The Reserve Bank of India’s (RBI) decision to allocate payments bank licences has evinced interest among telecom operators. Telecom companies have an edge over other contenders given their vast point of sales network. However, they are likely to face challenges such as consumer unwillingness to deposit money in quasi-banks. Industry analysts share their views on the potential opportunity provided by payments bank licences and the associated challenges...

What are the business opportunities offered by payments bank licences to telecom service providers?

Kunal Bajaj

The business opportunity for telecom operators in terms of a payments bank licence is that it further develops their mobile wallets. As a result, customers will not only be able to transfer money in the wallet and spend it through the merchants registered on the networks but also withdraw cash. However, the challenge with m-wallets is that they only function one way, that is, one can only deposit money into the wallet; it cannot be withdrawn in the form of cash.

Hemant Joshi

Some of the opportunities offered by a payments bank licence to telecom operators are as follows:

• Tapping the rural market where there is a lack of basic banking infrastructure. Mobile penetration with a teledensity of 45 per cent in rural India and an extensive distribution network provides telecom players with an opportunity to work as mobile banks in areas with limited banking access.
• M-commerce could be successful with the m-banking application. In Kenya, money transfers of over $1 billion take place through m-pesa every month, with nearly 13 million customers. In Tanzania, 5 million people do transactions worth $1.5 billion through mobile banking.
• Payments banks cannot give credit products; therefore, there would be no revenue from interest. However, with a huge number of subscribers, the fees from remittances and services such as utility payments or mobile top-ups could be high. Transaction volumes will play a significant role given the subscriber base of 937 million, which is much more than the number of banking customers. Operators could follow a low value-high volume model.
• This can eventually minimise the churn rate as the customer is financially attached to the telecom player and the market will be more stable.
• For urban India, it can provide customers an opportunity to safeguard their money through cashless transactions using different digital wallets like Google Wallet and Paytm which will help operators attract more customers. Telecom operators are already offering mobile wallet services for remittances.

Murtuza Kachwala

In India there is a huge unbanked population, which will respond to payments banks just as it responded to mobile phones. The licence, which would allow operators to handle deposits, will add to the benefits of additional revenue by deploying these deposits. For all the large conglomerates with retail and telecom arms, like Reliance and the AV Birla Group, all in-house transactions including salaries across group companies and payment exchanges with customers and suppliers can be carried out without the need for banking tie-ups. Further, with the implementation of such payments banks, the revenue for mobile data service usage will also increase, since the payments for all transactions will be made through mobile data connectivity.

Inderpreet Kaur

In India, more than 40 per cent of the population is under-banked. However the majority of this population uses mobile phones, which makes telecom operators a natural fit for reaching the under-banked and unbanked sections. What works to a telecom company’s advantage is that many of them are already offering mobile wallet services. More so, because a mobile wallet, unlike mobile banking, does not require an internet connection, thus making it a sound choice for countries like India where internet penetration is still very low. Bharti Airtel, Vodafone, Idea and Aircel are offering mobile money services, with a primary focus on remittances. Cash-out, however, is currently not allowed if an operator does not have a tie-up with a bank, and requires the operator to pay a commission to the bank whenever a customer withdraws cash. If they secure a payments banking licence, these operators will not have to pay a commission to banks for any cash-out transactions. While there are strong synergies between the payments bank business with services that are already being provided by telecom operators, the main opportunity for telecom companies is to increase customer touch points and hence, reduce future churn. A new addition to the services list of payments banks is the acceptance of demand deposits, with a cap of Rs 100,000 per account. This may offer an opportunity to include an additional income source through spread on the deposits. While we do not expect payments bank services to contribute significantly to operators’ top line, it would be interesting to see if this leads to any cross-selling opportunities for operators.

Garima Pande

The primary objective of setting up payments banks is to ensure financial inclusion by providing small savings accounts and payment/remittance services to the migrant labour workforce, low income households, small businesses and other unorganised sector entities, by enabling high volume-low value transactions in deposits and payment/remittance services in a secured technology-driven environment.

For telecom operators, it brings in a new opportunity by leveraging the existing distribution and technology infrastructure, to increase customer touch points and provide a suite of services (deposits and payment related). This, over a period of time, will not only enhance customer retention and provide a greater share of the customers’ wallet, but also contribute towards increased data revenues for operators. Payments banks also open up an additional channel of income.

Brijendra K. Syngal

Payments banks could be a revolution for the needy, unprivileged and unconnected to reap the benefits of technology, which has already changed the lives of billions, by connecting them through mobile phones. Various services have been made available through mobile phones. However, it is now time for value additions such as depositing and withdrawing cash through mobile phones. The setting up of payments banks using mobile technology will enable the instant transfer of money from a sender’s to a recipient’s account, with the objective of furthering financial inclusion by providing small savings accounts and payments/remittance services to users. The key reason for financial exclusion is the lack of a financially viable business model to serve the “bottom of the pyramid” customer segment in a cost-effective manner. Payments banks are a synthesis of a basic banking facility and technology, cellular in this case, from collection to processing to delivery.

