In recent years, while mobile services have penetrated the remotest corners of the country, many other industry verticals, including banking and financial services, have not been able to replicate this reach. According to the World Bank, 72 per cent of the population in India owns a mobile phone while only 35 per cent has a bank account. The growing retail and network presence that has helped telecom operators establish a strong base across rural areas can be leveraged to offer basic banking services. In fact, this could prove to be a game changer in India’s financial inclusion story.
To this end, the Reserve Bank of India (RBI) recently granted in-principle approval to 11 entities to set up payments banks. Among the companies with telecom operations are Aditya Birla Nuvo Limited, Airtel M Commerce Service Limited, Reliance Industries Limited and Vodafone m-pesa Limited. Telecom operators already have experience in providing mobile transaction services. According to CRISIL, transaction volumes on m-wallets have increased more than three times in the past two years to over Rs 27 billion. While the payments banks licence will act as an important tool for operators to help them improve revenues and expand their rural subscriber base, starting and sustaining banking services is going to be a whole new game, which would require long-term assessment and planning.
tele.net takes a look at the RBI guidelines and requirements pertaining to payments bank licences, opportunities for operators and their readiness to leverage these, and potential roadblocks…
RBI guidelines and requirements
As per the RBI guidelines issued in November 2014, for licensing and setting up of payments banks, the objective is to provide small savings accounts as well as payment and remittance services to migrant labourers, low-income households, small businesses and other unorganised sector entities. The entities eligible for setting up such banks include mobile service companies, non-banking finance companies, corporate business correspondents and public sector entities.
Payments banks have a limited scope of activities. For instance, the maximum holding allowed in these banks is Rs 100,000 per customer. Further, while these banks can issue ATM/debit cards, they cannot issue credit cards. They can offer simple financial products such as mutual fund units and insurance products. However, they are not allowed to offer lending services. They can choose to act as business correspondents of other banks to offer credit and other services.
Further, payments banks will have to invest a minimum 75 per cent of their demand deposit balances in government securities and treasury bills, while they can invest a maximum 25 per cent of these holdings in current and fixed deposits. Such a portfolio can help maintain liquidity and allow banks to earn interest.
As the country has no prior experience with payments banks, RBI has noted that it is difficult to anticipate which payments bank business model will be the most successful. Hence, the bank has provided licences to different entities with diverse experience, so that different models of delivering these services can be tested. These companies would, however, need to fulfil certain conditions stipulated by RBI. So far, the apex bank has only given its in-principle approval for setting up payments banks. The approvals will be valid for 18 months, after which the entities will be given formal licences. The RBI intends to use the learning from this licensing round to revise the guidelines in the future.
Past experience
A large segment of the rural population and the low-income urban population has traditionally relied on insecure means of saving their earnings. This is because the performance of regional rural banks has not been very satisfactory while the services offered by post offices are far from adequate. Thus, banking authorities realised that financial service requirements cannot be met through brick-and-mortar branches alone. Therefore, in 2006, the concept of branchless banking through business correspondents was floated. According to the Grameen Foundation, about 96,828 agents were deployed by various business correspondent companies in 2012. However, the initiative failed to generate transaction volumes, which remained much lower than those of similar international initiatives.
It was during this time that m-wallet services witnessed rapid uptake. As per research conducted by CRISIL, India’s m-wallet market grew from Rs 2 billion in the first quarter of 2012-13 to Rs 13 billion in the first quarter of 2014-15. According to CRISIL, the favourable response to m-wallets can be attributed to the limited internet and banking penetration in low-income households. However, the business has not yet turned profitable for telecom operators, as operational expenses are still high and the value of transactions remains small (Rs 200-Rs 400). Further, the estimated Rs 800 billion-Rs 900 billion domestic remittance market is largely dependent on informal channels or the postal service, in which the end-consumers have a certain level of trust. Despite these challenges, the call for payments banks is much stronger in the context of financial inclusion.
Operator strategies
In India, the majority of the underbanked and unbanked population uses mobile phones, which makes telecom operators the natural choice for reaching these sections. What works to their advantage is that many of them are already offering m-wallet services. Moreover, since a m-wallet, unlike mobile banking, does not require an internet connection, it is a good option for countries like India where internet penetration is still very low. Payments banks offer several advantages over the m-wallet model, thereby offering an even better business case for mobile service providers.
First, by establishing payments banks, telecom service providers will be able to offer a cash withdrawal facility, which was not available earlier with m-wallet services. This will help telecom companies acquire a greater share of customers’ income, which will be saved in deposits. Second, these banks will allow operators to provide deposit services without any tie-up with banks. These services will open up another channel of revenue, which would be the yield on investing the deposit money less the interest offered to end-customers. While it may take a few years to break even in these services, they can provide a steady flow of revenue in the long term. Third, these banks will facilitate interaction between operators and their mobile service customers. This will help operators improve the uptake of their telecom services and help them retain customers.
Bharti Airtel will set up payments banks through its m-wallet subsidiary, Airtel M Commerce Services Limited (Airtel Money), which entered into a partnership with Kotak Mahindra Bank in January 2015. Going forward, Airtel intends to acquire 19 per cent stake in the bank. The operator has also acquired YTS Solutions to bring in a new set of products targeting migrants in urban and rural households. “We are confident that the granting of the payments bank licence will play a pivotal role in bringing millions of unbanked Indians into the folds of banking,” says an Airtel spokesperson.
