Can Payments Banks Succeed?

In a dynamic growth-oriented economy, it is critical that the financial system is flexible and competitive to cope with the multiple demands placed on it by various economic actors. Also, adequate access to finance is thought to be a prerequisite for poverty reduction and social cohesion. Therefore, financial inclusion becomes imperative to achieve inclusive growth.

The vision of “inclusive financial sectors” was first invoked by Kofi Annan during a United Nations General Assembly Greenlights Programme following the adoption of 2005 as the International Year of Microcredit. On 29 December 2003, ­Annan said:

The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people i­mprove their lives. (UN 2003)

More than a decade later, financial exclusion continues to be a major international policy concern. Globally, 1.7 billion adults (approximately 31% of the world adult population) lack or have restricted access to such basic financial services as bank accounts, low-cost credit, remittance and payment services, financial advice, and insurance (Demirguc-Kunt et al 2018). Even modest levels of financial well-being are beyond their reach.

Reasons for this state of affairs are stated as, on the one hand, the lack of money income or (even in the presence of money income) the lack of a desire for a bank account, perhaps because of distrust in the financial system or other sociological, cultural or religious concerns. On the other hand, it is the prohibitive operational costs to banks of opening and maintaining accounts for low-income individuals. Yet, some progress has been made. Around 700 million people are estimated to have gained access to a transaction account between 2011 and 2014 (Demirguc-Kunt et al 2018). The promise of such an account is of more effective management of household ­finances and therefore a rise in the standard of living and perhaps even an exit from poverty.

Indeed, payment services are often the first and most frequently used financial services by the hitherto financially ­excluded, and this has motivated the publication of a joint study by the Bank for International Settlements (BIS) and the World Bank Group in 2016, that sets out the guiding principles for countries wishing to achieve financial inclusion through the payments route (BIS and World Bank 2016).

In India, as well, policymakers have begun to pin their hopes for financial inclusion on payments services. In this context, the current article looks at the evolution of a special category of financial institution called payments banks. The promise of such banks is supposedly a highly restricted domain of operations and therefore a simplified structure that will enable the harnessing of technological innovation to deliver financial inclusion. We will argue, however, that the goal of financial inclusion may remain elusive unless the regulatory framework is fundamentally altered to allow for experimentation and even possible failure.

Genesis of Payments Banks

In India, the role of banks and the importance of financial sector development have occupied the minds of policymakers since independence. But the overall picture on financial inclusion remained largely poor and uneven till the 1990s. The 1991 crisis brought home the realisation that little had actually been achieved by way of financial inclusion, and that the banking sector was in a state of disarray for a variety of reasons. The liberalisation programme begun after 1991 therefore accorded a very high importance to rehabilitating the financial health of banks, in the form of appointing two expert committees in 1991 and 1998 under the chairmanship of M Narasimham to suggest wide-ranging reforms for the sector.

Together, the Narasimham I and II Committee reports targeted efficiency and competition, awarding greater autonomy to public sector banks, suggesting ways of resolving loans gone bad, allowing foreign banks to enter the domestic market, and introducing a monetary policy tool, called the liquidity adjustment facility to encourage banks to borrow money from the Reserve Bank of India (RBI) via repurchase agreements (GoI 1992, 1998). As a result of these reforms, the formal financial sector swelled, and cheap credit avenues were instituted.

The focus turned more squarely to financial inclusion only in the 2000s. The phrase itself was first mentioned in 2005, by RBI Governor Y V Reddy (2005), in the RBI’s annual policy statement. In the same year, the report of the Internal Group to Examine Issues relating to Rural Credit and Microfinance (Khan Committee) announced that banks were now allowed to open “no frills” accounts for customers that wished to hold zero or very low balances (RBI 2005). This was quickly followed by the appointment of two more committees, the Rangarajan Committee—headed by C Rangarajan, a former RBI governor—to examine the state of financial inclusion in the country, and the Rajan Committee—headed by Raghuram ­Rajan, a future RBI governor—to suggest comprehensive ­reforms for financial sector deepening.

