The new crop of payments banks, that will spring up over the next year or so, promises to change the country’s banking landscape, altering the way transactions take place. At the core of this change will be the mobile phone.
India’s payments market today is estimated at $15.5 trillion (excluding inter-bank clearing and CCIL). The share of mobile banking, Bank of America Merrill Lynch estimates, may rise to 10% in seven years from 0.1% currently, with the value increasing 200 times to $3.5 trillion. People are likely to use mobiles for making payments through all key channels including even RTGS ad payments through paper may fall to less than 2%, the brokerage believes.
Such a transformation would necessarily change the way banks operate. How they stay competitive in an environment where a clutch of payments banks is present—who cannot lend but can borrow up to a limit—will depend on how quickly they tweak their business models; while payments banks are unlikely to be big disruptors in the near term, they may make life just a little difficult for incumbents. While plain vanilla payments banks could capture some share of the payments volumes, it’s the bank centric model that’s likely to succeed given the regulations in favour of having a bank account. As BoAML observes, “telcos and payments banks—once they become operational—are unlikely to cause any disruption in India as the customer franchise will remain with the banks.
Indeed, some universal banks like State Bank of India (SBI) and Kotak Mahindra Bank (KMB) have already teamed up with licencees—the former with Reliance Industries and the latter with Bharti Airtel—to make sure they get a share of the action. “Ïf you can’t beat them, join them,” Arundhati Bhattacharya who heads the largest bank in the country, said at a banking event in August. Bhattacharya remarked the new payments banks would be run by deep-pocketed telecom companies with unparalleled reach and could pose some competition existing players.
“It would be a dog-eat-dog market if the deep-pocketed corporates, which have bagged the payments bank licences, unleash a rate war,” Bhattacharya had said.
However, banks should not worry too much since payments banks can raise deposits of up to R1 lakh and can invest only in government paper. Currently, gilts fetch yields of 7.00-7.50% while savings banks accounts offer 4-6% and one -year term deposits fetch just around 8.5%. Aditya Puri, managing director and chief executive officer of HDFC Bank observed recently that to be viable a payments bank may not be able to offer more than the standard 4% on savings deposit. “They have only to play between five and seven percent. So, I hope they want to be profitable,” Puri remarked in an interview to a news channel. Suresh Sethi, business head at Vodafone M-pesa concedes it is a stretched margin situation. “I think at the beginning margins could be below 100 basis points,” he told FE.
However, what banks will essentially be looking to do is to try and acquire customers to whom they can lend over the long term. Dipak Gupta, joint managing director at Kotak Mahindra Bank, which will buy a 19.9% stake in the payments bank of Airtel M Commerce Services, points out that the penetration of telcos is far greater than banks like KMB. “This in itself presents an enormous opportunity for us. There is certainly a segment of customers from this base who we can tap for regular banking services. Even a small slice of this segment can significantly add to our customer base,” Gupta observes.
The motley group of companies that has won in-principle licences from the RBI is in a position to reach out to customers in far flung areas of the country; telecom companies and the Department of Posts, for example can access people in the very small towns and large villages. The technological superiority of Tech Mahindra, NSDL, payment service providers such as Paytm could up the competition on the cost front. “Technology is the game here. There is no alternative. Distribution will be the differentiator,” said Saurabh Tripathi, partner and director at Boston Consulting Group. Tripathi estimates that nearly 50% of bank customers, who transact using various digital media, could migrate to payments banks for solutions and perhaps even deposits.
Smaller bankers may have reason to worry given Vodafone, Airtel, Reliance Industries, Aditya Birla Nuvo and several others may be able to use their large networks to attract the average customer to use their deposit products. Vodafone M-pesa already has tie-ups with government agencies for money transfers akin to the banks’ Jan Dhan Yojana accounts. “Vodafone M-pesa has been playing an important role in building the financial inclusion ecosystem and we have already partnered with several government bodies to run pilots for enabling direct transfer of wages/subsidies. The payment bank licence will enable us to build on this further and offer a more comprehensive portfolio of banking and financial products and services,” Sunil Sood, MD and CEO, observed.
