In 2006, when the Reserve Bank of India (RBI) issued guidelines allowing banks to employ business correspondents (BCs), it not only gave them a strong tool to work with, it also empowered the largely marginalised customer. BCs could carry out a range of services and transactions on behalf of banks for a wider consumer base, getting a commission for this service.
FINO PayTech was incubated as such a BC by ICICI Bank in July 2006—with a seed capital of Rs 15 crore—out of Navi Mumbai. The acronym FINO stands for Financial Inclusion Network & Operations, and financial inclusion is what took this freshly-minted BC to the bustling Chandni Chowk market district of Old Delhi soon after.
Fresh from its first project of opening accounts for slum dwellers in Mumbai, on behalf of Union Bank of India, a FINO team had gone to Delhi to explore business opportunities. A recce of the Chandni Chowk area revealed how rickshaw- and cart pullers as well as coolies—mostly migrants with no fixed homes who slept in night shelters—were unbanked; savings were a challenge for them and they had limited ways to remit money to their families. “They kept their daily earnings [Rs 300 then] with local baniyas [shopkeepers] for safekeeping, without any records,” says Rishi Gupta, CEO of FINO PayTech. In about 3-4 months, FINO introduced smart cards (biometric-based identity cards, to help transfer money) at the night shelters for nearly 1,000 migrant workers, on behalf of Union Bank of India.
Payments banks are an Indian innovation, given shape by the RBI to promote digital transactions and financial inclusion through small savings accounts and also to provide payments and remittance services to low-income households and migrant labourers (see box Contours of a Payments Bank). Once a payments bank, FINO will compete for business with seven others, including large corporates like Aditya Birla Nuvo (partnered by group firm Idea Cellular), Reliance Industries (with State Bank of India), Vodafone M-Pesa, Airtel Payments Bank (with Kotak Mahindra Bank), National Securities Depository Ltd, Department of Posts and Vijay Shekhar Sharma (founder of mobile wallet firm Paytm), to provide banking solutions.
Three of the original eleven firms granted in-principle payments bank licences—Cholamandalam Distribution Services Limited (CDSL), Sun Pharma promoter Dilip Shanghvi (partnered by IDFC Bank and Telenor Financial Services) and Tech Mahindra—have withdrawn from the race this year. At the time of quitting from the payments bank race, CP Gurnani, managing director and CEO of Tech Mahindra, had cited profitability concerns.
“Unfortunately, due to competitive pressures, margins started getting squeezed so much that we realised the payback period has become very long. The question that Mahindra Finance and us sat together and asked is: Is this our priority?” he told the media at the time. “Is this something where the capital allocation is appropriate? Or should we let this opportunity pass and hope that there will be other areas where we can collaborate and work together, like block-chain technology or creating other digital solutions instead of becoming a payments bank?”
In the case of the Dilip Shanghvi-IDFC Bank-Telenor trio, the re-think came from the individual players: Shanghvi was a pure investor in the venture with interest in entering the financial services space; Telenor has been re-evaluating its current India footprint even as a telecom player; IDFC Bank was already a bank, competing with other universal banks. “[The payments bank] is a long-tail model and with on-tap banking a reality, the business landscape for banking has become very competitive, which could have caused IDFC Bank to have a rethink,” a senior official with a rival bank said on condition of anonymity.
Cholamandalam Investment and Finance, the financial arm of the Chennai-based Murugappa Group and CDSL’s parent, cited competition and a long gestation period as concerns in launching a payments bank. In a note to the stock exchanges in March, the company said: “We will not proceed with the investment or capital infusion of Rs 75 crore in CDSL for this purpose.”
As Santosh Singh, head, research at Shanghai-headquartered Haitong Securities, puts it: “While the concept [of a payments bank] seems a good one to promote financial inclusion, the ability of coming up with a viable business model has been questioned.”
In April this year, SBI chairman Arundhati Bhattacharya, whose bank plans to roll out a payments bank with Reliance Industries (which owns Network 18, publishers of Forbes India), too pointed out that “neither payments banks nor small finance banks seem to have devised a model which can be called viable.” She said it would be a challenge for a payments bank to take away customers or income from a universal bank.
Credit Suisse India analysts Ashish Gupta and Sunil Tirumalai say that under the current norms for a payments bank, there will be “little scope” to make money as pure payments enablers. “Instead, we could see payments banks lead partnerships across banks and non-banks where they act as the main customer interface and cross-sell products of partners.”
Profitability, concurs Singh, is the biggest concern, since most of the revenue streams that banks have are unavailable to payments banks. Even if they were to offer higher rates on deposits to woo customers, it would impact their net interest margins, another analyst says. Also, given that the basic reason for the RBI to grant a payments bank licence was to create efficiency in the payments system, and make it less costly with the use of technology, this will inevitably be a high volume, low-margin business.
But Paytm’s Sharma is not too concerned. “Margins in the payments bank business are way higher than those in the payments business. If you see it from a payments side, it is a high-margin business. If you see it from the banking side, it is a low-margin business.”
Gupta, too, says revenue per transaction could be low but he is confident that FINO can find a business model for a successful payments bank.
It will have to contend with Paytm, the Department of Posts as well as telecom companies like Vodafone, Airtel and Idea Cellular; all of them, like FINO, have a large, existing, sticky customer base.
But among the eight prospective payments banks, FINO is the only one with an existing and impressive track record in financial inclusion, Gupta says, a fact the company considers its strongest point. Of FINO’s nearly 100 million customers across the country, 45 million are banking customers and the balance is enrolled in large projects such as the Rashtriya Swasthya Bima Yojna (RSBY) and the Unique Identification Authority of India’s Aadhaar.
But Gupta knows, despite the success so far, the road towards becoming a successful payments bank will get trickier.
Vodafone India’s mobile commerce arm M-Pesa, offering money transfer, finance and microfinance, is one of the largest BCs in India with 1.2 lakh authorised agents and 5.4 million registered customers. “Vodafone M-Pesa’s biggest strength is in its strong distribution network and mobile customer base, which it can leverage for providing payments bank services to the last mile,” says Suresh Sethi, business head, Vodafone M-Pesa. “Over 50 percent of our customer base lies in rural India. We are strong in both distribution and mobile penetration and have the ability to give banking services on mobile.” (Sethi declined to share M-Pesa’s business strategy and a rollout plan for its payments bank.)
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(This story appears in the 19 August, 2016 issue of Forbes India. To visit our Archives, click here.)