The 2008 report by the first of these committees concluded that the poor had been largely excluded from the organised ­financial sector, and that the government and the banking sector would have to work together to rectify the problem. Financial inclusion was formally defined as “the process of ensuring access to financial services and timely and adequate credit where needed to vulnerable groups such as weaker sections and low-income groups at affordable cost” (GoI 2008). The 2009 report by the second of the above committees included a chapter entitled “Broadening Access to Finance” to underscore the need for developing a financial sector that would be broad-based and inclusive (GoI 2009). Such a financial sector would, in addition to credit, also offer payment services, savings ­accounts, insurance products, and inflation-protected pension schemes. This would require, according to the committee, a paradigmatic shift away from large, public-sector banks being burdened with the goal of financial inclusion, towards private, well-governed, small-finance banks. This particular recommendation was further elaborated in a report published in 2014 by the committee on Comprehensive Financial Services for Small Businesses and Low-Income Households, headed by Nachiket Mor (RBI 2014).

It is the Mor Committee report that inaugurated for the first time in India, the concept of a “payments bank” as part of a vertically differentiated banking system (VDBS) design that ­revisits the notion of a full-service bank and forms different types of banks using the three building blocks of payments, deposits and credit. The committee opined that it would be important to have the regulatory flexibility to approach payments, deposits and credit independently and to bring them together when the efficiency gains are high, and other costs low. Payments banks would accept deposits and offer payment services but not credit. Each Indian resident above the age of 18 would thereby have an individual, full-service, safe, and ­secure electronic bank account. As other examples of VDBS ­design, the committee cited the South Korean Post Office Bank (only payments and deposits), GE Capital (credit and payments), and MasterCard and Visa (only payments).

Structure and Conduct of Payments Banks

The Mor Committee recommendation of a differentiated banking system is not entirely a novel one. There have been a few attempts to create smaller sized banks in the banking system and help achieve “last-mile connectivity,” such as regional ­rural banks (dating back to the 1970s), urban cooperative banks, agricultural societies, and local area banks.

Prepaid instrument providers (PPIs) or “digital wallets” are another prominent example of a quasi-banking institution that precedes the publication of the Mor Committee’s report. Since 2010, PPIs have facilitated a significant expansion of low-value payment services among individuals. PPIs are not without their critics though. The know your customer (KYC) norms are purportedly too lax, the inability to pay interest on balances is argued to be a drawback, and the possibility of contagion risk and therefore the safety of funds is a subject of concern. It is against the backdrop of such vulnerabilities associated with PPIs, that the Mor Committee recommended the formation of payments banks.

In November 2014, the RBI released comprehensive guidelines for the licensing of payments banks. The full list is represented in concise form in the Appendix Table 1 (p 45). Here, we ­restrict the discussion to only the most important features. A payments bank is allowed to accept demand–deposits (up to a maximum of ₹1,00,000 per individual), and issue debit cards and other prepaid instruments. It will provide payments and remittance services, and internet banking. The objective of ­financial inclusion being paramount, the primary beneficiaries of such services will be migrant labourers, low-income households, small businesses and other unorganised sector entities.

A minimum of 75% of the demand-deposits of a payments bank will have to be parked in government securities and treasury bills and a maximum of 25% can be held in the form of current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management. This will ensure that payments banks do not carry any significant credit and market risks, but they will still be subject to operational and liquidity risks, and they will be allowed to manage these risks in an appropriate way (Appendix Table 1 for details).

The business model will therefore be a high volume–low value one, based on fees charged for services rendered rather than returns on assets, and the business environment will be a secured technology-driven one. In addition to adhering to the above guidelines, a prospective payments bank is required to provide the RBI with a detailed business plan. In case of deviation from the stated business plan after the issue of a license, the RBI will consider restricting the payments bank’s expansion, effecting change in management and imposing other ­penal measures.

In August 2015, the RBI provided in-principal license approvals to 11 entities to start up payments banks. These were Aditya Birla Nuvo, Airtel M Commerce Services, Cholamandalam
Distribution Services, Department of Posts, Fino PayTech, National Securities Depository, Reliance Industries-SBI, Dilip Sanghvi–IDFC–Telenor JV, Vijay Shekhar Sharma, Tech Mahindra, and Vodafone M-Pesa. Subsequently, in the course of setting up businesses, three of them (Cholamandalam, Sanghvi–IDFC–Telenor, and Tech ­Mahindra) surrendered their licences in 2016, citing the model to be unviable due to regulatory impositions such as the limits placed on deploying deposits freely so that fee income was the only source of revenue, and the challenges of customer acquisition in the face of stringent KYC norms. These three entities also expressed worries about high compliance costs, competition from other payments banks, and the long gestation period for profitability implicit in the business model.

