By Jayanth Varma
The Reserve Bank of India (RBI) has granted “in principle” approval to eleven new payment banks and has also promised to license more in future. Many of the licensees could prove to be fierce competitors because of their deep pockets and strong distribution networks. For the incumbent banks, the most intense competition from the new entrants will probably be for the highly profitable Current and Savings Accounts (CASA) deposits which are primarily meant for payments. And it is here that the complacency of incumbents banks could provide an opening to the new payment banks.
In the late 1990s and early 2000s, new generation private banks innovated on technology and customer service and gained significant market share from the public sector banks. However, in recent years, some complacency seems to have set in; customer service has arguably deteriorated even as fees have escalated. Public sector banks have caught up with them on ATM and online channels; and in any case these channels are rapidly being overtaken by mobile and other platforms. In fact, India may not need any more ATMs at all.
In this competitive landscape, payment banks could gain significant market share if they are sufficiently innovative and provide better customer service than the incumbents. Unlike mainstream banks which have to worry about investments and advances and lots of other things, payment banks can be totally focused on serving retail customers. Since their survival would depend on this sharp focus, there is every likelihood that they would turn out to be more nimble and innovative in this segment.
The ₹100,000 limit on balances at the payment banks means that initially it would be the rural CASA that would be at risk. But if payment banks do a good job, the limit may be raised to a much larger level (maybe ₹500,000) over a few years. At that point, urban CASA will also be at risk of migration. It will be easy for RBI to raise the limit because the balances have to be invested in Government Securities and so customer money is subject only to operational risk.
eWallets could prove to be another competitive weapon in attacking the urban CASA segment. Large segments of the Indian population are uncomfortable with online credit card usage and with netbanking.
A few years ago, eCommerce firms in India used Cash on Delivery (COD) to gain acceptance. However, COD is not scalable and it is breaking down for various reasons.
In the last year or so, eWallets have begun to replace COD, and these too could pose a threat to traditional payment services. All banks are trying to launch eWallets and mobile banking apps, but I am not sure that traditional banks have a competitive advantage here. In fact, a customer who is worried about online security might well prefer to have an eWallet with a small balance for online transactions instead of exposing his or her main bank account to the internet. In this context, the payment banks may find that the ₹100,000 limit does not pose a competitive disadvantage at all.
All this is of course, good news for the customer.
Jayanth Varma is a professor of finance working at the Indian Institute of Management, Ahmedabad.
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