Payment Banks - There's many a slip between the cup and the lip

Payment Banks – Why is it also brave to turn back

“Because it’s there”, George Mallory’s immortal riposte on why he longed to  climb  the Mount Everest is now part of the folklore. But it will take a lot more than the heroic bravado to want to run a payment bank (PB). Like the Everest, the challenge is twofold. One, it is about the degree difficulty posed by the mountain itself. And two, it is the climber’s mental and physical endurance, his skills, his will power and maniacal focus on the goal to stay on the course.    

So what’s the degree of difficulty in setting up a PB and turning it into black?

First and foremost let’s see how a typical universal bank (UB) earns most of its revenue.  Net Interest Margin or NIM is a major source of income (60 to70%) of a UB. A typical UB operates at about 4% NIM. What about a Payment Bank? It will not be difficult to imagine that being the new entrants these banks might end up paying higher interest on the deposits than what most of the UBs are offering, say 6 to 7%. More over PBs will need to maintain 75% of their deposits in safest securities such as government bonds. A back of envelope calculation says that their NIM will hover around 1.5% to 1.75%.

This is not all. UBs also supplement their income by earning fee. This fee is earned by advising their customers on Investment and Insurance, Treasury Operations and Commercial Banking.  Fee from Commercial Banking is primarily  due to their ability to extend fund and non fund based limits to their small, medium and large corporate customers. Anybody would guess by now that a PB on the other hand has no opportunity to earn fee from Commercial Banking operations as it simply can’t offer those fund and non fund based limits. It can only earn fee by way of Transaction Banking and by  distributing Insurance and Investment products. It is still early days to comment on their ability to earn large revenues by way of Treasury operations. This will stunt the opportunities of earning fee for a PB.

These challenges are presented to the Payment Banks by the very design that created them in the first place. Payment Banks are going to have to take a route to the top through a very steep climb indeed. Dozens of people and organizations had applied to the Reserve Bank of India to get a license to earn the privilege of setting up a Payment Bank. And one hopes that they had a reason other than the one offered by Mallory.

What do the climbers need to possess to conquer the challenges posed by the Mountain?

We know now a mountain, even the mighty Everest can be conquered.  But it’s not a game for the novice. Beneath the dauntless spirit and nonchalant attitude of Mallory, there was one of the finest mountaineers in the world. That’s the point a PB should bear in mind.

For better odds to be successful as a PB, a player must have some unassailable core strengths.

• First of all, it needs clarity about who its target customer is.  It also must have a finger on  the gaps in the apparent needs of these customers and the existing options available to them.  It will then have to identify if there are yet any undiscovered needs of these customers which can be fulfilled for a price.
• Second, it should be a brand that people will trust with their money. It is easier if the aspirant of a PB has already acquired and serviced those millions of customers in its present avatar.  
• Third,  it is inevitable that customers of a PB would prefer to avail its services primarily through their own mobile phones. This will require a PB to have an ability to deploy its mobile banking solutions easily onto the phones of its target customers.
• Fourth, it should be able to run a lean and mean force with bare minimum overheads. So as a corollary, cutting edge technology should enable every single aspect of its operations, from running customer facing businesses to managing back office processes. 
• Fifth, it should have ability to source and service millions of customers spread across the length and breadth of the country at a cost far lower than that  incurred  by a traditional Universal Bank. Rent and HR costs form bulk of the fixed costs of UBs. This would obviously mean that the last mile customer service points (CSPs) of a PB will have to come out of independent network such as local grocery stores.  This will afford them the ability to partner with such Business Correspondents on a variable pricing model. It is anybody’s guess what it would cost to retain loyalty of such independent network when a dozen odd other banks are also trying to woo them simultaneously.  
• Sixth and the last point is its ability to sustain for unpredictably long periods before it can hope to see positive returns on its investment.

No mountaineer ever dared to set for the Everest without full insight into his own ability and the danger posed by the mountain. World lost two of the finest climbers in Rob Hall and Scott Fischer to the Everest in 1996 because they did not turn back. One hopes that the worthies didn’t apply for a PB license because it was available. Cholamandalam surrendered its license because it was brave. 

Visit Digital Dimensions to know more about the Author