Payments banks might eat into low cost deposits of commercial banks

Universal banks have reasons to worry about the just-licensed payments banks. The latter are likely to eat into the low-cost deposits of commercial banks, beside hurting their fee income.

Many individual customers are likely to shift a part of their liquid cash from use for day-to-day transactions from their savings accounts to those at payments banks. For, the regulations allow payments banks to pay interest on deposits as universal banks do. However, the maximum deposit in a payment bank account cannot exceed Rs 1 lakh per customer.

Nor can a payments bank lend money. Surplus cash can only be invested in government securities.

Currently, the competition for current and savings account (Casa) deposits is largely between younger private sector lenders like YES Bank and Kotak Mahindra, and public sector banks and large established private banks such as HDFC Bank, ICICI Bank and Axis Bank. The former are paying a higher rate on high-value savings deposits to wean of customers from established banks. Now, they have to prepare for competition.

Casa deposits are as much as 40 per cent of deposits of top public and private lenders such as State Bank of India, Punjab National Bank, ICICI Bank, HDFC Bank and Axis Bank.

Paytm.com was among the 11 payments bank licences issued by the central bank.

“Existing mobile wallet applications like paytm.com and mobikwik.com are already popular with consumers and have began to handle quite a bit of utility payments.  Once they start offering interest on deposits, customers might move their liquid cash to accounts at these payments banks,” says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.  

The trend will be aided by a rise in consumer confidence once these institutions come under the regulatory radar of the central bank.

The spread of payments banks might also deprive regular banks of the fee income they earn from customers, like those for making demand drafts, cash transfers, remittances, cash withdrawal through cheques and ATM transaction fees.

Other say the pain for universal banks, if any, would be only in the short term. “In the longer term, banks will adopt many of the practices and technologies adopted by payments banks and participate in the growth story,” says financial advisor Ashvin Parikh.

Others say the impact will largely depend on banks' ability to cope with the new environment. “It might happen that universal banks themselves adopt technologies and launch mobile applications that mirror the payments banks. Given their existing customer base, they could end by undermining payments banks. So, it is premature to say it's negative for universal banks per se,” says Kartik Srinivasan, head of financical sector ratings at ICRA.

He explains that banks have a huge advantage, given their customer base and the flexibility to offer the whole suite of financial products. Unlike a payments bank which can only make money by tolling on transactions.

A deposit with a bank also makes it easier for individuals to get loans. This might lead many to keep the bulk of their savings with regular banks and only move a small part of the cash to payments banks.

One thing is for sure. Retail customers and depositors are up for a treat as incumbents and newcomers vie for their attention in the new environment.