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Payment Banks – A Path to Financial Inclusion in Indian Economy

In recent years India has witnessed the paradigm shift as the Financial Inclusion1 inculcated by the Government policies, which plays an important role in the development of India. Payment Banks that is similar to Digital Wallets, an idea of Nachiket Mor. The Committee which was setup last year by RBI; can be seen as one of the paths where the committee aims to contribute in spreading the financial inclusion mission by bringing small businesses and low income households into the realm of financial services. On the other hand 'Digital India' vision of Hon'ble Prime Minister Narendra Modi's has helped transforming our nation to create new opportunities and outlook as it aims at digitizing of various individual projects of all central government and ministries which can be delivered to citizens by joining all the areas of India including the Gram Panchayats at high speed internet through Mobile Phones.

As Payment Banks is a platform where it will help to reach customers mainly through their mobile phones rather than traditional bank branches, Digital India would play a vital role in India's fast evolving ecosystem. The objective of this paper is to review Payment Bank as a viable option to inculcate nonbanking population into banking arena and its future prospects as business model.


Payment Banks, Digital Wallet, Online Payment, Mobile Commerce, Indian Economy, Financial Inclusion, Digital India


Financial inclusion delivering financial services contributes to economic growth, especially for those who are ignored and left out of digital financial systems by formal sector institutions. As Mr. Shashwat Sharma, partner, KPMG India, says “With the release of final guidelines for licensing of small finance banks and payments banks, the RBI has reinforced its commitment to financial inclusion. This is a step in the right direction to bring India's unbanked and underserved segments into the formal finance structure, with banking penetration expected to expand substantially beyond the traditional segments”.

Payments banks are niche banks which complements the plan of financial inclusion. Payment banks are anticipated to offer innovative models to the new generation with a digital approach. It has the potential to be more receptive to the changing economic and market trends. As Payment Banks and other Government project Digital India will use smart phones as a tool for interacting with the customer which is one of the fast growing instrument due to its affordability rate, user friendly and availability in various language, which can be further seen in the below statistics the reach of mobile phones and its usage.

Source: Global Social Media Research Summary 2016, by Dave Chaffery

1- Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society, in contrast to financial exclusion where those services are not available or affordable

Source: Global Social Media Research Summary 2016, by Dave Chaffery

Source: Global Social Media Research Summary 2016, by Dave Chaffery

According to TRAI telecom subscription report, March 2016, and the above statistics we can interpret that India has millions of new subscriber's additions, predominantly coming from rural areas where it grew nearly by 5x as compared to Urban. India currently ranks number 2 in the world with over 1 billion mobile subscriptions, of this, approximately 240 million consumers' use smartphones and this base is projected to increase to over 520 million by 2020. The Indian population is projected to make digital payments worth $500 billion in the next four years, resulting in non-cash overtaking cash transactions by 2023. All these insights would in turn help Payment Banks be a great platform to penetrate in these areas and as emphasized, the vision of Digital India program which is the flagship program of Government of India expresses 'transform India into a digitally empowered society and knowledge economy'.

A] Payment Banks

Payment Banks which will be revolutionizing the banking sector; are like Prepaid Payment Instrument (PPI2) works as digital wallet with banking facilities. It's a theory based on PPI whereby cash can be pre-deposited and be used for multiple purchases and payment by transferring money from one mobile to another mobile or a bank account or to Point of Sale terminal at a retail chain outlet. Payment banks expected to reach customers mainly through their mobile

PPI: As per the RBI, Pre-paid payment instruments are payment instruments that facilitate purchase of goods and services, including funds transfer, against the value stored on such instruments

phones rather than traditional bank branches. It is recommended options for creating a special cluster of banks which would positively impact financial inclusion within India. As SBI Chairman Arundhati Bhattacharya has said “This partnership brings together the combined strengths of two of India's Fortune 500 corporations committed to making a transformative impact on India's financial inclusion landscape. We see this license as an opportunity to promote financial inclusion”.


As per the directive, telecom operators, Post office systems, Corporate Business Correspondents, supermarket chains, electronic wallets and prepaid instrument players can open these payment banks to accept deposits, offer basic saving facilities and provide remittance services for millions of people. As these are the key strategic units where people can easily have access anywhere even in remote places of rural areas.

