What is a Payments Bank?

Last Updated: 26 Apr 2024

A Payments Bank is a bank that does not offer loans or credit cards. It takes deposits up to Rs 1 lakh from its customers. It provides various other financial services such as remittance transfer services, selling of financial products of other banks etc. So a payment bank does not offer loans such as gold loans, business loans, and personal loans. But they can sell the loan products and insurance products etc. of other NBFCs and banks.

How do payments banks earn revenues for themselves? They earn revenues by putting the money deposited with them by their customers in deposits in other banks. A payments bank pays a lower interest rate to its customers on their deposits than what it earns on deposits placed with other universal banks. The difference between the interest earned and interest paid is a source of revenue for the payments bank. They can also invest the deposits raised from their customers in government securities and earn interest.

Another source of revenue of payments banks is the transaction charges. Suppose you have an account with a payments bank. You deposit Rs 10,000 in this account. A small transaction fee of between 0.2% and 0.7% may be charged by the payments bank as transaction fee. You also pay transaction charges when you use the remittance services of a payments bank or use their debit cards. Payments Banks cannot issue credit cards, but they can issue debit cards.

Payments bank also earns revenues from selling the products of other banks and NBFCs, through it. So a payments bank can sell the gold loan product of another NBFC- such as IIFL Finance- or bank. It will charge a fee and commission from that NBFC or bank for doing so.

The objective of having payments banks is to increase financial inclusion in remote parts of the country, where there are no physical bank branches. Most payments banks predominantly operate digitally. Customers mainly use them through their mobile apps. Payments banks have very limited number of physical branches. Some of the payments banks that are currently operating in India are Airtel Payments Bank, India Post Payments Bank etc.