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The Business Behind Payments Banks

CASE FLYER, BANKING & FINANCIAL SERVICES
ET Cases, 5 Pages
AUTHOR(S) : Y. Bala Bharathi and Dr. Nagendra V. Chowdary

Case Preview

The Business Behind Payments Banks

 

Expected Learning Outcomes

• Elucidate the overview of the connotation and contours of financial inclusion and debate on why financial inclusion is important for an economy in general and banks in particular
• Understand the business and revenue models of the Payments Banking in the light of the characteristics of Payments Banks
• Discuss and debate on the impending challenges that Payments Banks face and examine the possible ways and means to overcome these challenges

I. Financial Inclusion

1. Who can be classified as ‘unbanked’? What are the financial sources and services accessible to the unbanked?
2. Why is 50% of India’s population unbanked even after 68 years of independence and with wide presence of public sector, private sector, cooperative, rural and foreign banks?
3. How would banks make a difference to a common person like Dattaram (as quoted in the base article)?
4. What is financial inclusion? List the current practices, business mechanisms used to target and achieve financial inclusion.
5. .............................

II. Payments Banks and their Business, Operating and Revenue Models

1. What are Payments Banks and their unique characteristics?
2. What is the basic business premise, and business/operating/revenue model of Payments Banks?
3. How is financial inclusion useful to banks?
4. .............

III. Payments Banks’ Success: Challenges and Concerns

1. What do you think would be the key challenges for Payments Banks? What are the basic sources of revenue for Payments Banks?
2. What according to you is the relationship between financial inclusion, Payments Banks and Pradhan Mantri Jan-Dhan Yojana (PMJDY)? How do you think Payments Banks can build on PMJDY’s initiative of financial inclusion?
3. ....................

Teaching Note Preview

The Business Behind Payments Banks

 Synopsis

In September 2013, a “Committee on Comprehensive Financial Services for Small Businesses and Low Income Households”, headed by Nachiket Mor, was formed by the Reserve Bank of India (RBI). By January 2014, the Nachiket Mor Committee submitted its final report and one of its recommendations was the formation of a new category of banks called Payments Banks. This was followed by an announcement in Union Budget 2014-2015 (presented on July 10th 2014) wherein it was decided that, “After making suitable changes to current framework, a structure will be put in place for continuous authorization of universal banks in the private sector in the current financial year. RBI will create a framework for licensing small banks and other differentiated banks. Differentiated banks serving niche interests, local area banks, Payments Banks etc., are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force”. Taking cues from the Budget, RBI issued the draft guidelines in July 2014 on Payments Banks and small banks as differentiated or restricted banks. Based on the feedback, RBI came out with final guidelines for Payments Banks in November 2014, and called the applications from entities, which are interested to start such banks. After scrutinizing 42 applicants, RBI has accorded its in-principle approval to 11 Payments Banks paving the way for a new format of banks in India. As none of them is operational, it is yet to be seen how they pan out in terms of serving the financial inclusion objectives.

Case Positioning and Setting

This Case Flyer can be used in the MBA Program for Retail Banking course in the following modules:

  • • Payments Banks module – To understand the business and operating models of a Payments Bank and discuss on the challenges and Critical Success Factors (CSFs) thereof
  • • Financial Inclusion module – To discuss how, if at all, Payments Banks can aid financial inclusion objective

 

Preamble to this Case Flyer Analysis

As it has been mentioned in the synopsis, none of the Payments Banks is operational (till January 2016) and hence this case flyer is meant largely to understand the connotation of a payment along with their operating and business models. How do Payments Banks make money? Can they aid financial inclusion? .......................

Case Analysis

I. Financial Inclusion

The purpose of first section is to introduce the participants/students to the need and importance of financial inclusion, and to sensitize to why financial inclusion is imperative within the Indian banking context.

1. Who can be classified as ‘unbanked’? What are the financial sources and services accessible to the unbanked?

• Unbanked are those individuals who do not have their own bank accounts. They usually depend on alternative channels of financial services to cater to their financial needs
• Typically, the unbanked population depends on informal channels of credit like family, friends and moneylenders as they do not have access to formal banking services

2. Why is 50% of India’s population unbanked even after 68 years of independence and with wide presence of public sector, private sector, cooperative, rural and foreign banks?

• Even after 68 years of Independence large sections of the society are still unbanked. The ratio is usually high in rural regions as the poor and low-income groups are unaware of most of the financial services. As per ‘The Committee on Financial Inclusion Report of 2008’, 51.4% of farmer households are financially excluded from both formal and informal sources
• Even in the 2015 Rural Report Card of BusinessLine, rural markets accounted for just 10% of all bank deposits in India [Exhibit (TN)-III]. As seen in the exhibit, the unbanked population in rural regions is high even in 2015
• There are various reasons for the lower penetration of formal banking service into the rural areas. Majority of the unbanked receive their salaries in cash mode. So, they tend to pay the expenses also through cash mode
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Abstract

This case flyer and the base article1 intend to introduce students/participants to the concept and importance of financial inclusion in general, role of Payments Banks in achieving financial inclusion as well as Critical Success Factors (CSFs) and challenges on their way to build a business around financial inclusion in particular. This case flyer's purpose is to understand the business, operating and revenue models of the newly permitted Payments Banks. On August 19th 2015, Reserve Bank of India (RBI) has given its in-principle approval to 11 Payments Banks. While this development signals a major landmark in the history of Indian banking industry, the genesis of this innovation lies in augmenting the financial inclusion, i.e., providing banking access to nearly 50% of Indian population, 'unbanked'. These Payments Banks' scope of activities has been structured and aligned to serve the unbanked Indians. Of the first ever Payments Bank licensees (11 Payments Banks) - two (Airtel and Vodafone) are mobile phone operators; one a NBFC (Cholamandalam Distribution Services Limited); two being large business conglomerates (Reliance Industries and Aditya Birla Nuvo); two individuals (Paytm's Vijay Shekhar Sharma, Sun Pharma's Dilip Sanghvi); an IT company (Tech Mahindra) along with the Department of Post, Fino PayTech and NSDL. However, how would these Payments Banks make money is the intriguing question? Can they scale up and be viable with several restrictions?



Pedagogical Objectives

  • To have an overview of the connotation and contours of financial inclusion and debate on why financial inclusion is important for an economy in general and banks in particular
  • To understand the business and revenue models of the Payments Banking in the light of characteristics of Payments Banks
  • To discuss and debate on the impending challenges that Payments Banks face and examine the possible ways and means to overcome these challenges

Case Positioning and Setting
This Case Flyer can be used in the MBA Program for Retail Banking course in the following modules:

  • Payments Banks module - To understand the business and operating models of a Payments Bank and discuss the challenges and CSFs thereof
  • Financial Inclusion module - To discuss how, if at all, Payments Banks can aid financial inclusion objective

1N Shivapriya, "The Business Behind Payments Banks", The Economic Times, February 5th 2015, page 16

This Case Pack Includes:
- Abstract
- Case Flyer
- Analysis


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