Source- Economic Times

For the last few months, political talk has completely overtaken any sensible discussion on the economy; the atmosphere has in fact been so vitiated that puerile talk of replacing the RBI Governor was being taken seriously in the media. Hopefully, now all that is behind us and we can get on with fixing the mess we are in. There is a new government in place, already rushing ahead with fresh ideas. The 10 point agenda released by the PM has given structure to what we may expect and one point in particular gives considerable reassurance for a new beginning: ‘Innovative ideas welcome, bureaucrats will be given freedom to work.’ Obviously this point works for all sectors and all departments, but for those of us who track the financial space, this has special meaning now.

Last week, the RBI Governor Dr Rajan spoke about the need for increasing competition in the banking sector, about licenses on tap, about differentiated banking licenses and payments banks. There had been quite a bit of buzz in January when the Mor Committee recommendations had come out, and now this has been revived. Most people are wondering whether payments banks will be a reality now. Dr Rajan talks of the debate going on about these new ideas, so here are some more thoughts.

The keystone for raising efficiency has to lie in competition; often even the threat of competition spurs innovation, so allowing more players in is a win-win for all. When it comes to payments, payments service providers have to be in step with technology trends as also with the consumers needs at the last mile; this means innovating continuously to find the best model, which will change over time.

Given these basic principles, payments banks make for an excellent concept, a new idea that will allow entities like India Post to transform themselves into modern payments institutions, to leverage the vast network that India Post already has in the hinterland. Another strand of competition and innovation already introduced by the RBI is the Pre-paid Instrument issuers or PPIs. These are non-banks licensed to facilitate payments and a pilot announced by Dr. Rajan last year is currently underway to check the ‘technical and operational feasibility’ of cash-out payments at designated retail outlets. If this pilot works well, then we can see a wider network in place that will allow people to transfer money, especially to unbanked or under-banked areas.

Are there risks in opening this space to other players? While payments banks are of course within the banking sector, PPIs are not banks, but they are under the regulatory supervision of the RBI. Any case, whichever entity gets a license for the payments business, regulation and oversight will remain: minimum capital requirements, restrictions on account balances, stringent transaction monitoring systems will be put in place to limit the downside risks. The point to remember is that by not allowing more players in, we would be losing out on tapping potential benefits of existing synergies.

Let’s face it, given the challenges that face India today in access to financial services, every extra bit can make a difference. The Bank of International Settlements study on innovation in retail payments shows that while banks have made more innovations in card payments, non-banks have led in the internet channel. Global experience in retail payments surely pointsto the fact that new ideas, more efficiencies come through by allowing different players to enter. Each player brings different strengths to the table. So from the regulatory point of view, facilitating entry is most important- this means keeping capital requirements to the minimum needed, leveraging existing networks etc. to allow the market grow. The call for innovation has now come from the highest office; let’s see how this pans out for payments now!