India post payments bank

I’d once written about India Post Payments Bank, after a visit to a post office, and wondered if it will actually help foster financial inclusion. Now that the bank is about to launch, it seems to be doing some interesting thing, and mostly in terms of the intermediary it will be.

Being a payments bank, IPPB can only take deposits, and not give loans. It is trying to build a platform where it will simply act as a distributor for loans, and different lenders can make use of its customer transaction data and lend to its customers.

Also, since payments banks can only invest their deposits in government securities, the “float” is limited by the difference between the yield on such securities and the interest offered to depositors. Competitive pressures mean that the latter needs to be high, resulting in a thin float. Consequently, a payment bank needs to make money on payments and selling third party products such as investments insurance.

A recent interview with IPPB CEO Ashok Pal Singh gives some interesting pointers about how the bank might go about this. Firstly, the bank will dispense with the investment+insurance products, and will sell pure unbundled life insurance. The logic is that since the clientele is likely to be the hitherto unbanked, they will not be able to understand complicated products, and there is a high chance of misselling. By restricting product choice to those that are highly unlikely to be missold, the bank can ensure customer protection.

Similarly, in case of mutual funds, distributors have an incentive to recommend funds with high fees since they also tend to offer higher distributor commissions. Again, given IPPB’s clientele, the chances of mis-sale are high, and so the bank has decided to sell only index funds!

This is remarkable since index funds have hitherto been non-starters in India. Benchmark Mutual Fund had managed to establish a market, but a series of acquisitions has meant that the market hasn’t really taken off. Most financial advisors in India swear by actively managed funds. So a bank, however small, announcing that it will only sell index funds can give a massive boost to that market!

Apart from selling “simple” products such as term life insurance and index funds, the way the bank is going about the process is also interesting. Rather than tying up with a single provider of these products (as most other banks have done), IPPB plans to take the “broker” route and distribute products from different asset managers and insurers. This ensures that the rates remain competitive, though it is natural that the end salesperson might choose to sell products with the highest commissions/incentives. Nevertheless, with the products being inherently simple, the rates to the end customers are still likely to be competitive.

After over a decade of slumber, the RBI licensed a few (limited) banks last year. It is interesting to see the kind of diversity this new set of licensing has unleashed. Again goes to show that removal of barriers to entry can result in significantly better markets!

During his last few speeches, former RBI Governor Raghuram Rajan kept mentioning how full-service bank licenses will be soon “put on tap”. The sooner that happens, the better it is for Indian banking customers.

Financial Inclusion

Matt Levine had a superb newsletter recently on whether asset managers and pension funds who push customers towards buying high-cost retirement savings plans are doing a good thing or a bad thing. As Levine expertly explained, it all depends upon the context.

 Is bad retirement advice worse than no retirement advice? Like here is a simple hierarchy of things you could do to save for retirement, from best to worst:

  1. Save for retirement in an efficient portfolio of index funds with very low fees.
  2. Save for retirement in a mediocre product with very high fees.
  3. Not save for retirement.

So if some slick-talking hustler shows up at your place of employment and talks you into option 2, has he done you a favor, or done you harm? The answer depends on what you would have done if he hadn’t shown up. If you were on your way to Vanguard to buy index funds when he waylaid you, he has moved you from option 1 to option 2, and made you poorer in retirement. If you were on your way to blow your paycheck on lattes at Starbucks, he has moved you from option 3 to option 2, and made you richer in retirement. The context is key.

Earlier today, I was at a post office, trying to cash a National Savings Certificate that my parents had somehow bullied me into investing in, and was reminded of how inefficient post offices are. For a long time, India Post has allowed people to maintain deposits, in so-called “savings accounts” (though India Post is itself not a bank).

And as I’ve experienced while trying to operate such accounts on behalf of sundry relatives, it’s incredibly inefficient. Lines are long. Post offices are understaffed, and staff mostly overworked. Computerisation is minimal – while finally they have a way to print out pass books, it still lags significantly behind even nationalised banks. Things we take for granted at most banks – such as ATM cards – are absent. You need to line up to take your cash out.

The reason I’m describing this is that the “Post Office Savings Bank” has recently received a license to formalise its banking, to become a so-called “payment bank“. The “bank” won’t be able to lend, but can facilitate payments and movement of money. The amount of money in the savings accounts is capped at Rs. 1 Lakh.

The intention behind the license is sound – India Post has a network that goes into all sorts of nooks and corners of the country, and now people in those nooks and corners can have a bank account, and send money to each other! Which is a wonderful thing.

But then, India Post is a really large and slow-moving operations, so it’s unlikely that they’ll adapt much towards modern ways of banking after they become a proper (small) bank. So the customers they’ve “financially included” will need to wait in line to put or get out money, perhaps fill forms in order to be able to transfer funds, and face other inconveniences to be able to “bank”. So is the financial inclusion worth it?

To paraphrase Levine, it all depends on the context. To continue paraphrasing Levine, if India Post Payments Bank (as it will be called) were to waylay a customer who was on his way to opening a PayTM account, it has done a disservice, by replacing an easy-to-use electronic account with one where he will have to face lines, which might dissuade him from banking altogether.

If on the other hand IPPB were to waylay a customer who was on his way to the post office (!) to send a money order to a relative, they are actually doing him a service, providing him a more efficient method for transferring funds.

It all depends upon the context.