On 19th Aug 2015, the Reserve Bank of India 'in principle' cleared 11 entities to set-up 'payment banks'. These are:

  1. Aditya Birla Nuvo,
  2. Airtel M Commerce Services,
  3. Cholamandalam Distribution Services,
  4. Department of Posts,
  5. Fino Pay Tech,
  6. National Securities Depository,
  7. Reliance Industries,
  8. Dilip Shantilal Shanghvi, the Sun Pharma promoter,
  9. Vijay Shekhar Sharma, Paytm founder,
  10. Tech Mahindra,
  11. Vodafone M-Pesa


B] Need for Payment Banks

In many regions of India there are places where they have less or no access to formal institution, regional disparities, connectivity or technology due to which they have negligible options in doing business, building assets, banking systems or even save for old age. In the ADBI working paper series, the authors Abheek Barua, Rajat Kathuria, and Neha Malik mentioned that “India's record of financial inclusion, despite the existence of a large and well-regulated financial system dominated by commercial banks, is poor. The absence of inclusion is especially conspicuous in rural India, home to around 60% of the population ”. It is even noticed that it is not feasible or economical for banks to open branches in such areas; here Payment Banks would play an important role in bringing the unbanked masses in the realm of general banking.

There is still lot of opportunity available in India for this type of banking provided they get the essential technology solutions. “The recent Google and Boston Consulting Group (BCG) report, Digital Payments 2020, states that the digital payments industry in India is projected to reach $500 Bn. by 2020, contributing 15% to India's GDP3. Further, non-cash4 contribution in the consumer payments segment will double to 40%”. By this Google-BCG report and the above graphical statistics, we can observe that the Payment Banks would not only help reach out to the people in remotest corner of India where banking system is not effective as a platform but it will also help increase the country's GDP.

It is predictable that the payment banks through the mobile phones will be promising low cost platform for providing basic banking transactions, particularly; payment for services and subsidies. A mobile phone platform still has lot of opportunity to penetrate rural India. Over the next few years the smartphone outburst will usher in a new era in digital payments in India which would be a turning point to encounter credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force. A study conducted by Access Markets International (AMI) expects the Digital India initiative to further expand e-commerce as India's tier 4 towns and rural areas will have access to internet .

  • - GDP: Gross Domestic Product
  • - Non-cash includes cheques, demand drafts, net-banking, credit/debit cards, mobile wallets and UPI

Source: Quora, What's the revenue model of payment banks by Rajeev Wadhwa

As per the Economic Survey 2015-16, 'India has the third largest base of technology start-up firms in the world' ; these tech-savvy population in turn look for smart payment solutions while dealing with their customers within India as well as in foreign countries. So the mobile-based payment solutions and proprietary payment networks have become the hot arena in the Indian ecosystem. This will drive merchant acquisition by offering low-investment solutions resulting in merchant's establishments that will accept digital/mobile payments, acceptance network which is simply expected to grow.

  • - Unbanked: Who do not use or not having access to the services of a bank or similar financial
  • - Underbanked: People or businesses that heavily relies on checks and cash as a mean of funding or have poor access to mainstream financial services

Revenue model of Payment Banks

People from low-income households, migrant labor workforce, small businesses and other unorganized sector entities and other similar users travel distant places to get access for the basic banking services like deposits, fees, and transfer money. People should be encouraged to join the digital economy by migrating cash-based customers into digital networks by offering digital payment transactions for free or rock bottom digital charges; this will lead to rapid uptake and usage of payment banks. It will also enable high volume-low value transactions in deposit and payment/ remittance services in a technology driven atmosphere. This will help people to less depend on cash and encourage to use mobile wallet as a bank account soon enough.

Figure 8: Smart Payment Bank Model (Urban/Rural)

Source: Quora, What's the revenue model of payment banks by Rajeev Wadhwa

Payment Banks provide amenities to the customers who make e-commerce purchase expense through their payment bank account using Mobile/ Web Apps, PoS7, Merchant Point etc. All day-to-day payments including P2P8 and P2M9 payments can be done remotely through mobile phones.


Although Indian economic growth looks favorable but the living standards of most citizens have not changed, with eCommerce and digital payments still gaining ground in India; which is primarily still a cash based society, suffers from irregularity in digital infrastructure – technology adaptation would be a key feature in this scheme for financial inclusion. The other challenge would also of customer acquisition as some of these customers who are using mobile banking services might not be willing to migrate to a new bank. As banks already have infrastructure for mobile

  • - PoS: Point of Sale
  • -P2P (Person-to-person) payments is an online technology that allows customers to transfer funds from their bank account or credit card to another individual's account via the Internet or a mobile
  • - P2M (Person-to-merchant) payments is an online technology that allows customers to pay any e-commerce or brick-and-mortar

banking in place with low cost remittance alternatives, payment banks on the other hand would find it difficult as they would have start establishing everything from scratch. Most of the population in India vastly resides in rural and semi- urban areas who are mostly less educated with limited knowledge of using technology and literacy constraints for availing services.

The entities which that were granted an in-principle approval for starting a payments bank, after eight months, a JV between a qualified group, a bank, and a telecom player; they have reservation of having economic sense to start and operate a payments bank and also that the regulations on operations were quite stringent and restricted. Other than this the entities were not allowed to undertake any lending businesses or issue credit cards and the income stream is initially restricted to remittances. Eventually, they can cross-sell banking products through their reach and earn a fee, but this stream of revenue are not high-margin businesses as the ability to earn depends on the capability of generating large volume. This, in turn, will be easier for entities like telecom companies who already have significant networks in place. Then the growing market of various payment gateways and other financial systems will be overlapping with the Payment banks which will ultimately somewhere hamper the business.


