Paytm Payments Bank and Fino face RBI’s wrath: Why are PBs failing to take-off?

Payments bank appears to be a tricky business, and this could be ascertained from the fact that a quarter of entities that won license ultimately had to surrender. Even those who managed to launch are unable to make any dent. For instance, Airtel Payments Bank was barred by the Reserve Bank of India for onboarding new customers in December last year.

In a recent development, following an audit, RBI had asked Paytm Payments Bank to stop registrations of new customers. The apex bank of India isn’t happy with the process adopted by Paytm Payments Bank while registering new customers. RBI also has frowned upon its adherence to know-your-customer (KYC) guidelines.

According to a Mint report, the movement of Renu Satti from Paytm Payments Bank was also driven by RBI diktat. The regulator had expressed its concern about Satti’s inability to lead the Payments Bank. However, Paytm has denied RBI’s role in Satti's movement.

The company claims that her appointment was in accordance with RBI guideline and approval. Satti resigned as CEO of Paytm Payments Bank last week to head the Alibaba-backed company’s new retail initiative.

Moreover, RBI had reportedly objected cashback and other discounts offered by Paytm while onboarding customer for its Payments Bank. The regulator also has asked PPB to do the KYC physically instead of e-KYC for signing up new customers.

Following the RBI diktat and compliant with its guidelines, the company had recently moved PPB to a separate facility.

Besides PPB, Fino Payments Bank is also barred by RBI to sign up new customers as many account holders were found to have deposited more than Rs 1 lakh (exceeding the upper limit) in the wallet. It had stopped adding new customers since May.

Over the past 10 months, Payments Banks have been facing ire of government agencies including Unique Identification Authority of India (UIDAI) and RBI.

Airtel was barred by UIDAI following allegations that Bharti Airtel was using the Aadhaar e-KYC-based SIM verification process to open payments bank accounts of its subscribers without their consent. Security and privacy of Aadhaar data have been fiercely debated and the Supreme Court is currently looking into its various aspects.

Only last month, Airtel Payments Bank was allowed by the banking regulator to enroll new customers.

Why are Payments Banks failing to find firm foot?

Hailed as a game changer, payments banks were projected to offer financial inclusion to 37 per cent of the underbanked adult population. However, the euphoria around such banks turned into skepticism as detractors begin questioning their viability.

Payments Banks have fundamental flaws as they can’t lend in any form. Most of the banking bodies make revenue out of lending and credit card business. Moreover, payments banks are allowed to accept only savings and current deposits of up to Rs 1 lakh per customer.

The cap on deposit with the current account at one time also makes it irrelevant for SMEs.

Meanwhile, building a banking business requires a longer gestation that doesn’t suit the DNA of companies such as Paytm and Airtel.

Awareness about the existence of payments banks is very low. And, this is because operators like Paytm, Airtel, Jio, and others are yet to begin aggressive promotional campaigns.

While many experts are writing off the business case of payments banks business, it’s too early to pass any sort of verdict. For an instance, several pundits (especially, during 2014-17 period) were busy forecasting that e-commerce business case won’t work in India. However, Flipkart and the likes of Paytm, Ola, Zomato, Swiggy and many others have been proving them wrong.

Similarly, the business of Payments Banks can be viable if executed properly.

As regulator wants PBs to stop eKYC, physical authentication would certainly inflate KYC cost in the range of 6 to 10X. While eKYC can be covered well in mere Rs 50, pure-play offline KYC will require investment in a range of Rs 300 to 500.

Going forward, it would be interesting to watch how Paytm, Jio, Airtel, and Fino would resolve RBI’s concern and bring innovations to disrupt the new form of the banking business.

Last but not the least, let’s accept it. Payment banks are no longer as much of a focus for those who got licences. Since India Post Payments Bank is all set to kick-off its payments bank operations this month, competitors, analyst, and media will have a hawk eye on its potential in bringing financial inclusion to marginalised unbanked population.