Differentiated Banks – Payment Banks, Small Finance Banks, etc.

Jul, 13, 2019

Merchant Discount Rate


  • The recent budget proposal seeks to incentivise digital transactions by reducing Merchant Discount Rate (MDR) for customers as well as merchants.

What was the Budget announcement?

  • The business establishments with annual turnover more than 50 crore shall offer such low cost digital modes of payment to their customers and no charges or MDR shall be imposed on customers as well as merchants.
  • In other words, the government has mandated that neither the customers nor the merchants will have to pay the so-called Merchant Discount Rate (or MDR) while transacting digital payments.
  • It is good news for both customers and merchants because their costs of digital payments come down.

Merchant Discount Rate

  • Merchant Discount Rate (alternatively referred to as the Transaction Discount Rate or TDR) is the sum total of all the charges and taxes that a digital payment entails.
  • Simply put, it is a charge to a merchant by a bank for accepting payment from their customers in credit and debit cards every time a card gets swiped in their stores.
  • Similarly, MDR also includes the processing charges that a payments aggregator has to pay to online or mobile wallets or indeed to banks for their service.

Who will bear the MDR costs?

  • If customers don’t pay and merchants don’t pay, some entity has to pay for the MDR costs.
  • In her speech, the FM has said that RBI and Banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move to these digital modes of payment.
  • Necessary amendments are being made in the Income Tax Act and the Payments and Settlement Systems Act, 2007 to give effect to these provisions.

Issues surrounding

  • Contrary to public perception, the MDR has not been made zero.
  • The FM’s decision has just shifted its incidence on to the RBI and banks.
  • However, if banks pay for the MDR it will adversely their likelihood to adopt the digital payments architecture.
  • Moreover, many payments providers apprehend that the banks will find a way of passing on the costs to them.
  • In turn, this will negatively impact the health of a sector that needs nurturing.
Oct, 23, 2018

[op-ed snap] Turf battle: on independent payments regulator


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Payment and Settlement Systems Act, 2007

Mains level: RBI’s role in financial sector regulation and how the proposal of a new regulator to oversee payments banks will affect it


RBI’s opposition to the proposal for a new payments regulator

  1. The Reserve Bank of India released its dissent note to clearly signal that it was opposed to an independent regulatory body to supervise India’s payments and settlements architecture and to move it out of the central bank
  2. This reform was proposed by an inter-ministerial committee headed by the Secretary, Department of Economic Affairs for the finalisation of amendments to the Payment and Settlement Systems Act, 2007
  3. The central bank observed that it would prefer the Payments Regulatory Board to function under the purview of the RBI Governor

RBI’s arguments

  1. The RBI stated that the activities of payments banks come well within the purview of the traditional banking system, which the central bank oversees as the overarching financial regulator
  2. It might make better sense to have the RBI oversee the activities of payments banks as well instead of creating a brand new regulator for the growing industry
  3. Since banks are regulated by it, a holistic oversight by the central bank would be far more effective besides ensuring lower compliance costs
  4. RBI has experience of having regulated this segment over the last several years, marked by competition, innovation and customer protection measures, which are the main objectives under the proposed new law
  5. There was no case for a separate regulator for payments and settlements given that there is no evidence of any inefficiency in India’s payments systems
  6. Globally, the country was gaining recognition as a leader in payments systems with some other central banks having adopted the bank’s systems
  7. The payments and settlements systems, according to it, are a sub-sect of currency which is regulated by the RBI and the impact of monetary policy provides support for the regulation of payments systems

Global financial infrastructure landscape

  1.  The US Federal Reserve’s Board and the dozen Federal Reserve Banks around that country have a distinct responsibility with regard to the payments system
  2. So is the case in Australia and Canada and some other jurisdictions — with such arrangements having been put in place to support the implementation of monetary policy

Way forward

  1. There is the real risk that a brand new regulator may be unable to match the expertise of the RBI in carrying out necessary regulatory duties
  2. At a time when there are increasing risks to the stability of the domestic financial system, both the government and the RBI must look to work together to tackle these risks instead of battling over regulatory powers

With inputs from editorial: Note of dissent

Sep, 08, 2018

[op-ed snap] Post office solutions: the challenges facing India Post Payments Bank


Mains Paper 3: Economy | Inclusive growth & issues arising from it.

