[By Dhawni Sharda & Anshika Agarwal]
The authors are students of National Law University Odisha.
INTRODUCTION
Through Budget 2024, the Government of India has pioneered an ambitious objective to set up over a hundred Payment banks as a significant step towards financial inclusion and security. These banks have been a modicum between the formal banking institutions and the unbanked population. This fosters greater financial literacy, encouraging savings and ensuring economic security amongst the economically weaker sections of society.
However, whether an increase in the number of these payment banks would provide the solution for the problems plaguing them is a question to be addressed. The authors, through this article, aim to highlight the strategic importance of partnerships between payment banks and institutions like Micro Finance Institutions (MFIs) and Business Correspondents (BCs) . While BCs enable access to unbanked areas, MFIs provide financial services like microcredit, micro-insurance, and savings, etc. This is done.to overcome the inherent barriers in their performance.
Starting with the rationale behind setting up such banks to analysing the recent actions faced by such banks for the failure of compliances, the authors adopt such an approach concerning how the lacuna of these banks can be resolved through strategic partnerships and tie-ups which can further broaden the understanding of such payment banks as beyond the digital wallets and can lead to being a host of variety of services.
TRACING THE ORIGIN AND AFTERMATH
Given the significant risks associated with Prepaid Payment Instrument(PPI) model such as concerns around KYC compliance, and the need for quick access to payment services at the grassroots level, a recommendation was made to establish the payment banks. These banks provide their essential payment services and function such as a digital wallet wherein the customers like MSME’s and low-income individuals can maintain their bank balance and use it to serve their needs.
With all this in process, payment banks started functioning as a miniature model of scheduled commercial banks. These banks were required to follow certain mandates as prescribed by RBI in the same way as Scheduled Commercial Banks do. Alongside, these banks were granted rights and privileges which came with the grant of the license.
Their performance was further enhanced by their strategy of branchless banking wherein the network of such banks was spilled over semi-urban, and rural areas. This phenomenon got fillip when these banks started entering into strategic partnerships.
STRATEGIC TIE-UPS
In recent years, the financial infrastructure of the underbanked areas has been boosted by the various deals between traditional banks, fintech companies, and payment banks. Doing so would ultimately broaden the horizon of the payment banks and help them to overcome their limitations which they would otherwise encounter if they would operate solely.
Microfinance institutions have already an established customer base in the low-income regions. Payments banks can use these channels to venture into new markets thereby leading to reduced cost, financial inclusion, and efficiency in operations.
In a deal, Multilink announces tie-up with NSDL payments bank. This move would contribute to financial services to all societal sections. To elaborate it further Multilink has around 3000 distributors, 200 mass distributors, and 60 API distributors. They even have strong associations with renowned platforms like IRCTC, Yes Bank, TATA AIG, Kotak Life, and so on. This NSDL-Multilink partnership would help customers perform all banking facilities around the clock through BC agent points.
Such partnerships are entered not only to avail the benefits of a well-established clientele base created by the MFIs/BCs, but also to avail the advantage of merging resources leading to efficiency in operations. Additionally, established monitoring and audit regulations are available to the payment bank.
SPOT ON ANALYSIS
Going Beyond the Conventional Perspective.
Going beyond the brick-and-mortar aspect of payment banks wherein they function as digital wallets, such collaborations with BCs or MFIs would become a good source of lending, thus fulfilling the debt gaps or the cash crunch requirements in the lower segment areas. If these two entities join hands, the issue of such operational needs of the banks would also be fulfilled.
Improved Market Offerings
The host of activities undertaken by the BCs can prove to be catalysts in the performance of the payment banks through their aid and assistance considering the low-cost model of BCs in branchless banking. So, these BCs can act as nodes to the branchless banking model of the payment banks, thereby amplifying the scope of financial activities.
Additionally, Payments banks can use MFIs’ strategic partners which have an established base in providing cross-banking marketing services to their clients, besides their experience in providing financial services to the low-income segment. This can work as a win-win situation for both the parties.
Plugging the Internal Problems
The abovementioned problems relate to the external issues which can be resolved through such alliances. However, certain internal issues are barriers to their expansion.
Payment banks in their initial years of set-up need to meet the high fixed costs leading to elevated break-even points. This further leads to the higher need for significant transactional volumes and substantial scale. In the process of doing the same, payment banks spend a considerable amount of time and resources in increasing profitability. Consequently, they miss on their sole purpose of creating better market offerings and attaining RBI’s objective of financial inclusion.
Need for Diversification
These payment banks fulfill the dire needs of the micro-finance institutions wherein these institutions plan to makeover their negative image of being involved in the unethical practices used in lending activities. In the wake of this situation, the state government came up with laws that completely put a halt to their operations. Given such a payment bank with a strong government and institutional support at the backend, the MFIs would get a relaxation in terms of regulatory oversight permitting their free and fair operations.
WAY FORWARD
Strategic partnerships are not an easy path to tread since these payment banks can’t enter such strategic alliances as independent entities because they are subsidiaries implying that they are controlled and influenced by their associated mobile apps.
It is further stated that inconsistency in the strategic objectives and priorities of the payment banks and MFI may lead to conflict of interest and operational inefficiency. On one hand, where payments banks concentrate majorly on transactional volumes, MFIs look forward to maximizing their credit outreach. Such a misalignment in the attainment of the objectives can lead to a diversion in goals and further prevent a coordinated course of action.
Furthermore, there can be certain additional risks. MFIs typically engage with higher-risk customer segments. On the other hand, payment banks operated under a different model by allowing individuals to make deposits and avoiding lending operations at the same time. This ensured their esteem as the secured deposits. Now, if these banks through their strategic partners intend to engage in the lending activities, they are supposed to make preliminary checks before lending so that their esteem won’t be hampered.
If a payments bank takes on some of this risk without proper due diligence and risk management regulations in place, it could deteriorate the bank’s financial health and would result in serious repercussions.
CONCLUSION
In conclusion, the path of payment banks is fraught with challenges from high operational costs to substantial transaction volumes and customer base expansion. In light of such challenges, these strategic alliances bring a ray of hope through such strategic moves, thereby entering into these collaborations. These partnerships have the potential to increase operational effectiveness, expand the services provided, and assist in overcoming the challenges that payment banks encounter in their autonomous operations.
However, such partnerships are not a cakewalk since the alignment of the strategic and operational objectives between the payment banks and the BCs/ MFIs becomes necessary so as to avoid conflict of interest. Besides this, this joint entity i.e. collaboration of payment banks with BCs/ MFIs has to take up rigorous checks before engaging in such lending actions since the trust of the lower segments of the society is reposed because of the assurance of secured withdrawals at the Payment banks.
Besides this, if numbers of such payment banks are to be increased, then there are risks associated with traffic management which can be mitigated through the workings of these payment banks in close nexus with the payment processors. At the end, if such partnerships are carefully designed and with a calibrated approach, these tie-ups can benefit both the parties entering into such alliances.