Are payments banks viable in the age of UPI?

Payments banks as a category of banks were introduced in 2015 by RBI, to bridge the gap between traditional banking services and the unbanked population, particularly in rural areas.  

These banks were envisioned to leverage technology to offer basic banking services, focusing on financial inclusion and digital transactions.  

The story of such banks has been a mixed bag over the last decade with Paytm Payments Bank (largest of them all) facing frequent regulatory compliance challenges in recent years on various aspects including KYC issues, risk management etc.  

However, the outlook and sentiments on digital banking and payments banks have turned negative ever since the RBI imposed latest set of fresh restrictions on Paytm Payments Bank to be effective from February 29 this year. 

Although Reserve Bank of India Governor Shaktikanta Das has already asserted that there is no systemic issue flowing from the Paytm Payments Bank crisis, this episode serves as a wake-up call for India’s fintech ecosystem.  

It has highlighted the imperative of regulatory compliance, risk management, and governance for digital banking entities. 

This has far-reaching repercussions for India’s fintech ecosystem and the broader banking sector. 

The incident has raised concerns about the stability and integrity of digital banking platforms. How will it affect funding for fintechs in the coming days is a question uppermost in the minds of stakeholders and investors. Are payments banks still viable in an UPI era? Of course, RBI as regulator has been focused on protection of banking customers and has already ruled out any rethink of its interventions with regards to Paytm Payments Bank.  

Srinath Sridharan, a policy researcher and corporate adviser, helps listeners get a sense of how he sees the future of Payments Banks in the country. He takes a view that payments banks as a concept is not viable anymore in the current times when UPI is scaling newer heights. Sridharan also feels that the time may be ripe for RBI to go in for a review of the licensing framework for various categories of banks and bring necessary changes. 

Listen in to this blpodcast to know more. 

(Host: KR Srivats; Producer: Amitha Rajkumar)