The Reserve Bank of India (RBI) has revoked Paytm Payments Bank’s license, concluding a sequence of supervisory measures that started with a suspension on onboarding new customers in March 2022 and led to severe business restrictions.
Though the action may seem to stem from a failure to comply with regulations, it has sparked a wider discussion about the viability of payments banks. Originally designed for those without bank accounts, their necessity is now under scrutiny due to the widespread account ownership resulting from Jan Dhan Yojana and growing rivalry from fintech platforms, particularly UPI.
Weak wicket
Payments banks were established to promote financial inclusion by providing small savings accounts and digital payment services to low-income households, small businesses, and migrant workers in the unorganized sector. Initially, in 2014, they were allowed to accept customer deposits of up to ₹1 lakh; this limit was increased to ₹2 lakh in 2021.
However, their operating scope is sharply constrained as they are barred from lending, issuing credit cards, or accepting deposits from non-resident Indians.
Although it was initially celebrated as the exemplar of India’s differentiated banking experiment, enthusiasm quickly waned. In 2015, the RBI issued in-principle approvals to 11 entities; however, several of them withdrew, citing high compliance costs, lending restrictions, and thin margins as reasons. Ultimately, seven licenses were granted, with Airtel Payments Bank being the first to commence operations.
Due to the constrained business model and high upfront costs, the path to profitability was lengthy. Payments banks only became profitable in the 2022-23 period, supported by an increase in interest income. They have continued to operate profitably since then, including in 2024-25; however, the recovery seems tenuous, as evidenced by a slight decrease in profits due to increased provisions and contingencies.
Margin limits
The main difficulty is a revenue model with structural weaknesses. Conventional banks primarily earn their income from lending activities, whereas payments banks are not allowed to engage in lending.
Rather, they depend on activities that generate fees, including transaction fees for utility payments and minor transfers, banking correspondent services, micro-ATM operations, cash management services, commissions from PoS transactions, and additional para-banking services like insurance distribution and facilitating mutual fund investments.
These services inherently have low profit margins. They have small ticket sizes, are highly sensitive to price changes, and operate in a saturated market with numerous competing platforms. Thus, pricing power continues to be restricted.
In 2024-25, around 76% of payments banks’ revenue was derived from non-interest sources, in contrast to traditional banks, where 80-85% of revenue comes from interest based on lending spreads.
The margin difference is pronounced. Commercial banks usually borrow at approximately 4% and lend at rates of 10-12%, creating substantial spreads. Payment banks, in comparison, pay 3-4% on deposits and earn only 6-7% on safe investments such as government securities—resulting in thin spreads and structurally constrained profitability.
Deposit preponderance
In this segment, deposits are sharply concentrated, with India Post Payments Bank (IPPB) accounting for approximately 73% of the total deposits.
With the support of a nationwide postal network comprising more than 150,000 post offices and nearly 190,000 postmen and gramin dak sevaks, IPPB has quickly onboarded customers, particularly in rural and remote regions. In 2024-25, the bank served approximately 117 million customers, showcasing the benefits of utilizing the postal system’s familiarity and physical presence. Integration with Post Office savings accounts has further facilitated seamless and interoperable banking services.
Airtel Payments Bank, the second-largest player, accounts for approximately 13% of deposits and has established its position by leveraging its vast mobile subscriber base, extensive prepaid recharge network, and retailer presence.
There are only these two; beyond that, the market dwindles rapidly. The payment banks Fino and Paytm have relatively small shares, while others are marginal. As the model favours institutions with robust distribution networks, extensive existing customer bases, and the capacity to function at scale in a low-margin, highly competitive market, there is limited opportunity for smaller players to achieve meaningful growth.
Fintech fight
Payments banks started functioning right as UPI was becoming mainstream, with both designed to facilitate low-value digital transactions. The shared interests rapidly escalated into head-to-head rivalry.
UPI made seamless transfers between banks possible, eliminating the necessity for users to store funds in payments bank accounts or wallets. This action undermined the fundamental value proposition of payments banks, which depended on facilitating small-value transactions via stored balances.
With the help of factors such as demonetization, user-friendliness, interoperability, and the absence of transaction fees, UPI transactions have skyrocketed from a mere 20 million in 2016-17 to over 240 billion in 2025-26—an increase of nearly 12,000 times. The transaction value increased from ₹0.07 trillion to approximately ₹314 trillion during this period, representing an increase of over 4,000 times.
Importantly, UPI has made its way into the grassroots economy, encompassing small merchants and street vendors who constitute the primary customer base for payments banks.
UPI, which has zero-cost transactions and is nearly universally accepted, is rendering specialized payments banks increasingly unnecessary for everyday digital payments. Payments banks have encountered strong competition from services like PhonePe and Google Pay, which provide integrated payment ecosystems built on UPI.
Market misfit
Payments banks in India were inspired by the success of mobile money platforms in Sub-Saharan Africa, where services like M-Pesa and Orange Money revolutionized finance for populations that were largely unbanked.
Telecom operators spearheaded that transition, capitalizing on their extensive customer bases, comprehensive distribution networks, and straightforward onboarding processes. As time passed, these platforms grew to provide targeted services like mobile credit, wealth management, and microinsurance, using comprehensive customer data to customize their offerings beyond basic transfers.
A considerable degree of adoption has occurred. Sub-Saharan Africa made up almost 50% of global mobile money accounts in 2025 and handled 92 billion transactions, which represented the majority of the world’s total of 125 billion.
India tried a similar telecom-driven model, but the results differed significantly. Due to regulatory constraints and increasing competition, M-Pesa Payments Bank closed down in July 2019, just a few years after its launch.
While firms in Sub-Saharan Africa can levy charges for basic services—given that mobile money frequently acts as the main account for numerous users—India’s highly competitive fintech environment, extensive bank account penetration, and emergence of UPI (a costless and widespread payments system) have posed challenges to the sustainable monetization of transactions by payments banks.
