganised sector entities and other users.”

What is the Paytm Payments Bank episode?

The RBI on January 31 imposed major business restrictions on Paytm Payments Bank including accepting fresh deposits and undertaking credit transactions after February 29. On March 11, 2022, the RBI had for a second time barred Paytm Payments Bank from taking on new customers, on the ground that it had violated Know Your Customer (KYC) norms.

The central bank said a comprehensive system audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliance and continued material supervisory concerns in the bank, warranting further supervisory action.

How many payments banks do India have?

According to information available on the RBI website, as of January 6, 2024, six payments banks are operational in India — Airtel Payments Bank, Jio Payments Bank, Paytm Payments Bank, India Post Payments Bank, Fino Payments Bank and NSDL Payments Bank.

Also read: SBI chairman says no communication with Paytm on transfer of business

The external advisory committee formed by the RBI in 2015 to scrutinise payments bank licence applicants gave more weight to telecom companies considering their reach. Hence, on April 11, 2016, Airtel Payments Bank became the first entity in India to receive a payments bank licence from the central bank.

What happened to the banks?

With time, five out of 11 payments banks have shut shop.

Aditya Birla Payments Bank, a joint venture between Aditya Birla Nuvo and Idea Cellular, discontinued its banking business within two years of its inception due to a lack of funds In July 2019, the payments bank announced that it would wind up its business on account of "unanticipated developments" that made its economic model "unviable". And later in November 2019, the RBI said Aditya Birla Idea Payments Bank was headed for liquidation. The payments bank was promoted by Grasim Industries and Vodafone Idea with 51 and 49 percent shareholdings, respectively.

Cholamandalam Investment and Finance Company, the financial services arm of the Murugappa Group, dropped its plans to set up a payments bank in 2016 and surrendered the in-principle approval given by the RBI. The company cited reasons like competition and a long road to profitability for the decision. “It is a decision by the board considering competition and other factors including a long gestation period,” the company said.

Also read: Post RBI action, what happens to your money in Paytm Wallet or Paytm Bank?

Shanghvi, who too was given an in-principle approval to start a payments bank, had announced a tie-up with Telenor Financial Services and IDFC Bank for the new venture. But in May 2016, in a joint statement, the three partners said they would be communicating their decision to the RBI to not pursue a payments bank. However, they did not list the reasons.

Tech Mahindra, citing a long payback time on its investment, dropped plans for a payments bank in May 2016. “The company realised that intense competition would only erode already thin margins,” CP Gurnani, the then managing director and chief executive officer of Tech Mahindra, said at a press conference.

Vodafone Idea, the promoter company of Vodafone m-pesa, in late 2019 decided to close the payments bank following the closure of Aditya Birla Idea Payments Bank. Balesh Sharma, the then CEO of Vodafone Idea, attributed regulatory changes to the payments bank business and deterioration in the health of the telecom sector.

What do experts say?

Industry pundits said that the failure of payments banks can be linked to a lack of capital available to them, limited reach and network and the limitation of offering only selected banking services.

Chandan Sinha, former RBI deputy governor, said that payments banks worked as an ancillary business to an entity’s core business. “Take the example of cellular and telecommunication companies. They already had an existing retail network and, hence, payments banks worked for them,” Sinha pointed out.

He also highlighted that these banks had limited income streams that were not commensurate with the expenses involved.

“Payments banks had high costs and there was not much functioning and limited banking services to offer,” Sinha added.

Sharat Chandra, co-founder of India Blockchain Forum, said that evolving technology and amending the required regulatory norms were also some challenges the payments bank faced.

“KYC has always been an Achilles heel for payment banks. The RBI mandating KYC norms for payments banks was a shock. Additionally, the evolving landscape of AI (artificial intelligence) and the emergence of deepfakes have introduced a new dimension to the challenge, posing a formidable threat to the integrity of KYC processes,” Chandra said.