India’s new payments banks require a new business model for digital financial inclusion

This blog post was co-written by Lara Gidvani and Francesco Pasti 

The first of India’s payments banks began its operations last month – 15 months after the in-principle licenses were awarded by the Reserve Bank of India (RBI). The payments banks arrive not a moment too soon, as recent demonetisation has created an imperative for Indians to transact without cash. A total of eight more payments banks are soon expected to join the fray, offering basic banking and payments services, leveraging mobile and other technologies to digitise payments and support widespread access to basic banking services. Four of the new payments banks include an MNO as one of the promoters.

Neither full banks nor simple mobile money providers, the payments banks framework introduces an innovative but untested model. The bank-based regulatory regime ushers in a new operating model, where a traditional mobile money wallet is only one of the payments and savings products under the payments bank umbrella and the new entity is well-positioned to take advantage of an already growing digital transaction ecosystem. The payments bank is a different animal from the successful and lean e-money issuer that dominates mobile financial services in East Africa.

The success of the payments banks hinges on dedicated and innovative commercial players and a regulator willing to maintain an open dialogue with the industry to ensure proportionality as the payments banks go-to-market.

To become profitable, payments banks will need to drive digital transactions through accounts at scale. However, unlike traditional mobile money players, it is unlikely that payments bank will be able to live off transaction revenues alone – and without a growing ecosystem and adjacent revenue streams (e.g., digital credit, micro insurance and merchant payments), the road to profitability will be difficult.  Payments banks would also benefit from more proportionate regulations on ongoing capital requirements and continued policy support to bring down both the high direct costs of account acquisition and maintenance.

Though the payments banks will take different approaches – our study builds one potential business case for payments banks in India and offers unique insights into the key strategic and operational decisions to achieve sustainable profitability. By analysing the business case for a MNO-led payment bank and the new regulatory model for offering mobile financial services, several lesson emerge for payments banks, and the policymakers and regulators that guide them.

Read our new report to understand the implications.


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