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India may be one of the world’s most active fintech markets, with EY’s Fintech Adoption Index 2017 even rating India as the nation with the second highest rate of fintech adoption. But behind the arc lights, there’s a bottomless void filled with many players.

In March, mobile wallets saw their value of transactions plummet 23% in just one month. Though official data isn’t available for the month of April, anecdotal conversations paint a gloomy picture for mobile wallets as usage continues to plummet on account of the Reserve Bank of India’s (RBI) stringent Know Your Customer (KYC) norms.

Then there are payment banks, a curious new lifeform artificially engineered by the RBI in 2014—banks that could collect deposits, but not lend. An initial stampede for licenses by India’s largest business groups in 2015 led to 11 licenses being granted that year. Fast forward to 2018: just three have been operational for more than six months. And they too, are still searching for their raison d’être.

To try and trace back the policy paternity/maternity behind floundering mobile wallets and payments banks, we have to go all the way back to 2013. That was when the RBI constituted a committee under Nachiket Mor, a wunderkind banker who now heads The Bill and Melinda Gates Foundation. Called the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, its job was to study and recommend policies to aid financial inclusion in India.

When it came to mobile wallets (part of what are called Prepaid Payment Instruments, or PPIs in RBI-ese), the committee wasn’t a fan. Money stored in wallets didn’t appear to fall within the ambit of RBI’s deposit insurance cover.

To address this, the regulatory framework required wallets to escrow the value outstanding from customers with a sponsor bank on a 1:1 basis. But the committee believed that this nested set-up exposed both parties to reciprocal risks.

The solution? Create a new kind of financial services player under the direct regulatory oversight of the banking regulator—payments banks.

While this reasoning was debatable, the RBI accepted the recommendation to create a new regulatory category termed ‘payment banks’ in 2014. This was a subset of the broader push towards differentiated banking that articulated a disintermediated (unbundled) view of banking.

Payment banks could offer what might be termed as deposit-side banking and up-sell other financial sector products for fee-based income. But most importantly, they could not engage in lending and were subject to CRR and SLR covenants (stringent rules that define a percentage of a financial institution’s deposits that must be kept or invested with the central bank or government-backed securities).

Wallets, bad.


Mandar Kagade

A policy wonk and a lawyer (in that order), Mandar Kagade is focussed on the development of regulatory policy in connection with the payments ecosystem. He is passionate about exploring intersections of finance and policy.

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