The big bet which is riding on the payments banks is to see whether India’s massive unbanked/unconnected population will take to payments banks like they took to cell phones. The penetration of mobiles has far outpaced that of bank accounts. As a result, telecom companies have penetrated the unbanked and underbanked customer segment. Therefore, these companies have the advantage of developing a much leaner and far-reaching network in rural segments.

How are telecom service providers placed vis-à-vis their competitors in terms of securing a payments bank licence?

Kunal Bajaj

A payments bank licence can be used for various purposes. In the telecom space specifically, operators are looking at leveraging electronic wallet services. Telecom service providers are best placed for such a service as they have a large distribution network along with many merchant partners. This will allow them to reach out to customers who put cash into the wallet system for further use.

Hemant Joshi

According to the World Bank, 72 per cent of the population in India has a mobile phone while only 35 per cent has a bank account. The transactions volume via m-wallet has increased more than three times in the past two years to over Rs 27 billion, according to CRISIL. Telecom operators are in a better position because of their reach in rural and remote parts of India. They have already complied with the know your customer guidelines. If the government considers KYC forms as identification proof, telecom operators are well-positioned for payments banks. Although telecom players have a huge debt, they are consistently showing profitability in their operations. This could provide the credibility demanded by RBI as “financially sound” applicants.

Indian Post, which has also applied for a licence, could be the biggest competitor for telecom operators in rural areas because of its reach and customer trust. However, the presence of telecom operators via mobile phones can be helpful in attracting customers. Further, in urban India, the presence of large retailers who have already applied for licences might give tough competition. But the ease of use, safety and security of mobile phones might help in winning urban customers.

Murtuza Kachwala

Telecom operators have managed to reach out to areas that other aspirants for payments bank licences have not managed to access yet, in terms of network coverage. Therefore, telecom operators will have the advantage of having to make lower investments as compared to their competitors as they already have a rural distribution infrastructure in place and the requisite technology to reach populations. For example, unlike India Post, Paytm can be expected to reach break-even for its payments banking business early, as its distribution infrastructure is already in operation.

Inderpreet Kaur

Retail chain giants; payment processors/ solution providers ITZcash and Oxigen; and small finance banks are among the other entities that have applied for payments bank licences. For telecom companies, the main advantage would be their substantial customer base and existing distribution network. They not only have a well-established distribution network, but also the technology infrastructure in place. As the entire business model is transaction based, it is important that the cost of handling these transactions is kept low, so as to make a meaningful case for payments banks. Telecom companies handle billions of transactions annually and have a proper billing infrastructure in place to offer the cheapest cost of executing transactions.

Garima Pande

There is no formal communication on the number of licences that will be issued. Given this, it is difficult to estimate the telecom operators’ advantage over others in securing licences. Having said that, telecom operators appear to be the ideal candidates to set up payments banks, given their significant customer base in rural areas and well-entrenched distribution networks. Moreover, they are already offering m-wallet services for remittances.

What is the business case for offering financial services under a payments bank licence for a telecom service provider?

Kunal Bajaj

The main reason for applying for a payments bank licence is to build deeper customer relationships. Secondly, it simplifies the procedure for e-recharges and e-top-ups. Today, there are a number of online recharge providers like Paytm and FreeCharge and even banks, which facilitate transactions, and customers can recharge through debit/credit cards or by using their wallets. However, if the telecom company has its own infrastructure, the credit transfer from the wallet to the prepaid account of the customer becomes seamless. Along with customer engagement and enhancement of its existing business, a payments bank licence will allow operators to leverage their existing infrastructure for delivering financial services including transferring money to family and friends and sharing group expenses.

Murtuza Kachwala

Telecom operators will be able to leverage their existing network and distributor coverage for accessing millions of customers in a short span of time. Also, the huge amount of cash flow through deposit schemes can be deployed by the companies to increase the revenue cash flow through various interests. The increase in the usage of data services to access payments bank services and the customer base will also add to the revenue stream.

Garima Pande

Technological capability and geographical reach gives telecom companies an edge over other players that have applied for a payments banking licence. The payments banks business has strong synergies with services already being provided by telecom operators and their existing distribution and technology infrastructure can be further leveraged. Being in this business, telecom operators will be able to increase the touch points with their customers and provide a suite of services (deposits and payments related). Consequently, over a period of time, they would be able to enhance customer stickiness and obtain a greater share of customers. Further, they would be able to save the commission currently paid to banks whenever customers withdraw cash. In fact, telecom companies have the cheapest cost of executing transactions, which a bank cannot match.

Brijendra K. Syngal

Telecom companies have gained significant experience in providing basic payment services such as mobile recharges, prepaid card/wallet top-ups, cash handling for e-commerce deliveries and cash handling for remittances. These have helped telecom players develop robust processes for customer acquisition and provide servicing for payment-related products. Therefore, the business case for offering financial services under a payments bank licence for a telecom company would seem plausible.

What are the issues and challenges that telecom service providers are likely to face in offering these financial services?

