Greetings from Yadnya!
Hope you liked reading Part 1 of this article that talked about the concept of payment banks and the current players. In today’s article, let’s touch upon the business sustainability and future outlook for payment banks in India.
Payments Banks - Is the Business Model sustainable in India?
In November 2016, Airtel came out with its payments bank, the first for India; the country was going through demonetisation at that time. It was later followed by IndiaPost and Paytm payments banks in the next couple of quarters.
Out of the 11 applicants who received PB licences from the RBI, Cholamandalam Investment and Finance, Tech Mahindra and a consortium, including IDFC Bank, Telenor Financial Services and billionaire Dilip Shanghvi (in a personal capacity), dropped out by late 2016. Even, Aditya Birla Idea Payments Bank shut shop in September 2019, just 20 months after starting operations.
The 6 PBs which are operational include Airtel
, IndiaPost, Fino, Paytm, NSDL (National Securities Depository Ltd.) and Reliance Jio. Out of these, Paytm Payments Bank registers the highest revenue and financial performance metrics considering the strong funding in the Paytm Fintech ecosystem. Reliance Jio, another telecom major, entered the space with a 70 to 30 partnership between Reliance, the parent company, and the State Bank of India (SBI).
G-Sec - Roadblock
A look at the investment structure and the revenue stream will actually give an insight as to what has gone wrong with the viability of PBs. For starters, the minimum paid-up equity capital requirement for each payments bank is INR 100 Cr. They are required to allocate and maintain 75% of their deposits in G-Secs, for a year and 25% of the deposits could be parked with commercial banks. But there is a cap on user deposit here.
Each customer can only deposit a maximum of INR 2 lakh in their PB account (which only increased this year from 1 lakh), which means the total deposit would never reach the levels of a traditional bank and the overall earning on the deposit would be much less. Also, the compulsory G-Sec deposit for a specific period does not help the case either, thanks to lowering interest rates. The G-sec yield for was 7-8% for the past three-four years, but in the past few months, it has fallen below 5.5% and will further hamper the earnings.
Although, PBs are allowed to offer remittance services as well as other day-to-day banking services, including deposit charges as applicable, mobile payment, doorstep banking, bill payments, withdrawal via ATM/debit cards, fund transfer across the interbank payment network and shopping at merchant PoS.
Additionally, they can deal in third-party financial products such as insurance, carry out transactions for other banks who deploy their business correspondents (BCs) and undertake non-risk activities such as Aadhaar enrolment or become members of clearing houses. However, PBs charge up to 1% commission on each transaction, but unless it is done on a large scale, the revenue stream will remain weak, considering no economies of scale which the traditional backs enjoy.
No Lending – No Business
What creates problems in payments banks is the underlying non lending business model i.e., they cannot lend money on their deposits, and hence, they have no scope to earn high interest income on a customer’s borrowed capital. Credit as a financial instrument does not exist for PBs, placing them at a huge disadvantage when compared with commercial banks. The idea is to protect the new banks from non-performing assets (NPAs), a major headache of the Indian banking ecosystem in the last 2 decades, but it has taken its toll on PBs top line.
The PBs stormed the market with high-interest rates on customer deposits as their operational costs were estimated to be very less, given the low-cost infrastructural requirements and greater usage of technology. In 2017, Fino, Airtel
, Paytm and IndiaPost were offering 4%, 7.25%, 4.5 and 5.5%, respectively, which proved to be quite lucrative when compared to traditional bank offerings.
As of 2020, the big four were offering 2.75%, 2.5%, 2.75%, and 2.75%, respectively as they sought to protect their margins, even below what most banks pay for low-value savings deposits. The fall in interest rates may lead to a falling customer base and a major loss of business as scale is the major operational USP of payments banks. They have to grow their user base and leverage low-value transactions for any hopes to survive.
UPI – Unaccounted Competitor
Payments banks are also facing stiff competition from unexpected fronts. The Indian payment landscape was different in 2017. India was under demonetisation; the Unified Payments Interface (UPI) was still in nascent stage, and the payment wallets (ex: Paytm Wallet) in the digital payment segment were plagued by regulatory changes. None of the PBs were prepared for a sudden popularity and the wide adoption of the UPI in the months & years to follow. The seamless operations, great security and good cashback offers even on government backed UPI platforms as well as from third-party payments apps on the platform soon made UPI the cynosure of digital transactions in the country. And was the case in the wallets, the transaction side of the payments banks has been hugely impacted by the third-party UPI apps ecosystem.
