Wednesday, February 25, 2015

Digital Banking vs. Payment Banks and the winner is?

Significant market frictions have been present in financial markets for new players to offer new or improved services. Most of existing players had high transaction costs or limited reach in their respective key markets.
From past few years, leading Banks in India have been busy in executing their digital strategy to allow banking services access from new digital channels be it web, mobile (WAP, SMS & Apps),  email, Facebook or Twitter. Some have even setup dedicated business units/ subsidiaries to incarnate their new avatar to compete in digital age. 
Growing middle class, urbanization, increasing access to better internet & mobile access, all these have been changing social interactions, consumer expectations & market dynamics be it retail, airlines, telecom or financial sector.
On one side, we have urban population covered by major banks & non-banking financial companies (NBFC), on the other side we have rural population which have been deprived of banking & financial services for many decades. To serve needs of unbanked consumers, many NBFC and telecom companies have now started offering bill payments, pre-paid cash cards, money transfers & mobile wallet services. They are building crucial distribution channels while acquiring customers thru their prime services.
Most Banks digital strategy has been focusing to engage existing customers across various digital channels as well as reaching out to new urban customers. E.g.  Leading private bank of India, ICICI bank, now have 2.8 million registered mobile banking users and 15 million Internet banking users thus shifting major transactions & interactions over digital channels.
So far new players offering payments & transfer services were required to have a tie up with a bank for KYC and other regulatory needs however now Reserve Bank of India (RBI) is offering a new type of banking license referred as “Payment Banks”.
These Payment banks will provide savings, deposits, payments and domestic remittance services to people who do not have a bank account, including millions of migrant workers.  Currently Payments banks are restricted to holding a maximum balance of Rs. 1 lakh (INR 100,000) per individual customer. They can issue ATM/debit cards, but not credit cards or loans. They can also distribute simple financial products such as mutual fund units and insurance products. 
Recently non-banking financial services companies such as IDFC & Bandhan Financial services got Banking license while India Post (having 150,000+ post offices across country) is under RBI consideration.  Now with Payment banks arrival, competition for acquiring new customers may intensify in banking sector.
Few leading banks have started revamping their payments & transfer services reach & customer experience to get ahead of expected competition from Payment banks like ICICI Bank launching their Digital Banking Service – POCKETS & HDFC Digital Wallet.
eCommerce and mobile Commerce is growing in India ($100 bn market by 2019 as estimated by Assocham) along with overall growth in retail & airlines sectors. This will present a significant opportunity for Payments Banks.
Are Payment Banks & Digital Banking going to operate in largely separate market segments or target same set of customers to expand their customer base? Will they complement or compete for similar services?  
What do you think , how this change will reshape banking & financial sector?
One thing is sure, it’s a good sign for financial services reach & customer experience.

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