Over 20 years ago, when the Narasimha Rao government decided to issue licences to private banks, few would have bet on some of those banks powering their way to the top, displacing a few state-owned banks. Since 1994, these banks have helped open up the market and pushed state-owned banks to transform both operationally and technologically and in the process add to the asset base of the Indian banking system. Private banks now have a much bigger share — especially in terms of deposits in urban areas — and the changes over the last two decades are reflected in the fact that HDFC Bank is now the most expensive bank from a valuation perspective.
The decision to licence some of the country’s biggest corporates and mobile telecom firms (11 in all in the first round) to start payment banks promises to be a similar game-changer. Here’s why:
Innovation: The new payment banks will over a period of time change the way we have viewed banking traditionally. Increasingly, with the introduction of products or new applications by these banks, instead of cash, people will start carrying out more transactions electronically. Globally, that has been the trend. But in India, though the number of users of cards – both credit and debit — are on the rise, it has been limited because of the costs involved for merchants or establishments which accept these cards. That’s why mobile phone platforms offer the promise of alternate methods for transactions without the need to step out of home with your wallet stuffed with cash. And payment banks are positioning themselves to do this.
Banking to be more a technology business: For years, banking has been a distribution business though new private banks have sought to change the definition of what has been called a brick and mortar model by encouraging customers to go online and bank or use the Automated Teller Machines or ATM’s for a variety of transactions. And the signs are visible. Even before the announcement of the licencing of payment banks, SBI and HDFC Bank have announced new products which will address this and attract more customers. If private banks in India have succeeded in the last 20 years, much of it has been because of the ease of doing banking – brought about by investing substantially in technology. That forced their larger peers – state-run banks – to follow suit with great gains to customers across the country. Payment banks could provide that push again to these banks to change their outlook and reach out to newer customers, especially in a country which has close to 900 million mobile subscribers.
Access to the unbanked and small business: A vast swathe of India is still unbanked with millions without access to basic banking services. Given India’s geographical spread, regional disparities, reach and connectivity, these payment banks can use the mobile platform to provide basic banking transactions, in particular, payment for services and subsidies through mobile phones.
It is in the hinterland that state-run banks have had a head start. Close to 40 per cent of their branches are in rural areas and over 20 per cent in semi-urban areas while private banks lag in reaching out to this segment. This should offer a good business opportunity to the banks if they get their technology solutions right. What should work for them is their pedigree – the fact that the government owns them – adding to the trust factor. But private firms which have promoted payment banks may be more nimble and aggressive.
Overall, the competition should benefit those who are on the periphery as long as regulatory oversight is good. More importantly, all this should help expand banking services to the remotest corner of the country over the medium and long term with huge economic spin offs.
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