In November 2016, Airtel launched India’s first payments bank by beginning operations in Rajasthan on a pilot basis. In January 2017, India Post Payments Bank (IPPB) became the second entity to start operations. The entry of IPPB into the landscape was greeted with significant anticipation, as the 2016 Independence Day speech by the Prime Minister had already signaled the tremendous advantage that IPPB enjoyed over other players. In Narendra Modi’s (2016) words,

If any government representative gets the affection of a common man in India, it is the postman. Everyone loves the postman and the postman also loves everybody ... We have taken a step to convert our Post Offices into Payments Banks. Starting with this, the Payments Bank will spread the chain of banks in the villages across the country in one go.

As of December 2018, IPPB had opened nearly 19 lakh ­accounts and facilitated close to a million transactions (LiveMint 2018). Following Airtel and IPPB, the other licence recipients have also set up their respective payments banks.

In the meantime, other noteworthy events have also transpired. In March 2018, the RBI imposed a fine of ₹5 crore on Airtel payments bank for violating operational guidelines and KYC norms. The RBI also barred payments banks started by Paytm (owned by Vijay Shekhar Sharma, one of the 11 licensees) and Fino PayTech from enrolling new customers as they were found to be opening accounts without the clear consent of customers. In September 2018, the cost of customer acquisition for payments banks arguably multiplied when the Supreme Court ruled that the Aadhaar number, the government’s biometric ID platform that had come to serve as a public good for KYC ­authorisation, could no longer be demanded of citizens by corporate entities as a matter of routine identity verification.

In October 2018, the RBI released operational guidelines on the interoperability of prepaid instruments. The guidelines stated that mobile wallet users would be able to transfer funds from one wallet to another and from their wallets to bank ­accounts through the government’s unified payments interface (UPI) platform. This development occurred despite the fact that in August 2018, some payments banks had app­roached the RBI to not grant such interoperability rights to PPIs. There was apparent reason for the payments banks to worry since the new norms have levelled the playing field for payments banks and PPIs in terms of access to a common technological platform, but whereas PPIs are not required to pay interest on the amounts deposited with them, payments banks are. On the other hand, mobile wallets are prohibited from ­accepting monthly deposits of more than ₹ 10,000 whereas for payments banks, that limit is ₹1,00,000.

Presently, it is safe to say that payments banks are in ­uncharted territory. Since their conception, mobile accessibility has become cheaper, rural connectivity has improved under the “Digital India” initiative, and the Pradhan Mantri Jan Dhan Yojana (PMJDY) has pushed for greater and greater numbers of the unbanked to be brought into the ambit of the formal financial system. All of these developments play arguably complementary roles for the purpose that payments banks are looking to serve. But the jury on whether they will succeed is still out.

According to a 2018 RBI report, the total paid-up capital of the seven entities that have set up payments banks is ₹3,346 crore (approximately $478 million), and they accounted for a deposit intake of ₹540 crore (approximately $77 million), which is about 0.005% of overall bank deposits in India (RBI 2018). As expected, profitability is a major concern, with the seven entities reporting combined operating losses of ₹240.7 crore (approximately $34.5 million) and ₹522.1 crore (approximately $74.84 million) for the years 2017 and 2018, respectively (RBI 2018).

For the financial year 2018–19, Paytm payments bank ­announced profits of ₹19 crore, but did not publish any hard data on whether these profits were mainly sourced from ­business operations in rural and unbanked parts of India, that is, whether the goal of financial inclusion was being achieved in any real sense. In an interview, the CEO Satish Kumar Gupta remarked that rural and semi-urban customers amounted to (only) 25% of the bank’s customer base (Bhalla 2019). In ­November 2019, the RBI notified that Aditya Birla Payments Bank is headed for voluntary liquidation, owing to “unanticipated developments” that made its business model “unviable.” (RBI 2019a)

Financial Inclusion, Competitiveness and Profitability

The institution of payments banks occasions two broad questions. The first is the more primitive one: Are payments banks an appropriate mechanism for achieving financial inclusion? The second follows from the first: Conditional on payments banks being an appropriate mechanism for achieving financial inclusion, how likely are they, as presently conceived in India, to succeed?

