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Payments Bank@India Post: What Will it Take to Make it Possible?*

CASELET, BANKING & FINANCIAL SERVICES
ET Cases, 6 Pages

Case Preview

Payments Bank@India Post: What Will it Take to Make it Possible?

 

Until recently, post-offices were communication lifeline of the country but with the advent of mobile phones and email, the postal system started losing its sheen. Over the years, the Department of PostS (DoP) has struggled financially and its annual deficit has over the years moved northwards (Exhibit I) , increasing from INR 5,473 crore in 2013-14 to INR6,258 crores in 2014-15 and then to INR6,665 crore1 in the budget of 2015-16.1

The DoP has also seen a drop in snail mail numbers, both in the registered and unregistered categories of letters. However, the premium products witnessed a jump of about 9 % (Exhibit II) thanks to the tie-up that DoP has with e-commerce companies for delivery of parcels as well as for Cash on Delivery facility (COD) through which it has disbursed more than INR1,100 crore during the period from April, 2015 to January, 2016. In addition to postal transactions (Exhibit III and Exhibit IV), the DoP through the Post Office Savings Bank (POSB) offers allied financial services such as Postal Life Insurance (PLI) and Rural Postal Life Insurance. 2

With a large postal network of 1,54,939 Post Offices as on 31st March, 2015, of which 1,39,222 (89.86%) are in the rural areas, the DoP network is twice as large as the outreach of all commercial banks in India put together. It has observed that postal employees while offering similar financial services earn less than their bank counterparts. Moreover, other fixed costs are much lower since post offices tend to be less well equipped than bank branches (no air conditioning, for instance). Therefore, it can be less expensive for the DoP to service accounts as compared to a bank. In countries where more than 40% of the population is unbanked, and more than 40% of the points of access are postal, the Post has a relative advantage over other financial providers in terms of outreach.3 .....................


 1 Response in Loksabha by the Telecom & IT Minister on question no: 2004 dated 09.03.2016
2 DoP, Annual Report, 2015-16, pg 35
3 Alexandre Berthaud and Gisela Davico, Global Panorama on Postal Financial Inclusion: Key Issues and Business Models, March 2013, pg 15

Teaching Note Preview

Payments Bank@India Post: What Will it Take to Make it Possible?

 

Synopsis

The Reserve Bank of India (RBI) in August 2015 issued licence to Department of Posts (DoP) to function as a Payments Bank (PB). Over the past few years, the DoP struggled financially and its annual deficit kept increasing from INR 5,339 crores in 2013-14 to INR 6,378 crores in 2014-15 to INR 6,665 crores in the budget of 2015-16. On the positive side, as against a total of less than 40,000 branches of all scheduled commercial banks, DoP had a network of 140,000 post offices in rural areas. On an average, a post office served 8,100 persons six days a week. Such an extensive and intensive network gave it a unique advantage in reaching the last mile to deliver any financial service. In the rural areas where 85% of the post offices are located, the workforce is largely local and is therefore known to the community served . Moreover, the PB license would help DoP to build on and further expand the existing postal life insurance and rural postal life insurance with mutual funds etc.

However, there are multiple challenges associated with DoP becoming a payment bank. Firstly, RBI’s licence comes with the condition that India Post cannot accept deposits of more than INR1 lakh per account. If DoP decides to transfer its entire banking business to India Post, it may face issues in cases where accounts have deposits in excess of INR1 lakh. There are several such accounts.

As a result, there will be a parallel business being conducted by DoP for large accounts and by India Post for other accounts, creating inefficiency and confusion as well as hampering viability of the business. Secondly, it will face intense competition from other PB licensees that come from diverse domains such as Mobile Network Operators (MNO), Micro-Finance Institutions (MFI), Mobile Apps, IT vendors and the non-licensed entities such as the mobile Operating System providers such as Apple and Google Android. Not to forget the business correspondents (BC) representing the traditional banks.

Each one of these, has domain-specific key strengths and weaknesses. As the smartphone penetration increases, the Mobile Apps and Mobile OS gain the upper hand, while DoP, MFIs, traditional banks and MNOs have the distinct advantage of reach, familiarity, trustworthiness and experience of working with rural population. But, all of them will have face issue of viability as was seen the case of BCs, and so, the PB landscape is a challenging and the PB players need to understand these challenges and strategise accordingly.

This case attempts to do a SWOT analysis of the various payment bank licensees as well as mobile based financial inclusion initiatives of traditional banks in comparison with DoP. It also aims to highlight the regulatory environment associated with PB license. Lastly, supported by examples from other countries, the case list key success factors for mobile banking initiatives......................

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Abstract

The RBI has issued a Payments Bank (PB) licence to Department of Posts (DoP), along with 10 competing organisations in August 2015. Over the years, the DoP has struggled financially and its annual deficit has shown an increasing trend during 2013-16 period. On the positive side, as against a total of 40,000 branches of all scheduled commercial banks, DoP has a network of 140,000 rural post offices. Moreover, 85% of these post offices are located in the rural areas manned by locally known workforce. The PB license has the potential of helping DoP to build on and add to the growth of existing postal life insurance and rural postal life insurance. The DoP will face intense competition from other PB licensees that come from diverse domains such as Mobile Network Operators (MNO), Micro-Finance Institutions (MFI), Mobile Apps, IT vendors and the non-licensed entities such as the mobile Operating System providers such as Apple and Google as well as business correspondents (BC) representing the traditional banks.


Pedagogical Objectives
The case study can be used to understand the following concepts/theories mobile banking and strategy.

  • To understand the ecosystem (banks, payment gateways, third party apps, OS providers, mobile operators) of m-banking, the ecosystem participants, the technology options and modes available for delivery of banking services
  • To understand the regulations related to m-banking and different types of licenses available in India
  • To understand the role of SWOT analysis in strategic decision making concerning mobile banking. To understand the relative strengths and weaknesses of the various players and modes involved in mobile banking

Case Positioning and Setting
The target audience for this case study would be post graduate students pursuing MBA or Executive Education program. It can also be used at undergraduate level to get them to understand certain concepts of mobile money, mobile banking and regulatory aspects of mobile banking


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