New-age digital bankers

Vijay Singh is an immigrant worker from Bihar who came to Mumbai three years ago and currently works at a construction site. His family, consisting of his wife and two children, still lives back home with his parents. Initially, Singh would send money through someone who was travelling to his village from Mumbai or via money orders from the local post office. While sending cash, there was always the risk of it getting lost and given his long working hours, getting to the post office in time was not always possible. Needless to say, there used to be several delays in the cash reaching his family and Singh would have to pay 5% as commission charges on top of everything else. But then he noticed his friend Mohan using his mobile to transfer money instantly to his family back home through Vodafone’s mobile wallet service m-pesa.

Thanks to Mohan’s guidance, Singh paid an initial deposit of ₹100 (of which ₹75 went towards activation) and was able to use the service to send money to his father’s account. Now, he regularly heads to the neighbourhood Vodafone recharge outlet and tells the storeowner the amount that needs to be deposited in his father’s account, even topping up his wife’s mobile in the process as well.

m-Pesa was launched by Vodafone and ICICI Bank in February 2014 and has now spread across 85,000 outlets in India, with close to 2.5 million customers. Using an m-pesa account, customers can deposit and withdraw cash from designated outlets, transfer money to any mobile phone in India, remit money to any bank account in India, recharge mobile phones and DTH subscription and clear utility bills. India has about 100 million migrants spread across the country, for whom remittance is a primary financial service requirement, close to 60% of them remit money back home. Only around 60% of the country’s 1.2 billion people are covered by banks.

Even as the prime minister’s Jan Dhan Yojana successfully hit its target of opening 115 million bank accounts to improve financial inclusion, data released by the ministry indicates that only about 28% of the accounts are active, with about ₹9,000 crore deposited. “Opening of bank accounts is not enough by itself. The access points need to be closer to the customers,” says Pramod Saxena, managing director, Oxigen Services. His company, which provides payment and remittance services through digital wallets, has tied up with banks such as SBI, ICICI and RBL for banking services. With 50 million transactions a month and 130,000 outlets, it has one of the largest retail networks in the country. The company handles transactions worth ₹1,000 crore every month.

So, when RBI issued guidelines for licensing of payment banks in November 2014, companies like Oxigen and Vodafone m-pesa, along with 39 other applicants, readily threw in their hats in the ring. “Telecom companies are best placed to leverage the opportunity in payment banking, given our strong distribution network and large client base,” says Suresh Sethi, MD, Vodafone m-pesa India.

A large chunk of the population still has no access to financial services, with around 41% of Indian households being un-banked and approximately 67% of all retail transactions still being conducted in cash. With over 900 million mobile connections, mobile subscribers significantly outstrip the number of bank account holders in the country at the moment. Both telecom and retail companies not only hope to leverage their current customer base and infrastructure, but also hope to improve customer stickiness through their payment bank offerings. 

Dialling growth

The idea behind payment banks is to provide small saving accounts, payment and services to migrant workforces, low-income households, small businesses and the unorganised sector. RBI wants to replicate the success that m-pesa has seen in Kenya in the past. m-pesa was launched in 2007 by Safaricom, Kenya’s largest mobile operator, which allowed consumers to transfer money through their mobile phones. According to a Crisil Report, m-pesa’s payments formed about 30% of Kenya’s GDP in 2014. “In Kenya, the adoption was faster as other options were limited — banking penetration was low and carrying cash was not seen as a safe option,” says Vodafone’s Sethi. 

Nevertheless, the potential to reach un-banked and under-banked audiences through payment banks is immense. “Payments bank will play a crucial role in converting cash transactions into digital ones,” says Vellayan Subbiah, managing director, Cholamandalam Investment and Finance Company, one of the applicants for the payments bank license. Part of the Murugappa group, the company hopes to leverage its network of customers, farmers and dealers across group companies EID Parry, Tube Investments and Coromandel and its own customer base — all of which adds up to 4 million — for a head start into the payment banking space.

