<div>You will soon get to see a new bank in your neighbourhood. It will accept deposits, remit money, hawk third-party products and services, and issue debit cards. But you will not get a dime as credit. The new beast is a payments bank. Now why on earth should you bank with one? We are told that’s the whole idea behind it — it’s not meant for folks who are already part of the banking universe or think of it the way they are accustomed to.<br /><br />Touted as the best on offer after sliced bread, payment banks are meant to bolster financial inclusion so that the multitudes who fall outside the pale of banking (not seen as ‘bankable’) — only around 60 per cent of the country’s 1.2 billion people are covered by banks — can be brought within its ambit. Nearly 43 per cent of rural households relied on informal credit when the last All-India Debt and Investment Survey was undertaken in 2002. While the population per bank branch has come down to 12,300 from 64,000 in 1969 (when such data began to be tracked), Basic Statistical Returns showed that rural India had only seven branches per 1,00,000 people in 2011 (the latest figures in the public domain); most developed economies have over 40 branches.<br /><br />Payments is big business. Crisil Research puts the domestic remittance market at Rs 800-900 billion and expects it to grow at 11-13 per cent (CAGR) over the next few years. It needs to be mentioned here that the ratings agency has restricted the remittances’ turf to low-income migrants who are seen as early adopters of payments bank services.<br /><br /><a href="/image/image_gallery?uuid=e2273bd2-81b9-487d-b487-dbfb3c7126c5&groupId=222861&t=1424348050637" onclick="window.open(this.href,'','resizable=no,location=no,menubar=no,scrollbars=no,status=no,toolbar=no,fullscreen=no,dependent=no,status'); return false"><img alt="" height="263" src="/image/image_gallery?uuid=e90ba314-0f04-44d6-988b-8b3f4b7c9db6&groupId=222861&t=1424348028556" width="640" /></a><br /><br />Non-banking financial companies, telcos, retail giants — even existing banks — can aspire to a payments bank licence from Mint Road. Telcos (current share 3-4 per cent of remittances) will snatch business away from an India Post or informal sources on account of superior reach (especially in rural areas) and lower cost of transaction; by fiscal 2019, their share is seen growing to nearly 15 per cent.<br /><br />Little wonder then that nearly 40 applicants have queued up at Mint Road for a payments bank licence; they include Reliance Industries (with State Bank of India), Aditya Birla Group (Idea), Bharti Airtel (with Kotak Mahindra Bank or KMB) and Vodapone (with Yes Bank) and business correspondents (BC) like Oxigen. A retailer, Future Group, is also in the race. If you look at the 70-odd applicants who have sought a small bank licence (full service, but with small ticket sizes), it’s clear that bottom-of-the-pyramid banking is seen as an El Dorado.<br /><br />Says Manish Khera, co-founder of FINO, a small-bank licence applicant and a BC: “There are scores out there who are not seen as bankable even by today’s small banks. The approach of most of them, too, has changed; it is like that of the bigger banks. They are not keen on the bottom of the pyramid.” Just how big is the scale of his ambitions? “Five years from now, I hope to have an asset size of Rs 2,500 crore,” he says. That’s the kind of bulk a medium-size bank puts on in two months!<br /><br />According to Monish Shah, senior director at Deloitte (India), “The approach of payment banks is to create supplementary access points from a customer’s perspective and this new supply of financial services will, hopefully, meet the unmet demand of providing banking at the doorstep.”<br /><br />What’s unsaid in all this is that any kind of banking licence from Mint Road can be a force multiplier for your branding and reputation. The irony is if payment banks do increase the ‘touch points’ to serve the needy, their very success has the potential to eat into many a weak commercial bank’s traditional deposit and payments business. And if that were not to happen, the question that arises is: what becomes of payment banks at the end of the day? Says Ravi Rajagopalan, CEO, Empays Payment Systems: “To the extent that all banks offer current and saving accounts (CASA), these (payment banks) are me-too in nature.”