Small finance and payment banks are aimed at increasing financial inclusion by expanding access to financial services in rural and semi-urban areas. They specialize in relationship banking and providing credit to underserved populations like small businesses and farmers. By using a technology-driven, low-cost model and focusing on reducing transaction costs, these banks can mobilize low-cost deposits and meet funding needs in a profitable way. They are expected to play an important role in the financial system by complementing large banks and laying the foundation for greater financial inclusion across India.

1. Payment & Small Finance Banks: A gate way for “Financial Inclusion” Page 1
Payments & Small Finance Banks – Role in Banking Space

2. Payment & Small Finance Banks: A gate way for “Financial Inclusion” Page 2
Indian Economy is in the phase of correction posing robust growth trend for the current and years coming
by, with sound policy and regulatory initiatives, backed by stable political environment governed by
visionary leadership directing the Nation move on the Directed Road Map with “Make in India” and
“Swachh Bharath” initiative appealing and attracting Investments both from Domestic and International.
Positive business sentiments, Improved Customer confidence to earn and expense, and more over enact of
corrective measures for controlled Inflation by the regulatory…are a few Means, to boost and correct the
Economic Growth.||rly Jan Dhan a Central initiative targeting every Indian with provide of Savings bank a/c,
on its successful grass roots and is a means step forward for Financial Inclusion.
Fact, the real India lives in villages (Rural Economy Mkt.), while it is an emerging Economic Power, life
remains largely rooted in these villages. There are nearly three fourth of the country's consumers residing in
6.38 Lac villages, who provides a huge demand base and offers a great opportunity for all marketers both
Indian and MNCs’ based on the few characteristic features as experiencing through..
In ref. to banking Industry being the barometer of the economy… with total asset size of Rs 81 trillion (USD
1.34 trillion), is expanding continuously but on a cautious note at moment, basis of the fact that the Industry
is plagued by bad loans, the lenders have chosen to go slow in terms of credit. Off take. Fiscal 2014 saw a
combination of various external and internal events that kept markets turbulent, interest rates high and
investor confidence low, resulting in shrinking investment and GDP growth. How-ever, view this to be on
short term and to pose more opportunities of Growth, the days coming by.
Understanding Rural Market, dynamics:
 Rural Mkt. is significantly predominant by informal finance sector comprising of Money Lenders,
Traders & Land Lords to that of the formal segment comprising Institutional financers.
 Informal sector which is legal, but officially unrecorded and unregulated... having its identity in the
grass roots based on few characteristics comprising of Caste, Religion, Social, Political and
Geographical features, Financial Illiteracy, low cost value transactions, large distance, poor transport,
etc...Similarities among the groups, with more identity.
 Backward (Deeper geo limits) having less access to Formal Finance Segment / Institutional Credit
and hence, they are more dependent on Informal Finance Sector.
 Potential opportunity exists for Consumption loans in rural market through formal finance
mechanism. How-ever, the segment is marked by seasonal based employment (Specific to
Agriculture),the risk of exposure funding in this nature is high and discouraging, unless a mechanism
for sustaining regular means of lively hood is in place.
 NBFCs’ having their significant identity in particular to Hire purchase, leasing operations, finance to
Traders of Agricultural pre and post related activities. In general, out-look of formal finance segment
being profitability / viability marked by regulatory requirements to be met by maintaining high
reserve ratios, Interest rate ceilings, branch licensing, directed credit etc..Constraints indirectly
proving to be a boon to Informal mkt. segment.
• Increase in educational facilities and literacy through IT and Electronic
Media
• Increase in rural income due to better monsoon in recent years along with
changing buying behavior and consumption pattern basis existence of rich
rural consumers having close contacts to urban areas.
• Improving overall Infrastructural facilities, like road, electricity, drinking,
sanitation etc.
• Rural development and investment programmes by Government agencies
• Prosperity through land reforms and adopting modern agriculture systems.
• Increase in Rural population, Remittances and Direct Investments in Rural
areas along flow of foreign goods
• Cut throat competition among market peers across all segments and
saturation of Demand in Urban areas.

