Shobhana Subramanian: Do you think UPI is going to be a WhatsApp moment for the financial world?
Rajiv Lall (MD & CEO, IDFC Bank): The short answer to this is, yes, and it’s been in the making for a while. UPI is just the tipping point. What’s been in the making are dramatic changes in infrastructure, regulation and technology, the net outcome of which is that the cost of delivering banking services has come down dramatically. And that really is the WhatsApp moment. It is an equivalent of the pre-paid moment for the telecom industry or equivalent of the sachet moment for shampoos.
SS: Mr Gupta, are banks going to gain from this or is the transaction business going to be taken away by, for instance, wallets?
Dipak Gupta (Joint MD, Kotak Mahindra Bank): The gains will be multi-fold. Banks will gain essentially because, hopefully, over a period of time, operating costs will come down and some of the benefits will be passed on to the customer. Customers gain significantly from a convenience point of view. All the long passwords, long bank account names, all the codes of other banks will go away.
But going back to your question on the WhatsApp moment, I think this is just one part of the WhatsApp moment. When you look at it in totality, i.e, the UPI, the Aadhaar, the smart phone, all of them put together create a WhatsApp moment from a banking perspective. This, in itself, is just one piece of the jigsaw puzzle.
SS: Do you think payments banks will take away some of the universal banks’ business? There is a feeling in general that banks really don’t have the technology to hold on to a lot of the customers.
Dipak Gupta: I think banks are investing a lot in technology. The challenge for a bank really is which of these technologies to bet on because there are hundred odd fintech opportunities out there. The advantage for a fintech is that they are normally mono-line plays. They know what to bet on. They have a lot of equity backing them for specific products. A bank is actually a fintech company in any case.
SS: Mr Shah, do you think many of the smaller players will gain market share, particularly at the expense of the public sector banks (PSBs), which may not have the state of the art technology? In fact, you have a Capital Float, which is now co-lending as an NBFC. So, even the loan piece seems to be moving away.
Pradip Shah (Chairman, IndAsia Fund Advisors): The digital innovators have been focusing on the front end, the customer facing end, which is where the fee income is. But the deposits remain with the banks. The customers today are with the banks. The digital innovators have to find the customers. So, there’s actually a fit between the two…
SS: Paytm says it will have two hundred million CASA customers in one year.
Pradip Shah: We will wait and see. There is a match that is likely to take place between the two. In 2015, a McKinsey study found that 62% of the income of the 350 largest fintech companies came from the front end operations like loan origination. They have done a marvelous job in customer acquisition. But at the end of the day, the money is with the banks. And they are the providers of credit. The banks will have to go and reach out to the under-banked. Now, the Jan-Dhan Yojana…
SS: But these are very unprofitable..
Pradip Shah: It may not be profitable today, but you originate a customer at a much lower cost today. Then, as the economy grows, the customer grows and there will be value propositions from them. This cost reduction is happening not only in origination, but also in delivery of credit and credit appraisal itself. Today, there are compa- nies doing a marvellous job of using algorithms and data from various sources to deliver credit at a much lower cost. The cost reduction due to this is a lot – between 40 and 100 bps.
SS: Mr Gupta, do you think payments banks can set up viable and robust business models?
Rishi Gupta (MD & CEO, FINO PayTech): I think the payments banks have come in at the right time, when the ecosystem is ready, so a payments model can have a viable model. I agree that a stand-alone wallet does not make sense unless you put a deposit to it and can do some data crunching on it and through which you can do some lending activities. But payments bank model is not here to cannibalise anybody’s market. It is a big opportunity and when we look at rural India and see large number of people outside bank branches, we see a lot of market there and we are pushing products – deposits, remittances.
SS: What would a customer get from keeping money in a payments bank or a wallet?
Rishi Gupta: The top 100 million people are already overbanked and the next 100 million have some access, but the next 100 million have no banking at all and even if they do, they are unhappy. Even in urban India, when it comes to micro transactions, there are people who want banking services and are ready to pay. We do one million remittances a month from urban to rural areas and people are ready to pay about a dollar or so.
People who will keep deposits with a payments bank are those whom banks are not interested in. If I try to service the high-end customers, nobody will keep a deposit with us because of the R1 lakh restriction and we do not offer anything special. But people are ready to pay for convenience, else they have to travel 20-30 km.
Rajiv Lall: The reality is that 60% of our household savings is not even coming into the formal financial system. So this is the opportunity.
So why would anybody put their deposits into a payments bank? Because they are going to help build a ubiquity of cash-in cash-out points and access. As a remote person in a rural area I don’t put money in a bank because it is a hassle for me. ATMs don’t work, I don’t want to walk to a branch since I get treated like a second-class citizen. If they are able to put, like we are investing heavily in last mile infrastructure, micro-ATMs, millions of cash-in cash-out points across the country you will see how quickly people start putting their money into the formal financial institutions. That is the revolution in the making.
Shinjini Kumar(CEO, Paytm payments bank): I agree there is a very large untapped savings market and actually even in urban India the ability to take money to safety is not there and a lot of investments into chit funds and even in insurance happens because people are looking to keep their money safe. That is a very critical need.
There is a fundamental difference in the way an universal bank looks at CASA, which allows it to leverage and lend vis a vis a payments bank which will have a cost of capital to grow its balance sheet and the return is capped since you have to invest in gilts. So if you really want to build a platform which is the only way for you to drive transactions and be successful, you cannot be greedy about CASA.
You have to stay focussed on transactions because you are chasing money—small value by definition—and moving very fast. The competition is between ATMs and wallets because ATMs force you to withdraw R5,000 and spend over the weekend and wallets allow you to keep your money and spend R5,000 over the week. It’s not easy because you are thinking about changing the behaviour and creating a very supersized infrastructure of acquiring. If that does not happen then the economics does not work out.