Unlike payment banks, the UPI app (third party) is a single-tap solution that a user can initiate directly without the hassle for KYC. In contrast, the PBs have targeted the unbanked millions, especially in the non-urban areas, and aimed to monetise their vast user databases for credit risk profiling, insurance sale and other purposes.
Surprisingly, most of the fundamental constraints, especially the non-lending one, were known to the PBs stakeholders from the very beginning. Experts opine that most of the licensees wanted to come in for a different purpose. They were planning to expand to mainstream (banking) roles and building the expertise and a captive user base required for the same. For telcos like Airtel
and Jio, it was all about ensuring better engagement with their subscriber base and providing complementary services.
An internal report by the RBI working group has recommended that a PB can be allowed to apply for a small finance bank (SFB) licence after three years of operations instead of five years as instructed earlier. Unlike payment banks, SFBs cater to small borrowers and can lend up to INR 25 lakh (subject to RBI norms). The report also recommended that NBFCs with an asset size of INR 50,000 Cr and above, including those which are owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations. It is one of the ways of resurrecting the fast-dwindling payments banks.
The limited operational space available to PBs and the large initial costs involved in setting up the infrastructure would take them longer to break even. However, PBs have managed to increase and sustain their user base.
As of FY2019-20, Fino, Airtel
and Paytm PBs reported revenues of Rs. 689 Cr, 474 Cr and 2,100 Cr, respectively. As consolidated revenue and profit data for payments banks are not available, the select financial ratios provided by the RBI demonstrate the PBs’ return on investments in the first two years of operations. Interestingly, Paytm PB reported a profit INR 29.8 Cr, up 55% year on year while Fino PB said it had turned operationally profitable in FY20.
Payments Banks – New Avenues
As Indian PBs fail to generate enough revenue, many are trying to leverage their core strengths to reach the broader market. For instance, each operator in the ecosystem is targeting and servicing different financial products. Some have enabled PoS transactions or got into FasTAG partnerships or relied on utility payments in rural areas. But these are some of the scattered solutions and not a properly thoughtout, long-term strategies.
IndiaPost PB (IPPB), for instance, based on its massive presence in 650 districts and among 3.5 crore customers, has set up a full suite of banking services and strong linkages with all interoperable payment and settlement systems. It is now focussing on pan-India G2C (government-to-citizen) payments, especially rural DBT (direct benefit transfer) disbursements under the Pradhan Mantri Garib Kalyan Yojana.
In contrast, Fino PB has utilized its massive BC (Business Correspondents) network to reach out to people. Both Fino PB and IPPB have enabled an Aadhaar-enabled payment system (AePS) for maximum convenience. Airtel PB has also set up a cardless cash withdrawal system called Instant Money Transfer (IMT), which can be used via its mobile app. Apart from this recent e-PoS initiative, its AePS can be used to transact at micro-ATMs manned by BCs.
Paytm, on the other hand, has several payment solutions in its portfolio. For the PB business, the company has brought in a number of big partnerships, including tie-ups with major auto manufacturers for FASTags under the National Electronic Toll Collection program.
From Deposits to Transaction led Model
According to consultants, payments bank seems to be focussing on different areas and alternative business & operational models. The huge volume and value of transactions when compared to customer deposits clearly indicate that PB account holders have been transacting more than depositing in these accounts, which essentially beats the fundamental principle of consumer banking – making it easier for people to save and invest.
However, transaction-focused payments bank accounts can still exist alongside deposit-focussed accounts of full-sized banks.
According to senior banking professionals, PBs either need to align themselves with mainstream banks or introduce customer-centric solutions (again to a non-smartphone user base) if they want to build a sustainable future.
However, the RBI’s proposal for constituting a National Umbrella Entity (NUE), which will work in parallel with the National Payments Corporation of India (NPCI) to help the digital payments ecosystem, could be a positive for PBs. As it will be a for-profit, it is a great opportunity for PBs to seek out profitable use cases. The headroom for growth is large enough to enable payments banks to grow with others in the market if they clearly define their place in it.
Key features of Payments Banks in India, JagranJosh, April 2020
Best Payment Banks in India 2021, GoodReturns, March 2021
Payments Bank, Bankedge, 19 Jan 2021
Payments Banks and The Broken Business Model, inc42, 24 Nov 2020
A Complete Outlook of Payment Bank License, Corpbiz, 9 April, 2021
Understanding the emerging frontiers in payments systems, Deloitte
Fintech in India, KPMG, August 2019