<br /><br /><img alt="" height="355" src="/image/image_gallery?uuid=87c7a39f-447d-47e9-a3ce-b9485f428121&groupId=222861&t=1424348084090" width="640" /><br /><br />Yet just about everybody has jumped onto the bandwagon. Last September, when asked how many such banks will be issued licences, Reserve Bank of India governor Raghuram Rajan said: “I don’t have a number… my guess is, and this is just a guess, that it will be certainly more than two and I don’t want to put an upper limit, I don’t want to put a lower limit, other than saying that the lower limit will not be two... We need to ensure that there are a variety of participants that are licensed here so that we can learn from the experience. That would imply a reasonable number.”<br /><br />Now your ubiquitous bank and its watered-down avatar cannot both laugh their way to the bank, although it needs to be said here that we are now in unfamiliar territory — nobody quite knows how the underfoot conditions in the park will play out.<br /> <br /><strong>Sound On Paper</strong><br />A payment bank has been conceived as a ‘scaled up’ version of a pre-paid instrument (PPI) player — an entity that accepts cash (‘deposits’) and tucks it into a ‘digital’ or ‘plastic’ wallet. The sums (aggregate) ‘raised’ by PPIs are parked in escrow accounts with banks (so that they are not diverted to ‘treasury play’) and earn no interest. Nor can PPIs pay interest to ‘depositors’ — now that’s a huge fault line as the sums are substantial relative to the savings of low-income households which are sought to be brought under the umbrella of financial inclusion. So PPIs can morph into payment banks. The well-heeled may also troop in.<br /><br />Nielsen (India) in a study (it reached out to high, mid- as well as low-income consumers, between 22 and 60 years of age, who influence decision-making in households) says a majority have few, if any, existing investments and show little inclination to invest over the next 12 months. This segment’s financial requirements are mostly confined to basic banking transactions like deposits, withdrawals and fund transfers. A resounding 72 per cent of respondents — low, mid- and high-income — said they would consider opening an account with a payment bank, with equal preference shown for retail and telecom players. While the response of low-income consumers comes as no surprise given that they are largely underserved by banks, those of mid- and high-income respondents is a bit of a surprise and come as a shot in the arm for payment banks.<br /><br /><img alt="" height="339" src="/image/image_gallery?uuid=bf4addbf-d1f7-4ed5-b096-915bc077600a&groupId=222861&t=1424348108354" width="489" /><br /><br />“In what may be of concern to banks, mid- and high-income consumers have cited the convenience of fewer trips to banks as the main attraction of payment banks. Younger consumers are more willing to open payment bank accounts because of convenience,” says Anand Parameswaran, director, Nielsen (India). Adds Rajagopalan: “A very large proportion of accounts are of less than Rs 1 lakh in value – this is the bulk of Indian CASA. These can migrate to new payment banks. Competition is expected to improve service, better the return and cut the cost of operations for the banking system as a whole. This is the intent of the legislation.”<br /><br />A closer reading of what Parmeswaran and Rajagopalan’s views makes a few things clear: one, there is a universe which is laid-back, but has a cash surplus; and two, many with less than a lakh in the bank will move to a payment bank. On paper, payment banks will fire.<br /><br /><strong>But Look At The Math</strong><br />A payments bank can accept deposits up to Rs 1 lakh from a customer (the limit may be revised upwards, but that’s in the future). To deposit a higher amount, you either have to go to another bank of its ilk or a ‘regular’ bank. Now, it’s a no-brainer that a payment bank must offer rates that are competitive. Recall that CASA (the more you have of them, the lower the cost of funds), is not exactly ‘cheap’. There is a cost to acquiring them other than the interest rate offered — branches and manpower, among others. That’s why it is the smaller banks such as Kotak Mahindra Bank (KMB), Yes Bank and IndusInd Bank that offer the best rates. But this game can be played only up to a point: when the share of CASA vis-a-vis total deposits is lower than that of peers. And while you do so, you have to be smart. Take KMB: its deposits grew 15.8 per cent to Rs 59,072.3 crore in end-March 2013; savings’ bank (SB) deposits rose 38.8 per cent to Rs 10,087.1 crore. But it may surprise you to know that while the bank offers 6 per cent on its SB accounts, its average cost for this mop-up stands at 5.5 per cent!