Why Payments Bank unable to scale up on Deposits?

30 October 2018: Following members of the FIAKS community participated in the knowledge sharing E-Panel discussions:

• Mr Roopesh Chandran, Director Business Development, Visa
• Mr Kamonasish Aayush Mazumdar, Chief Marketing Officer, MeraEvents
• Mr Abhay Kulkarni, General Manager Sales, Worldline Global
• Mr Ajay B Panicker, CEO & Founder, NetPay Limited
• Dr R Bhaskaran, Former Chief Executive Officer,IIBF
• Mr Hemal Shah, Technical Product Manager, Mastercard
• Mr Ishan Vaish, India Partnership Manager, Apple
• Mr Vijay Shekhar Sharma, Founder One97 & Paytm
• Mr Sony A, Head — Digital, South Indian Bank
• Mr Amrish Rau, CEO PayU India, Naspers Group
• Mr Piush Kothari, Business Head Digital, Customer Analytics and Strategy, Aditya Birla Idea Payment Bank
• Mr Balaji Vishwanath , Vice President- Digital Acquisition & New Initiatives
• Mr Dilip Asbe, Managing Director & CEO, NPCI
• Mr Neeraj Chandra, Head of Operations, Abu Dhabi Commercial Bank
• Ms Saru Kaushal, Country Business Head, Global Corporate Payments at American Express
• Mr Anupam Varghese, Former Head of Products, EKO India Financial
• Mr Abhishek Arun, Vice President, Paytm
• Many other CEO/CXO Bankers & Fintech professionals on FIAKS Forum

FIAKS Community Question

A total deposit of all payments Banks is less than 540 crores as of May 2018 which is less than SBI Andheri East Branch. Why are payment banks unable to scale up on deposits? What needs to be done at the regulatory end? What are the possible strategies the bank need to think about?

FIAKS Community Discussions

The tweet of Dibijay Mishra was “I filed an RTI on the state of payments bank (PB) deposits in India. @RBI has sent me in response to the RTI. Total deposit with *four* functional payments banks (including Paytm) is just Rs 540 Cr. This is as of May 2018, the most updated data available with the RBI. Rs. 540 Crs deposits are less than what would be in the SBI Andheri East branch.

This tweet was extensively discussed in various FIAKS community. Discussion started with community member said that people put money in banks because of two reasons:

• Auto salary credits
• Safety and trust

To scale PBs need good B2B alliances from SMEs to open salary accounts. Brand also needs to establish through ATL and BTL for people. While limit is a constraint, it’s not an immediate blocker for a large set of people. Also, banking needs to be aspirational from both products as well as offerings. If there were health and other livelihood benefits for the lower middle class it will attract attention.

Another expert responding to the question said the payment banks were supposed to have a model based on transaction fees/value adds more than interests on deposits raised. Though whether a model exists there fundamentally is the open question?

It was said that all of this is good in theory but the DNA of how banking works is that it has to be for everybody and not just a special class of citizenry, meaning banks can’t look just into low income exclusively because this goes against the fundamental theory of how a bank can work. A bank can’t work without an even bell curve — at the end of the day all banks are risk distributors and opportunity seekers, that’s how they run. You can’t mitigate risks by only looking at red lined people, you will need a balance between all kinds in order to serve everybody, including the red-lined poor and this will be by default true going forward if RBI takes the right steps and opens up banking as a sector.

There are many ways of enabling banks to do work for the poor and mass, but they can’t be made to work only for a certain section without looking at overall business outlook, and by the way, this burden/opportunity has to be shared by traditional banks too, and not just by opening bank branches.

PayTm redefined banking for small merchants. Today, even a panwala or a chaiwala is able to collect make and receive payments. Paytm is the new currency in market, which is growing day by day. I think there is a principal non-user standpoint thinking at play here. What we must ask is why should a user open a bank account with a PB? PB itself sounds like a caste system for banking, which itself diminishes trust. We can’t think like bankers, technocrats, and management professionals.