We believe that the first question is the subject of a very ­legitimate debate, but we do not address it in this paper. ­Indeed, the first question cannot properly be answered without tackling the second one, and so we focus on the latter. We do not feel the need to justify the question that we are tackling, as the surrender of licences signals the possibility that the Mor Committee and the RBI may not have fully thought through the implications of what they were bringing into existence. This is the gap we hope to fill with our analysis. Indeed, we believe that the regulatory structure is key, and so we frame the discussion from that perspective.

To make progress, we recast the second question in the form of an impossible trinity, to clearly identify the trade-offs that regulators must pay attention to. But also, we wish to make an intentional analogy to the Mundell–Fleming trilemma in macroeconomics, because it provides a way forward in thinking about how to mitigate those trade-offs (Fleming 1962; Mundell 1963). Our basic submission is that in the conception of payments banks, financial inclusion, profitability and competition together constitute an impossible trinity of objectives. That is, for example, we can have many competing payments banks that are all profitable to some extent, but then the goal of ­financial inclusion may not be achievable. Or, we can have many competing payments banks that financially include the majority of the presently excluded, but then those banks will not be profitable, and so on. To understand why such a trilemma occurs, let us first examine the dimension of financial ­inclusion and its implications for the kind of business model that payments banks are likely to employ.

The mandate of financial inclusion requires payments banks to serve a kind of consumer who is unlikely to generate a significant revenue stream from just the consumption of the services of a deposit account, because that consumer’s demand for such services is likely to be much more limited than that of a middle-income urban consumer who is the conventional ­retail banking customer in India. Yet the bank will need to cover the ongoing operating cost of maintaining and servicing ­deposit accounts. We note, in passing, that operating cost is the critical metric to consider for inherent financial viability, and not merely the difference between the in-rate (rate earned on government securities) and the out-rate (rate paid to ­depositors), which indeed is positive. Therefore, for a payments bank’s revenue model to make business sense, it ­becomes necessary for the bank to devise new and interesting ways of creating value from its customer base.

The number and variety of such new and interesting means of value creation have been multiplied considerably by the ­advent of the internet and mobile telephony, and a new kind of business model is emerging all over the world to take advantage of such opportunities. This is the business model of a platform. A platform business generates value when consumers and producers interact, with the platform essentially performing a matching function and appropriating for itself some part of the value that is created. Platforms have existed for centuries (for example, stock exchanges), but the digital domain has spawned a whole new variant of platforms (for example, ­Apple, Facebook, Uber, Airbnb) that are reshaping industry dynamics in both traditional and new sectors. Key to the success of these new platforms is the data generated by participants on the platform, because this data is itself a monetisable resource. Payments-based platform businesses such as Paypal and Alibaba have demonstrated how the onboarding of participants on both demand and supply sides of various markets can make available to the platform a wealth of data that can then become sources of value creation.

The point of the above discussion is to recognise that the ­social good of including within the formal financial system the hitherto excluded cannot, per se, provide sufficient monetary incentive for private sector participants to participate in the ­financial inclusion project. We think that the evidence for this claim is already before us. Payments banks need to adopt the platform business model in order to be financially viable. This will entail clever and innovative approaches to monetising the data that inclusion will make available to a payments bank. This data will capture the saving and spending behaviours of customers and can be used for credit assessment and the cross-selling of goods and services, including financial services. It could also be made available to software developers—via what are called application programming interfaces or APIs—for building “apps,” that is, software applications that use the data to create value-added products or services. These software developers do not need to be employed by the payments banks. They are external to the payments bank, sometimes ­independent free agents, but they nevertheless create value for the payments bank’s customers, and therefore for the payments bank and for themselves.

A simple and entirely hypothetical example would be the use of payments bank data to create a budgeting tool that customers could use to keep track of their expenditure patterns and therefore to incorporate some financial discipline into their spending behaviour. The point is that this tool would not be created by the payments bank, yet it would become an ­instrumental feature of customer retention and customer acq­uisition for the payments bank. What we are envisioning here is a business model, where the existence of a customer base will create the ground for layers of innovative revenue-­generating opportunities other than the provision of deposit and payment services, and it is those opportunities which will truly drive the payments bank’s business model. This does not mean, however, that the objective of financial inclusion will be bypassed, because financial inclusion will be the enabling ­condition for financial viability.

