The payment banks collect small deposits from its customers and make payments, on their behalf, to other parties. It cannot give loans.

With its decision to open payment banks, the Reserve Bank of India (RBI) brought in a new revolution in the banking and payments system. RBI, on Wednesday, gave licenses to 11 entities to open payment banks.



The concept to payment banks is on same lines as those of PayPal or Paytm. These banks collect small deposits from its customers and make payments, on their behalf, to other parties. A payment bank cannot give loans. It will just make payment on behalf of its customers.



Opening payment banks will open the era of cashless transactions across the world. Big names like Reliance, Bharti Airtel, Birla, Vodafone, Mahindra and startups, namely Paytm, have been given the license. Indian Post and NSDL have also been roped in considering their wide reach.



The key trigger for these differentiated licenses is to bank the unbanked. A year or two from now, the direct benefit transfers (DBT) from the government will happen into mobile wallets and people in rural as well as urban areas will be able pay for groceries through mobile and account in SBI’s payment bank.



In a probable scenario, it will be urban India that will first open payment bank accounts to pay cab drivers, vegetable vendors and our pizza delivery boys.



These companies will be able to make money via float of cash or by charging for services rendered. Right now, legacy banks believe that the money will come from services. The payment service may evolve much like banks provide free ATM services.



The big fallout of this system could be phase out of cash payments in day-to-day lives. However, another huge incidental positive could be that monetary transmission will improve. In the past and even today, a rate hike by the RBI does not touch half the population because they don’t have a bank account.



But if every last villager and slum dweller has a deposit account, which earns her 3 percent or 3.5 percent and that rate rises or falls with a rate hike or a rate cut, monetary policy transmission will be quick and impactful.