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Payments banks need to figure out rural outreach and a sustainable business model to escape unscathed 

Published 5 years ago on Apr 05, 2016 7 minutes Read

Facebook founder Mark Zuckerberg’s famous motto - Move fast and break things - is plastered on the walls of Paytm’s office in Noida. Abiding by the adage, Paytm has moved from a mobile recharge and utility payments provider to the country’s largest mobile commerce platform in its own words.  After being valued at $2.8 billion in its last funding round, Paytm has now set its eyes on becoming a payments bank, with 500 million users by 2020. It sure has moved fast, but the question now is can it break things? Or rather can it along with other payments banks wrest market share from the incumbents?

Yashraj Erande, partner, Boston Consulting GroupThe incumbents, judging by their comments, are wary. State Bank of India chief Arundhati Bhattacharya was among the first to express concern about payments banks. A day after the Reserve Bank of India awarded the licences, she said that the move would unleash a rate war and these banks would wean away low-cost CASA deposits by offering higher interest rates. The RBI has granted licences to 11 firms to set up payments banks to speed up the financial inclusion process. The idea is to allow entities to come up with technology-oriented solutions that can cater to the under-banked and unbanked segments in both rural and urban areas. 

But Bhattacharya may have over-estimated the competition. “Given the limited services that payments banks are allowed to offer, they will miss the two most important benefits of running a banking franchise —-- low cost of funds through large sticky customer deposits and the ability to lend money at a rate commensurate with the risk taken,” says Suruchi Jain, equity analyst, Morningstar India. Payments banks can only accept deposits up to Rs.100,000 per customer. To fight it out with legacy banks, they would need to offer higher interest rates on deposits. But with regulations not allowing payments banks to lend, the business model is likely to be a low-margin one, driven by volume. Currently, payments b


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