Question of Profitability

We can assume, however, that the typical payments bank will not just be content to cover cost, that is, be financially viable, but will want to grow and therefore be profitable. This brings us to the second dimension in the impossible trinity, that of profitability. Yet, how is a platform to assure itself of profits? The answer to this question is by now well known as the ubiquity of such businesses in contemporary times has ­given rise to a surge of scholarly interest in them and contributed to a growing canon of knowledge about how such businesses operate and succeed or fail (see Parker et al [2017], for a comprehensive survey). The key determinant of profitability is found to be scale. But it is not the traditional supply-side economies of scale that is at issue here. Rather, platform markets—the markets in which platform businesses operate—demonstrate “demand-side economies of scale.” It is important to ­understand that demand-side economies have not always been a feature of platform businesses even if platforms have existed for a long time. They are a more recent phenomenon, made possible by the technological innovation that drives digital or e-commerce, whereby efficiencies in the networks that are ­always already implicated in any market can be easily explo­ited. As a result, those networks can be quickly scaled up ­because larger networks attract more users and become larger still. These dynamics are therefore more appropriately termed “network effects.”

Network effects in platform markets are in fact two-sided, meaning that achieving scale on one side of the market automatically leads to the realisation of scale on the other side. A traditional payments settlement company like Visa illustrates this phenomenon well. Visa’s ability to attract more merchants into its card network depends on its ability to attract more customers into its network, but more customers can only be persuaded to use Visa if more merchants also accept it. Thus, network effects operate through positive feedback, and this is what makes them so powerful. A platform business that can activate this positive feedback process can quickly scale up, and therein lies the key to profitability. Until it has scaled, however, the business has a difficult problem to solve, because there is no clear rule or principle to be followed in terms of which side of the market is to be scaled up first. In other words, the scaling problem is akin to a chicken-and-egg problem, and this makes platform businesses exciting, but at the same time, subject to high levels of going-concern risk, as a significant amount of capital may need to be burned up before the scale is achieved.

Even as scale is being achieved, the question of how to monetise value remains an independent problem to be solved. This problem, much like the problem of scaling, is best solved via experimentation, so that both scale and value in platforms are emergent properties. In other words, what precisely will be the hook for participants on one of the sides of the market, and how thereafter that hook will translate into monetary value, are both questions that cannot be decided ex ante in a strategic sense, but rather their answers must be discovered. This is the conclusion that most case literature on platform businesses ­arrives at, and we think that there is more than a grain of truth in it because technological innovation in the digital domain offers the arising and testing of contingent possibilities (and therefore also, failure of businesses) at a far greater rate than has ever been possible in the history of commerce. As with scaling and revenue streams, so also, with the architectural design of a platform and its internal governance structure.

Architectural design refers to how the various parts of the platform connect and interrelate to one another and in what manner these parts allow or hinder entry to or exit of network participants. Governance structure refers to how the platform monitors and disciplines activity among participants. The emergent quality of value, in particular, is best illustrated by the example of M-Pesa in Kenya, which started out along the lines of a microfinance corporation but found out, quite by ­accident, that mobile payments were the real hidden opportunity, and then quickly became the payments platform for much of Kenya’s rural population (Harford 2017).

Competition Dimension

This then brings us to the third dimension of the trinity, that of competition. Requiring the market for payments banks to be competitive is equivalent to requiring that each consumer have access to multiple payments banks and can freely choose between them for the delivery of deposit and payments services. A corollary is that if a consumer should want to switch from one service provider to another, they can do so without impediment or discrimination. There are, however, reasons to anticipate that competitive forces are unlikely to manifest in any permanent sense in the payments banks space. This is because platform markets are often seen to be winner-take-all markets, which are markets that start out as competitive but end up, via a process of selection, as monopolistic.

The propensity for monopolising forces to arise in a platform market stems from a variety of factors: supply-side economies of scale, network effects, the absence or diminished possibility of “multihoming,” and the presence of niche specialisation (Parker et al 2017). Multihoming refers to a situation where participants in a platform have easy access to other platforms as well. Consider, for instance, the market served by such platforms as Uber and Ola. Because customers looking for a ride can easily switch from one platform to another on their smartphone, this market allows ample possibilities for multihoming and therefore low switching costs. On the other hand, the smartphone on which these two platforms are being accessed is itself a platform, and the market for smartphones is typically not susceptible to multihoming because most users of smartphones will choose one particular brand of smartphone and stick with it for some length of time. By a similar logic, if a platform is not providing access to a very niche product or service, customer acquisition and retention will be more difficult, and winner-take-all forces will be less likely to take hold in such a market.

