Payments banks have an opportunity in the millions of unbanked, but are these viable?

Early this week, when India’s largest mobile wallet player Paytm morphed into a payments bank — the third one to roll out operations since the RBI granted licences to 11 entities way back in 2015 — it was a momentous occasion for founder Vijay Shekhar Sharma, who recently raised $1.4 billion from Softbank and counts China’s Alibaba among its major investors.

“RBI has given us an opportunity to create a new kind of banking model in the world,” Vijay Shekhar Sharma, chairman of Paytm Payments Bank, said in a media release. Customer deposits, he added, will be safely invested in government bonds, and be used for nation building. “None of our deposits will be converted into risky assets.”

Paytm Payments Bank, which claims to be India’s first bank with zero fee on online transactions, will have no minimum balance, will issue a free virtual debit card, will keep every online transaction (such as IMPS, NEFT, UPI) free, and will make services like cheque book, demand draft and debit card available at a nominal fee. The bank, which will have 31 branches and 3,000 customer service points in the first year, has set an ambitious target of 500 million customers by 2020. A payments bank can collect deposits up to Rs 1 lakh, has to invest 75% of its deposits in government securities, can offer different payment solutions, but can’t lend. How, then, will it make money? Experts say it is going to be an uphill task.

For starters, payments banks can’t issue loans or credit cards, and are modelled to cover the cost of capital through transaction charges on their payment product, says Shubhankar Bhattacharya, venture partner at Kae Capital. Therefore, payments banks need to find other avenues to improve the yield on the assets made available to them from their depositors.

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Cross-selling opportunities also don’t sound too convincing. A typical bank or NBFC, reckons Bhattacharya, does not stop at merely selling deposit accounts and credit products. Most offer a bouquet of investment and savings plans, and insurance products. It is unclear if or how a payments bank will offer such financial products as they call for either in-house specialisation or strong channel partnerships with service providers. “Payments banks are more likely to cross-sell services that are being offered on their platform,” says Bhattacharya.

The model of the payments bank might turn out to be one that wallets specialise in: a high-volume, low-margin game. “They need very high volume to start churning profits,” says Ashita Aggarwal, head of marketing, SP Jain Institute of Management and Research. “Wallet was the game of boys. Payments banks is the game of men.”

Also Read: Why MobiKwik is attempting to morph into a financial services provider

Out of 11 entities that were granted licences, three — Tech Mahindra, Cholamandalam Investment and Finance Company and a consortium of Dilip Shanghvi, IDFC Bank and Telenor Financial Services — abandoned their payments bank plans last year. Tech Mahindra reportedly cited a long payback time on its investment as a reason. Intense competition, it maintained, would only erode already thin margins.

Cashbacks and freebies are the early baits to rope in customers. For instance, Airtel Payments Bank offered free talktime. Shashi Arora, CEO of Airtel Payments Bank, says: “We are fully committed to the government’s vision of financial inclusion and banking for all.”

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