Payments banks are different from commercial banks: All you need to know about them

Publish Date: September 07, 2018

The government of India launched the India Post Payments Bank on September 1. Providing 4% return on savings, the payments bank is now operational in 650 districts and has 3,250 access points across the country. The government, in its official press release, mentioned that all the 1.55 lakh post offices in the country will be linked with the IPBB system by the end of 2018.

But, what do post offices have to do with banks? That’s strange, you might think.

In fact, IPBB will provide QR cards to make digital and cash transactions. Postmen and Grameen Dak Sevaks will also be at your service if you need their help to make a transaction.

QR cards, postmen… scratching your heads still? We won’t blame you if you are because payments banks are new-age for sure.

Part of the Reserve Bank of India’s (RBI) design, payments banks have been slowly but surely making their mark in India. Actually, the launch of India Post Payments Bank is not sui generis as there already were five payment banks in operation.

In the last two years, six payment banks, including IPBB, have been launched in the country. They are Airtel Payments Bank, Paytm Payments Bank, Fino Payments Bank, Aditya Birla Idea Payments Bank and Jio Payments Bank. While the first three banks were launched last year, the other two started their operations this year.

But before we look at the facilities offered by the India Post Payments Bank, let’s understand what a payments bank is.

Meaning

A payments bank allows you to conduct regular banking activities like depositing and withdrawing cash, net banking and providing loans and insurance through a third-party organisation. You can avail these facilities provided you have a mobile phone.

Raison d’être

The RBI paved the way for payments banks in 2016 in a bid to spread the banking system in the country. Despite 200-plus years of the formal banking system, about 19% of our population has remained outside its ambit.

Related read: Are the troubles over for the Indian banking sector?

The RBI’s rationale was that since mobile networks have penetrated the Indian hinterland, the unbanked population may take to payments banks more easily. The RBI expects migrant workers, unorganized businesses and low income households to benefit from the launch of payments banks. Of course, working professionals can consider payments banks too, thanks to their zero-balance account facility. (You can scroll down to read about the benefits of a payments bank)

How are they different from regular banks

Regular banks, known as commercial banks, like State Bank of India, ICICI Bank etc. operate slightly differently from these payments banks. Some of the differences are:

Deposit amount: You can deposit up to Rs 1 lakh in a payments bank, whereas there is no such limit in a commercial bank.

Credit cards and loans: Payments banks are allowed to give debit cards to their customers but do not provide credit cards or loans. They can only do so if they have tied up with a commercial bank. Commercial banks, meanwhile, do provide loans and credit cards.

Minimum capital: Payments banks need to have a minimum capital of Rs 100 crore, with promoters contributing at least 40% of the capital. Commercial banks, meanwhile, need to have Rs 500 crore as its paid-up voting equity capital.

Onboard process: Opening an account in a commercial bank takes time due to documentation, while it is comparatively swifter in the case of payments banks thanks to a paperless process initiated by mobile technology.

Minimum balance: Many commercial banks require you to have a minimum balance in your account. Failure to do so may result in a penalty. In a payments bank’s case, there is no minimum balance. You can open an account without paying any money upfront. These accounts are known as zero-balance accounts.

Interest rate: Payments banks provide relatively higher interest rates than scheduled banks. For instance, SBI provides 3.5% returns on savings accounts, whereas most payments banks offer 4% returns.

Related read: 5 trends to follow on bank interest rates

Now that we know how payments banks work, let’s look at the facilities provided by India Postal Payments Bank (IPPB).

As mentioned earlier, IPPB offers 4% interest rate on their zero-balance account. The bank will also offer insurance and credit card facilities as it has tied up with Bajaj Allianz Life Insurance and Punjab National Bank for this purpose.

To sum up, the RBI has allowed 11 entities to open their payments banks in the country. Slowly but surely, these banks will help improve financial inclusion and also provide another way for people to bank.

Payments banks are another initiative to go cashless and its introduction in Kenya has been a success so far. Also, since traditional banks have geographical constraints (setting up of branches, ATMs etc), payments banks can be a game-changer in the country’s financial system.

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