Mumbai: A year after the Reserve Bank of India (RBI) issued in-principle approvals to 11 payments bank applicants, only four have a clear business model in place to start operations in a realistic time frame.
Bharti Airtel-owned Airtel M Commerce Services Ltd, FINO PayTech Ltd, Vijay Shekhar Sharma’s Paytm Payments Bank and the department of posts are the applicants with clearly defined business plans and timelines in place to launch operations.
According to the conditions under which the banking regulator gave in-principle approvals, the applicants had 18 months starting August 2015 to set up fully functional payments banks and receive approvals from RBI, other regulators and the government, depending on how their business model develops. This would mean that all applicants have time till February 2017 to get their payments banks up and running.
On 3 May, Mint reported that Airtel Payments Bank Ltd would start services sometime in the July-September quarter, though that deadline has slipped. In April, it received RBI’s final approval to set up a payments bank and while the company will continue to use its mobile wallet services to provide payments services, it will also leverage Bharti Airtel’s existing network of stores.
In the case of the department of posts, the India Post Payments Bank Ltd (IPPB), which is expected to have an initial corpus of Rs800 crore and the largest distribution network in the country, has been incorporated as a company under the Companies Act, 2013. IPPB has also started talking to technology vendors to take care of the back-end infrastructure necessary to provide banking services to its customers, Mint reported last month.
Paytm Payments Bank, which has already appointed a former central banker and senior executive at consulting firm PwC Shinjini Kumar as its chief executive officer (CEO), aims to launch its payments bank services by October-November, just in time for Diwali. While the company plans to start with a basic savings account for its customers, it will continue to drive payments through the mobile wallet for which Paytm is known.
While basic transactions will be the key business, selling third-party products through mobile apps and banking outlets will be Paytm bank’s avenue to make money, said CEO Kumar. Third-party products wouldn’t necessarily have to be limited to financial services products, she added. Presently, prepaid mobile recharges, utility bill payments, e-commerce payments and travel bookings are the largest digital payments segments, said a report by the Boston Consulting Group (BCG) and Google, released last month.
In an environment where universal banks that have been functioning for decades are finding it difficult to garner public deposits, Paytm bank will not actively target large deposits from customers.
“We are not consciously targeting deposits, but transactions and balances are a function of time mismatch between a person earning and spending. With our bank platform, we can pay interest on these balances or help move to higher yielding products,” said Kumar.
Besides, payments banks are only permitted to accept deposits up to Rs1 lakh, about 75% of which are mandatorily required to be invested in government bonds. On an average, the 10-year benchmark bond yield is ranging around 7-8%, which means that these deposits will have to be priced lower than that for a payments bank to earn a margin, as they are not allowed to lend.
FINO PayTech, which is one of India’s biggest business correspondents, plans to take till February to open its payments bank. To have a functional and profitable payments bank franchise, the company plans to convert 400 of its FINO Money Mart outlets into bank branches. FINO provides services ranging from remittances, utility bill payments and lending in rural areas to international remittance cash-out facility through these outlets. The company will continue to provide these services along with business correspondent services to universal banks.
“Every payments bank has identified its own customers. We have a lower and middle income customer portfolio base who will take their own time to use the digital platform. Going forward, we expect 2-3% spread,” said Rishi Gupta, managing director and CEO of FINO PayTech. The company expects to use remittances as a primary business driver, growing at a 25-30% rate every year. With an average transaction fee of 1-1.5%, FINO’s remittances business will ensure revenue for the payments bank, he said.
On 29 July, FINO PayTech sold a 21% stake to Bharat Petroleum Corp Ltd (BPCL) to raise Rs251 crore for its payments bank. The tie-up will enable FINO to use BPCL petrol pumps across India to conduct its payments services and improve its reach.
Of the 11 applicants that received in-principle approvals from the banking regulator, three have already backed out of setting up payments banks as it did not make economic sense to them.
