Last year, the Reserve Bank of India (RBI) gave in-principle approval to 11 applicants to start payment banks. These entities—including Airtel M Commerce Services and Vodafone M-Pesa—cannot lend but can accept deposits, and will reach customers through mobile phones rather than traditional bank branches. According to Saurabh Tripathi, partner and managing director at The Boston Consulting Group (with expertise in banking and financial services), this concept is going to change the way we bank. Edited excerpts from his interview to Forbes India:
Q. How do you look at the concept of payment banks?
The payment bank is an Indian innovation. It is a response to the problem of [financial] inclusion, which we have not been able to solve for so many years. There are telecom companies with a much larger customer base than traditional banks. So allowing telcos to participate in banking, in a manner where systemic risk is taken care of, is a very innovative solution. Instead of making telcos and banks work together, they [the RBI] have allowed telcos to work out solutions on their own.
There are also non-telecom players, like Cholamandalam Investment and Finance and Sun Pharma’s Dilip Shanghvi, who have received RBI’s in-principle nod to run payment banks. I see a lot of innovative options in the form of unbundling of banking. We have seen banks basically doing everything—they give loans and take deposits, they also do payment service and advise. Now, the best of services can happen for clients as banks unbundle.
Payments can be at the centre of the relationship and payment banks can bring a non-banking financial company (NBFC) or a mutual fund (MF) as a partner, and create an offering that replicates a bank. NBFCs are good at lending, payment banks have expertise in doing payments and an MF manages money well. We can create a seamless combination that is good for the customer and for the bank as well.
Q. Can payment banks be competitors for traditional banks?
There is no question about it. The logic was that these banks will go after financial inclusion, but I think customers were already banking digitally and these are the people who will now try to use the services of the payment banks. When we did a survey of customers, about their willingness to use payment banks, half of the digital banking customers were keen to try them out. They are keen to see if these new banks will offer better services than what they are presently experiencing.
But I don’t think the customers [of traditional banks] will shift to payment banks as they will get higher interest rates on deposits with traditional banks. But many would like to try them out if payments are simplified. If payment banks come out with offerings that are intuitive and seamless and make my life easy, then I’ll go for it.
Q. What should payment banks do about deposit rates in this context?
They might want to raise them a bit but payment banks do not have much scope to offer high rates. Sensible payment banks will compete to offer better services and not higher interest rates [on deposits].
Q. What is the business model for payment banks?
First of all, since payment banks are good at handling payments, customers will use them for that. Customers will leave the float with them. Some money can be made on the float. Payment banks will have to partner with NBFCs or MFs so that any funds above Rs 1 lakh can be transferred to them. They can do a lot of things based on partnerships to make income on commissions from the customer.
There is no lending operation, so there is no cost of lending and there are no bad debts for these banks as they have to maintain a very lean operating model. Telcom companies are going to leverage their infrastructure. Your prepaid SIM card is like a bank account. These companies will try to capitalise on that.
Q. Will payment banks eventually enter mainstream banking?
When we say banking, people feel it is lending. I think it is a foothold for a lot of telecom players to create business, which will also determine how large they can become.
Q. You seem to be bullish on payment banks.
I’m bullish not because there will be huge profits but because of the innovation that we can expect to see. If payment banks take it seriously, they can create innovative products that are different from traditional banking products. Across the world, we are noticing a lot of innovation in the business of banking where services are very intuitive and customers can make payments and manage their wealth. All this is happening through mobile phones. I’m hoping that payment banks will spur that innovation in the country. They will come up with new products. Let us look at robot advisory. Through the use of analytics you will be told which fund will save or bring you money. Payment banks will do it [innovate], so normal banks will also have to do it. But as a whole, the general level of customer experience will be high.
Q. How do payment banks attract non-digital customers?
It depends on what kind of a business model these banks adopt. We [BCG] found out that 51 percent of the current digital banking customers and 33 percent of non-digital banking customers were keen to try out payment banks.
If a quarter of these non-digital banking customers move to payment banks, then they can get around 15 percent of the funds [deposits]. And if we go ahead with this assumption that 25 percent of digital banking customers will move to payment banks—which translates to about 5 percent of total banking customers—it will account for 25 percent of total bank balances [deposits]. This means that 5 to 10 percent of the funds can move from the banking industry to payment banking.
But we also have to look at the supply side. What kind of ambitions these banks have becomes an important question. I suspect that non-telco payment banks will come with low ambition. PayTM is aiming to have 50 crore customers by 2020; that is more than any bank in the country.