Startups are challenging the status-quo financial entities

Role of technology in driving financial inclusion and how Payments banks can help financial inclusion is not just about having a bank account for everyone in the society. It is about creating an ecosystem that enables and encourages people to use financial instruments in their everyday life. There are four key instruments of financial inclusion – payment, credit, insurance and investment. Technology has the potential to trauly democratise each of these instruments and make tangible impact towards financial well being of people.

Cash as primary medium of payments has led to setting up of expensive cash management infrastructure. However, in last few years people have started questioning the very existence of cash itself. The idea of replacing physical currency with digital payments is not new. There are numerous global examples of cash less or less cash societies but it always looked like a distant dream for India.

Digital payments can emerge as a way of making traditional unbanked and underbanked sections of society more credit worthy. In China, millions of small traders have got access to loans based on their online trade and digital payments data. In India, this trend has recently started with credit companies partnering with e-commerce companies to disburse loans to small retailers who are selling online. In future, partnerships between credit companies and internet companies will be strengthened and these may become a milestone in increasing reach of credit.

Similarly, insurance and investments are going to become much more mainstream riding on digital revolution. The convenience with which we will be able to buy insurance or a mutual fund by using our smartphone is going to increase.

RBI has granted in-principle licence to 11 entities to set up payments banks. Most of these institutions are expected to have technology as their core competency. The model of these banks needs to be distinctively different from traditional banks. While traditional banks have a business unit to focus on technology products, most of payments banks will be organised and operated as technology companies. Cost and revenue centres are expected to be very different for these banks. Capex may be dominated by investment in setting up technology architecture and opex towards product design and updates. Revenue share from interest income and transaction based fee income may be small compared to value garnered from surrounding activities.

Revenue stream for bank will shift from fee income from transaction to income from leveraging data to sell more valuable products like credit or insurance. A good example of product innovation is 'Yuebao', money market fund of Alipay in China. Yuebao has been designed with no minimum investment requirement and high liquidity. Investing in this money market fund is like investing in a saving product. Additional returns are an advantage. The product has response great response from all customer segments. Data analytics and technology prowess will help payments banks in innovating traditional products. Scalability of technology based products is expected to develop a large untapped market. Absence of legacy is expected to be an advantage in questioning current norms of doing business.Reaching the unreached is going to be third important parameter.

Wide agent network to provide last-mile banking services will be a critical component of payments banks. Operating such an agent network can be very costly as well as risky for an organisation. A truly scalable solution and cost effective solution cannot be dependent on physical workforce for onboarding, training and managing agents. It has to be a simple to use technology platform that enables prospect agents to manage themselves.

Operation risk framework needs to be very robust. Good example of such innovation in managing last mile agents is on demand cab services. User experience needs to be managed with focus on product design.

Utility of product will not be enough and a bank will have to think like a product design company. Revolution in mobile phones is an example. Companies with low focus on user experience could not survive despite their high focus on utility and value for money. It will be worthwhile for payments banks to think about this aspect from the beginning itself.Trust is the last and most important factor in a banking relationship.

Timing is right for payments bank model to be successful in India and achieve the cause of financial inclusion. Government and regulatory bodies have been encouraging use of technology in financial system. Penetration of smart phone with data connectivity is ever increasing. Aadhar is emerging as a unique identifier and authentication system. Vibrant startup culture is promoting technology based innovations and new companies are emerging everyday to challenge the status quo.

The writer is CEO and MD, Paytm