Payments banks continue to struggle even after a decade of existence, largely on account of a decline in revenue and throughput volumes in remittance, Aadhaar-enabled payments system (AePS) and micro-ATM business, wafer-thin margins, and limited scope of operations.

Currently, six payments banks are operating in the country. These niche banks, which were established during 2016-18 to promote financial inclusion by leveraging technological advancements, collectively account for less than one per cent of all scheduled commercial bank deposits.

In 2013, the Reserve Bank of India (RBI) had released a discussion paper on ‘Banking structure in India — The way forward’. One of its observations was the need for niche banking in India, and that differentiated licensing could be a step in this direction.

Similarly, the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, chaired by Dr Nachiket Mor, had recommended in its 2014 report that, given the difficulties faced by pre-paid payment instruments issuers (PPI issuers) and the underlying concerns with this model, existing and new PPI issuer applicants should instead apply for a payments bank licence or become business correspondents (BCs).

Subsequently, in Union Budget 2014-15, it was announced that the RBI would create a framework for licensing small banks and other differentiated banks. The differentiated banks will serve niche interests. Local area banks and payments banks were contemplated to meet the credit and remittance needs of small businesses, the unorganised sector, low-income households, farmers, and the migrant workforce.

The RBI then introduced payments bank licence guidelines in 2014. The regulator received 41 applications for payments banks, and approved 11 — namely Aditya Birla Nuvo, Airtel M Commerce Services, Cholamandalam Distribution Services, Department of Posts, Fino PayTech, National Securities Depository, Reliance Industries, Dilip Shanghvi, Vijay Shekhar Sharma, Tech Mahindra, and Vodafone m-pesa.

The payments banks were not allowed to lend. Their scope of activities included opening low-cost deposit account with ₹1 lakh limit initially (later revised to ₹2 lakh) per customer, providing payments and remittance service, internet banking services, acting as a BC for other banks, and distribution of mutual fund units, insurance products, and pension products, among others.

Challenges galore

Within years of receiving in-principle approval for operating a payments bank, Cholamandalam, Vodafone, Dilip Shanghvi, Tech Mahindra and Aditya Birla Nuvo surrendered their licence. A decade after payments banks started operations, only Fino Payments Bank is listed on stock exchanges and Airtel Payments Bank has achieved a large size. The RBI’s embargo on Paytm Payments Bank has stalled its business operations, while Jio Payments Bank, NSDL Payments Bank, and India Post Payments Bank have built a limited presence.

Revenues of existing payments banks are under pressure. According to the financial results of Fino Payments Bank, in FY25 revenue from the remittance business, a key hook product and material contributor to the topline, fell to ₹341 crore from ₹455 crore in FY24. Overall remittance throughput decreased to ₹36,018 crore in FY25 from ₹52,695 crore in FY24.

Similarly, AePS business revenue rose by just ₹10 crore on-year to ₹120 crore in FY25, while AePS throughput was down to ₹31,189 crore (from ₹32,873 crore in FY24). Micro-ATM business revenue fell to ₹65 crore (₹86 crore), while micro-ATM throughput was down to ₹8,516 crore (₹13,032 crore).

These figures perhaps explain why Fino applied for a small finance bank licence about two years ago. Other payments banks do not share their detailed quarterly financial results.

“Remittances have been majorly affected due to the RBI’s new framework on domestic money transfer for regulated firms. Effective since November 1, 2024, the stricter know your customer (KYC) norms, aimed at secure money transfers within India, has had an industry-wide impact,” a source said. The micro-ATM and AePS business, meanwhile, is affected due to the rise of UPI transactions, including in rural and semi-urban areas.

What lies ahead

Payments banks are optimistic that the rising adoption of technology among smaller merchants augurs well for them. The use of mobile point-of-sale (mPOS) devices at merchant outlets is growing, which can help payments banks grow their customer base, further expanding their reach and influence in the financial services sector.

Citing the change in customers’ mode of payment and the large network of merchants and depositors that payments banks have built, industry officials have long been asking the RBI to allow them to extend small-ticket loans of up to ₹2 lakh.

In an earlier interview with businessline, Airtel Payments Bank MD Anubrata Biswas had said that India’s payments bank industry touches nearly 20 crore users each month, of whom 40-50 per cent lack access to formal credit. Allowing payments banks to lend could significantly boost formal credit and financial inclusion in the country, he added.

Experts say the time may be ripe for the RBI to revisit the payments bank model. Allowing small-value lending could enhance viability and profitability.