Payments Banks should reduce the cost of serving customers through an efficient tech platform, bundling of other services & economies of scale
The Reserve Bank of India (RBI), on July 17, 2014, issued the draft guidelines for the licensing of ‘Payments Banks’ with the objective of furthering financial inclusion. Once the final guidelines are issued, Payments Banks would be able to provide deposits and payments/remittance services to migrant labourers, low-income households, small businesses and other unorganised sector entities.
However, the concept of Payments Banks seems to have been overshadowed by the Pradhan Mantri Jan Dhan Yojana (PMJDY) launched as recently as August 2014. The PMJDY has driven a massive 6.18 crore account additions by the banking industry in the two months ended October 2014. The pace of new account opening is astonishingly higher compared with last year when 7.1 crore basic banking accounts were opened, directly as well as through banking correspondents (BC). Given the strong focus of the banks, the numbers are expected to increase significantly going forward, leaving one to wonder if we need transactions banks at all?
However, past data of banks suggest that transactions per account for basic savings accounts remain low (2.8 per account per year in 2013-14 for the accounts opened under the BC model). Clearly, as banking habits grow and as banking gets more convenient, transactions have the potential to increase phenomenally. However, to exploit the potential one may need banks/banking agents to be easily accessible to the target segment. This may be difficult for existing banks given their conventional approach to business and/or concerns over risk-adjusted returns. For the business to achieve economies of scale and to be profitable, one may need a player with a strong presence backed by a robust technology platform. Some of the telecom service providers and India Post may fit very well in that category.
However, as Payments Banks can offer only demand deposits (savings and current) and have restrictions on deployment of funds, revenue streams would be restricted to transaction charges and the interest on short-term government securities. Therefore, yields on assets could remain low. However, while the yields would remain low, the cost of funds is also likely to remain low owing to the nature of liabilities (current accounts are zero interest bearing, while minimum interest to be paid on saving deposits is 4%), leading to reasonable interest spreads.
Nevertheless, the cost to serve customers is likely to remain high, given the large number of transactions and possible small ticket sizes. Therefore, it would be critical for Payments Banks to reduce the cost of serving customer through an efficient technology platform, bundling of other services, and economies of scale.
Apart from cost to serve, short-term G-Sec yield and leveraging would hold the key to the profitability of any Payments Bank. While telecom service providers do have the advantage of established network and technology platform, the absolute profit potential from business may not seem very lucrative. However, possible reduction in customer attrition rates and some other positives arising out of increased customer interaction may seem attractive to such companies. Still, the requirement on dilution in shareholding to 26% within 12 years of operation of the bank may reduce the interest of investors to an extent.
Overall, while Payments Banks may serve the purpose of furthering financial inclusion, the jury is still out on whether they would make a sound business proposition.
The author is group head, Financial Sector Ratings, ICRA