Here, the fish we are asking to climb the tree is the PB, not the normal bank which is counter-intuitive because if normal traditional banks with thousands of crores or corpus from private funds, governments and hotline access to RBI can’t make it happen, we are expecting smaller banks to fill this gap? Why and how? The only difference between banks and PBs must be a more stringent look and better policy application at best.

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Adding to it, a CXO banker said I hope you mean more stringent look at universal banks. If it is the reverse then without lending and the primary segment PBs are supposed to cater to, the model will be impacted.

Payment bank seems to be coming at a wrong time when wallets had started gaining a user base. if they could have poised payment banks as wallets giving you 4% interest people could have related easily. it seems that people were flooded with lot many payment options and hence are hesitant to have one another accountable. As a common man payment bank conceptually is still not understood.

The discussion became interesting when a FIAKS community expert said technically money comes and goes. These people don’t use it to keep a ton of money, as they don’t have a lot of residual money. Secondly, we have sweep out arrangement, which has additional rupee deposit, which again due to the limitation on amount can’t be attributed to PB account deposit. We shouldn’t bother much of deposits in an account as this money is not useful to lending (that’s why traditional bank keep account of assets and liabilities). Here, an active account is more indicator of performance. Active equal to in or out money transaction or residual deposit.

Another expert said payments bank business model is dependent on deposits, transaction and consumer loyalty. Loyalty and transactions will happen if the consumer truly sees the payments bank account as their transaction account. That would mean they would like to store money there. These numbers show that consumers are yet to take up payments bank as the first choice and hence don’t necessarily use them for transactions. That’s where UPI leads Payments bank. In a UPI transaction, the consumer can keep money with their favorite bank and use for transactions. By the way, the UPI transaction on our platforms has grown 10X in the last 5 months.

So that means traditional banks shouldn’t promote UPI, isn’t it? No.

Register and read on how UPI will lead Payments Banks and at the same time benefit Universal Banks in the country

UPI is saving the traditional banks. NPCI is owned by the banks. They would do not do anything to hurt the bank. UPI allows traditional banks to hold the deposits. Float and deposits are the backbone of banking profits in high inflation, high-interest economies. I had extremely rough time 3 years back to explain all current banks that UPI is good for the banks to retain the accounts. When payment banks didn’t exist.

Another expert said I think India Post will drive better deposits especially it being driven through the government and there are a lot more trusts in the institution. Additionally, Jandhan plus banking penetration is pulling monies into the traditional banking system. Will there be an incremental need to create one additional bank account with a different player. If this had happened before the Jandhan scheme then maybe payment banks may have had a fair shot at banking and I do agree the 1 lakhs it low for those who may want to use the payment bank system

Once the KYC rails are firmly established and tested in addition to getting the money to lie with a formal institution the limits may be increased — and this will eventually fix the low taxpayer base problem.

It was said that when RBI put across the draft papers on Payment Banks and SFB the key thrust was on financial inclusion. The main revenue stream expected was from non-interest sources such as fees from core business (i.e. payments) and from Para banking. I think that’s where they should be benchmarked on. Any other comparison with a universal bank would be unfair for both.

PB and SFBs were meant for a particular cause and were structured accordingly by the regulator. The play box was to be really not a traditional bank competitor but an extension of the bare minimum banking services to a large populace that the existing plethora of traditional banks is not able to cater.

I guess now the players that got these licenses are grappling with the innovative approach that is needed to succeed under the rulebook. They shouldn’t try to be like the rainfall banker for that is what they were never meant to be. The vision mission that they were set out to be is different and so should be the business model and parameters of success. If you judge a fish by its capability to climb trees it will forever be deemed as a failure. The limit of 1 lakh is not low by any measure. Ask any banker how many of their deposit holders keep balances above 1 lakh? Let’s be real in what PB and SFBs were granted the license for. A small finance bank does not mean a bank that is small. It means it is the bank for addressing small finance needs. Racing that so-called small customer whom traditional banks don’t cater to. Similarly, payment bank is for addressing primarily payment needs and not fund management or private banking needs for example.

