More profitable to open post office accounts, those that want loans will move to banks, and there’s the UPI impact.
Does Paytm’s projection of a 200 million strong CASA customer base, to be built in a year, sound preposterous? Or can Vijay Shekhar Sharma use cutting edge technology to pull off something bankers haven’t been able to do in years? The fintech firm’s hoping to convince consumers—most of whom don’t have access to organised finance—to bank with it and earn attractive returns. Since the money will be parked in money market schemes, an ordinary person would have access to a wealth management product, is how the Paytm puts it.
For perspective, 200 million accounts would be about a third of the current population of roughly 700 million accounts, an estimated 200 million of which are ‘no frill’ accounts courtesy the PMJanDhanYojana. Going by these numbers, Paytm’s target is an ambitious one given banks have struggled for years to acquire even 20 million customers. And also because there at least half a dozen serious contenders for payments banks.
One reason banks don’t have as many accounts as they probably could is because they’re all chasing ‘profitable’ customers. Servicing small savers can be expensive. While PayTm may help unbanked customers to save, it clearly doesn’t want to be in the business of nurturing savings accounts. It will channel the money into insurance and mutual funds, much like a third party distributor— in the process earning a small commission.
From a customer’s point of view, a savings account with a co-operative bank will probably fetch more than what Paytm can offer. But they will probably be better off saving with a Post Office Savings scheme. Money market schemes currently offer at best 7% pre-tax, lower than returns on post office savings, though the former may be more liquid. Post Office schemes, in fact, are targetted at small savers. There’s also the question of the extent to which insurers and mutual funds want to service small accounts; while the SIP is a much- promoted product, it’s unlikely that insurers and mutual funds—at least those in the top bracket — will want to handle very small monthly ticket sizes because that would drive up their costs disproportionately.
In terms of reach, the Post Office Payments Bank —-with 1,55,015 offices across the country of which1,39,144 are in rural areas—-can be a formidable competitor. However, the organisation is hopelessly inefficient because it’s not even adequately computerised. Technology is where Paytm has an edge over most competitors; customers can get addicted to the ease with which they can transact over a mobile phone on the Paytm platform. It’s possible some banks will be able to match the technology, perhaps those that have partnered with telcos to form payments banks. But it won’t be easy. Also, the point frequently made that banks do not focus on payments or transactions is well-taken; it’s true they don’t and that’s because payments contribute a small share to their profits.
At the end of the day, however, transacting and saving are two different propositions. Both banks and post offices are perceived to be safe and trustworthy—some because they are government-owned but also thanks to their physical presence. That’s a big advantage. It’s not that Paytm can’t set up branches—it probably will—but there’s something to be said for a brand and an established network.
Again, as long as customers are merely savers, they may be willing to park whatever small surpluses they have with Paytm Bank to be invested in insurance or mutual funds. However, once these customers turn borrowers, lenders and particularly banks, are likely to wean away the savings accounts. Chances of the mass affluent customer— essentially a loan customer who also needs a savings account—banking with Paytm are slim. As for the less affluent, at some point they might want credit so payments banks will need to onnect them with lenders such as microfinance institutions or small finance banks. If lenders such as State Bank of India (SBI) are in the space it’s because they’re looking to tap the large customer franchises of telcos. On the other hand, players like Bharti Airtel who have 220 million customers, topping up every third day, are roping in banks to help get their customers a good return for their surpluses. That way customers would be more sticky.
In Paytm’s case the wallet business is what will pull in customers; it claims it has 75 million active clients. So how large a corpus would it be able to mobilise? Assuming 200 million customers sign on, how much is each one going to save? The average savings account balance is around Rs 5,000, but for the population that PayTm plans to cater for—essentially the less affluent —an average monthly savings of even Rs 1,000 is possible. For the moment the average balance to work with would be a more realistic Rs 500.
Assuming for the moment that 200 million people leave Rs 1,000 lying in a Paytm savings account, that’s Rs 20,000 crore of stock. This is less than 1.5% of the roughly Rs 15 lakh crore of the total savings accounts balances with banks today (total deposits are close to Rs 95 lakh crore) and, therefore, not an unreasonable share of the market to aspire to. At 100 million accounts, the stock would drop to 10,000 crore, an even smaller share of the market. Again, for some perspective, Kotak Mahindra Bank’s CASA balance, at the end of March, 2015, about 15 years after it started out,was Rs 27,000 crore.
But from Paytm’s point of view that’s an attractive amount because the flows can be five times that number and at a commission of 25-50 bps per transaction—which is on the higher side– not to be sneezed at.
The point is there are others eyeing the pie and while it is a big pie it’s not large enough for everyone. In a fast-changing technological environment—the Unified Payments Interface will soon be rolled out— it’s difficult to to even visualise how consumers will behave and how fintechs will respond. Which is why Paytm’s projections are ambitious.