Mumbai: The payments bank model, once considered a innovation, is looking less appealing, with three of eleven firms that received licences to start such banks abandoning their plans to do so.
On Tuesday, Tech Mahindra Ltd, which received in-principle approval to start a payments bank in August, said it is dropping its plans. Its management cited a long payback time on its investment as a reason.
The company realised that intense competition would only erode already thin margins, said C.P. Gurnani, managing director and chief executive officer, Tech Mahindra, at a press conference scheduled to announce the company’s quarterly earnings.
“We still feel that it is a very large unserved market," he added.
Last week, a consortium of Sun Pharmaceutical Industries Ltd promoter Dilip Shanghvi, IDFC Bank Ltd and Telenor Financial Services abandoned its plan to set up a payments bank. Earlier in March, Cholamandalam Investment and Finance Co. backed out as well. Neither gave a reason for its decision.
This leaves eight potential payments banking entities:
Aditya Birla Nuvo Ltd; Airtel M Commerce Services Ltd, a part of India’s largest telecom company Bharti Airtel Ltd; department of posts; Fino PayTech Ltd; National Securities Depository Ltd; Reliance Industries Ltd; Paytm founder Vijay Shekhar Sharma; and Vodafone m-pesa Ltd, a unit of Vodafone India Ltd.
Responding to the withdrawals, RBI deputy governor S.S. Mundra said the regulator is feeling “a little aggrieved" because of the effort that goes into processing applications. “So, having done that, if they don’t materialize, that’s the only point (of disappointment)," Mundra said on Monday.
Payments banks can collect deposits and offer different payment solutions to customers but are not allowed to lend. RBI has also asked them to invest 75% of their deposits in government securities, limiting their ability to earn. And they will need to offer at least 4%, the current savings rate that banks offer, to attract customers.
That leaves the banks with an interest spread of not more than 3-4% taking the current benchmark 10-year government bond yield of 7.46%.
That means payment banks are a high-volume and low-margin business. That may not work for everyone. Only telcos, and the department of posts may be in a position to generate enough business over time and eventually cross-sell banking products to their customer base.
The aggressive response shown by incumbent banks, which have launched several digital products and initiatives in recent months, has spooked aspirants, said Abizer Diwanji, leader of the financial services practice at consulting firm EY.
“What is increasingly being realized is that there is tough competition. Perhaps the applicants didn’t expect the extent of reaction from the incumbent banks. The USP of a payments bank was being nimble-footed and giving products on a digital platform. But ICICI Bank, HDFC Bank and even SBI (State Bank of India), all are doing this already," added Diwanji.
SBI, the country’s largest lender has launched its own mobile wallet application and has partnered with several fin-tech companies over the last one year. Other large lenders such as ICICI Bank and HDFC Bank have also been aggressive in the digital space.
Harish H.V., partner at consultancy firm Grant Thornton, noted that many aspirants are increasingly realizing that payments banks are not lucrative as they have thought initially.
“Companies are realizing that there is limited scope for scaling up profitably in the payments banking space."
To be sure, not everyone is abandoning the idea of launching a payments bank.
Vijay Shekhar Sharma, the promoter of Paytm, said that his company intends to launch a payments bank by August, according to a 13 April report in The Times of India. Airtel Payments Bank will start services in the second quarter of the current fiscal year, parent Bharti Airtel Ltd said on 3 May. Kotak Mahindra Bank holds 19.9% in the payments bank, which is currently called Airtel M-Commerce Services Ltd. India Post’s payments bank will start functioning from March 2017, communications and information technology minister Ravi Shankar Prasad said on 22 May.
Fino PayTech, another firm with an in-principle approval, also said it plans to go ahead with the launch of a payments bank.
“Fino PayTech has been working in the financial inclusion space for the last ten years and we would like to focus on our core strengths. We already provide most of the services that a payments bank is supposed to. In that context, we believe payments bank is a natural progression for us," said Rishi Gupta, managing director and chief executive officer of Fino PayTech.
Gupta said that cross-selling of third party products can help increase revenue. “While technology will definitely be a key enabler for payments bank, business models will define each player, who will bring their own strengths to the market place. We will have to see how this initiative finally takes shape."