India has been having a fantastic journey on mobile payments over the last decade. It started off with IMPS (Instant Mobile Payment System) by NPCI during 2010. Launch of UPI in 2015 took mobile payments to a global scale. Incumbent banks’ partnership with fintech and BigTech well-orchestrated by NPCI under the watchful eyes of the RBI has created a transformative ecosystem. Thanks to the government’s push, 600 million Jan Dhan bank accounts have been created.
There was lot of clamour for payments bank licence and as many as 41 aspirants jostled for the coveted licence. But the RBI granted licence to only 11 entities. As the hype wore off, some of the successful applicants realised that the business modelwas not viable and as such as many as five dropped out, leaving six players in the field.
The RBI’s recent supervisory action on Paytm Payments Bank has sent ripples across fintechs. The trigger, as stated by the RBI, is persistent non-compliance with regulatory guidelines. This comes on the back of earlier supervisory actions by way of penalties and temporary embargo on new business. Paytm Payments Bank had a good run and is by far the largest and most aggressive player in the payments space. It claims to have over 300 million wallets, 100 million customers and over 30 million merchants. These numbers include both active and inactive at monthly usage frequency. It leaves other players miles behind. Its disruptive innovations in accelerating digital payments is undeniable. But a regulated entity cannot exempt itself from regulations. There are no trade-offs between customer experience and compliance/governance.
Per the annual report, it has over 29 subsidiaries, seven associates and seven joint ventures. This is bit of stretch for governance in terms of resources, norms and oversight. Among others, compliance and monitoring of related-party transactions, not just in monetary domain but more importantly in data governance domain.
Paytm Payments Bank’s regulatory run-in notwithstanding, we need to look at issues and challenges of payments banks in general and explore the way forward.
The business model is the elephant in the room. Payment banks are not allowed to lend. They are not allowed to charge for UPI payments. They may only distribute and collect loans online in partnership with other regulated lenders. They just cannot generate enough revenues and prosper merely on the revenues from payment services . This had become particularly challenging with the launch of UPI and AEPS (Aadhaar Enabled Payment systems). Most of the payment banks are bleeding or struggling to be profitable.
The success of UPI and launch of AEPS had disrupted the entire payment ecosystem far beyond what was envisaged when the special category of payment banks’ idea was even conceived and licensed. Today, practically all the 600 million Jan Dhan accounts with banks are provided digital payment access with/without payment banks. One would question the relevance of payment banks with sole focus of payments in the present milieu of the digital payment ecosystem. In fact, payment products/services are only strategies for customer acquisition; they cross-sell and depend not just on payment business.
Post the Global Financial Crisis, the banking regulatory community have recognised that when big players fall, there would be massive systemic risks and moral hazard and it would be difficult to resolve and respond quickly. The ‘too big to fail’ framework is designed to mitigate systemic risks. This is essentially about capital and liquidity buffers. But the systemic risks arising out of failure of big payment players cannot be mitigated through these capital and liquidity buffers. The RBI needs to design a new framework for payment banks. Big players could probably be mandated to write ‘living wills’ for orderly winding down.
A case for neo banks
The banking landscape has over 600 million Jan Dhan accounts, 20 million micro enterprises, nearly two million banking outlets managed by business correspondents. Are Jan Dhan banks a logical extension? Maybe it is time to create a new tier, not just a new category, in the banking structure. What about neo banks — which play a major role at the bottom of the pyramid with full suite of products — that are smaller than small finance banks?
This may be designed to avoid concentration risk that currently afflicts payment ecosystem and also accelerate formalisation of the informal economy besides deepening financial inclusion for credit and insurance. Payment banks need to be allowed to engage in micro credit and are well suited to be the first-generation neo banks.
Regulation of the future
Micro supervisory intelligence is essential for macro supervisory interventions and vice versa. This is a huge challenge in the Internet world. For instance, an investigative report, some time ago, exposed several unauthorised lending apps that may inflict harm on unsuspecting citizens. Regulators intervened and brought down several thousand apps. But still nearly 4,000 lending apps are in operation and new ones crop up every day.
Secondly, banking functions/processes are disaggregated/aggregated — unbundled/bundled. Functions like lending, customer acquisition, KYC, risk management and even banking are offered as service.
In today’s digital world, supervising banking (to ensure consumer protection and market integrity and stability) is easier said than done with current tools and machinery. A section of the fintech industry has suggested that the RBI carve out payment regulations to a separate entity.
In this context, there is no harm in reopening this old but not irrelevant debate and an external expert committee may help. Regulation, after all, is the lifeblood of the market economy.
The writers served on the Boards of critical financial market infrastructure organisations