Other applicants include heavyweights such as Reliance, which is entering the fray with SBI; Airtel Money, which has joined hands with Kotak Mahindra; Kishore Biyani; Dilip Shanghvi; Venugopal Dhoot and payment service providers such as Oxigen, ItzCash, FINO Tech and One97 (which owns Paytm). 

“The payments bank is a natural extension of the business we are in. We have a deep presence across the country and our stores see a cumulative footfall of over 320 million. Customers are always in a transaction mode at our stores and for many, walking into a store is a lot less intimidating than walking into a large bank,” says Kishore Biyani, CEO, Future Group.

If granted a licence, Future Group’s new entity, which will be called NuFuture Payments Bank, will leverage its retail network — including Big Bazaar, KB’s, Nilgiris and Big Bazaar Direct — and its rural distribution. “Videocon has a significant chunk of its business coming from rural India. This cuts across consumer durables, telecom, retail and DTH. It is because of this that we saw an opportunity in payment banking,” says Venugopal Dhoot, chairman, Videocon Group. Videocon DTH has a subscriber base of 11.8 million and has over 7.45 million subscribers in its telecom business.

All applicants have submitted a business plan detailing how they will achieve the objectives of payments banking. RBI has indicated that the first lot of licenses will be given out by the end of August, and while most applicants may eventually get them, the first lot are likely to be those that have a widespread network of access points, particularly in the remote areas of the country, either through their network or banking correspondents (BCs) or through networks provided by others.

Crisil Research pegs the domestic remittance market at ₹800 billion-900 billion and expects it to grow at an average of 11-13% over the next couple of years. Apart from domestic remittances, payment banks can also accept international remittances. According to World Bank reports, India enjoys the largest amount of international remittances in the world, with over $70 billion flowing into the country last year. And with RBI guidelines allowing payments banks to service IR transactions, many see this as an area of huge opportunity.

“About 30-40% of the $70-billion international remittances are withdrawn as cash and that is a potential segment we can go after,” says Naveen Surya, MD, Itzcash. The company, which began in 2006, has more than 88 million prepaid accounts through prepaid cards, mobile wallets and e-wallets, serving over 29 million customers, with payment volumes expected to cross ₹8,000 crore in 2014-15.

Multiple benefits

Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries. Among other things, Mumbai-based FINO PayTech acts as a business correspondent for banks and financial institutions, with 32,000 agents servicing around 28 million active customers.

Payments for MGNREGA, old-age pension and other government welfare benefits worth ₹5,000 crore have been made through FINO’s network. Apart from this, around 5 million-6 million transactions worth ₹2,400 crore take place annually through FINO’s network of 250 Money Marts in urban areas and over 10,000 merchant points and franchisee outlets across 14 states in the country. 

According to the draft guidelines, while the payment banks can accept demand deposits subject to a cap of ₹100,000 per customer, they cannot lend to their customers. They can offer payment and remittance services through the internet, mobile and outlets and can be business correspondents of other banks. They will have to invest at least 75% of the deposits collected in government securities and a maximum 25% as deposits in other commercial banks. They will primarily depend on remittances and payments for their revenues and on the commission they get by selling third-party products.

The banks can also act as business correspondents for scheduled commercial banks and offer loans and credit cards. “Since they cannot give loans and make money on the interest spread on deposits and lending, they have to come up with an innovative model to keep their costs low,” says AP Hota, MD, National Payments Corporation of India.

Rajeev Ahuja, head, strategy and financial inclusion at RBL Bank, believes that payment banks must start by figuring out what customers want and come up with services and offerings accordingly rather than chase revenues. “Payment banks will not work if they function with the same DNA as conventional banks. The service architecture and the delivery model have to be very different. You need to build a platform that can handle millions of transactions,” he says. RBL has joined hands with Oxigen Services for its payments banking foray.

