Ideally a government should not try to shape and create markets. It should aim for minimal and efficient regulation that ensures a competitive, level playing field for all players and emphasises to consumer protection. It should create an environment conducive for a market landscape that attracts private entrepreneurship and risk capital, one that pushes players for innovative products and services.
The same principle applies to financial inclusion. "Payments banks" are an example of a whole new space in the payments market created to tap into the competitive advantages that non-banks have at the last mile. How will this market shake out?
While there is no readymade template, there are many applications from players of all sizes and with different core businesses. The advantage will clearly lie with those companies who already have the knowhow, are invested in this space, and are smart at innovating. Small and medium companies have more skin in the game and can be expected to be more nimble, able to deploy technology faster and in more cost effective ways than larger firms. On the other hand, the big firms are the ones with the advantage of deep pockets to make the heavy capital investment needed for a national network that works efficiently right into the hinterland.
How many will finally get operating licenses is again anyone's guess, though it certainly will be more than a couple. It appears certain that India Post should get a license, and then the list should include firms across the spectrum of telecommunications companies, business correspondent firms, retail giants, and so on.
Not all is going to be smooth. The culture and pace of some applicants' core businesses could be as different from banks as chalk and cheese. Partnerships with banks would help the non-banks adapt more smoothly and there is a flurry of activity to get those going now. On paper the synergies between banks and non-banks look like making a decent argument. Yet, given the track record of such alignments, this will only work if players are less competitive and more collaborative.
Telcos, for instance, have had trouble getting a partnership with banks going. Business correspondents would also need to realign their relationships to get banks on board their new ventures.
It is not as if such partnerships can't be arranged to work well. If each player allows the other to drive that part of the business where it has a core strength, partnerships can be extremely successful.
Whatever works out, all operators have to respect the fact that the payments market depends highly on technology, and they have to be quick on their feet to respond. Even as the applicants wait for approval and then start their new businesses, some disruptions are already taking place in the payments market.
For instance, a couple of private banks have recently come out with innovative digital banking apps and using social media to allow effortless transactions. Companies that currently offer pre-paid payment instruments, like pre-paid cards, can also be disruptive in this sector even without moving up the value chain towards a bank license, given recent dispensations such as higher limits for prepaid wallets, simpler know-your-customer norms, and so on.
The payments market is actually large enough to accommodate many players and India's regional diversity calls for way more innovation and penetration that the regular system has provided so far. Looking at kirana stores that meet the needs of the lower-income rural segment better than a large supermarket chain ever can, different types of firms can co-exist comfortably.
What we need is a market where players of all sizes are able to operate at national or local level, fitting themselves into a truly interoperable payments system. The system should allow for a digital account (bank/m-wallet as per RBI rules) that has a digital identifier (Aadhaar would be most suited here as a unique identifier, especially once it has universal coverage and statutory status) to link through any payment bridge in the country. Then direct benefits transfers or business payments or remittances can be done directly into the account. While the ultimate aim is to move to a less-cash economy, cash-out can be enabled at designated payment access points that have digital identifiers, extending the existing network by tapping into the numerous retail outlets across the country, as envisaged by the Nachiket Mor Committee.
To get such a system going, there is much detail to address. While policy makers can set the tone, globally, industry-led initiatives have worked better at ensuring interoperability, rather than regulatory mandates. If industry associations can work together to set standards and coordinate, we will move much faster on the path to seamless payments for inclusion.