3. Payment & Small Finance Banks: A gate way for “Financial Inclusion” Page 3
 The extent of transaction cost, rate of interest incurred etc under formal finance being low compared
to that of Informal segment. How-ever, these haven't given much importance to differentiate between
and expose by bring to the notice of end customer.
 Increase use of Technology, Centralized processing and decision procedures, KYC regulations
etc..measures adopted by Formal Segment is of higher standards in the current mkt. dynamics. On
contrary, Informal finance segments having been further aggressive in funding on SPOT and by
penetrate to deeper geo by understand of local flavor with decentralized process and flexible policy
procedures and decision making empoweredness, posing a cut throat competition.
With Increased focused and Investments by Govt.of India, in creating Rural Infrastructure, Employment and
promote of Literacy rate by bring in of quality educational needs, leading to rise in rural incomes and
consumption, made Rural Markets an attractive Investment opportunity.
Example to Understand: Mr. X, representing rural location earns and spend Rs.1000/- on his basic
necessities. The utility so derived is of 95-98%, vice-versa…if he being in Urban location and earns and
spends a ||r amount, the utility so measured is of 70 - 75% only… as the rest goes as Tax. In Indian ||ence, as
termed to be “Agriculture Rich Rural Economy,” with Zero-Tax on Farm Income, creating Potential Savings
and by increasing and vesting the buying power in the hands of Individual making him a “Rural Rich”, to
that of an Individual with similar buying, termed to be as “Urban Poor,”and this being the Untapped
potential Emerging Market segment to differentiate, identity and explore.
Payment & Small Banks: A gate way for Financial Inclusion.
Latest’s Reserve Banks of India (RBI’s) initiative by extend of 11 new licenses in the Payments and Small
Bank category, these indeed pose to be of ‘Challenger banks’, as they take on traditional banks with core
objective to sustain Financial Inclusion by expand of access to financial services in Emerging Markets
comprising of Rural and Semi-urban areas with traditional banking activities by accept deposits and lend to
underserved sections of customers, including small business units, small and marginal farmers, micro and
small industries, and even entities in the unorganized sector through power of Technology.
Evident and experienced, demand and use of Mobile phone had a greater penetration in India in line with the
population growth by 80%, as its usage had tailor-made to the needs of a country with a large semi-literate
population that is living on the borders of the poverty line though rn’t capable to handle a computer…but
were capable enough to use & operate a mobile phone, and this being a key driving factor for the banks to
sustain its objectives in a more tailored fashioned manner.
New technologies, notably Mobile technology has revolutionized retail banking practices in all income
brackets, and especially in lower income segments including people living in poverty, by provide of access
to basic financial services, such as cashless money transfers, for the first time ever, without having to hold a
bank account at all.
Over 70% of Indian population residing
in rural markets, they are clearly the
‘battle-ground’ for the current and future,
for one to Tap the Untapped Mkt., and to
accelerate business growth, as well
maintain Leadership position and
Healthy Portfolio.
Its evident...Urban Markets are getting
saturated as well proving risky and Rural
Markets are becoming more viable for
any industry to explore, based on the
following facts as observed.

