Home >Opinion >Why banks may eventually want to become virtual telcos

Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan insisted on Thursday that the current structure of the new payments banks will complement India’s traditional banking sector rather than compete with it. That may be the case for a few years, given that current RBI policy does not allow payments banks to lend and is primarily aimed at widening the reach of banking services to push for financial inclusion.

Global precedents, however, clearly indicate that telecom services providers, or telcos, will eventually end up disrupting the traditional banking sector. Further, the experience of banks in countries like Kenya and Nigeria, where mobile phone technology is driving financial inclusion similar to that in India, suggest that while banks will initially partner with telcos, they may also become virtual telcos to stave off competition from the former.

On Wednesday, the apex bank granted in-principle clearance for 11 entities including, a few telcos, to launch payments banks. These include Reliance Industries Ltd (RIL) that owns Reliance Jio, Aditya Birla Nuvo Ltd and a unit of Idea Cellular Ltd.

Further, India’s largest private telco Bharti Airtel Ltd’s unit Airtel M Commerce Services Ltd has got a licence and so has Vodafone m-pesa Ltd, which is a unit of India’s second-largest private telco Vodafone India Ltd.

Globally, there are precedents of telcos allying with, and even nurturing, banks.

In December, 2010, Turkey-based Avea Iletisim Hizmetleri AS (Avea) partnered with Garanti Bank to launch a commercial near-field communication (NFC) service in Turkey. In October 2011, Citigroup and America Movil teamed up for a $50 million mobile banking joint venture called Transfer to explore opportunities in mobile payments and banking across Latin America.

And Rogers Bank, a wholly-owned subsidiary of Rogers Communications that is Canada’s largest mobile carrier, became a Canadian Schedule I bank (domestic banks allowed to accept deposits) after it got the government’s permission in May 2013. It thus became the first Canadian telco to launch a credit card business in 2014.

RBI, on its part, has allowed payments banks in India to issue ATM and debit cards but not credit cards. They can accept cash deposits, permit remittances and roll out “simple financial products."

In India, telcos have already begun partnering with banks. While Airtel M Commerce has partnered with Kotak Mahindra Bank, RIL has joined hands with State Bank of India (SBI) and Vodafone m-pesa was launched almost three years back in collaboration with ICICI Bank Ltd.

Even way back in January 2011, SBI and Bharti Airtel had announced the setting up of a joint venture to serve “India’s unbanked millions" but ironically, the deal fell through, reportedly due to RBI’s objection of it being a back-door entry for a non-banking entity into the banking sector.

By Rajan’s own admission, when speaking at the second annual SBI banking conference in Mumbai on Thursday, he doesn’t foresee payment banks transition into universal banks, but he does envision small finance banks, which are yet to be licensed, having an easier path to transition into universal banks.

If this happens, there is a strong likelihood that banks may even think of becoming a telco.

Consider the case of Equitel’s launch in July 2014 in Kenya as a mobile virtual number operator (MVNO). Equitel is owned by Kenya’s biggest bank, Equity Bank. An MVNO does not invest or own any radio spectrum but leases the network services from an existing telecom operator at wholesale rate.

On 4 June, reported that First National Bank is set to become the first financial institution in South Africa to launch a mobile network by starting to sell SIM cards. FNB Connect launched an MVNO to roam on South Africa-based telco, Cell C’s infrastructure.

But India does not currently allow for an MVNO licence (though there are some workarounds, such as when UK-based Virgin Mobile tied up with Tata Docomo, now a brand of Tata Teleservices Ltd).

Regardless of how the scenario pans out, the fact is that young customers prefer net banking and mobile banking and would seldom visit a bank branch. Both banks and telcos thrive on an increasing customer base, hence mobile wallets are an imperative.

Almost 50% of India’s over 300 million Internet users are mobile-only surfers. HDFC Bank emerged as the leader in mobile banking with 38.2% market share in financial year 2014-15, followed by ICICI Bank, according to data compiled by BNP Paribas Securities India Pvt. Ltd. But most state-run banks, which account for more than 70% of the banking assets in the country, are laggards in this segment with a mere 17% share in total mobile transaction value.

Not surprisingly, banks today encourage customers not only to use other channels like the ATM, Internet banking and mobile banking but also perform realtime banking and money transfers on social networking sites like Facebook and Twitter, and bank using their wearables, primarily smartwatches.

With the technology treadmill moving at a rapid pace, one cannot hazard any guesses about the level of disruption that will take place going forward. But one fact remains: if telcos become universal banks and banks do take the telco route in India, presuming that the government allows it, there could even be a case for Account Number Portability.

In the interim, as banks and telcos start by sharing a closer relationship, regulators will have to ensure that these entities do not share sensitive customer data for cross-selling, or with governments for that matter, especially since India is yet to get a Privacy Act in place.

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