<br /><br />If a payments bank cannot lend, has to maintain a cash reserve ratio (CRR), a statutory liquidity ratio (SLR) and invest its deposits only in government securities (which offer returns of about 6-7 per cent), how is it to make enough to cough up for its operations and pay interest on deposits? Let’s also not lose sight of the fact that a payments bank has to compete with credit co-operatives (which cater to small and marginal farmers) which expand into urban cooperative banks; regional rural banks which incorporate features of co-ops and banks. And all of them offer credit too. If you are keen on numbers, here you go: we have 26 state-run; 20 private (seven new, 14 old); 43 foreign banks; 64 regional rural banks; 1,606 urban cooperative banks and 93,551 rural co-ops — all of them chasing customers.<br /><br />That’s why Crisil points out that even though telcos are likely to capture around 15 per cent of the domestic remittances market, luring deposits is another ball game altogether because they will have to invest in brand building and gain the trust of depositors (just paying competitive interest rates will not do). “As a result, we forecast payment banks having a minuscule share of less than 0.5 per cent of CASA deposits of the Indian banking system five years after launch,” says Ajay Srinivasan, director, Crisil Research. <br /><br /><img alt="" height="350" src="/image/image_gallery?uuid=1375f44d-e2c2-4e69-bddd-0577669a7913&groupId=222861&t=1424348126131" width="640" /><br /><br />In defence of payment banks, Swarup Roy Choudhury, managing director of First Data, says: “It is not a brick-and-mortar model. The cost structure is not like that of a commercial bank.” What if a commercial bank were to set up one of its own? “I don’t know how they (banks) will distinguish it from what they already offer their customers. You can’t (as a bank) just strip the entire payments business and push it into a new payments bank.” He stresses on cross-selling. “What matters is that you have a relationship with your customer on the credit side; it does not matter whether you `manufacture’ a financial product.” You can’t argue with that.<br /> <br />IndusInd Bank ‘sells’ home loans of HDFC Ltd; HDFC Bank also hawks those of its parent; and ICICI Bank vends AmEx cards; banks sell insurance products of their own and those of rivals. The point being made here is that as long as you can buy what you want to from a counter, it does not matter whose counter it is. At least that’s how the argument goes. But making cross-selling work is a different proposition; few have succeeded in pulling it off. The cross-sell ratio (relationships per customer) for the best of the lot will at best be a shade above three (there are no industry-level studies as yet). The global leader, Wells Fargo, claims in excess of six. You can’t expect payment banks to beat legacy banks straightaway on cross-sell.<br /> <br />Let’s look at the fee income potential for payments banks. The offerings (third-party) will perforce have to be tailor-made for clients. It’s a hurdle that even the best of commercial banks have not overcome in their efforts to get into lower-tier cities. So it’s a tough ask to expect them to customise offerings for payment bank customers. Then again, the credit appraisal in such cases is done by the bank whose product is being cross-sold.<br /> <br />And,what stops commercial banks from playing the same game? They too can cross-sell a suite of services to their depositors (whatever the size of deposits) and offer them better pricing if they consolidate their relationship (with a bank) — discounts on car, home and personal loans. The coming of age of credit bureaus, data mining and analytics will hasten this process. Axis Bank has made sure existing depositors drive 60 per cent of its incremental retail assets. Of course, you have to make sure as a bank that your liability and assets businesses ‘talk to each other’ to increase cross-sell and not be silo-ed. Few state-run banks do so (which account for 72 per cent of market share), but there’s nothing to suggest that at least the better among the lot will not do so down the line for the financially excluded.<br /> <br /><strong><img alt="" height="619" src="/image/image_gallery?uuid=859e6d15-8223-4b02-9579-24a3ccb0c781&groupId=222861&t=1424348156611" width="643" /><br /><br />Out Of Context?</strong><br />The case for a PPI to convert to a bank was valid as in case the bank in which the escrow was held went belly up, it could take the PPI with it — the amounts held by the PPI have no deposit insurance unlike the direct depositors of the bank. The Nachiket Mor Committee on Comprehensive Financial Services for Small Businesses and Low Income Households observed: “All `nested’ have this feature and there may be greater stability obtained from independent designs where the PPI deals directly with RBI rather than through a sponsor bank.” PPIs like Airtel Money and Oxigen are ‘nested’.