FIAKS community expert said the way to look at this is different for each player

• Look at throughout via wallet and bank. The wallet is super large, larger than most retail banks
• Deposit balance is not a criterion for us
• Active users and how many use cases consumed meaning one consumer paying for different use cases
• This is why horizontal expansion across different use cases from airline ticketing, movies to MF

Even if we get the balance there is hardly any income to be made given treasury and investment rules so why sweat over balances. Traditionally, banks needed balances for lending, which again does not exist

Reacting to the tweet FIAKS Community expert said It would be great if people also look at stripped down savings account balances for SBI, BOB, HDFC, ICICI, Axis and maybe Kotak for only retail customers. Numbers for most banks will look very different.

When were payment banks expected to keep balances? So this argument itself is flawed and if the argument is only banked with balances have the stickiness that is also incorrect.

The biggest challenge for most banks is 20% consumers keep 80% balances and this issue widens as you go past the top 5–6 banks. High CASA ratios of some of the banks are institutional money or large HNI keeping money in savings accounts and getting 7% plus interest so who are we kidding? Also from a customer perspective who are comfortable transacting, we see a large pool of people keeping money in the wallet despite having a bank account because of –

• Habit
• 2FA
• Easier to pay Uber or any payment via wallet Vs bank account

The customer does not earn interest on the wallet but they still are comfortable so frankly, interest is not a big issue unless you have lots of money.

Another community member said that PB Banks aren’t supposed to hold more than Rs 1 lakh deposit for any account at any time! As they aren’t supposed to lend, what’s the incentive to keep deposit & incur the cost of some interest pay-out? Their main income stream should be fees income from bills payment. KPIs for PB Banks got to be different from universal banks.

I used to have a salary account with a leading private sector bank. I used to use the bill payment (EBPP) for most utilities. After job switch, I don’t have salary credits into that account, but I top it up to continue pay bills. Simply because of comfort & confidence through past 3/4 years of the flawless mechanism.

What is it that a Payment Bank (PB) can offer ‘extra & relevant’ to disrupt my loyalty (or lethargy) to take away this pure-play bills payment relationship from me? The answer to PB’s success lies there, I guess.

On the amount restrictions, another community expert said 1 lakh leads to more inclusion. That was the reason these banks were created. The banks are forced to look outside the standard bank customer.

The objectives as per RBI setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labor workforce, low-income households, small businesses, other unorganized sector entities and other users.

Then they should open as a small finance bank (SFB). The objectives of setting up of small finance banks will be to further financial inclusion by (a) provision of savings vehicles, and (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganized sector entities, through high technology-low cost operations.

The focus of payment banks has to be the payments/remittance services to those who are not getting a good experience with the universal banks. migrants, low income, small and unorganized businesses.

One lakh is the limit for a deposit guarantee. Also, transaction banking is key to growth and less cash if not cashless society. Banks will have to keep the majority of the fund invested in risk-free government bonds. Also, higher deposits take the focus away from inclusion.

For payment banks playing on the spread is not an option. They have to invest heavily in tech. Therefore, volume should be their strategy. If they are allowed a partnership with universal banks it will achieve all objectives. They must try and capture all transactions. It will take time

Conclusion

Ms Anuradha Panditrao, Founder, Forum of Industry & Academic Knowledge sharing (FIAKS) acknowledged the contributions of the FIAKS Community members in creating intellectual pull by participating in the discussions. She said comparing the payment banks on deposit is not right. She added that UPI is good for the universal banks to retain the accounts and also UPI leads the payments bank. While many of the community members said Rs. 1 Lakh is sufficient but Anuradha suggested that regulator should consider raising the limit for the payment banks from Rs 1 Lakhs to Rs 5 Lakhs as this would help to the payment bank on B2B/SME alliances.