In a significant move to enhance the penetration of financial services, the Reserve Bank of India (RBI), in August 2015, introduced the concept of payments banks. Licences were granted to 11 entities, most of which had no prior experience in bank- ing. The message on the wall was loud and clear – that the government wanted to reach out to all unbanked and underbanked people (more than 60 per cent of the country’s population) and provide them access to at least basic financial services through the increased use of technology.

Thus, the fact that all the leading telecom operators – Bharti Airtel, Idea Cellular, Vodafone India and Reliance Jio Infocomm Limited – were awarded payme- nts bank licences did not come as a surprise. The penetration of mobiles in India has far outpaced that of bank accounts. Operators, by virtue of their extensive distribution net- work, already have a strong connect with the unbanked and underbanked customer segment, which puts them at an advantage to develop a much leaner and far-reaching network in rural areas, a prerequisite for the success of the payments bank model. In fact, technological capability and geograph- ical reach give telecom companies an edge over several other players that hold a payments bank licence.

However, while the synergies between telecom operators and payments banks are in principle, extremely plausible, there are several hurdles in the way. This is not only a road less travelled (considering it is a one- of-a-kind experiment), but also one that is fraught with challenges for the licensees. Traditional banks have time and again, reckoned that developing a model that reaches out to the financially underserved population, while being commercially prof- itable, is extremely difficult. At a banking seminar, Arundhati Bhattacharya, chair- man, State Bank of India (SBI), pointed out that customer acquisition is a big challenge for payments banks. “Why would someone who is using a mobile banking service that is readily available be willing to migrate to a new bank? That too, given that techno- logy such as unified payments systems would enable cheaper transactions through mobile phones,” she remarked. Notably, within a year of acquiring a payments bank licence, Tech Mahindra, Cholamandalam Distribution Services and Dilip Shantilal Shanghvi decided to shelve their plans to set up these specialised banks, leaving only eight companies in the fray, four of which are telecom operators.

Currently, four payments banks are in operation in the country. In January 2017, Airtel Payments Bank, a joint venture between Bharti Airtel (80.1 per cent) and Kotak Mahindra Bank (19.9 per cent), became the first payments banks to launch its banking operations across the country. In the same month, India Post Payments Bank (IPPB) launched its pilot operations with a branch each in Raipur (Chhattis- garh) and Ranchi (Jharkhand). In May 2017, mobile wallet service provider Paytm launched its payments bank. The most recent entrant in this space is Fino Pay- ments Bank, which went live in July 2017. takes a look at telecom operators’ new role as payments banks, the potential synergies, key opportunities and challenges, and the way forward…

Telecom operators as specialised banks a natural fit?

Operators’ existing customer base and extensive agent networks provide a spring- board to achieve and service the volumes required to break even in the payments bank business. Some of the advantages that operators have for offering payments bank services are as follows:

  • Operators work through extensive part- nerships, aggregating third-party pro- ducts seamlessly into their offerings, a model that is particularly essential for the success of digital financial
  • Operators have established multi layer distribution networks with thousands of retailers selling airtime and providing extensive urban and rural
  • Mobile prepaid platforms that manage high volumes of low-value electronic recharges are synergistic with the needs of digital financial services. These plat- forms offer highly customised and rele- vant products, supplemented by capabil- ities for fine segmentation and analysis of usage
  • Operators enjoy high levels of brand awareness amongst poor and rural cus- tomers, which can be leveraged well for cross-selling financial
  • Telecom, like banking, is an investment- intensive and long-gestation business. Thus, mobile operators have the capa- bility to source funds and make large investments with long-time horizons for returns. For instance, Airtel has com- mitted an initial investment of Rs 30 bil- lion for its payments bank operations.
  • Telecom service providers invest regu- larly and extensively in marketing and promotion campaigns to create channel and consumer awareness that could be leveraged for their payments bank business as well.
  • Since many operators already have mobile wallets in place, operator-led payments banks have a potential active wallet customer base that can be incen- tivised to migrate to the payments bank.

Gains for operators

Wafer-thin margins have always had oper- ators looking for avenues to diversify their revenue streams. Given that they present near-perfect synergies with this new banking model, exploring the opportunity offered by payments banks is surely worth their while. Amongst its several positives, the most important is that it will open up a new revenue stream for the debt-laden sector. Severe competition, growing price wars, and increasing commoditisation of voice and basic services are exerting seri- ous pressure on operator earnings. Payments banks will add a strong revenue stream, besides ensuring customer sticki- ness and reduced churn in a hypercompe- titive market.

