Payments banks could turn out to be a win-win situation for both corporate behemoths as well as the banks partnering them though the volume of transactions would necessarily need to be large.
After Kotak Mahindra Bank (KMB) and Bharti Airtel said they were teaming up to apply for a payments bank licence, State Bank of India and Reliance Industries (RIL) said on Monday, the last date for submitting applications to the Reserve Bank of India (RBI), they were joining hands in a similar venture. Others applying included Aditya Birla Group company Idea Cellular and the Future Group.
Meanwhile, SKS Microfinance, Village Financial Services, UAE Exchange India and IIFL said on Monday they had submitted applications for small banks.
Telcos, which will leverage their customer bases, must keep transaction costs low to make meaningful money, experts said, adding that a banking partner would bring in experience in cash and fund management as well as additional points of sales.
“The key is to keep transaction costs low since customers will be low value. So, the cost per transaction would have to be one-tenth of the normal banking transaction,” Aman Bhargava director, Grant Thornton, pointed out. RBI guidelines allow a payments bank to accept deposits and offer payment solutions but not to lend. So fee and treasury income are the only sources of revenue.
Banks, for their part, are looking for fresh customers to lend to in a bid to further financial inclusion and do some business in the bargain. SBI is hoping to access 2 lakh customer points from the current 60,000 and through this to be able to service at least 5 crore accounts over time. “We have to increase our reach and opening branches is not viable. Reliance Retail has procurement outlets in rural areas that we can tap while simultaneously scaling up on our own. In effect the payments bank gives us access to customer touch points,” Neeraj Vyas, CGM, SBI, explained.
The country’s largest lender is hoping to do transactions — comprising mainly receipts and payments — worth R35,000 crore in FY15 on its own steam, up from R22,000 crore in FY14.
Vyas believes that once the payments bank is in place, it could enable the bank to do an equal value of transactions over a period of time. The business model for the payments bank envisages a deposit base of Rs 10,000-11,000 crore over a period of four to five year.
While SBI cannot access those deposits, it is hoping to wean away small enterprises from the clutches of the moneylender to grow its business.
Initially the capital of the proposed payments bank will be Rs 100 crore but that will be raised to Rs 500 crore over the next four to five years. SBI is hoping to leverage the retail network of 2,285 stores under the Reliance Retail banner.
As Shinjini Kumar at PwC pointed out, banks bring to the partnership their experience of managing cash, creating financial products and, importantly, the trust and credibility of people and regulators.
So, for instance, while a Bharti Airtel can use KMB’s expertise in the financial services space, KMB can access Bharti’s reach via the customer touch points — Airtel’s subscriber base is 250 million.
Ashvin Parekh, banking consultant, believes that telcos must curtail costs. “The number of transactions have to be large and expenses have to be curtailed. I think telecom companies can do it,” Parekh said.
While there was no confirmation on whether IDFC would tie up with the Future Group, IDFC’s eventual bank operations could gain on the priority sector front by accessing the payments bank customers for potential borrowings.
With a large number of households unlikely to get access to formal banking, there’s potential for payments banks as the growing value of transactions through m-wallet, which has more than tripled in the last two years to Rs 2,750 crore, indicates.
The majority of these transactions were remittances but by providing customers with more services, telcos can reduce the churn, in the process earning additional revenues.
That way they could leverage their large distribution networks, including those in rural India, more effectively.
However, the revenues from the payments bank business are likely to be paltry — Crisil estimates that even after years the contribution to their total revenues is likely to be less than 1%. Moreover, payments banks are likely to have less than 0.5% of the total CASA.