Payments Banks: Financial Roadmap

Payment Banks are set to usher in a new paradigm for retail banking. There is understandable euphoria amongst business houses and customers alike, coupled with expectations that Payments Banks will contribute to JAM (Jan Dhan, Aadhar and Mobile Connectivity) to fulfill the objective of financial inclusion and reduce the dependency of cash in Indian economy.

However, there are also whispers in the corridors with regard to the viability and economics of Payments banks. These got amplified as FY 16-17 started due to the discussions in the print media by respected members from the established banking fraternity. In an earlier article, focus was primarily on the macro aspects of Payment Banking; here we will take a deeper look into their financial and economic model given the furors it has created.

Market size of the payments industry

The market size of the payments can be viewed from 3 angles:

* Revenue from existing merchants who are online: India currently has over a 1 million POS devices (i.e. the devices which allow the consumers to pay with debit card, credit card, prepaid instruments (PPI) etc). The combined value of transactions performed in 2015 was Rs 3.75 lakh crore (as per RBI sources), out of which Debit card and PPI constituted Rs 1.89 lakh crore (i.e. 45 per cent of all transactions). Assuming a growth of 10 per cent on a YOY basis, Payment bank's transaction base from this segment is expected to be Rs 2.08 lakh crore.

* Revenue from merchants who are offline: It's estimated that there are 10 million Small and Medium Enterprises (SMEs) which consist of kirana shops, vendors etc. Only a fraction of these accept digital payments. To put this in perspective, a whopping Rs 15.93 lakh crore (as per RBI annual report) of cash, was in circulation in FY 2014-15. If the new Payments Banks are able to digitalize even 10 per cent of this, it will create a market of around Rs. 1.59 lakh crore.

* Remittance: As per CRISIL, the domestic remittance market (e.g. migrant workers in Mumbai and Delhi sending funds to families in rural areas of Bihar and UP) was pegged around Rs. 1.1 lakh cr. If Payments banks are able to target 40 per cent of this space (currently dominated by PPIs), it will result in a market size of Rs. 0.44 lakh crore from remittance.

Potential revenue streams for Payments bank

As shown in the table, by summing the above items, we can estimate a market size of roughly Rs. 4 lakh crore in 2016. Assuming approx. 1 per cent to 1.2 per cent revenue arising from above transaction throughput, top line of the industry can be around Rs. 4,000 to 5,000 crore.

This excludes items such as float income, fee Income and income generated by market place, e-commerce and 3rd party products which can be around 25 per cent to 30 per cent of the payments business pushing the Payments Bank Industry revenue to approx. Rs. 6,250 to 6,500 cr.

Touching upon the cost elements of these newbies payment banks, it can be estimated that base setup cost would be the region of Rs. 500cr - Rs. 1000cr (depending the scale of operations, discounts offered etc) as big investments required in technology, sales and distribution, people and advertising.

Therefore, if a Payments Bank is to succeed, it will have to muster a significant market share (in the range of 25 per cent of Rs 6,500cr) to break even. This eventually means that maybe 4 or 5 payments bank will eventually succeed (as in the telecom industry).

Unconventional source of revenues
Side stepping a bit, there are some interesting revenue models in Digital and Telecom space which can potentially be applied to Payments Bank ie. ARPU (average revenue per user) model.

ARPU of IT majors e.g. Google and Facebook, ranges from US$45 (Google US ARPU) to low of $ 2 per user (see sidebox - courtesy Digital Strategy Consulting). The primary source of revenue for these companies is advertising dollars.

Drawing analogy from above, once payments bank have the economies of scale and a critical customer base similar to telecom companies (i.e. upwards of 100m users); sophisticated data analytics may be performed on such users, based on their payment history/pattern. It would then be possible to provide targeted e-commerce/financial goods and services to customers. These can serve as an additional source of revenue for these banks.

Assuming Payments Banks are able to convert half of the adult population (roughly 500 million) into payment bank customers - and estimating digital revenue per user at $1.5 to $2 (i.e. Rs 90 to Rs 120), additional revenue in the tune of Rs 4500 crore (assuming 1 USD to INR 66) can be generated for the Payments Bank, taking the Payment bank industry revenue (as a whole) to Rs 11,000 crore to Rs 12,000 crore.

Learning from Telcos/Other Innovative revenue models

Telcos currently have an ARPU of Rs 180 to Rs 200 per active customer Per Month (compared to Rs 90 to Rs 120 we have considered in the above analysis Per Year). One of the ways to increase ARPU for a Payment Bank is to provide value added services at a cost, for example guaranteed 2 day delivery of e-commerce goods (for Payments bank having a ecommerce portal), no surge pricing between 6pm to 9pm (for Payments Bank with Uber like merchants) or lower voice tariff/data allowance (for telco led Payments Bank). Payments Bank would be well advised to adopt similar innovative revenue models.

Conclusion
Its estimated that the total revenue of schedule commercial bank is around Rs 9.5 lakh crore. Without innovative models, Payments Bank will be at best, have revenue in the range of Rs 10,000 crore to 12,000 crore, which will be 1-2 per cent of the total revenue of schedule commercial banks.

Due to the paper thin margins and a smallish industry size, it's critical for Payments Banks to get their strategy right and try out innovative/off beat revenue models. Only a handful of Bona fide players with deep pockets, higher risk appetite and expertise in B2C small value transactions may find themselves afloat in the coming years.

If you have any predictions on them, do let us know.