Operators can follow a low-value, high-volume model. While there would be no revenue from interest, the fees from remittances and services such as utility payments or mobile top-ups would be high, owing to the large number of sub- scribers. Transaction volumes would also play a significant role, given that India’s telecom subscriber base is over 1 billion.

Further, as payments banks, operators will save on the commission costs that they currently pay to banks for cash-out trans- actions by their mobile money users. Currently, operators’ mobile money ser- vices do not give users a cash-out option. An operator has to mandatorily have a tie up with a bank and pay a commission in order to offer such a service.

Bumpy road ahead

Although offering payments bank services presents a plausible business case for opera- tors, the initial journey is not likely to be very smooth. To begin with, financial ser- vices are very different from the services that telecom operators specialise in. A mobile wallet service is much simpler and customers are willing to pay smaller amounts through it. However, telecom operators need to ensure that customers are ready to trust them with financial services such as savings. They are likely to face chal- lenges in establishing consumer trust to deposit money in quasi-banks. Moreover, there are already several specialised pay- ment services firms that can enhance their capabilities by collaboration and co-habita- tion with other financial entities exclusively for payments. High net worth individuals and even most salaried account holders who deal with mainstream banks may not need a separate payments service provider as they are already getting these facilities automat- ically from their banks.

In terms of operations, dealing with digital illiteracy also poses a challenge. Most senior citizens and rural people find it difficult to use mobile applications. To make them understand how to use new applications, that too mobile banking applications with multiple features, will be a challenge.

Operators are also likely to face strong competition from IPPB in rural areas because of its reach and customer trust. In urban India, the presence of large retailers who hold licences might give tough com- petition to telecom payments banks.

Another major challenge is cash mana- gement, which involves making cash available in the last mile. Today, customers go to retail shops and make payments for recharging their mobile phones. However, when the same customers go to the same retail point for withdrawing cash from their mobile account, operators will have to ensure that there is enough cash with each store. Further, the cost of cash man- agement may erode the margins expected from the business.

At a broader level, experts feel that RBI’s payments banks guidelines have not been crafted well, with too many restric- tions imposed on the licensees. A payments bank licence does not permit licensees to offer loans and credit cards to customers, and this may make them less lucrative to the rural people. Unlike regular banks, which typically earn money from their lending operations, payments banks have to primarily survive on fee income since 75 per cent of their deposits have to mandato- rily be invested in government bonds with maturity up to a year. Even though the scope of business is limited, the cost of compliance for a payments bank is not very low as compared to other entities involved in normal banking activities.

Operators, by virtue of their extensive distribution network, have a strong connect with the unbanked and underbanked customer segment, which puts them at an advantage to develop a leaner and far-reaching network in rural areas, a pre- requisite for the success of the payments bank model.

The way forward

Traditional financial institutions are at competitive crossroads today and the new contenders are telecom companies. It is widely believed that payments banks would work well for those who already have a well-established operation base and many contact points. Mobile companies, there- fore, are possibly in the best position to get the business model right because of their reach. However, even for them, this is a different game entirely because the nature of the relationship they are now trying to build with customers is different from that in the telecom market where there are a few large players. Competition in this space will further intensify once the remaining licensees roll out their payments bank services. The addition of several new fintech start-ups to the banking ecosystem will also keep operators on their toes.

For telecom operators to be successful in this space, their payments bank arms would have to operate as nimble start-ups for the next few years, focusing on their niche customer base instead of aspiring to become upper-crust bankers. Creating mass awareness about the need and benefits of inclusion in the financial system among the rural population should be high on their agenda. Operators and other licensees will have to invest significantly in marketing and customer education for turning pay- ments banks into successful ventures. As an initial strategy to attract more customers, payments banks can offer higher interest rates on savings deposits compared to tradi- tional banks. They can capitalise on the fact that SBI has slashed interest rates on sav- ings accounts from 4 per cent to 3.5 per cent per annum for deposits up to Rs 10 million, and other commercial banks are expected to follow suit. This is clearly an opportunity for payments banks to acquire some traditional banking customers.

While payments banks will open cross-selling opportunities for operators, it is a little premature to expect these to drive operators’ top line. The big bet really is to see whether India’s massive unbanked pop- ulation will take to payments banks services like they took to mobile phone services.

Akanksha Mahajan Marwah and Puneet Kumar Arora