Mumbai: When the concept of payments banks was floated in 2014, a number of experts said it was a model that could not only disrupt the payment space but also force banks to work harder to collect deposits in rural areas.

The excitement over the model only increased after the list of applicants was revealed by the Reserve Bank of India (RBI). Forty-one firms threw their hat in the ring and eleven were finally given an in-principle nod in August 2015. Those selected ranged from units linked to large telecom providers such as Bharti Airtel Ltd and Vodafone India Ltd to technology firms such as Tech Mahindra Ltd and entities like the Department of Posts, which already had a wide reach.

Successful applicants were given 18 months within which to launch their operations. But as the deadline nears and as initial PowerPoint plans are fleshed out into Excel sheet-driven business models, some are realizing that the business may not be easy to crack.

Three firms have now withdrawn their applications—Tech Mahindra; Sun Pharma promoter Dilip Shanghvi and his partners IDFC Bank Ltd and Telenor Financial Services; and Cholamandalam Investment and Finance Co.

Why? Because the economics does not make sense for everyone.

Low-margin, high-volume business

First, these entities can’t undertake any lending businesses and the income stream is initially restricted to remittances. Eventually, they can cross-sell banking products through their reach and earn a fee. But neither of these two streams of revenue are high-margin businesses. As such, the ability to earn depends on the ability to generate large volume. This, in turn, will be easier for entities like telecom companies who already have significant networks in place.

Restrictions on deploying deposits

RBI has put in place strict rules on how you can deploy the deposits you garner. Seventy-five per cent has to go into government securities. This limits your ability to earn from your deposit base as well. Garnering a strong deposit base in the first place will be a challenge as well. If you want to steal customers away from banks, you may have to offer more than the 4% interest rate that banks do. But to do that, you need to be able to earn enough on your deposits as well. According to an August 2015 report by Icra, interest spreads for payments bank are not expected to be more than 3-4%, which are not particularly attractive.

Competition from banks

The third factor which may be playing a part in the decision of some entities to give up their licences is the fact over the last few years, large banks, including private lenders, have significantly expanded their networks in rural areas. This means that these markets are no longer wide open for new business with limited competition. Banks are offering most services that payments banks can and hence, for payments banks to offer a new and differentiated proposition will not be easy.

Will telcos have the last laugh?

Three withdrawals may not be the end of it. There could be a couple more entities, such as the National Securities Depository Ltd, for whom diversifying into the payments business does not make sense. Those who will be left behind will be the telcos, for whom this business makes the most sense. “They already have the pipes in place and the incremental cost is very limited. It’s an add-on business for them and hence it makes sense," said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services Llp.

For the regulator, the payments banking model was an experiment. RBI said as much when it first issued the guidelines. The experiment is still underway and it may be too early for the regulator to be “aggrieved" (as RBI deputy governor S.S. Mundra put it) at the decision of three applicants to withdraw their plans.

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