Kunal Bajaj

Financial services are very different from the services offered by telecom operators. While a mobile wallet service can be simpler and customers are ready to pay smaller amounts through it, telecom operators need to ensure that customers are willing to trust them with their financial services such as savings. Another major challenge will be managing large amounts of cash. Today, customers go to retail shops and make payments for recharging their mobile phones. However, when the customer goes to the same retail point for withdrawing cash from the mobile wallet account, the operators will have to ensure that there is enough cash with each store.

Hemant Joshi

Some of the challenges that operators might face are as follows:

• Licence limitations: Financial inclusion in rural India can be successful if operators are allowed to lend money to the rural people. However, a payments bank licence does not permit licensees to offer loans and credit cards to customers. The maximum amount an individual can save is Rs 100,000, which is very low.
• Awareness: Indians do not accept new technology very easily. The RBI as well as public and private sector banks will have to spread awareness regarding the safety and security of the new service and build local language applications for the same.
• Digital literacy: Most senior citizens and rural people find it difficult to use mobile applications apart from making and receiving calls through a device. To make them understand how to use new applications and features will be a challenge. In fact, mobile banking applications need to be user friendly and be made available in local languages.
• Cash management: Since operators have less experience in managing huge amounts of cash, this could be a challenging task.
• ATM set-up: Setting up ATMs across India might be a problem. Most of rural India does not have continuous power supply and it is not viable to run ATM machines with generators.
• High investment requirements: An incumbent operator has estimated investments of about Rs 7 billion in building IT infrastructure, and distribution and servicing outlets for payments banks. These are huge costs for the already debt-laden operators.

Murtuza Kachwala

The issues and challenges telecom service providers are likely to encounter in offering these financial services are as follows:

• Limited customer ownership and managing customer loyalty compared to universal banks: Payments bank will be restricted to offering accounts, deposits and payment products. No credit exposure is permitted for them and they have a maximum deposit limit of Rs 100,000 per customer. Therefore, a universal bank would always have an edge over a payments bank due to its broader product portfolio.
• Regulatory requirements: The regulatory requirements to keep an adequate cash reserve ratio, invest demand deposit balances in statutory liquidity ratio eligible government securities and treasury bills with maturity periods of up to one year, and in current and time or fixed deposits with other scheduled commercial banks, enhanced reporting and compliance might drive down profitability.
• Ensuring sustained profitability: Business viability would be a challenge as the target customer is from the financially excluded segment, where the cost of acquisition is high and ticket sizes small. Payments banks are likely to be a low-margin business as demand deposit balances need to be invested in SLR eligible securities (minimum 75 per cent) and current and time or fixed deposits with other scheduled commercial banks (maximum 15 per cent) giving returns of 7-9 per cent on the overall cost of capital of 4-5 per cent reducing the spread to 2-4 per cent.

What will be critical to the success of payments banks, however, is their ability to identify the right regions to expand and set up networks in areas with limited access to mainstream banks and where a large amount of money is coming from urban remittances. An understanding of the local economy and how people spend money will also be important in this regard.

Inderpreet Kaur

Gaining trust, especially for the deposit product offered by payments banks would be an initial challenge. While the telecom companies are well-recognised brands in India, the main challenge would be to develop trust in the agents that would undertake the cash-out and cash-in transactions. Another challenge would be the cash management activities, which involve making cash available in the last mile. The cost of cash management will further drain the margins expected by them. Creating mass awareness about the need and benefits of inclusion in the financial system and access to the formal financial services among rural inhabitants should be high on the agendas of policy-makers and applicants. Operators and other applicants will have to invest large amounts in marketing and customer education for turning payments banks into successful ventures.

Garima Pande

As mobile commerce emerges, spam, malware and outright theft of personal financial information will become an increasing threat that must be prevented. Managing fraud will add to costs and complexity, which will make it more difficult for new market entrants to succeed. Further, though cash displacement and payment cost reduction is high on the agenda, the business case is far from straightforward for banks and operators. With a lack of clear and viable business models (for example revenue-sharing issues), large-scale mass market financial services will encounter various teething problems.

The mobile money ecosystem extends across financial institutions and mobile operators. It, therefore, requires close cooperation among all stakeholders to make this service successful. Interoperability between all parties offering services and technology standards needs to be addressed, so that payments can move between operators and from one country to another. Further, it is difficult to convince consumers to use new services as most of them simply ignore the need for payment functionality. Therefore, a lot of work needs to be done to promote customer acceptance.

Banks and mobile operators have been competitive in the mobile money space, primarily due to stricter security requirements and tough local financial regulations. Since both these entities hope to control the market, it gives rise to the need for a converged regulation.

Brijendra K. Syngal

Telecom companies have an inherent advantage in terms of having a superior reach and distribution networks to the bottom of the pyramid. However, these companies will have to assess customer interest and the scope of viable expansion. Further, payments banks cannot give loans and therefore, cannot earn any revenue from the interest spread between loans and deposits. They will have to rely mostly on fees from remittances and services such as utility payments or mobile top-ups. Payments banks can also act as business correspondents for scheduled commercial banks and offer loans, credit cards and earn commission on any insurance and mutual fund products that they sell. This is a thin-margin high-volume business that requires a lot of patience and hard work.