Similarly, Kotak Mahindra Bank will pick up a 20% stake in Airtel Money, subject to the latter getting the payment bank licence from RBI. “Payment banks give us an opportunity to service a large section of the population that we were not in a position to service earlier,” says Dipak Gupta, joint managing director, Kotak Mahindra Bank. “The partnership with Airtel Money will give us the much-needed reach and distribution. It didn’t make sense to create the reach afresh.” Airtel Money was the first mobile-based prepaid payment instrument service in the country. Bharti Airtel currently has a subscriber base of 229 million through a distribution network of over 1.4 million retail points in India. 

Scheduled banks can hold up to 30% equity in a payments bank. While for banks like RBL and Kotak, it opens up an avenue to service a large new set of audience, for payment services providers, having a bank sign on as their partner gives them the much-needed stamp of credibility with consumers who are looking to sign on. “People already using mobile wallets want to earn interest, have access to ATMs and have the same confidence of a bank,” says Bipin Preet Singh, CEO, Mobikwik.

The company, which has 17 million users, has tied up with over 50,000 businesses across e-commerce, cab services and food chains to offer digital wallets and enable customers to pay directly while shopping online. It has also tied with up Big Bazaar and Café Coffee day to enable their customers to pay for their purchases offline as well. 

Consumers have been getting used to mobile transfers ever since m-wallets were launched in 2011. According to a Crisil Research report, the value of transactions through m-wallets, which have tripled over the past two years, was estimated at ₹2,750 crore, though the value per transaction remains small at ₹200-400. Expected to touch more than 100 million next year, mobile or electronic wallets have already outstripped the number of credit cards in the country, currently pegged to be around 20 million.

Currently in a semi-closed wallet, no cash-out is allowed, where a customer can maintain a maximum balance of ₹50,000 if they meet the KYC requirements and ₹10,000 if they don’t meet the KYC requirements for utility payments. In an open wallet, customers can maintain a balance of ₹50,000, provided they meet the KYC norms. Cash-outs are allowed at agent outlets, which act as business correspondents of the partner bank, but there are limitations and a cap on cash withdrawal.

Pre-paid service providers have to maintain an escrow account, where they can deposit cash. Once the payments bank license comes through, they would not need a bank anymore. But becoming a bank is not the primary motive of all the prepaid service providers, they are looking to convert cash into a flow of digital money in the system. “We want to be a payments-first company and a bank second. Our focus is to bring more of the cash in the system into the digital mode by enabling merchants to accept payments. We are looking at the payments bank as an opportunity to create one of the biggest financial services institution and have already put together a team from ICICI bank and HDFC Bank towards this end,” says Amrish Rau, CEO, Citrus Payment Solutions.

The company supports around 5,000 merchants and processes transactions worth ₹1 billion. It is one of the top three players in payment gateways solutions, with Billdesk and CC Avenues making up the larger chunk of the market. However, being one of the later entrants, it is looking to be more than a payments gateway solution company and instead provides analytic services to its merchants and wallets where consumers can store their credit and debit cards and banking account details. It also has an app through which subscribers can transfer money among themselves and make payments to smaller merchants. “Digital payments are set to explode irrespective of the form factor,” says Rau.

Tech-savvy

Most digital payments systems have used technology to their advantage. “We have been able to scale our business rapidly even with low capital thanks to technology. Unlike a majority of bank accounts that remain dormant, our wallets are actively used by our customers,” says Amit Lakhotia, vice-president, Paytm. “For us, cash is our only competition. Wherever there is a cash transaction, whether it is paying for your groceries at your kirana store or giving cash to your family members, we want to target that and replace all the cash in the system.”

The mobile wallet platform has around 80 million wallets, with around 60% of its consumers in tier 2 and 3 towns and the rest from metros and tier 1 cities. Paytm has to set up an Indian subsidiary for its payment bank if it gets a licence, as the parent company is owned by foreign investors. 

