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.  

Financial Inclusion: A vehicle for shared prosperity

Author: Somanta Raj Bhattarai, Telecom and IT Professional, Nepal

 People marginalized, underprivileged, illiterate and at the bottom of the economic pyramid do not tend to have good management of their finances. The money that comes by, goes by, there is no concept of saving, and investment. Financial security is largely non-existent. They do not have access to finance and financial resources to help them in providing seed money for any micro-enterprise that if they contemplate to undertake. They do not know how to access these, and become prey to informal and exploitative borrowing/lending mechanisms, adding to their financial misery and exploitation. Systematic management of monetary resources and access is so far out of reach of this section of the population. Financial literacy is among the key component that is limiting such access.

But there exists a well-organized formal financial system in place in the world, and the world economy organized accordingly. Global financial system, through its institutions (financial institutions and mechanisms – banks, cooperatives, micro-credits, etc.) and their products and services, serve the general population with a wide variety impactful services to the population, enhancing their livelihood. Financial inclusion is a movement that aspires to bring this benefit of the mainstream financial system of the world to the above mentioned section of the population and incorporate them in the mainstream of the global financial system. Its goal is to expand the available financial products and services to hitherto excluded population. And it aims in creating and promoting financial literacy and affordable financial products and services so as to benefit the larger population, especially those at the bottom of the rung in the economic ladder.

Albeit being increasingly referred to as a priority policy and implementation sphere by governments across the developing world, financial inclusion still remains a work under-served. The fact is that a large section of the population, at the bottom of the pyramid, remains outside reach of the modern financial market and financial mainstream. This has prevented the population the opportunity to participate in the development and share in the growth of their respective national economies. It makes more sense, now than ever before, therefore, to accelerate the process of accommodation of the left-out population to the fold of formal financial system.

The benefits that can incur to the hitherto excluded population is enormous. It helps them to better manage their financial aspects; access to savings can enable them to deal more effectively with situations such as health care emergencies, etc. Access to credit that is available through inclusion in the formal financial mechanism can enable them invest in income-generating activities. Financial access can also enable to help in the growth of small and micro enterprises, and in consequence in creating jobs.

After the adoption of liberal economic model since 1990, Nepal has seen a rapid growth in the number and types of financial institutions and intermediaries. The financial sector has been able to expand the reach of people to formal financial mechanisms many-fold. Still, the access remains limited, and a big chunk of rural as well as BOP population remains left out. The use of banks is still limited. Financial NGOs and cooperatives are playing a large role in bringing in the left out population to the formal financial mechanism, and in providing both deposit accounts and loans.

The governments’ efforts should be towards creating the conducive environment for banking and financial institutions to invest more in expanding their products and services to cater to the excluded population. Encouragement to financial institutions through friendly organizational policies has the benefit of diversifying and expanding the range of products and services that are affordable and can cater to the excluded population.

Our national aspiration for prosperity cannot be inclusive, unless we roll-out and expand the financial products and services to the marginalized, poor and left-out section of our national population.

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