Can payments banks live up to their promise?

The opportunity in last-mile connectivity in India is there, but the success of payments banks will depend on creating a business model that is light on overheads and smart on technology

Nupur Anand Mumbai
Can payments banks live up to their promise?

As the 11 entities that have got the payments banks licence from the Reserve Bank of India chalk out their plans, analysts believe that deep pockets and wide reach will be the key to success. In fact, these two were amongst the vital criteria on which RBI selected these 11 amongst 42 applicants.

Sources close to the developments say that RBI gave preference to applicants that had a clear business plan, specifically in the northeast and areas affected by Naxals. In fact, a report by rating agency CRISIL had pointed out that east, northeast and central India will be good catchment area for payments banks because of inadequate formal banking in these regions.

  • Aditya Birla Nuvo
  • Airtel M Commerce
  • Cholamandalam Distribution
  • Department of Posts
  • Fino PayTech
  • National Securities Depository Limited
  • Reliance Industries
  • Tech Mahindra
  • Vodafone m-pesa  
  • Dilip Shantilal Shanghvi
  • Vijay Shekhar Sharma (Paytm)

Payments Banks can offer current and savings account deposits of up to Rs 1 lakh. They can issue debit cards and offer internet banking, but they are not allowed to lend or issue credit cards. Three-quarters of the deposits they get will have to be invested in government securities, while the rest they will need to deposit in a scheduled commercial bank (for easy liquidity).

This, experts say, could crimp their earnings, and hence their ability to pay interest on deposits. In any case, it is expected that their net interest margin will be thin. Some may go for wafer-thin margins in order to get deposits. Either way, it will essentially be a high-volume, low-margin game. Therefore, a wide reach and last mile connectivity will be essential for any payments bank.

"CRISIL believes success will be a function of the ability to generate transaction volumes, having a business structure that's light on overheads and smart on technology, and on the ability to extract fees from clients. However, building franchises and managing operational risks while offering last-mile connectivity will be a challenge," said the CRISIL report.

Can payments banks live up to their promise? Growth opportunity
The success of the Pradhan Mantri Jan Dhan Yojana will be another big challenge that these new banks will need to tackle. It is believed that 99 per cent of households have been covered under the scheme. However, with a large number of these accounts still inactive, there is opportunity for payments banks to get business. According to the PMJDY website, as on August 26, 178.9 million accounts have been opened under this scheme, but about 45 per cent of them are inactive. This is where the payments banks can fit in. The challenge though will be to get these customers to open an account and to ensure that it is not dormant.

"While a large number of accounts opened under PMJDY scheme have lowered the potential for payments banks, these banks are expected to improve last mile connectivity, penetration of payments points and service outlets in a significant way (through business correspondent structure and through use of technology)," says Vibha Batra of ICRA, a rating agency.

In spite of this, some believe the opportunity for payments banks is big. "Even if they are able to gather around 10 per cent of rural savings deposits from areas that have banks, and from unbanked areas served by chit funds and other non-banking channels, the opportunity to attract savings deposits will be in excess of Rs 1 lakh crore over the next five years," says CRISIL Ratings Business Head Raman Uberoi.

However, it is unlikely that banks will cede business to payments banks without a fight. With increased competition, the offerings by the existing public and private sector banks, especially in semi-urban and rural areas, are expected to improve. This in turn will end up increasing competition amongst payments banks and other lenders.

What are payments banks?
Payments banks are niche banks set up by the Reserve Bank of India to further the agenda of financial inclusion. These banks will provide small savings accounts and payments/remittance services mainly to migrant labourers, low-income households, small businesses, etc.

What can they do?
They can accept demand deposits from individuals, small businesses and other entities, but there is an upper limit of Rs 1 lakh per customer. Customers will earn interest on their savings account balance. They can accept and send remittances. The payments banks are also allowed to undertake utility bill payments and can distribute mutual fund, insurance and pension products.

What they are not allowed to do
They cannot lend to customers or issue credit cards.

The many challenges
Apart from competition and keeping a tight check on cost in order to remain profitable, there are other challenges payments banks will face. "There are structural challenges such as infrastructure that need to be tackled by the payments banks. Since they will have to reach far-flung areas, infrastructure becomes key," says PwC India Leader (banking and capital markets) Shinjini Kumar.

Kumar believes that it may take new players a minimum of five years to break even. "If there are going to be players that will disrupt the market like we have seen in e-commerce, then it will take higher time to break even."

Another change that is likely to happen with these new entrants is that there will be increased liquidity in the bond market. This is because payments banks need to invest 75 per cent of the demand deposit balances in government securities and treasury bills with maturity of up to one year. With an additional category of buyers coming into the bond market, there will be an incremental demand for bonds. This may play a role in bringing down the yields and thereby impact their earnings.

Though it is too early to identify who may be the winners but banking analysts and experts believe that India Post and the telecom companies will definitely have an edge over the rest of the players. In fact, even the Nachiket Mor Committee on payments banks had pointed out that telecom companies that already deal with the unbanked segments can offer deposit services with little incremental costs.

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First Published: Aug 31 2015 | 10:30 PM IST

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