2015 is drawing to a close and, in so far, payments banks seem to be the flavour of the year. Well, for the mobile financial services space at least!
Just a quick recap-a few months ago, the Reserve Bank of India (RBI) granted in-principle approval to 11 private parties for establishing payments banks. The new licenses include many established mobile operators, technology firms and financial services companies. But, wait, why is this development a big deal? After all, this isn’t the first time an initiative has been taken to promote financial inclusion. So, what is the fuss all about? As of today, the country has a dime a dozen banks scattered across every nook and cranny. So why are payments banks garnering such an enthusiastic response? Before we deep-dive into the subject, on a side-note, this blog isn’t aimed at positioning payment banks as a panacea for the payments space. Well, not just yet, anyway.
Now, let’s address the fundamental question-what is a payments bank and how does it differ from existing banks? A payments bank is a differentiated bank that will undertake only certain restricted banking functions that the Banking Regulation Act of 1949 permits. These activities include acceptance of deposits, payments and remittance services, internet banking and function as business correspondent of other banks. Initially, they are allowed to collect deposits up to Rs 100,000 per individual.
Wait, that’s not all-they can facilitate money transfers and sell other banking products including loan products, insurance and mutual funds. Besides, they can issue ATM/debit cards. They cannot set up subsidiaries to undertake non-banking financial services activities. More importantly, they are not allowed to undertake lending activities at all.
The RBI has defined the objectives of establishing payments banks as follows; to further financial inclusion by providing small savings accounts and payments or remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments and/or remittance services in a secured technology-driven environment.
Straightforward enough, I would think. Now, let’s ask the most basic question-what are the opportunities for payment banks in the country?
To sum it up in a single statement-to disrupt the payments space. No, really. Of course, these entities also have a three-fold opportunity facing them. First, a staggering 47 per cent of the country’s population is unbanked (as per the World Bank Group’s findex report). So, essentially, payment banks are expected to help drive financial inclusion by banking the unbanked in a cost-effective manner. More on that later. Next, reducing dependency on cash is another important objective. Did you know that India spends Rs 21,000 crore annually on operations costs alone? (Source: Cost of Cash’ Institute for Business in the Global Context)Finally, as per news reports, the country has 20 crore dormant bank accounts. Payment banks will reduce dormancy by providing financial services which are easily accessible, convenient to use and can be used regularly. Well, we hope so, at least!
Of course, before deep-diving into this sea of opportunity, payment banks ought to remember that they should ideally consider (and function) themselves as “fintech” (financial-technology) entities. In other words, using technology to boost financial services across all customer segments. These companies aren’t merely providers of financial services but technology enablers as well. These entities shouldn’t consider themselves as financial companies that merely leverage technology as an additional tool.
Now, here’s where it gets interesting-payments banks stand apart from regular banks, not just owing to the interesting assortment of companies which obtained the license. The industry is waiting with baited breath to see what kind of business model these entities adopt.
Permit me to offer my humble opinion-we believe (and this isn’t being driven by the fact that we’re a technology company) that such entities are likely (and ought to) adopt a four-pronged approach, centred on the target segment, the operating model, the strategic focus and the revenue model.
Let’s get the fundamentals out of the way once and for all. The strategic focus of these entities ought (and are likely) to be leveraging technology and mobility for cost-effective, convenient and real-time delivery of financial services. Logically, since most of the licensees are companies who depend on technology for their bread and butter and boast of a wide distribution network, it won’t be a stretch to assume they would use technology as the key enabler for all financial transactions. In a nutshell, these entities are expected to bring convergence between technology and financial services and leverage new age access channels such as mobility to overcome infrastructure and adoption challenges faced by conventional banks.
Now that that’s out of the way, let’s proceed. These entities are likely to focus on two customer segments, interestingly, at opposite ends of the spectrum. I am referring to the banked and the under-banked and the millennial customers, obviously. Unlike conventional banks, payment banks, with their cost effective and wide distribution network, will reach the un-and under-banked customer base, by permitting them to perform low-value transactions and voila! bring them into the financial mainstream. In addition to serving the bottom-of-the-pyramid customer base, payments banks have the opportunity to ensure convenience for the millennials, i.e. the banked and the carded customer by allowing them to use the latest and cutting-edge mobility technologies to make seamless transactions anywhere, anytime. For instance, in the near future, we can expect customers paying at a PoS terminal via NFC or receiving a micro-targeted promotion via BLE or even scanning a QR code on an electricity bill to pay it! The advent of these technologies will redefine the way millennials carry out various transactions.
As a logical extension, these entities are expected to promote a cashless society. As you may already know, cash is still the king in India. This is despite the steady rise of plastic money (i.e. debit and credit cards) in the country. In this kind of scenario, by collecting small sums of money from the under-and-unbanked, payment banks will promote the use of debit cards and internet banking among depositors. This, (hopefully) will help consumers migrate to a cashless economy. Also, on a side-note, this may have an additional benefit-restricting the black money in circulation. Of course, that is another story, altogether.
The base for all of this (i.e. the operating model) will be a focus on delivering simple but contextual services ranging from remittance, utility and merchant payments to savings and insurance. This will be boosted by the creation of a robust distribution network to deliver last-mile services. Coming to that bit, just imagine the number of touch-points-the new set of payments banks may have an all-India presence through franchise models. The licensees would obviously leverage their distribution network and club it with the power of mobility to reach out to a broader audience which (with all due respect), conventional banks haven’t been able to do so far in a satisfactory manner.
In fact, the humble Mom-and-Pop stores can provide the franchise and can be the fixed point service outlets. Let’s not forget, amongst the motley crew of licensees are included bigwigs like Bharti Airtel and Vodafone, both with a pan-India network. And there you have it-this fact alone exponentially contributes to their potential to be formidable players in financial inclusion and remittance service.
Now, let’s talk about how these entities will make big bucks-essentially, the fee earned from transactions will be the primary source of revenue. Moving on, access is a primary talking point as well-the advent of payments banks will essentially mean that accessing an account could be similar to visiting the post office(On an interesting side-note, India Post was amongst the lucky few to obtain a licence. Looks like its efforts to enter the banking business finally paid off!) or the neighbourhood kirana-cum-mobile recharge shop — and cheaper, no-frills services. And, please, I cannot emphasise this strongly enough-mobility will be the crucial component for agents to offer services to consumers as well as to connect to the back-end of the banking system.
But, wait, while these plans are very ambitious, the availability (or non-availability) of a suitable ecosystem will be a key factor. Payments banks will have to set up a big ecosystem in order to flourish. The success of these entities is directly proportional to the acceptance network. To have an expansive partner ecosystem, it is vital to have a flexible platform to integrate with multiple billers and merchants easily.
Like any fledgling enterprise, payment banks have to contend with quite a few issues, before taking off in a significant way. The biggest challenge (in my opinion) would be attempting to wean the Indian customer off cash. So, these entities ought to be ready to invest time and energy for this monumental task.
Of course, the idea isn’t to sound discouraging. Far from it, the concept of payment banks has gained ground abroad, it’s just that a few more creases need to be ironed out before it takes off in this country. Having said that, I’m pretty confident that its journey will be a memorable one and personally, I, for one, will be closely monitoring the situation!
