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Paytm may not have a dream run as a payment bank

Could face competition from telecom operators, which have huge physical distribution networks

Sounak Mitra & Ishan Bakshi  |  New Delhi 

It already has more users than the total number of credit cards issued in India, and is the fastest-growing mobile wallet service. But Paytm, which has applied for a payment bank licence, might not have an easy run as a banker, in spite of its user base of 20 million.

If Paytm, owned by Noida-based One97 Communications, gets a licence from the Reserve Bank of India (RBI) to operate as a payment bank, it is likely to face stiff competition from telecom service providers like Bharti Airtel. These operators, also vying for payment bank permits, will have an advantage over Paytm, given their huge physical distribution networks, especially in rural areas.

Though RBI guidelines specify that ‘other financial and non-financial activities of promoters’ should be kept distinctly ring-fenced, these can easily leverage their existing networks, even if indirectly.

By comparison, like Paytm, essentially technology operating in the virtual transaction space, do not have physical retail networks, particularly in rural areas, where a large section of the currently unbanked population resides.

As the purpose of providing differentiated banking licences is to bring the country’s unbanked segment in the formal financial system, building physical networks will be important for addressing last-mile issues. RBI guidelines mandate payment banks to have at least 25 per cent of their physical networks in rural areas. While both telcom operators and mobile wallet operators like Paytm could leverage the existing mobile user base across India for bringing the unbanked into the formal financial system, about 40 per cent of India’s 1.2 billion people are unbanked but 80 per cent use mobile phones, building the physical network will be critical.

Vijay Shekhar Sharma, chairman & managing director of One97 Communications, which operates Paytm, believes establishing a robust physical distribution network will not be a major hurdle for the company.

“We will have to build the physical network. We already work with major fast-moving consumer goods companies like ITC and PepsiCo. We can always make some arrangements to leverage their networks, besides our own.”

Sharma believes Paytm can create better infrastructure and network than telecom operators, as it will be focused on payment-related businesses, while for telecom operators payment banks will only be an extension.

According to analyst estimates, payment banks are likely to contribute only a small part of total revenues for telecom operators. Equity research firm Credit Suisse has pegged mobile payments to be only 1-1.2 per cent of telecom sector revenue. By more optimistic assumptions, there could be a “seven-eight per cent revenue upside”.

CRISIL Research agrees. Though telecom operators are ideal candidates to set up payment banks, considering their customer base and distribution networks in rural areas, even five years after launch, the contribution of payment banks to their overall revenues would be less than one per cent.

Even as technology is core for Paytm, Sharma says if his company gets a payment bank licence, it will have to buy new technologies to provide banking services. “It would be like a normal bank. So, we will need additional technologies. We have already started exploring opportunities for potential buys. We would take a call once we get a licence,” says Sharma, adding Paytm might spend more than $50 million on acquiring additional technologies over the next two years.

Besides offering standard banking services, Paytm has plans to offer a bouquet of financial services like insurance and investment products, to retain and attract customers.

Paytm aims to increase its current user base of 20 million to more than 100 million by 2016. And, getting into the payment bank business will help the company, says Sharma, adding more than 40 per cent of Paytm’s present users are from Tier-II and -III cities. Some of its users don’t even have credit cards or internet banking exposure. “Some independent shopkeepers create mobile wallets for the unbanked, using their own credit cards or online-banking facilities, and physically accept cash for the amount deposit in the mobile wallets,” he notes.

One97 Communications, which is in advanced talks with Alibaba to raise roughly $500 million, as reported by the Financial Times, is planning to invest more than $100 million in establishing its payment bank, in the first phase. This will definitely go up as it scales up, says Sharma. “We are looking at a break-even period of three to five years.”

The company will have to set up an Indian subsidiary for a payment bank, if it gets a licence, as the parent company is already majority owned by foreign investors. According to RBI guidelines, ownership of banks should rest in Indian hands. Paytm, which has an annualised transaction value of $600 million, is currently funded by SAIF Partners, Intel Capital, Sapphire Ventures and Silicon Valley Bank.

Mobile wallet providers like Paytm follow a semi-closed model, according to which users load money on to wallets and make payments to only those merchants that have operational tie-ups with the mobile wallet service provider. However, a mobile wallet licence does not allow a company to offer cash-out options, under which users could withdraw cash from their wallets. So, mobile wallet users can only use the deposited amount to pay bills and purchase products. But a payment bank licence will give the cash-out option and allow them to operate like standard banks.

Obtaining a payment bank licence will also increase the money that individuals can deposit. Currently, deposits are below Rs 10,000, as KYC (know your customer) is mandatory for higher amounts. But, under a payment bank licence, the company could hold a maximum balance of Rs 1 lakh per individual customer.

Also, as a mobile wallet operator, Paytm cannot use the cash deposited by its users in their wallets — the money is deposited in an escrow account at a nationalised bank. But payment banks are allowed to invest 75 per cent of their total deposits in government securities; this will enable it to increase its earnings.

At present, Paytm earns 1-1.5 per cent of payments as transaction fee. But through its mobile-commerce business, where it works as a marketplace for merchants to sell their products, Paytm earns higher transaction fees of up to five per cent. It has about 10,000 offline and 16,000 online merchants currently registered on its mobile-commerce platform.

A deal with Alibaba will provide Paytm an edge in the mobile-commerce space, giving it access to deep pockets. The company is likely to use the funds to support establishing its proposed payment bank, enhancing its marketplace and strengthening technology and security.

First Published: Thu, January 15 2015. 00:48 IST