India is an emerging growing market where the usage of smartphone are rapidly catching up but largely a huge unbanked market where Payment Banks can play an important role in emphasizing the growth of financial inclusion and tapping all the corners of the country progressively. Here adaptation of the infrastructure and technology would definitely be the key features in this scheme for financial inclusion. As the author Gopal Sathe mentions in online website Gadgets 360° that “This is also very important when considered from the perspective of financial inclusion, as someone could now fill cash into a m-Commerce bank account from Delhi, and a relative in a small town who holds the debit card could withdraw cash from any ATM frictionlessly, or even in a more rural location, through any point of sale terminal with a "business correspondent", essentially an authorized partner for the bank”.

With Payment Banks coming into play other factors like m-Commerce, small business, online transfer, etc. would grow with ultimately giving rise to the India's GDP in turn helping in financial inclusion upsurge. The payment bank license will enable us to build on this further and offer a more comprehensive portfolio of banking and financial products and services, accelerating India's journey into a cashless economy. Payment Banks will help keep pace with the ever growing expectations of customers for faster, easier and simpler banking and financial services.

It would be interesting to see how Payment Banks will change the living standards of people and boosting businesses of millions of MSMEs10and the coming entrepreneurs in the near future.


Google-BCG study reveals Indian digital payments industry to grow to $500 billion by 2020, contributing to 15% of GDP. (2016, July 25). Retrieved from BCG:

Abheek Barua, R. K. (2016, April). The Status of Financial Inclusion, Regulation, and Education in India. ADBI Working Paper Series.

Bhargava, Y. (2016, February 27). India has 3rd largest base of start-up firms. Retrieved from The Hindu:

Kashyap, K. (2016, August 18). India's Fintech Startups Will Cause A Cashless 'Payment Revolution' By 2023. Retrieved from Forbes:

Krishnan, A. (2015, September 24). AMI: Digital India mission to boost India's e-commerce. Retrieved from Infortechlead

Notification: Master Circular – Policy Guidelines on Issuance and Operation of Pre-paid Payment Instruments in India.(2014, July 1). Retrieved from Reserve Bank of India:

10 - MSME: Micro Small Medium Entrepreneurs

Payments banks: The 'challenger' banks in India. (2015). About Digital India. (n.d.). Retrieved from Digital India:

Chaffey, D. (2016, August 8). Global social media research summary 2016. Retrieved from Smart Insights:

Dugal, I. (2016, May 24). Payments banks aren't looking that lucrative anymore. Retrieved from Live Mint:

Ethiraj, G. (2016, May 30). The Real Reasons Payment Banks Are Returning Their Licences. Retrieved from Boom :

Jagannathan, R. (2015, August 20). It is a big deal. Why payment banks will change the banking game for you and me. Retrieved from FirstPost

Jaiswar, P. (2016, July 25). Initial hiccups aside, these Payment Banks are closer to reality. Retrieved from ZeeBiz WebDesk:

Kabir Kumar, D. R. (2015, January 27). What Will It Take for Payments Banks to Succeed in India? Retrieved from CGAP:

Kesavam, M. V. (2015, August). The Diversification of Banks to the era of payment banks by reserve bank of Inda with specific reference to Indian banking sector. International Journal of World Research, 1.

Mehra, P. (2015, August 20). All you need to know about payment banks. Retrieved from The Hindu:

Modgil, S. (2016, August 8). Banking On Digital India: PayPal Looks To Empower Homegrown Startups To Get A Share Of $500 Bn Pie. Retrieved from Inc42:

Pande, D. J. (2015, November). “Payment Banks” – A Newer Form of Banks to Foster Financial Inclusion in India.GJRA- GLOBAL JOURNAL FOR RESEARCH ANALYSIS, 4(11).

PTI. (2016, July 4). RBI may soon allow interoperability of India Post's payment bank ATMs . Retrieved from The Economics Times:

Sathe, G. (2015, August 20). What Are Payment Banks, What They Can and Cannot Do, and Who Will They Affect? Retrieved from Gadgets 360°, an NDTV Venture:

Talwar, S. (2015, August 20). Payment Banks: An Evolution in the Banking Sector. Retrieved from

Vohra, A. (2015, January 11). E-wallets: Money on the move. Retrieved from The Financial Express:

Wadhwa, R. (n.d.). What's the revenue model of payment banks? Retrieved from Quora:

Authored by
Prof. Bhavesh Kapuria
MPSPS Degree College of Arts, Science and Commerce

Prof. Sana Khan
MET - IOM, Mumbai

Tags: MET Institute of Management