India is betting that mobile phone vendors, fuel stations and corner stores can help it put basic banking within the grasp of hundreds of millions of its poor people living beyond the reach of traditional bank branches.
The clock is ticking down to a Feb. 2 deadline for applications to set up so-called payments banks under new rules that would allow successful bidders to offer services such as remittances and deposits, but not loans.
The regulations announced by the central bank, the Reserve Bank of India (RBI), reflect a realization that traditional banks alone can't achieve the objective of financial inclusion championed by Prime Minister Narendra Modi.
In a four-month campaign to end "financial untouchability", Modi has opened 115 million new bank accounts. Yet of those, 80 million have no money in them, underscoring the huge challenge he faces in delivering on his promise.
Backers of the payments banks say they could help bring those accounts to life by bridging the gap from bank branches in town to India's 600,000 villages, making it easier to send money home, collect state benefits or do business deals.
"There's an entirely new set of actors," said Bindu Ananth, a member of the RBI committee that designed the payments banks rules. "We said: Let's create a regulatory framework that allows the participation of non-banks."
Mobile operators and pre-paid wallet players are expected to lead the charge, seeking to add transaction fees to revenue streams from products such as phone minutes and bill payments.
Retailers are interested too. Future Group, one of India's biggest with a presence in more than 100 cities, says it will apply for a permit.
Online players also spy an opportunity to boost client loyalty and scale up volumes. Paytm, a platform that is close to winning backing from China's e-commerce king Jack Ma, founder of Alibaba Group Holding Ltd (BABA.N), will bid.
"We are aiming at 100-200 million users (overall)," said Vijay Shekhar Sharma, CEO of Paytm, which provides pre-paid wallet services, helps consumers make bill payments online and offers coupon discounts. Paytm now has 20 million users.
THE LAST-MILE BANK
In the most important change, payments banks will be allowed to not only accept cash, but also pay it out, boosting their appeal for low-income savers. Their precursors, Pre-paid Payment Instrument (PPI) providers, were not allowed to pay out cash.
Payments banks could cut the use of cash in an economy where nine out of 10 transactions are still paid in notes and coins and kick-start the use of low-cost payment forms like mobile money that have been used by only one in every 300 Indians.
That compares with 76 percent of people in Kenya, Africa's mobile money pioneer, where Vodafone's (VOD.L) M-Pesa affiliate dominates the market.
Payments specialist Oxigen is applying for a license and wants to become a "last-mile" bank, said group president Rajpal Duggal. Oxigen would treble its 130,000-strong agent network to meet a requirement for the payments banks to have a quarter of their retail 'touch points' in rural India.
For Oxigen agent Gurmukh Singh, who sells air time, runs an Internet cafe and offers city tours from his tiny shop in New Delhi's Karol Bagh market, the payments bank model is a new opportunity.
"Now we can only send money to a bank account, but if we could pay out too it would be a good business," he said as, with a few computer clicks, he made a 2,000 rupee ($32) bank transfer for a customer remitting money to his family in the Himalayan state of Uttarakhand.
FEE DRIVEN
The business model for the payments banks will be driven by transactions, rewarding players like Bharti Airtel (BRTI.NS) that have already built out their infrastructure.
India, a country of 1.25 billion people, has more than 900 million mobile phones. The cost to a mobile operator of hosting a payments account would be a tenth of that to a regular bank, according to RBI committee member Ananth.
Airtel and Vodafone declined to comment but are widely expected to apply.
Modi, meanwhile, is determined to activate the new accounts opened at conventional banks under his financial inclusion drive, linking them to India's identity card scheme and paying welfare benefits into them.
By partnering with mainstream banks - as Oxigen has with State Bank of India (SBI.NS) - the payment banks could deliver "cash out" welfare payments, and become a marketing channel for products like loans and insurance.
Daniel Radcliffe at the Bill & Melinda Gates Foundation sees payments banks as the "engine" to push Modi's financial inclusion drive over the finishing line.
Depending on when licenses are issued, the first payments banks could launch in late 2015 and achieve scale within a couple of years, said Radcliffe, senior program officer at the foundation's Financial Services for the Poor unit.
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