What is Payment Bank in India? How it works

Introduction to Payment Bank in India: Payment banks in India represent a groundbreaking initiative by the Reserve Bank of India (RBI) introduced in 2014. These banks serve a unique purpose, diverging from traditional banking models. They are designed to facilitate financial inclusion, targeting the unbanked and underbanked segments of society that have historically lacked access to formal banking services. This comprehensive guide explores the features, operations, benefits, limitations, and the impact payment banks have on financial inclusion in India.

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Table of Content

Overview of What is Payment Bank

what is payment bank

Payment banks operate under a distinctive mandate, focusing on providing essential financial services rather than extending credit lines. Their core services cater to individuals who may have been excluded from the formal banking sector due to various reasons, offering a simplified yet crucial set of financial functionalities. The primary goal is to bridge the financial gap, empowering individuals economically and socially.

Overview Table: Payment Banks in India

AspectDescription
ObjectiveBridging financial inclusion gap, targeting unbanked and underbanked
Services OfferedLimited to essential banking services, excluding credit cards, loans
Deposit LimitsUp to ₹2 lakhs per customer
Account TypesSavings and current accounts
Debit CardsIssued for convenient access to funds and cashless transactions
Money TransfersFacilitates domestic money transfers
Bill PaymentsAllows convenient payment of utility bills and recurring expenses
Financial ProductsActs as a distributor for simple insurance and mutual fund products
Technology ApproachHighly technology-driven, services offered through mobile apps
Branch PresenceFewer physical branches compared to traditional banks
Impact on Financial InclusionPivotal role in bringing the unbanked and underbanked into the formal financial system
Convenience and AffordabilityOffers convenient and affordable banking solutions
Encouragement of Cashless TransactionsPromotes financial transparency and reduces the risk of carrying physical cash

What is a Payment Bank?

Payment banks, unlike traditional counterparts, refrain from offering credit cards or loans. Instead, they focus on core services tailored to meet the basic financial needs of their customers. The key features include small deposit limits, offering both savings and current accounts, issuing debit cards, facilitating money transfers, and enabling bill payments. Additionally, payment banks can act as distributors for straightforward insurance and mutual fund products.

How Payment Banks Work

  1. Small Deposit Limits: Payment banks can accept deposits of up to ₹2 lakhs per customer, providing a crucial entry point for individuals with lower income levels and savings capacity.
  2. Savings and Current Accounts: These banks offer both savings and current accounts, allowing customers to effectively manage their finances through accessible and straightforward account options.
  3. Debit Cards: Payment banks issue debit cards, providing convenient access to funds and enabling cashless transactions, enhancing overall financial accessibility.
  4. Money Transfers: Facilitating domestic money transfers is a key function, simplifying the process of sending and receiving money across different geographies.
  5. Bill Payments: Customers can conveniently pay utility bills, mobile recharges, and other recurring expenses through their payment bank accounts, fostering financial convenience.
  6. Simple Financial Products: Payment banks act as distributors for basic insurance and mutual fund products, introducing individuals to the world of financial investments with uncomplicated offerings.
  7. Technology-Driven Approach: Leveraging technology, payment banks operate through mobile apps and online platforms, ensuring a wider reach and accessibility. This approach aligns with the evolving digital landscape, making banking services more convenient for users.

Benefits of Payment Banks

1. Financial Inclusion:

Payment banks play a pivotal role in bringing the unbanked and underbanked population into the formal financial system, promoting economic empowerment and development.

2. Convenience and Affordability:

They offer convenient and affordable banking solutions, often with lower fees and minimum balance requirements compared to traditional banks.

3. Financial Literacy:

By providing access to basic financial services and products, payment banks contribute to financial literacy and awareness among the underbanked population.

4. Cashless Transactions:

Payment banks encourage cashless transactions, promoting financial transparency and reducing the risk associated with carrying physical cash.

What are the Limitations of Payment Bank

1. Limited Services:

Compared to traditional banks, payment banks have a restricted range of services, excluding loans, credit cards, and high-value transactions.

2. Lower Deposit Limits:

The maximum deposit limit of ₹2 lakhs might not be sufficient for individuals with higher savings needs, limiting the appeal for certain segments of the population.

3. Fewer Branches:

Payment banks typically have fewer physical branches compared to traditional banks, potentially posing challenges for customers in remote areas who rely on physical

Comparative Payment Banks Vs Traditional Banks

AspectPayment BanksTraditional Banks
Services OfferedLimited: No loans, credit cardsComprehensive: Loans, credit cards, mortgages
Deposit LimitsUp to ₹2 lakhs per customerVaried, often higher
Account TypesSavings and current accountsWide range including specialized accounts
Physical Branch PresenceFewer branchesExtensive network
Technology DependencyHighly technology-drivenUtilizes technology but not as dependent
Financial Product OfferingsSimple: Insurance, mutual fundsDiverse: Investment, insurance, loans, etc.

The Road Ahead

Payment banks have played a significant role in advancing financial inclusion in India. Despite their limitations, their impact on expanding access to basic financial services cannot be understated. As technology evolves and regulations adapt, payment banks have the potential to further refine their offerings, cater to a wider range of needs, and bridge the financial gap for millions more.

A Word of Caution

While payment banks offer a convenient and accessible entry point into the financial system, it is crucial to choose a reputable bank with a secure platform and transparent policies. Carefully consider your needs and compare the services offered by different payment banks before committing to one. Remember, financial literacy is key. Equip yourself with the knowledge to make informed decisions and manage your finances effectively, regardless of the type of bank you choose.