Pradip Shah: There is wind in the sails of all the digital innovators. You have 65% of your population which is very young and which naturally takes to the computer. Then there are the trends in communication technologies, Internet penetration, smartphone where you don’t need physical infrastructure of a branch to be able to do your banking business. These young millennials are perfectly happy to deal with a handheld device rather than go to a bank. These payments bank concept as enunciated by the RBI will have to change. The R1 lakh deposit and putting money only in government securities is not a workable idea. It will get transformed into a full service bank. In the US we see a reversal where in 2014 there were 6,799 banks and they came down by almost 25% to 5,260. We are going the other way and I don’t think it is going to go forever and there will be convergence, payments banks will transform into universal banks and they will have to offer full service, you can’t do without that.
SS: Are you afraid of fintech or will you partner with them?
Rajiv Lall: So I think there will be multiple formats that will emerge. There will be some banks that own the customers; there will be other banks who will just become a balance sheet. And then there will be all kinds of models, there are variants that lie in between. As far as we are concerned, we are propagating this idea of what we call radical partnering. For a start-up bank with no customers, and rapidly changing customer behaviour and technology, the idea is to create a bank, not as a rigid battleship but the bank as a flexible platform. So, you know, this tech-speak about API connectivity and so on, it sounds easier than it actually is. But creating a bank as a platform with a very large number of partners, I think, is a model that we are trying to embrace.
SS: Will you share the profits?
Rajiv Lall: Well the profits are already shared and the customers are shared. Data is shared, IP is shared.
SS: So the question is, is there enough of a profit to build a scalable model then. Because if you are going to be sharing everything…
Rajiv Lall: Of course, because the costs of running a bank have come down very dramatically. And as a new bank, if we are not able to develop or acquire a customer base, at the lowest number of branches per customer and the lowest number of employees on our rolls per customer, as a new bank we have failed.
Rishi Gupta: I think in today’s world we have to share the infrastructure. We have tied-up with Bharat Petroleum for instance.
Customer acquisition costs in today’s world, going by the offers and the amount of money that is being burnt are high. And the loyalty keeps on changing every minute, because it is a transactional relationship. We still hold the same bank account which we had 20 years back. So bank accounts don’t change, the transactional relationship keeps on changing.
SS: I believe in the bank model and am not so convinced about fintech. So, what will happen to the old public sector banks?
Pradip Shah: All banks, will adopt fintech, whether in-house or outsourced. HDFC Bank told us that they are giving a loan in 10 seconds. They own the customer and they are providing the fintech services. The public sector has ideas, they have brilliant people there. But they are handicapped by unions they are too much oriented to branch banking, they cannot implement the technology. It is internal management dysfunctionality that is causing the problem. It is not the contemporising of management, the management is as contemporary as you can get. But down the line it is not. So how do we help that? They will have to give up profit to the others, they will have to share the cost of customer acquisition and all. They will not get the same kind of margins that they used to get in the past. They may continue to get deposits because they are owned by a credible government.
SS: Does UPI keep fintech out?
Dipak Gupta: Fintech is a very broad term, UPI only tackles the transaction part of it. There are lot many issues that still need focus, like loans. If you look at banks’ revenue stream, transactions are about 5%. There is a lot of fintech activity happening on the loan side of it too, origination, credit approval etc. I think what the UPI probably creates a problem for is the wallet part of fintech, which is probably not that important as it was in the past.
Shinjini Kumar: I think what Dipak said about Fintech being a very large nomenclature is right, UPI creates ability on the transaction side but also on the service side. You give out a loan but recovery of small value loans even today is full of friction, so things like that can become easier. I think wallets aren’t under threat because wallets substitute for the piece of plastic you were carrying around to do a transaction. Now instead of using that, you will flash your mobile phone to do a transaction. So the ecosystem that needs to be changed is on the acquiring side and the purchasing side and a bank could do it using UPI and a fintech could do it using UPI, provided they were given the access. So today banks have essentially blocked out wallets being on the UPI platform. Flipkart has launched its app and can use UPI as can a Kotak Mahindra Bank; so the competition between UPI and wallets is a bit of a myth. It is actually creating a whole new transaction layer for financial services and people will use it for different purposes.
Dipak Gupta: I wasn’t talking about competition but the importance of wallets coming down.
Shinjini Kumar: If you are a merchant, then importance of the wallet remains; a person would use a wallet or a UPI to spend. So the person to person transfers remain in the banking ecosystem but the moment you bring in commerce, somebody needs to be there, it’s like you are substituting the master visa, the interchange of arrangements. So NPCI will not tie up with merchants and banks are not very likely to acquire that ecosystem as we have learnt from the experience of acquiring on the commerce side.
Rishi Gupta: These are very early days for UPI and the wallets, so maybe we should be having this debate a little later. At the end of it it’s the customer who will decide whether they want to use wallets or UPI. UPI only brings wallet companies and the banks on the same level; how well banks market it, how much they will lose and whether they come up with offers like wallets is yet to be seen .
SS: Do you think banks will be able to hold on to their customers?
Rajiv Lall: I think there will be a range of products and services that mainstream banks will end up losing. And more of them will happen in the transactions and payments arena. Most of them will be outsourced and banks will then be competing for the core business of banking, which is providing a deposit and lending either through partners, with partners or on their own. Lending and borrowing will be the key service of the bank, and transactions and payments will move to another ecosystem.
Dipak Gupta: It will be tougher for
fintechs to get the deposit piece, you only make money when you are a primary banker. But, most banks are spending a lot of money on the transaction side also so it’s not going to be that easy either.