From UPSC perspective, the following things are important:

Prelims level: IPPB

Mains level: A new era of banking via payment banks and challenges faced by them


Launch of IPPB

  1. Amidst some fanfare, PM Modi launched the India Post Payments Bank (IPPB), a financial service provider that will operate under the country’s age-old postal department
  2. The primary rationale behind the public payments bank idea is to help in the government’s goal of achieving financial inclusion by providing savings, remittance, and payments services to the rural and unorganised sectors of the economy
  3. It is also hoped that the payments bank idea will help reinvigorate the postal system, which has a wide network of branches across India
  4. All the 155,000 post offices in the country are expected to be linked to the IPPB system as early as in December this year

Services that will be provided by payments bank

  1. The government-owned payments bank will be able to accept deposits of up to ₹1 lakh from customers but without the rights to use these funds to advance risky loans at higher interest rates
  2. It plans to offer a variety of other financial services to people
  3. The payments bank will also have a digital platform that is expected to make financial services more accessible even from remote locations

Challenges in its operation

  1. A big challenge facing the new public payments bank is whether it can manage to earn the profits required to survive as a standalone business entity
  2. Given the severe restrictions imposed by the Reserve Bank of India on how payments banks, in general, can employ their funds, the odds seem to be stacked against the IPPB at the moment
  3. The IPPB promises to pay an interest rate of 4% to its savings account customers
  4. To generate revenues, it plans to charge fees on money transfers and other financial services while investing idle customer deposits in safe government securities in order to earn interest
  5. The IPPB is also likely to face stiff competition from private companies, which are generally more nimble in adapting to business realities and far more customer-friendly compared to the government-owned behemoths
  6. With increasing competition, the IPPB’s revenues and margins are also likely to come under pressure

Way Forward

  1. Banks have traditionally stayed away from the business of pure deposit banking unless customers have been willing to pay for these services
  2. The payments bank model is still untested even though prominent private companies such as Airtel and Paytm have shown interest in the space
  3. The new payments bank could usher in a new era of rapid financial inclusion across rural India
Aug, 25, 2015

[op-ed snap] Payments banks can change the future. How?

The principle behind payments banks is simple –

Accelerating the penetration of financial services among low-income consumers by leveraging technology and the large, non-banking retail network without compromising the security of the financial sector.

With the Reserve Bank of India (RBI)’s in-principle approval to 11 payments banks, India has taken one big step forward on the road laid out seven years ago.

Challenges, if any?

A recent Consultative Group to Assist the Poor report titled Doing Digital Finance Right concluded that low-income consumers are hesitant to adopt digital modes for financial transactions due to:

  1. Inability to transact due to network/service downtime
  2. Insufficient agent liquidity or float, which also affects ability to transact
  3. User interfaces that many find complex and confusing
  4. Poor customer recourse for grievances and queries
  5. Non-transparent fees and other terms
  6. Fraud that targets customers
  7. Inadequate data privacy and protection
Aug, 19, 2015

Licence to payment banks

  1. RBI gave in-principle nod to eleven entities including Reliance Industries Ltd, Tech Mahindra Ltd and The Department of Posts to launch a payments bank.
  2. Payments banks will not lend money but will provide basic savings, deposit, payment, and remittance services.
  3. They will play a key role in reaching the unbanked half of India’s population.
Apr, 23, 2015

ICICI Bank launches Tap-n-Pay, an NFC enabled payment service

  1. NFC technology will allow users to tap NFC enabled tag or mobile phone at the merchant’s point-of-sale device to make payments.
  2. Near field communication (NFC) is a set of ideas and technology that enables smartphones to establish radio communication with each other by touching them together or bringing them into proximity
  3. It is a prepaid account which will be available to customers of any bank by simply registering for it and transferring money online from any bank account.
Mar, 12, 2015

Post Offices to double up as Payment Banks

  1. Dept. of Post to launch an independent (of it) entity for the proposed payment bank venture. Existing post office infra. will be used.
  2. What’s the post office stats?  650 main branches + 25,000 spoke branches + 130,000 banking correspondents!
  3. DoP is in the process of revamping itself – task force set up under former cabinet secy. T S R Subramanian.
  4. Plans to create a holding company which will have 5 independent entities – banking, insurance & e-commerce.
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