It is prima facie unclear whether payment platforms in India operate in a winner-takes-all market. While network effects are an obvious potential feature of the market for payment services, something like the government-issued Bharat Interface For Money (BHIM) app, that allows users to use any bank ­account to make payments over a mobile phone, opens the space for multihoming. Furthermore, the ability to make payments per se is not a niche service. Still, neither the possibility of multihoming nor the pedestrian nature of the service being provided argue against the possibility of a single payments bank coming to dominate the space. Everything depends on the winner’s particular business model—that is, what really is the winner serving as a platform for—which itself is a matter of discovering how best to implicate and exploit network ­effects. Should such a winner emerge, then the selection mechanism would be one of intense and fierce competition, so that competition is not necessarily ruled out, except in the long-term, which is defined endogenously as the length of time that it would take for a winner to emerge.

Putting the three dimensions together, we can examine how the impossibility of the three objectives asserts itself. If the arena for payments banks is populated by a large number of competing entities, as regulators would like it to be, then it is clear that the financial inclusion objective can be achieved. But the payments banks will compete viciously to acquire and retain customers, and this competition, which will be an ­unfolding process of building scale, will render profits elusive. If the process of building scale is characterised by winner-take-all forces, then the scaled-up winner will be financially inclusive and will be profitable, but clearly, the arena for payments banks will now be devoid of competition. So, the nature of the impossibility transitions from one kind to another with the passage of time, but the impossibility itself persists through time.

How might the short- to medium-term impossibility be ameliorated? In other words, is there a hope that payments bank licensees will be able to operate profitably, compete with one another, and also achieve financial inclusion? We suggest a particular kind of intervention that could help. Here, a more explicit analogy to the Mundell–Fleming trilemma in macroeconomics is helpful for framing purposes. In that trilemma, a central bank cannot fix the exchange rate, conduct independent monetary policy, and allow free capital mobility, all at the same time. Yet, this seemingly intractable trade-off can indeed be mitigated, provided the central bank has a large stock of foreign exchange reserves. We propose that the role of ­reserves is played in the payments bank trilemma by the IPPB’s network of postal service employees. That is, the proposal is for the IPPB to allow private sector payments banks to piggyback on its network of postal service employees, thereby providing all competitors a level playing field at least in terms of customer acquisition, which as discussed earlier is a formidable scaling problem for platforms in any industry to solve and made even more difficult for payments banks by the Aadhaar verdict of September 2018.

Challenge of Customer Acquisition

This still leaves significant room, and indeed frees up resources for innovation in the customer acquisition domain, in terms of payments banks differentiating themselves along the dim­ensions of product offerings and user interfaces. Note that ­acquiring customers is also a matter of creating trust among those that are not accustomed to formal financial practices, and merely creating e-KYC procedures—as the regulators have sought to do, ostensibly to ease the process of signing up customers—will not solve this problem. The network of postal service employees therefore, performs a double function from the perspective of easing the route to customer acquisition and helping payments banks gain a measure of profitability as they compete with one another to build scale.

One possible objection to the above proposal is that it is ­beside the point, as some of the payments banks licensees that are telecom companies and non-banking financial companies (NBFCs) already have customer bases and so do not require the IPPB network to piggyback on. We would argue, however, that the dual objectives of financial inclusion and profitability ­require not only that those existing customers be predominantly rural and low-income households, but also that they be very large in size. It is not clear from published data whether either of those conditions is met. Furthermore, selling SIM cards is a fundamentally different business proposition from persuading customers to open deposit accounts. The factor of trust is critical and will require a significant additional investment of time and resources, not to speak of the added expenditures involved in employing core banking solutions to power functionality.

