Competition awaits PSBs in fee-based biz

Remittances and charges on current and savings accounts will be their lifeline as they can't earn interest income through lending

The rise of payment banks is going to be a clarion call for public sector banks (PSBs), which have a large business share in the fee income segment, especially in semi-urban and rural markets.

PSBs have enjoyed a dominant share in this — remittances and charges on current and savings accounts. Yet, such income is going to be a lifeline for the proposed payment banks, as they can’t earn interest income through lending.

Besides strong competition, the new kids on the block should also bring positive spinoffs. For one, this could lead to expansion of the market for third-party products.

Shinjini Kumar, leader-banking & capital markets, PwC India, says: “When the supply side grows, it is natural that the competition within the network of players will increase and this is likely to happen even in this case, that competition between PSBs and payment banks will surface. But I don't foresee direct one-to-one competition, as the assumption is that payment banks will be covering the unbanked customers.”

The existing entities will have to come up with better strategies to expand their reach and distribution, she said.

Elaborating on competition in specific products and services, Shashwat Sharma, partner, KPMG in India, said payment banks would give a thrust on innovation and part of the business handled by PSBs in the bill payments and prepaid cards segments could move to the former. Some prepaid card companies have begun to explore the prospects in turning themselves into such a bank.

Retail fee income is one area where banks, especially private ones, have increased their focus to augment their growth. Retail fee income of banks typically comprises commissions from sale of third-party products such as insurance and mutual funds, transaction charges on savings and current accounts, processing fees on consumer loans and credit cards, and fees from remittances.

Vaibhav Agrawal, vice-president, research, at Angel Broking, says PSBs have been facing stiff competition from peers in the private banking space for fee income. Private banks have been much more aggressive than the PSBs in distribution of mutual funds and insurance products. With the presence of payment banks, the competition is set to increase and this will be good for the banking sector and consumers, he said.

Investment in information technology is going to be key for service quality and efficiency. With technology in place, the ease of doing transactions will increase. Competition will expand the market for third-party products such as mutual funds and insurance, said Vibha Batra, co-head for financial sector ratings at Icra.