Payments bank: What does it mean for you?

Cost of transferring money could fall because of lower overheads but the bigger advantage is bringing banking to almost one's door

Your nearest grocery shop might soon become a one-stop shop for depositing and withdrawing money.

With the Reserve Bank of India allowing 11 entities to start payment banks, basic banking services will soon be offered even in unbanked areas. In fact, you would be able to buy insurance and mutual fund products as well. However, they will not offer any loans or credit cards.  

Customers who already have regular savings bank accounts can use their payments’ bank account to make  daily or monthly cash transactions, such as utility bill payments or payments for groceries, either through debit card or mobiles. This could also help guard against debit card fraud, as customers can maintain a smaller balance in these accounts, as compared to their regular SB accounts. Even if you don’t have a regular savings’ bank account, you can still deposit and withdraw money up to Rs 1 lakh.

“Since these accounts are meant for payments and use technology in a big way, they will have more scope than mobile wallets. Convenience is the biggest advantage, since payment banks can bring banking to customers' doorsteps,'' says B Sriram, a managing director at State Bank of India. The bank has a tie-up with Reliance Industries, one of those to get approval for setting up a payments bank.



Currently, with minimum Know Your Customer (KYC) compliance of mobile number and e-mail ID, a mobile wallet is allowed to hold up to Rs 10,000. For higher amounts, a full KYC, like that of a bank account, is required. In the case of SBI's own mobile wallet, Buddy, launched on Tuesday, the maximum balance allowed is Rs 10,000.

Costs for payments banks could be lower, as they are not required to set up physical branches. It is possible that this savings in cost will be passed to customers by way of lower fees. The extensive use of technology will also reduce costs for these banks.

Students living away from home would also be able to use such accounts to receive money from their parents and to pay their school or college fees. Small businesses — that have five or six employees — can operate salary accounts in payment banks, instead of paying out cash. The biggest advantage of a payment bank is 'last-mile connectivity', unlike a regular bank. So, it is possible that your neighbourhood store can function as a bank branch.

However, payment banks might not be able to offer a higher interest rate, as they are allowed to invest only in government securities, Sriram adds. Besides, KYC will continue to be the same as for regular bank accounts.

The introduction of a payment bank in urban areas is going to impact e-commerce in a big way, says Shinjini Kumar, executive director at PricewaterhouseCoopers. "Transactions will be easier and customers can expect multiple discounts in the initial stage. But, once the customer acquisition is done, these entities will need to work on establishing institutional trust," she says.

In the financial inclusion space, payment banks will not only help the unbanked to get into the banking channel but also give them opportunity to build a credit score, Kumar adds.