Five things to know about payment banks

The Reserve Bank of India on Wednesday gave the go-ahead to a total of 11 companies for setting up payment banks. The ‘in-principle’ approval given to these companies is valid for three years, after which they stand a chance to get a license, provided they fulfill all the conditions listed down by the RBI.

With the list of the 11 successful applicants including big players such as Reliance Industries, Bharti Airtel, Vodafone India, Idea Cellular and the country’s postal service, payment banks are touted to be revolutionize the Indian banking sector, especially after the RBI announced that the entities who were unable to qualify for this round could well be successful in future rounds.

To make the concept of ‘payment banks’ a tad bit familiar and simpler, we at Business Insider break down its salient features into digestible bites and answer any questions our readers might have.

1. What are Payment banks?
Payment banks will essentially be set up as differentiated banks which will be able to open current and savings accounts and perform every activity that a regular bank does. Thus, one can pay bills, make deposits of upto a maximum of Rs 1 lakh and enjoy interests on them, issue cheques and drafts through these banks. They can also offer services like remittance and distribute financial products such as insurance and mutual funds. Individuals can make daily or monthly cash transactions either through debit card or through their mobile.

2. How are payment banks different from regular banks?
Unlike regular banks, the only activity that payment banks will be unable to perform is to offer people loans or credit cards. They can only lend to the government, which evidently makes them the safest of banks as they only has the government as a borrower, who would not default in payments. However, what it can offer are debit cards and ATM cards, which will work in all banks’ machines.

3. Who can open an account in a payment bank?
Anyone can open an account in a payment bank, even people who have salary accounts in regular banks. This is because there is no restriction on the income levels of anyone who wishes to open an account in payment banks.

4. Who can set up a payment bank?
The minimum capital needed to set up a payment bank is set at Rs 100 crore, so anyone with that much capital, who adheres to the guidelines laid down by the RBI qualifies to get a license in order to set up payment banks. The payment bank will however need to invest 75% of its fund in government securities.

5. What are the advantages of payment banks?
Payment banks are not being considered revolutionary for the banking sector for no reason. It does have its set of advantages intended to make life very much simpler.

Firstly, payment banks will pave the way for mobile banking, which in turn will herald a new era of cash-less banking. This effectively means that over a period of time, the need for too many cash payments will die down as mobiles will end up performing the same functions as credit cards or debit cards

Secondly, payment banks will bridge miles between bank branches and a customer living in rural locations, through the mobile phone and will reach to people residing in villages. Mobiles will substitute ATMs and also act as a cheque-book for small payments. The physical presence of an ATM branch will be not considered necessary to a great extent due to these banks.

And, lastly payment banks will be beneficial to both the government and a customer. It will provide high interests to the customer, while the government can expect to borrow more cheaply with a reduction of short-term rates due to the steep impact of additional money coming into payment banks which can only be invested in government securities.

Image Credit: Indiatimes