Everything You Need To Know About Payments Bank

In our last blog, we discussed about how digital banking is trending worldwide. Today we are going to talk about Payments bank, which has taken the financial sector by storm.

What is Payments Bank?

A payments bank is a type of niche bank in India licensed to undertake only certain restricted banking functions as per the rules laid down by the Banking Regulation Act of 1949. These functions include activities such as: Acceptance of demand deposits, Issuance of ATM/debit cards, Payments and remittance services through various channels, Business correspondents of another bank, Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc. It cannot carry out lending activities or issue credit cards to its customers.

Need for Payments Bank

The main intention of setting up payments bank by RBI was to further the financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.

RBI felt a need for transactions and savings account for the underserved in the population. To cater this need, a differentiated licensing seemed like a desirable step in this direction particularly for infrastructure financing, wholesale banking and retail banking. This move will enable high volume-low value transactions in deposits and payments / remittance services in a secured technology-driven environment.

Payments Bank License

On 19 August 2015, the Reserve Bank of India gave "in-principle" licences to eleven entities out of 41 applicants to launch payments banks. These include:

  • Aditya Birla Nuvo

  • Airtel M Commerce Services

  • Cholamandalam Distribution Services

  • Department of Posts

  • FINO PayTech

  • National Securities Depository

  • Reliance Industries

  • Dilip Shanghvi, Sun Pharmaceuticals

  • Vijay Shekhar Sharma, Paytm

  • Tech Mahindra

  • Vodafone M-Pesa

The "in-principle" license is valid for 18 months within which the entities must fulfill the requirements. They are not allowed to engage in banking activities within the period. The RBI will consider granting full licenses under Section 22 of the Banking Regulation Act, 1949, after it is satisfied that the conditions have been fulfilled.

A Revolutionary Step

With the recent announcement of the first set of differentiated bank licences to 11 entities to set up payments bank, the Reserve Bank of India has indeed, taken a revolutionary step in the financial sector of the country. From large companies to the leading telecom companies as well as the new-age technology companies, these mix of eleven entities would provide the much needed expertise and technology in catering to the needs of the underserved households of the country, thereby facilitating opening of bank accounts and use of payments services by all.

“In order to get sustained growth, we need more competition, especially from new entrants who are in a better position to reach hitherto excluded parts of our economy. After a decade of no new entry, we will see two new private banks this year, and a large number of payment banks and small finance banks next year. Licensing is likely to go on tap.” - Raghuram Rajan, RBI Governor.

While digitization and mobilization is the new talk of town, it will be interesting to see what the future holds for these payments bank and how successful will it become in achieving its desired objectives. Watch this space for more!

Source: RBI

Published on Sep 24, 2015
Harshit Agarwal
Written by Harshit Agarwal
Harshit Agarwal is the co-founder and CEO of Appknox, a mobile security suite that helps enterprises automate mobile security. Over the last decade, Harshit has worked with 500+ businesses ranging from top financial institutions to Fortune 100 companies, helping them enhance their security measures.
Beyond the tech world, Harshit loves adventure. When he's not busy making sure the digital realm is safe, he's out trekking and exploring new destinations.


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