Payment Bank of Paytm

Paytm, India’s leading digital payment company is all set to establish its Payment Bank on the 23^rd of May 2017, after receiving approval from the Reserve Bank of India. Paytm is the third company to establish a payment bank, after Airtel and India Post. 

What are payment banks?

The RBI had introduced the system of payment banks which are banks that reach customers mainly through their mobile phones, rather than the traditional bank branches. These banks cannot grant loans but can accept deposits worth Rs 1,00,000 per customer. They can issue services like debit cards, net banking, ATM cards, etc. Savings and current accounts can be operated by these banks. 

Analysis

The main reason why RBI has approved the establishment of payment banks in the country is to offer savings accounts and remittance services such as transferring funds, making purchases and storing money to the low income households. All the active wallet accounts on the Paytm app will be transferred to the payment bank. Customers who do not want to transfer their account can notify the company beforehand. Despite being the major shareholder in Paytm, Alibaba would not have a direct shareholding in the payment bank. 

Assessment

With over 200 million users, Paytm’s bank may help to establish a unified payment system enabling better and cheaper transactions through mobile phones. It may also help it to attract more users as mobile phone coverage is large and economical, when compared to traditional banks.

Payment banks are compelled to invest 75% of their deposits in government securities, which limits their ability to earn. They must offer at least 4% as the current savings rate to its customers. Since they do not lend out money, they do not earn interest and hence profit margin is less. Companies like Tech Mahindra had received its license to start a payment bank but it soon abandoned this plan as the payback period of the investment was long. Thus, Paytm might face intense competition as even traditional banks like SBI, HDFC provide similar digital services to its customers.