Top Payment Banks in India

list highlighting the top payment banks in India, shedding light on their features, strengths, and limitations to assist you in making an informed choice.

1. Airtel Payments Bank:

  • Strength: Extensive reach with over 500 million Airtel mobile subscribers.
  • Features: Largest micro-ATM network, robust rural presence, integrated merchant payments, insurance, and mutual fund distribution.
  • Limitations: Slightly lower deposit limits, higher fees for specific transactions.

2. India Post Payments Bank:

  • Strength: Leverages India Post’s extensive network, reaching remote areas with limited banking access.
  • Features: Diverse cash deposit and withdrawal options, government pension, and salary disbursements, international remittances.
  • Limitations: Limited digital platforms, smaller product portfolio.

3. Fino Payments Bank:

  • Strength: Focus on financial literacy and inclusion, expertise in the rural market, strong partnerships with NGOs and microfinance institutions.
  • Features: Micro-insurance products, micro-credit facility through partner NBFCs, doorstep banking services, remittance solutions.
  • Limitations: Smaller branch network, limited digital features.

4. Paytm Payments Bank:

  • Strength: Leading digital wallet provider with a massive user base, emphasis on mobile banking and online transactions.
  • Features: Swift account opening through Aadhaar authentication, high-interest savings accounts, cashback, and rewards programs, diverse bill payments and travel bookings.
  • Limitations: Limited physical presence, reliance on internet connectivity, potential security concerns.

5. NSDL Payments Bank:

  • Strength: Expertise in capital markets and securities, dedicated focus on financial literacy and investor education.
  • Features: Demat account opening, mutual fund investments, online money transfers, doorstep banking services.
  • Limitations: Limited physical presence, smaller deposit limit, absence of certain features like insurance products.

6. Jio Payments Bank:

  • Strength: Leverages the massive subscriber base of Reliance Jio, potential bundling of banking services with telecom offerings.
  • Features: Easy account opening through Aadhaar authentication, high-interest savings accounts, digital payments integration with Jio ecosystem, diverse bill payments.
  • Limitations: New entrant with limited data on performance and service quality, smaller product portfolio.

7. SBI YONO:

  • Strength: Backed by the State Bank of India, potential for leveraging the existing branch network and customer base.
  • Features: Convenient account opening, instant debit card issuance, bill payments, mobile recharge, UPI payments, micro-ATM withdrawals.
  • Limitations: New entrant with limited performance and service data, smaller product portfolio.

8. HDFC Bank Ltd. – Payments Bank:

  • Strength: Reputed brand name and extensive branch network of HDFC Bank, potential for cross-selling financial products.
  • Features: Easy account opening, bill payments, mobile recharge, UPI payments, digital payments integration with HDFC services.
  • Limitations: New entrant with limited performance and service data, smaller product portfolio.

The Decision-Making Process: Choosing the right payment bank hinges on individual needs and priorities. Consider factors such as deposit limits, available services, fees, digital capabilities, physical branch presence, and brand reputation. For rural residents, India Post Payments Bank or Fino Payments Bank might be optimal, while tech-savvy users may prefer Paytm. Airtel offers widespread reach, NSDL focuses on investments, and Jio leverages its telecom base. Conduct research, make comparisons, and select the bank aligning best with your financial journey.

Conclusion: What is Payment Bank

With a clear understanding of their features, benefits, and limitations, payment banks can be powerful tools for financial empowerment and inclusion in India. As they continue to evolve and adapt, the future of banking looks brighter for everyone, especially those who have been left behind for too long. Financial education is an ongoing journey, so keep exploring and learning to make the most of the financial instruments available to you.

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FAQs: What is Payment Bank

  1. Are there any limitations to using payment banks?

    While payment banks offer convenient and affordable banking solutions, they have limitations such as a restricted range of services compared to traditional banks, lower deposit limits, and fewer physical branches, which might pose challenges for customers in remote areas.

  2. Can payment banks offer loans and credit cards?

    No, payment banks are not authorized to offer loans or credit cards. They primarily focus on providing basic banking services to promote financial inclusion.

  3. How do I choose the right payment bank for me?

    Choosing the right payment bank depends on factors such as deposit limits, available services, fees, digital capabilities, physical branch presence, and brand reputation. Consider your individual needs and priorities when making a decision.

  4. What are the deposit limits for payment banks?

    Payment banks can accept deposits of up to ₹2 lakhs per customer. This limitation is in place to cater to individuals with lower income levels and savings capacity.

  5. How are payment banks different from traditional banks?

    Payment banks differ from traditional banks in terms of their services. They do not offer credit cards or loans and have lower deposit limits. However, they leverage technology for wider accessibility, often operating through online platforms and mobile apps.

  6. What is a payment bank?

    Payment banks in India are financial institutions authorized by the Reserve Bank of India (RBI) to provide basic banking services. Unlike traditional banks, payment banks focus on offering a limited set of services to promote financial inclusion.

  7. What services do payment banks offer?

    Payment banks offer services such as accepting deposits (up to ₹2 lakhs per customer), providing savings and current accounts, issuing debit cards, facilitating money transfers, and enabling bill payments. They can also act as distributors for simple insurance and mutual fund products.

  8. How do payment banks contribute to financial inclusion?

    Payment banks play a pivotal role in bringing the unbanked and underbanked population into the formal financial system. Their focus on basic services and technology-driven approach promotes economic empowerment and development.

  9. Can I open an account with multiple payment banks?

    Yes, there is no restriction on opening accounts with multiple payment banks. However, it is essential to consider your banking needs and compare the offerings of different payment banks before making a choice.

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