Since the regulations say that the majority ownership in a payments bank should be Indian, Vijay Shekhar Sharma, the founder of Paytm, applied for the license in his personal capacity. Lakhotia believes that for mobile payments to go viral, the product must be simple and there must be ease of transaction. He uses the example of WhatsApp, which is extensively used by people across all ages. “Everyone is using it, right from our parents to our kids to the domestic help and vendors. Nobody taught them how to use it. But if you keep the product simple, it is bound to go viral.” Similarly, he feels that if payment companies ensure ease of transaction, the adoption of mobile payments is likely to gather a lot more momentum. 

Apart from ease of transaction, payments banks will have to ensure that they keep their costs low with the help of technology. “Since there are restrictions on the revenue side, only the costs are under control, and even that we cannot control beyond a point. We have managed to keep our costs low by developing all the technology in-house,” says Rishi Gupta, CEO, FINO PayTech.

According to him, the cost of a BC is one-tenth of the cost of a bank branch per location and one-fourth of the cost of an ATM, which enables it to offer attractive terms to its customers. For instance, a ₹5,000 remittance will cost the consumer ₹250 if he sends it through the post office, ₹100-150 if he sends it through a bank and ₹75 if he uses one of FINO’s money marts. Payment banks, too, will work on wafer-thin margins, but payments service providers believe that it will be a viable business in the long term. 

“We have been in the payments business for the past 10 years, of which the past four years we have been cash-positive, so we know what it takes to make the business viable,” says Oxigen’s Saxena. ItzCash’s Surya believes that payment banks will give their consumers more opportunities to transact. “If a customer was making transaction worth ₹10,000, payment banks will now give consumers opportunities to transact 10X more, which will drive our volumes,” he says.

Rajeev Ahuja believes that as new consumers are introduced to formal banking, their financial needs will also increase with time. “Traditional banks haven’t been very successful in figuring out what customers want, except for maybe for HNIs. Payments banks must start from the other spectrum and figure out products that would suit customer needs,” he says.

Despite consumers testing the waters with mobile wallets and the increasing reach of payments companies, most players expect payment banks to reach some scale over the next three to five years. “India still remains a predominantly cash economy and it will take some time to change consumer behaviour. Even developed economies struggled a bit when they went from being a cash economy to a digital currency economy,” says FINO’s Gupta.

Cholamandalam plans to partner with local agencies to educate customers on basic banking transactions such as cash deposits, fund transfers and bill payments. “We propose to build an assisted hyperlocal payments model by leveraging retail touch points to provide last-mile connectivity. By focusing on high penetration in selected hyperlocal markets, most stakeholders will be able to see our products during all their transactions, such as groceries, bill payments and remittances,” says Vellayan.

While adoption is a challenge, making money in this business is going to be tough. “It is a volume versus value trade-off. You have to make it work on low-ticket sizes and fees. These models work only on large volumes and adoption will be critical in driving those volumes,” says Kotak’s Gupta. Biyani agrees. “Return on investment depends on how we scale the business and how fast we do it. We are already in the services business and have a fair understanding of customer spend, and hope to use it to our advantage,” he says. 

While most applicants agree that that the space will get increasingly competitive and the margins will give them very little wiggle room for error, they believe that the financial services sector is ripe for disruption today. RBI, too, believes that increased competition for deposits by payment banks will force traditional banks to come up with more innovative products, think harder about financial inclusion and convert a part of the existing cash into digital currency.

Telcos, NBFCs, retail chains and BCs are looking to leverage the existing network and customer base for an additional revenue stream. For mobile wallets companies and payments gateways, the attraction for payments banks is the consumer’s ability to withdraw cash and the hope that the RBI licence would make them more mainstream and lead to larger adoption. Private banks are already waking up to the increasing competition by offering their own mobile payment apps and wallets in a bid to retain customers.

As customers get comfortable, payments banks could become serious contenders to traditional banks. With attempts through traditional channels failing to increase financial inclusion, payments banks could be just the solution that the government and RBI are looking for.