In March, Cholamandalam Distribution Services Ltd surrendered its in-principle approval to RBI citing “competition and long gestation periods”. In May, Dilip Shanghvi, promoter of Sun Pharmaceutical Industries Ltd, and Tech Mahindra Ltd too surrendered their respective in-principle approvals.
The four remaining payments bank applicants continue to be vague about their business plans.
While Vodafone m-Pesa and the Aditya Birla Group did not share any information regarding their respective payments bank plans, National Security Depository Ltd managing director and CEO G.V. Nageswara Rao maintained that it would start operations some time in December, without giving details.
A spokesperson for Reliance Industries Ltd (RIL) said that its payments bank offering was work-in-progress, adding that the company aims at a launch some time next year. State Bank of India, the nation’s largest lender, holds a 30% stake in RIL’s payments bank.
“We are currently going through the process of regulatory approvals to operationalize the payments bank. We await RBI’s revert on our submissions, following which we will start working towards the launch,” the RIL spokesperson said in an emailed response.
Naresh Makhijani, partner and head (financial services) at KPMG, said even though there is less clarity about some of the payments bank applicants and their plans to launch services, some developments are likely within the next few months. “This is a difficult, time-consuming process and first requires agreements between multiple stakeholders within the company. The regulatory approvals come after. It is best to be patient and see what new business models will come up in the months to come,” he said.
According to Makhijani, sale of third-party products will be the key revenue driver for most payments banks in India.
Even as technology is a differentiating factor for these new banks, stringent regulation may play spoilsport.
“Technology can be an effective enabler to achieve scale at reduced costs. In fact, the cost advantage of digital technology becomes incrementally greater with scale, while not compromising on security. And we are absolutely well placed to make this advantage work for our clients,” said Kumar of PayTM bank.
“However, there continues to be major cost on account of people and channels because as of now, much of the regulatory requirements are the same for us as for conventional banks. We hope this will get aligned with the digital advantage soon,” she added.
According to Saurabh Tripathi, senior partner and director at BCG, most people don’t realize how difficult it is to come up with a completely new business model and thought process when developing a payments bank. “Not only do you have to rethink liabilities as compared to what banks have been doing all these years, you also have to remain true to it for years to come,” he said.
While most payments banks will start with one or two products that are close to their previous business models and serve as vantage points, a full bouquet of services for each should emerge in about five-seven years, added Tripathi.
Banks which have started their operations in the last two decades have taken their time to grow their liabilities franchise beyond term deposit products.
Yes Bank Ltd and Kotak Mahindra Bank Ltd, both of which got universal banking licences in 2003, had to wait till October 2010—when RBI deregulated interest rates on savings bank accounts—before truly growing savings deposits.
The banks started offering higher interest on their savings bank products, allowing for their CASA (current and savings account deposits) ratio to grow quickly. Not only do these accounts allow the banks to build their customer base, they also tend to help improve fee income through cross-selling of other products such as credit cards and personal loans. As such, banking is a long-term business where the payout may take time.
The benefit of having large companies backing payments banks is that there is no dearth of capital for them, said Tripathi.
It would also be interesting to see how these companies react to the operational guidelines which RBI released on 6 October. The guidelines are aimed at providing some form of standardized formats for payments banks and small finance banks. The regulator has asked payments and small finance banks to maintain a higher capital adequacy ratio (CAR) of 15% from the start of their operations.
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Both tier I capital, or core capital, and tier II capital will have to be 7.5% each. In comparison, under Basel III norms, full-fledged commercial banks have been asked to maintain a CAR of 10.25% by March 2017 and 11.5% by March 2019. Capital adequacy is a measure of a bank’s financial strength, expressed as a ratio of capital to risk-weighted assets.
E-KYCs (know your customers) would allow these new-age banks to conduct their activities without necessarily setting up physical branches. For physical access points, the payments banks will need to submit an annual growth plan to RBI for prior approval during the first five years. Later, RBI may choose to relax the prior approval norm, the guidelines said.
Payments and small finance banks will also be allowed to work with group firms, employing them as business correspondents and using their premises to conduct business, albeit at an arm’s length.
Kalpana Pathak contributed to this story