Meanwhile, Vodafone India will try to build on the success of m-Pesa and develop its mobile money and payments networks. “The combination of being a bank and a mobile company allows us to reach the masses,” says Suresh Sethi, business head, m-Pesa, Vodafone India. The company distributes its products through 1.8 million retail outlets, 60 per cent of which lie in the rural areas. It plans to tie up with various companies to offer different financial products. “For each of the products we want to sell through our payments bank and our collection agents, we will be forming a partnership and not necessarily doing it on our own,” says Sethi.
Reliance Industries has tied up with the State Bank of India to set up payments banks. The joint venture will leverage Reliance Jio Infocomm Limited’s (RJIL) telecom network and the group’s retail online and offline business to offer financial services. Meanwhile, Aditya Birlo Nuvo, which has also been awarded a licence, already has a presence in financial and telecom services. It is the largest shareholder in Idea Cellular, which operates m-wallet services called Idea Money, and its financial arm, Aditya Birla Finance Services, offers non-banking financial services. The group company will leverage its stake in both these companies to extend the reach of its payments banks.
The most formidable player in the payments bank space, however, is likely to be India Post, which is planning to set up a subsidiary to operate payments banks. The organisation has one of the largest postal networks in the world, with 90 per cent of its offices located in rural areas. India Post is in discussions with Bharat Sanchar Nigam Limited for a possible tie-up for setting up these banks. In the meantime, it has sought approval from the cabinet for an investment of Rs 6.5 billion in the proposed payments bank entity. Of this, at least Rs 1 billion will constitute the equity base while Rs 2 billion will be required for setting up the entity. India Post intends to launch these services at all its 155,000 branches by March 2016. This will enable it to build its remittance services and its existing relationship with rural consumers, which will boost its banking services.
Meanwhile, Vijay Shekhar Sharma, founder and chief executive officer of mobile payments company Paytm, has also been awarded a payments bank licence. The company already has about 100 million users in India, with 75 million transactions being carried out every month. Meanwhile, Tech Mahindra has been awarded a licence for its mobile payments platform, MoboMoney. However, to what extent these companies can tap into the rural segment remains to be seen.
Overcoming challenges
As telecom service providers gear up for setting up payments banks, several challenges need to be overcome to enable them to popularise these financial services and break even.
Having invested heavily in acquiring spectrum and setting up 3G and 4G networks, operators are under major financial pressure. Operators such as RJIL, Vodafone and Idea have not yet launched 4G services commercially, and hence have not earned revenues from these investments. Even after the launch, it has been anticipated that competition in the 4G space is likely to drive down data tariffs, further impacting bottom lines. Amidst this, setting up payments banks to reach out to the rural population will also require heavy investments. Although telecom operators have distribution chains and rural outlets, significant capital will be required to train staff and educate end-users on the benefits of payments banks. Although the deposit per user is likely to be only up to Rs 100,000 per day, handling money in deposits and earning interest on the same requires banking expertise. According to Sethi, “We still need to understand how a full-fledged bank works and that is a different experience. It has its own challenges in terms of treasury and interbank working, and that is a learning that we have to undertake.”
Telecom operators are thus tying up with banks and other financial companies to establish a strong foundation for their payments banks. According to GSMA’s recent report, “State of the Industry: Mobile Financial Services for the Underbanked (2014)”, mobile money deployments can expect to break even after 36 months of operations and can generate profit margins of about 20 per cent, provided the requisite opex investments are sustained through the high-growth stage. Mobile money can be profitable only when telecom operators are able to invest sufficiently in opex, that is, seven to eight times the amount of revenue generated, to build out an agent network and create customer awareness to attain profitability.
Since payments banks cannot provide credit products, there would be little revenue from interest. However, with a large rural subscriber base, revenues could be generated from remittances and services such as utility payments and mobile top-ups. Operators could work on a low-value, high-volume model. This would eventually minimise the churn rate as the customer becomes financially attached to the telecom player, thereby making the market more stable.
Another key issue that is likely to occur is competition with the Pradhan Mantri Jan-Dhan Yojana, which offers similar services through both bank outlets as well as business correspondents. However, the penetration of mobile services is greater than that of rural banks, which offers an advantage to operators. On the other hand, limited awareness and digital literacy may pose a challenge in the successful adoption of payments bank services. 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.
Operators are likely to face teething problems when it comes to cash management since they have less experience in managing large amounts of cash. Further, setting up ATMs across the country is a challenging task, as most of rural India does not have continuous power supply and it is not viable to run ATM machines on generators.
Also, to enable inclusion, efforts would need to be made for building trust with underbanked consumers. These banks are likely to first impact the remittance market, wherein it would be easier for urban migrant customers to send money to people back home in smaller towns and villages. To capture this segment a certain level of trust needs to be developed with the end-users on the delivery mechanism, which would eventually help form long-lasting customer relationships for even operators’ core businesses.
Conclusion
The concept of payments banks needs to be understood more from the perspective of financial inclusion and long-term returns, rather than short-term benefits. Telecom operators are better suited for setting up such banks as opposed to other eligible entities. First, their technological capability and geographical reach, which includes widespread distribution and retail networks, give them an edge over other players that have applied for or obtained payments banking licences. Second, payments banks can help operators build on their existing m-wallet facilities by enhancing their present offerings.
Going forward, the successful setting up of payments banks by operators will open up new revenue streams for them while helping the government to achieve its target for financial inclusion and improving the livelihood of millions of unbanked consumers.