Experiment With Truth

One and a half years ago, when the RBI issued the final guidelines for payments banks, the obvious candidates were tech-savvy wallet companies and non-banking finance companies with operations in rural India. The business model looked lucrative and only 11 players could make the cut for RBI's stringent standards for launching payments banks.

Most were of the opinion that they could deploy the low-cost deposits in government securities to earn fixed returns and make a decent profit on transaction services, such as payment of utility bills. The big takeaway was that they would not be in the lending business.

Despite the enthusiasm, a section of experts were baffled with the list of successful candidates - names that had little presence in the financial services business - NSDL, Tech Mahindra, Reliance Industries and Sun Pharma promoter Dilip Shanghvi. However, RBI Governor Raghuram Rajan had spread out the licences to different sets of players for a reason. Payments bank was a new model to achieve financial inclusion, and the idea was to see which model succeeds in the Indian context. And, Rajan was perfectly right in doing so. But now, a section of licencees are having second thoughts about the sustainability of the business model. So much so, that Tech Mahindra, Cholamandalam Finance and Shanghvi have decided to drop out of the race.

But the jury is still out on payments banks. While HDFC Bank CEO Aditya Puri was always of the view that his bank, in its essence, was a payments bank, SBI and Kotak Mahindra Bank tied up with payments bank aspirants Reliance Industries and Bharti Airtel, respectively, to ensure they did not lose out on the emerging opportunity. However, a large number of banks stayed away. Instead, they kick started their digital campaign by launching digital wallets, mobile applications and put processes in place to approve loans within seconds.

But what is it with payments banks that some have now decided to quit? Clearly, some are worried about the reach and deep pockets of large banks and the competition all around, as established banks already have a well entrenched network in the transaction services space, especially in utility bills payments, and are also considering making bill payments services free. Banks are also opening one-man branches to reach out to the rural populace in a cost-effective manner. In fact, over the long term, costs for large banks will go down as they roll out digital initiatives and fine tune their processes with the help of new technologies. And if that happens, payments banks will face severe margin pressure, and may find it difficult to wriggle out of the situation as full-scale banks launch a whole gamut of services. Now, that's what may be playing on the minds of payments bank licencees, more so as the existing model already ensures wafer-thin margins. Besides, the new-generation unified payment system (UPI) from the National Payments Corporation of India (NPCI) is all set to make digital wallets a history, making fund transfers as easy as dialing up a friend.

Some payments bank aspirants, however, are confident. "It is a big opportunity. We are on track to launch the payments bank within the RBI's timeframe," says Rishi Gupta, Managing Director and CEO, Fino PayTech. And, why not? There will certainly be some well-entrenched players who would survive and thrive in the payments space, but the road ahead is certainly bumpy.