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The Road Less Traveled
Reserve Bank of India (RBI) granted ‘in-principle’ approval to 11 payments banks in August 2015. By the end of 2016, three had already dropped and timelines for others were hazy, creating doubts on the success of this seemingly progressive experiment of RBI.
The year 2017 began with a good omen, though. Airtel payments bank and India Post payments bank (IPPB) have commenced operations, Paytm is slated for August launch and Fino PayTech is tentatively confirmed for 2017 end. Although the news from Reliance (along with SBI) is still ambiguous, NSDL is still sticking to its launch date of ‘very soon’ for long and the recent talk of Idea and Vodafone merger creating doubts on their plans (both have payments bank approvals). For 2018, my hope is four to five payments banks would be operational across the country. Considering the challenges for payments banks, it’s still good news.
The verdict on the viability of payment banks varies, depending on whom you speak to. While the critics would easily fault the regulatory framework, even the strongest advocates would concede that payments bank isn’t a cakewalk. It necessarily needs a new, innovative approach. Innovation, in turn, requires creativity. And creativity is in some ways an antithesis of banking!
The road to building a payments bank is not only less traveled (considering this is one of a kind experiment) but is likely to be bumpy.
On paper, the concept of payments bank kills two birds with one stone. Firstly, it gives an impetus to the financial inclusion initiative by widening the digital payment infrastructure. Secondly, it encourages the FinTech culture in the Indian banking landscape and indicates RBI is in tune with times, despite its legacy.
While both are desirable objectives, in reality, the case of payments banks is a tough nut to crack. The key challenges are:
1. The payments-only model
A payments-only offering is an incomplete proposition and relies highly on low ticket account balances (capped at ₹1 lakh) for profitability. It’s akin to any high volume-low margin commoditized business, driven by convenience and pricing, with little customer stickiness. Making a payments bank viable requires a fine balance between cost of acquisition of granular liabilities, offering competitive pricing on transaction charges and ability to quickly reach critical mass. Going by the example of Airtel offering 7.25% interest rate to acquire balances and high inter-bank transaction charges (which will discourage interoperability and high customer attrition), seems they are yet to figure out what to do with the license. Contrastingly in traditional banking, CASA (current account-savings account) is still the best source of low-cost funds while high transaction charges are the worst way to build customer loyalty.
2. Cross-sell fee
While the cross-sell fee is touted as a ‘green pasture’ for building profitability, unfortunately, it is a shade less than green for the following reasons:
- Selling of insurance and mutual fund products is closely regulated by sectoral regulators (IRDA and SEBI). Not only are the distribution and sales commissions capped, there are strict requirements to prevent miss-selling. Both require certified and trained manpower to sell the products, which implies hiring better quality manpower, expense on training them and longer gestation before the resource is productive. In simple words — higher costs and limited upside on income.
- Cross-selling credit products like loans from NBFCs or Banks is not easy either. Building competence for basic credit evaluation to target right customers has a learning curve for both individuals and organizations.
- Cross-selling is successful where the deep relationship with the customer exists. If payments banks rely on third-party point-of-sale intermediaries like retail shops, where this is a side activity, revenue from cross-selling is unlikely to make a significant contribution to the bottom line.
3. Restriction on fund deployment
Payments banks are required to invest 75% of their CASA balances in Statutory Liquidity Ratio (SLR) eligible government bonds or T-Bills. For the balance 25%, the option is deposits with other SCBs. While this is considered as a safety net for depositors, it restricts their ability to optimize treasury operations.
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