Payments banks no threat to current banking giants: Report

Says they will only complement full-service banks

Entrenched players in the banking space should not be nervous over the introduction of payments banks as they will only play a complementary role to the existing system, says a report.

"Payment banks will complement full-service banks. We believe the payment bank business model is a no-moat one," Morningstar analysts said in a note.

Payments banks have a very limited scope of services to offer customers and will particularly not have access to sticky low cost deposits which the traditional banks have along with capacity to lend.

The payments banks model will be driven mainly by volumes, and the selected entities will have to make with thin margins and fees generated by selling products of full service lenders.

It added that its rating on the established banks in the country remains intact.

Established lenders, including the country's largest bank State Bank of India, have expressed fears of impact to their business after RBI granted in-principle nod to 11 applicants, including deep-pocketed ones like Reliance Industries, Aditya Birla Group and the Mahindras, to start payments banks.

"Why this payments bank is a little worrisome is because they will be allowed to have savings deposits.

"What if they go for poaching rates. Then many of the commercial banks could lose a portion of the deposits which are relatively lower priced so that will take away the ability to transmit rates and give further loans at lower rates," SBI chairman Arundhati Bhattacharya had said.

Morningstar said the cap of accepting deposits only till Rs 1 lakh is one of the limitations for the lenders and the mandatory provision to invest excess cash in the low-yielding government bonds as a limiting factor.

"They cannot compete with banks, as they are not full- service entities and don't have adequate customer switching costs. The business model will then be primarily volume-driven and focused on helping traditional banks to attain further reach," the report added.

In August, the Reserve Bank formally kickstarted the era of differentiated banking in the country by issuing the in-principle nods, which was followed up with selection of 10 entities to start Small Finance Banks.