4. Payment & Small Finance Banks: A gate way for “Financial Inclusion” Page 4
Traditional Banks Vs Small & Payment banks (differentiating factor)
 Heavy focus on technology and IT infrastructure. Only core
banking operations such as risk management, treasury, finance
and accounts expected to be in-house
 Follow asset light approach with pay per transaction for
technology, customer acquisition, collections, transactions,
etc.
 Technology is the backbone and plays a central role across all
functions and processes
 Cost efficient technology platform to reduce overall cost of
transaction
 Focus on all customer segments - Retail,
M&SMEs,Corporates;Unbanked population only for
fulfilling regulatory obligations
 Follows Brick and Mortar ‘Branch’ centric distribution
model
 Cost to serve unbanked population is traditionally high
 Offers product variants across entire product range of
accounts, deposits, payments and credit; Credit is the
primary product for revenue generation
 Financial inclusion and unbanked/under-banked population are
the priority target market
 Though internet banking services has been encouraged, the RBI
does not envisage a Payments Bank to become “virtual” or
branchless bank
 Cost to serve unbanked population is lower due to technology
adoption right from the inception
 Focus on only simple accounts, deposit products and transactions;
Fee earned from transaction is primary product for revenue
generation
 Adopt outsourcing of only administration and other non
core functions
 Follow asset heavy approach by investing in
technology, infrastructure, office space, branches, etc.
 Technology plays only an enabling role in few
functions and processes
 Heavy and continual investment in technology and
lower ROI due to leverage and legacy issues
 Formal Mkt. Segment comprising of regular income
from Salaried/Self Employed individuals as source of
income
 Lower/Inconsistent category customers comprising of
daily wage earners, retail traders, street vendors /
hawkers, casual workers / labour force etc.
 Dependents / Survivalists comprising of people
dependent on Govt. Aid / grants comprising of
pensions / credits in the form of subsidies, dependent
remittances etc.

5. Payment & Small Finance Banks: A gate way for “Financial Inclusion” Page 5
Banked and technology savvy segment with
higher internet penetration
Banked/unbanked/under banked segment with
limited access to internet facilities
Customer
demographics
Educated and Tech Savvy
Less educated with limited knowledge of using
technology for availing services
Average age of 30 years Middle and lower income segment
High-income segment Mostly reside in rural and semi-urban areas
Mostly reside in Metros, Urban and Semi
Urban areas.
Challenges faced
in using new
payment modes
Slow/limited adoption by the banked, owing
to user comfort with internet banking,
ATMs/debit cards and card transactions
Low penetration of internet, ATMs, PoS, and
other enabling infrastructure
Lack of standardized and easy-to-use payment
services
Technology inexperience and literacy constraints
Lack of trust in mobile and wallet payments
due to security and reliability issues
Lack of awareness about electronic and mobile
payments
Existing mobile solutions do not facilitate
cash-takeout
Cash continues to be the sole medium for
effecting financial transactions
Payments banks
potential
propositions
Secure and well encrypted payment platform Access to basic banking services
Standardized services enabled by Mobile
Technology
Simple and intuitive payment platform with an
option of multilingual interfaces
More number of use-cases to provide
compelling reasons to use digital payments,
especially in Person-to-Person (P2P) and
Person-to-Merchant (P2M) transactions
More often used, especially in Person-to-
Government (P2G) and Government-to-Person
(G2P) segments
Customized merchant offers based on
transaction history – both online and offline
A simple and dedicated domestic remittance
platform
Product add-ons such as cash backs, discounts
and loyalty programmes
Customer education and handholding to drive
adoption and facilitate usage
Rich and visual tool sets for spend
management and expense tracking
On boarding of Small Retail Merchants on the
mobile payment ecosystem to effect non-cash
transactions
New offerings
Digital banking and payment approaches
which are smooth, intuitive, functionally rich
and support anytime, and any device banking
Route the direct benefit transfer through the
mobile ecosystem to improve familiarity and
adoption
Strong set of customer incentive pull (loyalty
programmes, discounts, cash backs) to drive
enrolments and usage
Payment to/from the government on the mobile
payment ecosystem (NREGA payments, small
savings schemes)
Rich functionality and tools for spend
management, etc
Merchant acquisition services for small retail
merchants in rural areas on the mobile payment
ecosystem
Integration with social media feed that
understands and predicts what is needed

