Looking for viable payments banks
The formula for viability is to acquire and sustain a large base of active customers at low marginal cost and progressively expand revenue from this base
By giving in-principle approval to 11 payments bank (PB) applicants, the Reserve Bank of India (RBI) has taken an assertive step towards enabling financial inclusion. There is no denying that there is significant opportunity available to PBs in terms of potential customers, that is, unbanked (but bankable) and under-banked individuals. This potential is in the hundreds of millions, even though banking penetration in India has crossed 50%.
Not only is there significant headroom for new customers, there is also a large number of dormant or under-utilized accounts. In a 2014 World Bank survey, only 15% of respondents reported using their bank accounts to make/receive payments. When this large untapped base is considered alongside average per capita household expenditure of $750 (World Bank, 2014), the opportunity available to PBs begins to assume sizeable monetary value, even if adjusted for unbanked/under-banked households (and can exceed the current annual value of credit and debit card transactions—that is, $60 billion). The question, therefore, is not if PBs will be viable, but which ones and over what time frame.
The formula for viability is to acquire and sustain a large-scale base of active customers at relatively low marginal cost and progressively expand the sources of revenue from this base. Successful PBs will be those that are able to do so over a short period of time—that is, under three to four years. Beyond this, several doubts may arise on soundness of business models and execution capabilities.
While the viability formula is simple, one challenge is that the market potential described earlier has existed for years without much success on realization. The other key challenge is the likelihood of intense competition. PBs will have to compete not only with each other but also with small finance banks, not to mention universal banks (including their business correspondents) and prepaid payment instrument companies.
On both these counts, what is clear is that PBs will have to be anything but banks. Consumer products businesses (physical and digital) have had a better record of changing customer behaviour, unlocking potential and responding to intense competition. There are inspiring examples in this domain, ranging from sachet pricing several years back to the more recent taxi app innovation. PBs will need to be more like these innovative consumer products businesses (particularly digital businesses).
As such, they will need to have clear focus on finding the biggest payments-related problem faced by a specific customer base they understand well. They will need to solve the problem using the simplest product possible (such as the smallest amount of functionality), leading to a “wow" customer experience.
Several big problems can be found in areas such as subsidies, remittances, in-store payments, mass transit and e-commerce. The bigger the problem, the more precise its definition (including customer base) and simpler the solution, the greater is the probability of garnering a large, active customer base. Digital technology, coupled with a rigorous approach to user interface/user experience and an asset-light strategy, making good use of cloud-based services, will play an important role in enabling PBs to develop simple solutions and acquire customers at low marginal cost. PBs will need a highly experienced build team to bring all of this together.
This makes it clear that PBs don’t need to use high interest rates to entice customers. Besides, PBs need their customers to transact and drive fee income, not just maintain large balances (since balances can only be invested in low-yield government securities).
Having gained a large active customer base, PBs can look to expand their revenues by addressing a wider set of their customers’ needs. To do so, PBs will need to employ data analytics techniques and enter into strategic alliances, including those beyond banking. Their key objective is to capture a progressively greater share of their customers’ spends, no matter how small. This is the monetization stage and the opportunities for PBs will be limited only by their imagination.
Vijay Mani is a senior director with Deloitte in India.
Comments are welcome at otherviews@livemint.com
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