Payment banks were envisaged to usher in a technological revolution in the Indian banking sphere and were expected help reduce transaction costs dramatically and usher in a host of new products and services which are now within the realm of possibilities through the innovative use of information technology.
While existing banks have domain knowledge in banking, fintech companies have the technical skills but not the domain knowledge. This combination retards penetration of technology into banking and payment banks were considered an ideal solution. Bankers are, by temperament and experience, rather conservative and, therefore, adoption of new technology by them has traditionally been slow. One of the key functions of the banking system is to provide and manage the payment systems of the society.
Since personnel policy of banks in India has no provision for cadres / career path for bankers who would like to specialise in payment systems, banks lack technical and conceptual skills to meaningfully contribute to the development of this area of banking. This lack of skills has become more acute with fast changes in technology which enables a host of new possibilities, apart from offering existing services at much lower costs.
For most bankers, payment systems are restricted to something that RBI does and arranges, and full marks to RBI on this count. Thanks to RBI India has one of the best and most advanced payment systems infrastructures in the world, due to institutions such as the Institute for Development and Research in Banking Technology (IDBRT) and National Payments Corporation of India (NPCI) set up through an initiative by the RBI. However, the benefits of the infrastructure have not percolated to the masses which payment banks were expected to address.
A total of 11 entities were given in-principle approval to set up payment banks by RBI. From this lot, three dropped out without setting up shop. Later one more announced that it was shutting down its operations. Of the remaining payment banks which continue to operate, not much progress is visible on the ground.
One of the key strengths of the banking system is to benefit from economies of scope. That is, banks use the same infrastructure, data set, skills, and technologies to provide a wide variety of services, thereby spreading their fixed costs with only marginal addition in operating costs. Banks, being highly leveraged businesses, even small slippages in their main business of providing loans and advances can push them into the red. That is why, leveraging economies of scope is critical for their long term survival, growth and profitability.
Payment banks by definition / as per their licence conditions, are precluded or restricted from offering very many banking services, thereby, prima facie, making their operations sub-optimal.
Going forward, the option before them is to either get bought out by traditional commercial banks or build up a customer base large enough to enable them buy out one of the existing banks. Without this synergy, their continued viability looks difficult. The second option seems far-fetched, given the large difference in size.
The best fit would, therefore, be for payment banks to merge with an upcoming small finance bank and together blaze a path of glory in the Indian banking sphere.
Once the technology base of banks is strengthened and is assimilated, the same set of skills can further transform all the other areas of banking operations bringing down the overall operating costs of banks even further.
And such innovations, especially those that bring about disruptive changes, are rarely brought about by existing players. Hence, payment banks, small finance banks et al!
(Sushil Prasad worked with various banks - public, private, and foreign both in India and abroad - for nearly 30 years and is currently on a self-imposed sabbatical to try and understand as to what ails Indian banking and what, if anything, can be done to improve its functioning.)