Payments Banks (India) and now Payment Services Banks (Nigeria)
Will the RBI & CBN Sustain Focus on Goal to Advance Financial Inclusion?
In 2015 the Reserve Bank of India (RBI) introduced breakthrough innovation to help solve the challenge of financially including the unbanked. The then newly created experimental model for providing basic financial services was and is referred to as “Payments Banks”. There were 41 applicants for the RBI’s provisional license to operate a Payment Bank. The RBI selected 11 from the 41. As of 1Q2019, 6 of the 11 are in market (4 others withdrew plus there was a merger between 2 of the 11). Of the 6 in market, 3 are operated by telco-carriers. In 4Q2018 the Central Bank of Nigeria (CBN) embarked on supporting a similar innovative approach to offering alternative financial services via their new “Payments Services Banks”. Thus far the initial first movers expressing their intention to apply for a Payments Services Bank license have been several telco-carriers. Brief overview of Payment Banks and Payments Services Banks:
Who? The RBI (Reserve Bank of India) created a new license for non-bank entities (business correspondent/agent) to be involved in offering basic financial service in India. Three years later the CBN (Central Bank of Nigeria) created a new license, similar to the RBI’s approach.
What? The RBI’s Payment Bank was a first-in-the-world new category, licensed/sanctioned to provide basic financial service in India for those who do not have access to traditional banking services. The CBN’s similarly named Payment Services Bank have adopted a similar approach, with a similar purpose.
Where? Nationwide in India and Nigeria respectively (plus accessible for depositing by family and friends internationally)
When? In India, the 6 Payment Banks entered the market between 2016 and 2018. In Nigeria, expectation is interested applicants will apply for Payment Services Banks in 2019, potentially launching as early as 2020.
Why? The adult population of the world is estimated to be 5.42B. Of that total, 31% (1.7B) are estimated to be unbanked (per World Bank Global Findex triennial reports). Traditional models for reaching unbanked populations have been unsuccessful at onboarding the unbanked for a variety of reasons (i.e.: cost to reach and support the distant rural, as well as the absence of basic infrastructure and literacy). Policy makers in India and now Nigeria decided the time has arrived to allow innovative licensing models to leverage emerging technologies to see if the significant unbanked populations can be reached. (India and Nigeria have two of the largest unbanked populations in the world thus can benefit significantly from pioneering approaches that succeed.)
The RBI made a strategic decision in 2014 to proceed with a first-in-the-world pioneering financial service model to help improve financial inclusion by permitting innovative models that can bring basic financial services to India’s vast unbanked population which is beyond the economical reach of traditional banking. According to research commissioned by the Bill & Melinda Gates Foundation (BMGF), only 47 percent of Indian adults had a bank account as of 2013-14, of which 25 percent were active (although since this study, Prime Minister Modi has led an effort that has financially included another 100M+). Others expected to benefit from Payment Banks are small businesses and students attending school away from home.
After researching alternatives to consider after Nigeria’s progress with advancing financial inclusion had stalled, the CBN decided to proceed with Payment Services Banks in 2018 beginning with distributing draft guidelines to the public for comment, then finalizing the guidelines and inviting interested parties to apply. Payment Banks are permitted to operate a model that provides basic deposit, saving and withdrawal functionality, leveraging non-bank distribution partners residing in rural areas where traditional banks cannot afford to have a presence (i.e.: a grocery store, a Mom & Pop shop, etc.) – a significant last-mile breakthrough. Further, Payment Banks are permitted to support facilitating mobile money transactions – another major last-mile breakthrough that will allow domestic migrant workers, as well as India’s vast global diaspora, to utilize mobile phones to transmit money to families back home, who will then be able to withdraw cash via sanctioned distribution partners of licensed Payment Bank. Thus far Payment Bank provider innovation includes supporting wage distribution from employer to employee Payment Bank account, as well as supporting Virtual Debit & Prepaid Card, Life Insurance, along with Fuel and Entertainment purchases. The RBI’s experimental restrictions on Payment Banks has a maximum amount a depositor can have in a Payment Bank of 1 Lakh [₹ Indian Rupees]. The 1.0 Lakh total = ₹100,000 Indian Rupees which in India is expressed as INR 1,00,000. As the currency exchange rate on February 5th 2019 was ₹1 INR = $0.014, thus the ₹100,000 [INR 1,00,000] is worth $1,397.10 USD. This represents the maximum amount of money a Payment Bank account holder could have in their Payment Bank account at any one time. Another of the RBI’s Payment Bank ‘experimental’ restrictions does not permit Payment Bank providers to offer advanced financial services such as issuing credit cards nor providing loans (but offering debit cards as well as utility bill remittance is permitted).
Again, a key aim of the new Payment Bank idea (as well as now Payment Services Banks) is to help bring about improved financial inclusion for the vast unbanked in India (and Nigeria). Those served include low income households, farmers, the domestic migrant work force and others. In India and Nigeria, improving financial inclusion is a top priority for RBI & CBN, as well as India’s Prime Minister Modi and Nigeria’s President Buhari.
While the innovative Payment Bank idea in India was expected to be a game changer and a flagship for addressing financial inclusion globally as details were worked through during pre & post launch planning and execution … as of 1Q2019 Payment Banks are under-performing while RBI restrictions remain in place. The 4 provisionally approved Payment Bank applicants withdrew pursuing Payment Banks after they each decided the RBI’s experimental restrictions would not permit financial viability. If the remaining 6 Payment Banks in India continue to under-perform, will the RBI assess marketplace feedback and relook at any of its experimental restrictions? Will similar restrictions by the CBN also result in under-performing Payment Services Banks? If the RBI makes adjustments to restrictions, will the CBN consider adopting similar changes? From 2015 to 2017, the World Bank’s Global Findex triennial reported that 1.7B remain unbanked, just 0.3B less than the 2.0B total achieved per the 2nd triennial report released in March 2015 for 2012 to 2014. Of note is that while efforts to advance financial inclusion were at higher levels than ever between 2015 to 2017, progress advancing financial inclusion fell by over 62% from the prior 3 year period, thus delays adjusting experimental restrictions on experimental Payment Bank and Payment Services Banks will only prolong achieving the stated goals of advancing financial inclusion to the unbanked. Time will tell.