<br /> <br />The idea of a payments bank is not new. Brazil’s (Law 12865) created a new legal entity known as a ‘payments institution’, to be regulated by the Brazilian Central Bank; in 2007, the South African Reserve Bank said non-bank payment service providers (PSP) can play an important role in the payments system. And, globally, in the inclusion context, Kenya‘s M-Pesa is the most successful ‘nested’ payments bank. Over two-thirds of Kenyans use this service and about 25 per cent of the country’s GDP flows through it. But the Indian version is an ‘independent payments bank’ which would be a direct participant in the payments system and, instead of escrow balances with a sponsor bank, hold reserves — CRR and SLR — with Mint Road.<br /><br />These examples cannot be stretched to make a case for payment banks. “We do not expect payment banks to repeat that success in India. Rather, the value of transactions through payment banks is likely to be less than 0.2 per cent of India’s GDP by fiscal 2019,” says Srinivasan. His view is that the M-Pesa service in Kenya benefited from lower banking penetration (less than 15 per cent at the time of launch in 2007), higher working migrant population and regulatory patronage (telcos in the country do not require tie-ups with banks). Safaricom was able to navigate KYC concerns as Kenya has a national identification system. “Compare that with India where users need basic identification to open ‘accounts’ and must go through some due diligence, which reduces adoption. Also, competition from other modes of money transfer (postal system, etc.) is significant unlike in Kenya where remitting money through people (which can be unsafe) was the predominant mode of money transfer prior to M-Pesa,” says Srinivasan.<br /><br />Yet some telcos may pull it off. That’s because, compared to them, an India Post, a large BC, PPIs and retail chains will be at a disadvantage as their customer base is limited. They will have to make significant investments on expanding their distribution network, technology and brand-building. The business will make losses for at least a few years (till volumes pick up), as spreads earned on deposits and earnings from remittances may not be sufficient to cover distribution, marketing and technology costs.<br /><br />The key driver for telcos is that they can increase the ‘stickiness’ of their customers. That means a lower churn rate which, over a period of time, could lead to an increase in average revenue per user (ARPU) which is in the region of Rs 119 per month. Another plus is the commission telcos can earn on transactions — big telcos have well over 100 million subscribers; even if each one of them conducts one transaction a month, it translates into 1.2 billion transactions annually. The value of transactions through m-wallet have more than trebled in the past two years to over Rs 27 billion in the last fiscal, indicating the huge business potential. The additional channel of income for them as payments banks is deposits (difference in yield earned by investing deposits and the interest rate offered on deposits). Crisil feels it will hasten the EBITDA break-even period by 2-3 years compared to plain vanilla m-wallet services. They can also save on commissions currently paid to a bank whenever a customer withdraws cash (technically called cash-out), but then telcos will have to take care of cash management on their own (which can be a challenge).<br /><br />Former RBI deputy governor K.C. Chakrabarty is on record stating that “my only question about payment banks is what will be their viability? How will they earn money?” He said financial inclusion was not limited to merely opening bank accounts. “Financial inclusion is also providing emergency credit. The maximum request from the poor is for emergency credit.”<br /><br />Given the number of applicants for both payment banks and small finance banks, it is possible that Mint Road may go in for an ‘on-tap’ approach while issuing licences — dole them out as and when they are seen as fit, proper and needed (and not unlike the method adopted for new private bank licences). You might well see the first of this lot a year down the line. We are well on our way to ‘tap’ and ‘pay’.<br /> <br /><em>With inputs from Anup Jayaram</em><br /><br />(This story was published in BW | Businessworld Issue Dated 09-03-2015)</div>
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