Five years from now, if everything goes as planned, it may simply take a few clicks on a smartphone for a migrant labourer to send money to his wife residing in a far-flung village. The wife, in turn, will not have to travel to a bank to withdraw the money wired by her husband. Instead, she could walk to the nearest kirana store, buy her groceries and pay the shop keeper using her cellphone.
This process of carrying out banking transactions via cellphones underpins the basis of payments banks launched in India eight months ago. Payments banks (PB) are stripped-down deposit-taking institutions formed to reach customers mainly through their cellphones rather than traditional bank branches. While on paper PB appears to be a grand plan to drive down banking services to the grassroots, there is widespread scepticism about its success.
There is already a growing buzz that a few players of the eleven who got in-principle licences from RBI in August 2015 having a relook at the viability prospects of PB even before launch. At least one company, Cholamandalam Investment & Finance Company, is said to have pressed the exit button, according to people familiar with the matter.
It appears that most players were not fully aware of what it took to set up a profitable PB at the time of applying for licence. A good number of the original applicants (around 40 of them) had signed up for a PB licence to jack up their group valuations. They seemed oblivious to factors such as need for advanced technology (in business), large capex, equity base restructuring and prospects of “delayed break-even and profitability.” In the case of Cholamandalam, it appears to be late realisation that they were entering an unviable business.
A consultant who has worked with the group on other mandates says Cholamandalam should have applied for a small finance bank instead. “They opted for PB without really knowing what the beast was.”
Though Cholamandalam is active in the NBFC space, it does not really have pan-India presence or enough technological muscle to set up a PB. That apart, the need to infuse more capital and the long waiting period to profitability may have discouraged the south-based group to abandon their plans, according to the people familiar with the matter. Cholamandalam declined to comment.
Besides Cholamandalam, Aditya Birla Nuvo, Reliance Industries, Paytm, Sun Pharma founder Dilip Shanghvi, Fino Paytech, National Securities Depository Limited, India Post, Tech Mahindra, Airtel and Vodafone have received in-principle approvals to start PBs.
These players have been given 18 months to set processes in place before seeking ‘final approvals’ from RBI.
The rub for Cholamandalam and a few others having second thoughts is that PBs are grossly inadequate or restrained with strict conditions to meet their banking ambitions. For one, PBs are allowed to accept deposits only up to Rs 1 lakh and for another, they are not allowed to lend. A large chunk of the float funds PBs would hold (up to 75 per cent) will have to be invested in government securities and they are required to pay at least 4 per cent interest to customers.
On paper, PBs make a clean 300 basis points profit spread (rate differential between two coupon-bearing instruments/products) if they invest in G-Secs (bearing 7 per cent coupon currently) and pay 4 per cent interest to depositors. But that’s just a theoretical possibility. Who will keep a PB account in these times when new generation private banks are offering savings bank rates in the range of 4.5 to 7 per cent?
PBs would be forced to offer higher rates to depositors if they desire to expand. But this will skim their treasury margins significantly. Also, it may take years, lots of work and many a feet on the ground for PBs to corner bulk deposits.
“If there’s no volume, there’s no money in payment banks,” says Naresh Makhijani, partner & head (financial services), KPMG. “PBs will have to adopt a lean model and raise small deposits from a large number of people. Players who have got inprinciple licences are hoping to make the most out of their captive clients.”
A mixed bag That doesn’t mean PBs are staring down the barrel of an empty future. India is the epitome of “bottom of the pyramid banking” only 59 per cent of households have access to banking services in India, according to the 2011 Census).
PBs will also rely on remittances to augment revenues. The flow of money from urban centres to villages is huge, fuelled by a wide base of migrant wage-earners working in metros and cities. These remitters now use informal hawala channels, post office and PSU bank branches to dispatch money home. While hawala circles charge 8-9 per cent as commission, India Post and PSU banks levy 5 per cent and 1.5 per cent respectively on the value of money sent. PBs will be able to offer these services at much lower cost.
PBs will also look at tapping the ‘inward remittances channel’ by tying up with foreign banks and remittance service providers. In 2015, India received $69 billion in remittances, which is nearly three times FDI.
“You’ll have to play the business as per your strengths. It will have to be linked with your existing line of business – as an add-on service,” says Rishi Gupta, MD and CEO of Fino Paytech, which has tied up with five remittance service providers to corner the flow of remittances into India.
Pushing sales Payments banks also have options to generate income by way of distributing third party products. To diversify their product suite, players have also teamed up with banks. Here PB would function as an extension, accepting larger deposits (above Rs 1 lakh) and distributing credit and investment products on behalf of the bank. PB can also take up retail forex mandates, bill payment services and card acceptance mechanisms to third parties.
Paytm founder Vijay Shekhar Sharma says there are many more options besides payments to generate revenue through payment banks. He lists cash management, bank EMI clearances and leveraging on set distribution lines to cross-sell other wares and products. “Payments is just one part of it,” says Sharma.
PBs could also be a blessing for e-wallet providers (like Paytm, MobiKwik, CitrusPay…) which have lost their utility value with the launch of unified payment interface (UPI).
“PB is not really for people who are already transacting online. It’s to serve people who are not connected online. So there’ll be touchpoints,” says Sharma, adding, “it’s going to be capital intensive in the initial stages as PBs will have to spend money to set up the infrastructure and acquire customers.”
Capital outlay As per broad estimates, PB licensees may have to invest up to Rs 500 crore to set the ball rolling. At the village level, they will have to wheedle change-resistant merchants and shopkeepers to use their services. PB may also need to set up cash (currency) dispensing outlets across the country.
“There’s a lot of cost involved in setting up of PB… and it may take at least 3-4 years for it to break even. One way to stay afloat is by distributing customised financial products to customers,” says Bhavik Hathi, MD of consulting firm Alvarez & Marsal.
“Also, RBI is likely to introduce on-tap licences; so if payment banks turn successful, there will be more players wanting to jump in,” he says, adding, “For sure, PBs will work for some players but not all. Player-level consolidation may start happening in a few years,” says Hathi.
Individual players will have to spot their niche to benefit from this business. Telcos Airtel and Vodafone may use PBs to lower their subscriber churn as those opting for mobile money service are not likely to abandon service providers in a hurry. NBFCs and payment service providers may use PB to reach out to the unbanked and get business from them.
Yet, one crucial question remains: what can eleven PBs achieve that 26 state-run banks, 20 private banks, over 40 foreign banks, 56 regional rural banks, 1600 urban co-operative banks, 93,550 co-operative banks and 60 MFIs could not do all these years?
The answer to that lies in the use of mobile phones to reach potential customers. PB may run their business through 970 million mobile users in the country.
Hathi of Alvarez & Marsal says payment banks are a new experiment and no one is clear as to whether PB would survive (and be profitable) or not. “We’ll have to wait for them to start their operations.” Rashod Hill Authentic JerseyShare This