* DFS = Digital Financial Services
Reserve Bank of India (RBI) has announced an ‘in principle’ approval for 11 payment banks this week. And I, with my exalted seat on the sidelines, would like to shout with all the excitement I can muster “don’t stop, keep going.” It is hard to believe that I can be that excited about something that sounds so out of our regular work. But, bear with me for a few paragraphs to understand the reason for my unseemly enthusiasm.
We have been looking for a third-party service to provide a friction-less payment processing to be part of the tech platform that we are building for Krishi Janani, the ag tech network in India. We will share more details about this and other tech components in due course. But, suffice it to say that we needed a reliable service provider who can move money around without too much trouble for anyone, either the farmers we are serving or ourselves. Krishi Janani needs a solution that does not necessitate a trip to a physical location or any wasted time. In short, a mobile money platform.
Our research showed that the news was not good. Dan Radcliffe and Kabir Kumar have a series of blog posts at CGAP explaining the issues. To quote from one “2015 Set to be Big Year for Digital Financial Inclusion in India”:
When it comes to digital finance, India punches below its weight. The 2014 Intermedia Financial Inclusion Insight (FII) Survey of 45,000 Indian adults found that 0.3% of adults use mobile money, compared to 76% in Kenya, 48% in Tanzania, 43% in Uganda, and 22% in Bangladesh.
This stems from a range of factors, but lack of innovation-friendly regulation has been barrier #1. Most importantly, the Reserve Bank of India (RBI) historically allowed non-banks to participate in payment services in two restricted ways. They could build and manage an agent network on behalf of a bank; or they could issue a “semi-closed” wallet which allow customers to cash-in, buy airtime and other services, but not cash-out – not a particularly useful product for a poor customer!
We cannot build Krishi Janani on a foundation of something that only 0.3% of adults use! So, the search continues, for alternate options and workarounds now. It is in this context that I herald the arrival of payment banks with such enthusiasm.
The first round of licenses have been awarded to Aditya Birla Nuvo (with Idea Cellular), Airtel M Commerce Services (in partnership with Kotak Mahindra bank), Cholamandalam Distribution Services, Department of Posts, Fino PayTech (ICICI bank has a stake), National Securities Depository Limited, Reliance Industries (in partnership with State Bank of India), Dilip Shantilal Shangvi (of Sun Pharma in a tie-up with Telenor), Vijay Sekhar Sharma (of Paytm with investments from Alibaba), Tech Mahindra, and Vodafone’s M-Pesa. There are hints of more to come in the future.
As the permutations and combinations show, banking, mobile services, tech companies, government sector, and everything else in between are being thrown in together and shaken up. RBI sees payment banks as a way to revolutionize banking and increase financial inclusion for the unbanked and underserved, especially the rural poor (a few links at the end if you want to learn more on this payment bank topic).
What this means is that the vast majority of India’s population that live in the rural areas without access to any easy digital financial services will have more options. And, social impact startups like Krishi Janani will have more efficient ways to handle transactions. Soon. And we cannot wait.
Perhaps you understand my enthusiasm now. And, maybe you would like to join in as well? ;)
Additional reading on payment banks:
- Banks for the unbanked
- Smaller, wider: Payments banks could be game-changers, bring in genuine financial inclusion
- 11 entities get payments bank licences: What it means for Indian banking sector
- It is a big deal. Why payment banks will change the banking game for you and me
- Meet 10 startups that are attempting to unseat cash by making digital payments the king