Fino Paytech, will leverage its network of business correspondents—25,000 of them—and its experience in financial services in rural areas to transform itself into a full-fledged payments solutions entity. Paytm, a mobile wallet provider, is hoping its 20,000 strong customer points will help it forge ahead “We have a significant advantage over others since we have been able to build a large consumer base in a very short time. We already have close to 20,000 distribution points where a customer can walk in and deposit cash,” Amit Lakhotia, vice president-business of Paytm observed.
If they build scale quickly, they will find it easier to defray costs but BCG’s Tripathi feels new entrants may have to rough it out initially as business volumes would be thin. “Once they have data on customers transactions, in 3-5 years, the economics will change as benefits from monetising data will kick in,” he believes.
Samir Bali, MD and Head (financial services), Accenture India says the scales are evenly balanced since both incumbents and new entrants will work to increase the banking pie even while competing for the existing pool. “New entrants will try to get a share of the existing customer base. But existing players who are exploring unbanked segments and digital technology to offer profitable propositions to these customers will also benefit,” Bali believes.
Accenture’s view is that as most of the entrants have a customer base and infrastructure to leverage, margins will be easier to maintain and break-even quicker. “Their ability to leverage the existing distribution network and infrastructure, the rate of conversion of their existing customer base, the ability to implement lean banking platforms and digital initiatives, and their success in cross-selling third party products will determine where they lie in the break-even range of 2-4 years,” Bali explains.
G.V. Nageswara Rao, managing director of NSDL, which has bagged an in-principle licence says his firm’s advantage is that it has a track record of handling large volume of transactions as a depository and is one of the cheapest. “We are the largest depositor in the world with the lowest cost. We charge only Rs 4.50 on one side for a transaction,”Rao says.
Incumbents, for their part must build digital platforms to be able to retain customers and their savings. Else, their growth would stagnate.
Chanda Kochhar, MD and CEO, ICICI Bank, the second largest bank in the country had said at a banking event recently the entry of new players would enhance the financial ecosystem making banks technology savvy and getting them to come out with new products. To be sure those banks that have not embarked on a digital drive need to size up the competition. Vodafone M-pesa, a two-year old venture of telecom behemoth Vodafone already has about 90,000 agents through which it facilitates money transfers. M-pesa has a customer base of 36 lakh. Airtel M-commerce, launched three years ago, can tap Bharti’s large user base of more than 200 million mobile users; other conglomerates such as RIL and Aditya Birla Nuvo too have the wherewithal to quickly build a successful payments bank given the former is teaming up with SBI.
SBI operates 16,377 bank branches across the nation, has 59,516 customer service points including business correspondents (these are also supplied by players such as Vodafone and Fino Paytech), and 55,768 automated teller machines (ATM). ICICI Bank has 4,052 branches, 12,811 ATMs and a strong digital banking offering. Other players such as Union Bank of India, Central Bank of India and Bank of Baroda have strong branch networks but cannot boast a strong digital channel.
The Department of Posts which boasts the largest postal network in the world too has an edge. Given its public sector status and the fact that it accepts deposits from the public, has 2.6 lakh dak sewakas foot soldiers, it can quickly establish as a key player in the payments space. India Posts has 1.4 lakh post offices across India with 90% in the rural areas and 2.6 lakh postmen who can act as points of contact with customers; it has implemented core banking solution and is slowly digitising its operations.
Which is why banks must try and attract the customer base to grow their loan books and that’s precisely what SBI and KMB are attempting to do with their partnerships while Union Bank of India is looking for a stake in a future payments bank. Payments banks will cover hitherto un-banked areas bringing more households into the financial ecosystem and banks must try and access these customers. This will benefit banks at a time when credit offtake has slumped to a decade low of sub-10% and loan disbursals to corporates are unlikely to revive at least for another two quarters. While retail portfolios have been growing at a pace of 15% for more than two years now, this segment too will get saturated soon. But as Gupta of KMB points out, the pie is large enough for everyone to get a slice.“There is enough demand for banking products and services, and both the old and new can participate in fulfilling India’s banking needs,” he feels. Well spoken. At the end of the day that’s what it’s all about.