It is also not obvious that the large upfront fixed cost of acq­uiring customers can be easily paid for by cross-subsidisation even if many of the payments banks’ licensees are ostensibly high net-worth companies. The legal constitution of payments banks requires them to be financially separate from parent companies, except in the case of PPIs (which we would argue is probably the reason that Paytm payments bank is able to ­declare profits). It is against the background of all of these considerations that our proposal should be assessed. That the IPPB has now applied for a small finance bank (SFB) licence does not also invalidate our proposal, as payments banks are allowed by the regulator to piggyback on existing networks of other banks. Rather, the point to be noted is that the regulator has begun to license SFBs, which suggests that the regulator itself believes that the payments banks model is unworkable. It is indeed doubtful that the IPPB is a profitable operation and so, by applying for an SFB licence, the IPPB is perhaps signaling that without credit operations, it will be unable to survive. Such considerations only bolster our case for the presence of a trilemma, but we are also going a step further in suggesting a way forward wherein the payments banks model is tweaked to allow them to avail of the IPPB network. In making this ­argument, we are in no way constrained by whether or not the IPPB is itself loss-making, since the crux of our argument is that private financial viability is in this case contingent on the provision of a public good.

Turning, therefore, to the implications of our analysis for the regulation of payments banks, we are able to deduce that there is an urgent need for the current regulatory framework to become sensitised to the novel and particular features of platform businesses and platform markets. We have seen, from our examination of the first two dimensions of the ­impossible trinity, that even without having to worry about the competition dimension, regulators are faced with a formidable chall­enge in laying down guidelines for payments banks to follow. The nexus of profitability and financial ­inclusion is itself a ­sophisticated tangle of novel issues having to do with honouring the imperative for innovation, search and discovery.

Currently, however, the preference is for licensing, and therefore a detailed framework of ex-ante norms. Even if payments banks are exempt from the prudential norms that usually apply to loans and advances, the ex ante norms are in many instances categorically similar to those that apply to regular retail banks. This is puzzling, since payments banks carry no credit risk. More broadly, preconditions for market access may be the wrong approach where payments banks are concerned. Room for experimentation and innovation calls for light-touch regulation at the point of entry, and a tolerance for ambiguity in respect of “fit and proper” business models. Thus, a more appropriate mode of due diligence would be ex-post transparency, where payments banks are required to document, in detail, their operational decisions and outcomes and submit such records for scrutiny by regulators.

Considerations of data privacy and the proper use of customer data, or more broadly, of customer protection, remain important matters for regulatory oversight, but there is no reason why such considerations cannot be folded into an ex post governance framework. At least, such a view appears to accord with the vision of the Nilekani Committee’s recommendations for the regulation of digital payments (RBI 2019b). Then, there is also the matter of the trilemma. Regulators may have to ­consider providing something akin to a public good (as des­cribed in the previous paragraph) but need not insist on competition as a constitutive feature of the market for payment services. The case of M-Pesa is once again instructive, because the ­M-Pesa platform enjoyed a de facto monopoly at the time it started operations, but Kenyan regulators did not actively ­resist or seek to overturn this status (Heyer and Mas 2011). There is, in other words, such a thing as too much market ­access, ­especially if the market for payment service providers is winner-take-all. Seen in this light, the October 2018 decision to provide PPIs the same kind of market access that payments banks enjoy, may well turn out to be counterproductive.

Conclusions

In this paper, we have reviewed the history of payments banks in India and assessed the viability of this new category of ­financial institution. We have elucidated also the conditions required for payments banks to deliver on the objective for which they have been created. We have argued that the current regulatory framework does not adequately respond to the real challenge of enabling success for payments banks. In the interest of space, we have not addressed the first research question occasioned by the arrival of payments banks on the scene. The implicit assumption behind their conception seems to be that the availability of low-cost easy-to-use mobile money will readily provide a venue for financial inclusion. This is by no means a certainty. Interdisciplinary research on mobile money projects around the world is beginning to demonstrate that the deployment of mobile money often runs against the grain of existing cultural practices and therefore is not always successful (Rea and Nelms 2017). This research questions the very basis for adopting a “financial inclusion” frame for such interventions, since the deployment of mobile money may not necessarily advance developmental goals such as gender equality or the flattening of existing class or caste hierarchies that may be oppressive. Whether payments banks perpetuate such developmental bottlenecks or not remains, therefore, an open question from a “cultural economy” perspective, and we do not address this question in our paper, although we propose to take it up in future research.

References

Bhalla, Tarush (2019): “100m Savings Accounts, 350m Wallets – Behind Paytm and Its Ambitious Payments Bank Business,” YourStory, 4 April, https://yourstory.com/2019/04/paytm-payments-bank-ceo-satish-gupta.

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