6. Payment & Small Finance Banks: A gate way for “Financial Inclusion” Page 6
Growth Prospects Strategy. A Mean approach:
• Simplified documentation and account opening procedures using the modern technology comprising
Bio technology (Fingered print / Voice recognition), UID - AADHAR Integration etc.
• Promote and encourage digital payment transactions instead of Cash, by issue and install of Swipe
Cards, Machines and acknowledge with print..in apart to extend of digital reward points (Credit to
Savings account) which can be later accumulated and converted to cash rewards / gifts on long run.
This in ||r lines of Credit Card business where in banks often encourage to spend more through credit
cards and allocate reward points.
• Promote of easy availability of timely and door-step services comprising of secure acceptance and
dispensing cash, money transfer facility etc..through set-up of business correspondents in general
comprising of Kirana / Pan Shop / Grocessory Small merchants etc.(Customer – Merchant - Bank
(CMB)) approach.
• Promote banking business habits through Franchisee mode (Skill Development), by appoint of local
youths as their franchisees, as all these were people whose families have resided in the area for
several generations and who know most of the people residing in the village and are also known to
people in the surrounding areas.
• Promote loans with minimal / no collateral security. Further employ and recruit Local appraisers
( Loan officers ) by take of advantage forms basis being these officers at Small banks can take into
account a wide variety of factors in reviewing applications for small business loans, including the
3C’s (Character,Capacity,Capital ) of the borrower and special features of the local market and is a
strategy to promote financial inclusion of the rural masses while creating a new breed of local
entrepreneurs who could bring financial products and services closer to the villagers.

7. Payment & Small Finance Banks: A gate way for “Financial Inclusion” Page 7
• Innovate, Design and promote with Tailor-made low cost savings & insurance products which can
suit customer’s conditions surrounding rural business comprising ruined crops, bad monsoon
seasons, and natural disasters etc which are ever present and largely uncontrollable factors.
• Promote banking facilities by conduct of road shows in regional languages and make use of
advantages of Grameen Mela/ Loan Mahotsav etc..along with support of Business Correspondents.
• Impart continuous training on financials products by converting local partners into brand
ambassadors, advising locals on financial investments and selling them appropriate financial
products in an extremely beneficial factor.
Promote Financial Knowledge / literacy and improve skill sets by
 Make people aware how to save and understand the uses of credit
 Promote awareness of different types of financial products and help them understand terms & conditions
of products
 Ability to make interest rate calculations
 Know how to put together a budget and to track income & expenses
So as to bring changes in behavior pattern comprising of
 Save more Borrow less
 Use more financial products and choose cheaper products
 Shop around for loans and borrow from cheapest lender
 Follow a budget and track income and expenses
Factors that facilitate scale
Partnerships and Networks: Public and Private Partnership (PPP approach) by blend of Education
&Technology support along with leverage financial support, Infrastructure, Human Capital by delivery of
quality financial education across the country
Use of Mass Media & Technology: These being the popular channels for wide dissemination of financial
education content and more specifically Radio & TV & Print Media programs offered in the vernacular
language to reach multiple end users who are difficult to reach under traditional approach. Further, use of
mobile technology by means of SMS / simplified APP applications etc is alternative means to support
Financial Education to mass segment.
Institutionalization: Financial education should be an integral component of an organization’s regular
interaction with its community customers.
Financial Inclusion and Financial Literacy are two sides of the
coin as one represents the Demand side -making people aware
of what they should demand and Inclusion represents Supply
side - providing in the financial market “What People
Demand.”
Raising financial literacy supports social inclusion and
enhances the wellbeing of the community. There is need for
financial literacy in both the developed and the developing
countries and these banks had greater role to play by take the
position of the School / college and promote Financial
Education & Innovation aimed at Identified Target Set of
Customers, with Twin Objective to sustain comprising of

8. Payment & Small Finance Banks: A gate way for “Financial Inclusion” Page 8
Summary:
Small Finance & Payment banks tend to play an important role in the financial system of Our economy as
they complement the role of large banks by specializing in relationship banking and extension of Credit to
under-served population. As are aimed to serve Customers in Rural, Semi Urban areas by render of service
in Payment as well Deposit and lending to large percentage of the population, while pose little Systemic
Risk, their importance to some key sectors and areas of the Economy Warrant RBI’s interest and oversight.
Being a technology driven low cost model approach with overall focus on reduction in of transaction cost
and by enable to mobilize low cost deposits and meet funding needs, these tend prove to be a foundation
stone in the Nation’s Economic growth by promote of Financial Inclusion through Financial Literacy and
Service, and by extend of opportunities of Growth, the days coming by.