Unpacking the Journey: Why Half of India’s Payments Banks Have Closed Shop

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In a roller-coaster trajectory marked by regulatory challenges and strategic shifts, India’s payments bank landscape has witnessed the closure of half of its initially licensed entities. 

Launched in 2016 with the issuance of 11 payments bank licenses, the industry aimed at promoting financial inclusion through predominantly digital platforms. Presently, only six out of the original eleven are operational.

Evolution of Payments Banks:

The inception of payments banks in India began with the issuance of licenses to entities such as Aditya Birla Nuvo, Airtel M Commerce Services, Cholamandalam Distribution Services, Department of Posts, FINO PayTech, National Securities Depository, Reliance Industries (Jio), Dilip Shantilal Shanghvi (Sun Pharmaceuticals), Paytm Payments Bank, Tech Mahindra, and Vodafone m-pesa.

Operational Payments Banks:

As of January 6, 2024, six payments banks are still operational in India: Airtel Payments Bank, Jio Payments Bank, Paytm Payments Bank, India Post Payments Bank, Fino Payments Bank, and NSDL Payments Bank. Notably, the industry recently witnessed regulatory scrutiny with Paytm Payments Bank facing business restrictions due to Know Your Customer (KYC) norm violations.

Rise and Fall of Payments Banks:

The journey of payments banks has been tumultuous, witnessing strategic withdrawals and closures. Aditya Birla Payments Bank, a joint venture between Aditya Birla Nuvo and Idea Cellular, shut its operations in 2019 due to unforeseen challenges, eventually heading for liquidation. Cholamandalam Investment and Finance Company surrendered its in-principle approval, citing competition and a prolonged path to profitability.

Dilip Shantilal Shanghvi, initially granted approval, abandoned plans in collaboration with Telenor Financial Services and IDFC Bank, without specifying reasons. 

Tech Mahindra dropped its payments bank venture, emphasizing the extended payback period and intense competition eroding thin margins. Vodafone Idea closed its payments bank following the discontinuation of Vodafone m-pesa.

Challenges Faced by Payments Banks:

Chandan Sinha, former RBI deputy governor, emphasizes the ancillary nature of payments banks to entities’ core businesses, particularly telecom companies leveraging existing retail networks. Sinha notes limited income streams for payments banks, leading to operational challenges.

Sharat Chandra, co-founder of India Blockchain Forum, identifies challenges such as evolving technology and regulatory norms, particularly citing KYC requirements as an Achilles heel. 

The RBI’s mandate on KYC norms, coupled with the emergence of artificial intelligence and deepfakes, has introduced new dimensions and threats to the integrity of KYC processes.

As India’s payments bank landscape continues to evolve, the industry grapples with balancing technological advancements, regulatory compliance, and sustainable business models in the pursuit of financial inclusion.