How viable are payments banks in India?

Ever since the RBI granted licenses to 11 companies to start payments banks in 2015 , we have seen three fully functioning, the latest one being Paytm. Vijay Sekhar Sharma, the founder, has recently raised 1.4 billion USD from Softbank and Alibaba.

In a release addressed to media, Sharma said, “"RBI has given us an opportunity to create a new kind of banking model in the world. None of our deposits will be converted into risky assets."

While Airtel Payments Bank offered free talktimes, Paytm Payments Bank defines itself as the first bank with zero online fees for any transaction, which includes virtual debit card, NEFT, IMPS. The only things that would be charged are cheque books, demand draft and debit cards, which would be physical.

In India, payments bank can collect deposits up to Rs 1 lakh, has to invest 75% of its deposits in government securities, can offer different payment solutions, but can't lend. This comes to the bigger question how would they make money?

Shubhankar Bhattacharya, venture partner at Kae Capital told The Economic Times, “For starters, payments banks can't issue loans or credit cards, and are modelled to cover the cost of capital through transaction charges on their payment product. Therefore, payments banks need to find other avenues to improve the yield on the assets made available to them from their depositors.”

"Payments banks are more likely to cross-sell services that are being offered on their platform," added Bhattacharya.

“They need very high volume to start churning profits. Wallet was the game of boys. Payments banks is the game of men," Ashita Aggarwal, head of marketing, SP Jain Institute of Management and Research told ET.



The 11 entites, which were granted licenses last year, Tech Mahindra, Cholamandalam Investment and Finance Company and a consortium of Dilip Shanghvi, IDFC Bank and Telenor Financial Services have already given up on the venture. It’s for us to wait and watch how Sharma makes Paytm Payments Bank successful like the mobile wallet.