Payment banks – finding a ‘moat’ for success

Reported by: |Updated: September 27, 2016

Alyyalur R Akhileshwaran

How financially inclusive is our country? Cash transactions are an important part of India’s reality. To illustrate, let us consider how many of us pay our domestic help in cash. But are we aware of how they send it forward to their families in smaller towns and villages? In most cases, it is not through banks.

Therein lies the opportunity. There is a vast untapped market for cashless transactions across the country. Teamed with the pervasiveness of mobile, payment banks have become a call word for addressing the needs of the majority, for smaller transactions. With easy access to mobile phones, the banking industry is looking towards total financial inclusion with payment banks, which eliminate the need for traditional bank branches while providing basic savings, deposit, payment and remittance services (but without lending capabilities).

RBI granted in-principle approval to 11 aspirants with differentiated licenses to open payment banks in 2015 with a view to enhance financial inclusion in the country. Payment banks can accept deposits up to Rs 1 lakh and provide payments and remittance services. They can’t issue credit cards and most importantly, cannot lend money. Their key source of income is derived from fees received by providing transaction services like electronic benefits transfer (EBT) or remittances. So, unlike other full service banks, they do not receive interest income from the deposits and loans. Not much time has passed since the issue of the 11 licenses, three applicants have already sought to withdraw in the last few months citing business viability issues as a reason.

The current applicants for opening payment banks are a mixture of companies, including banks and telcos. However, there is a significant edge that each has over the other, and possibly a different business focus. We could examine this through the concept of Warren Buffet’s ‘economic moat’ which defines the business viability of companies depending on whether they are capable of maintaining a competitive advantage over others while protecting their profits and market share. A moat, in practicality, could thus be identified as a huge customer base, customer loyalty or a cheap source of funding, among others.

It is possible that the telecom operator-turned-banks with the payment banking feature are not necessarily getting into this space to make more money or acquire more customers. Their focus could be to enhance stickiness of customers, stay relevant, and hopefully innovate along the way. In the present scenario, their moat is a large customer base, established service channels, and a financial relationship with customers via wallet marketplace.

But does this affect the potential for banks who are applying to open payment banks? Full service banks already have a moat through wallet presence and establishment in the mobile banking space, either by themselves or through tie ups. The reason for integrating payment banks with their other offerings would be to increase customer base and cater to a larger market, considering that at least half of India’s population is currently unbanked.

There are also other challenges in the market, which come in the form of other players in the internet based payment systems space. The NPCI-introduced Unified Payments Interface (UPI) is a digital payment platform that facilitates ‘virtual address’ as a payment identifier for sending and collecting money and works on single click 2-factor authentication. Having been built on the same infrastructure as Immediate Mobile Payment Service (IMPS) which is currently used extensively for real-time transfer of funds and has nearly 50% of remittance market today, UPI has the potential to be an important payment platform digitizing last-mile payments.

Overall, the current scenario for payment banking has many challenges, but it is at a cusp of exciting times. With all these concerns, the question to ask is, it is time to re-think the concept of payment banks before it is implemented? Is it too difficult a proposition to be managed profitably? Or is it actually an incredible opportunity to build a business model based on a lower cost of distribution? Only time will tell.

Alyyalur R. Akhileshwaran is partner and industry leader, Banking and Financial Markets, IBM Client Innovation Center India