Will Airtel's launch of India's first payments bank change anything?

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Here’s what we all know by now. Airtel Payments Bank has rolled out its pilot in Rajasthan. It wants to disrupt the market with a savings bank interest rate of 7.25 percent per annum, with a personal accident insurance of a lakh thrown in.

But why?

This isn’t the first foray of Airtel in the financial space. The company launched their mobile wallet service, Airtel Money, pan-India in 2012.

Airtel Money already has strong roots in the Kenyan market with a close to 20 percent market share, and steadily pumping investments to increase their share in the rest of Africa. In its most recent quarterly report, the company claimed Airtel Money customer base as having grown by over 15 percent, and transactions value by more than 53 percent to $3.77 billion (in case you are wondering, that’s more than Rs 25,600 crore).

Now, most of this is from the African market. But, Africa is only a small part of Airtel’s business (13 percent of revenue). The motherlode remains India and South Asia. Moreover, Airtel has a 1.5 million outlets across India, which is a little higher than the total distribution network of PoS machines in the country (1.49 million). That itself could provide massive heft when it comes to banking touchpoints.

Secondly, Airtel’s close competitor Reliance Jio is expected to launch its payments bank by early next year.

Another reason being spoken of by sources close to the development is telecom companies (like Airtel) might be jumping onto the payments banks bandwagon to curb their attrition.

Lizzie Chapman, who’s closely tracked the fintech industry’s evolution in the last 13 years, believes that telecos can encourage customers to use their billpay facilities.

However, it might be less meaningful these days with other bill pay solutions in the market.

Is there even a business model?

Both Lizzie (co-founder and CEO of ZestMoney) and Sanjay Sharma (a consumer banking veteran of 25 years, and the co-founder of micro-lending platform, AYE Finance), believe that mobile wallets will be front gainers of this trend rather than payments banks, the current demonetisation and move to digital payments, notwithstanding.

Sanjay points out to a challenge,

It is true that at smaller markets, the business models which are easy to breakeven are those involving credit lending. However, RBI has limited the payments banks to just payments. Hence, the next obvious model for them is to take on large volume payments and activities associated around digital payments. But they will only inch to revenues through higher payment transactions and volumes.

Lizzie too has her doubts,

The business model for payments banks is still questionable. Almost no payments bank could make a good case to make revenues from the pure guidelines we see today. Further, telcos seem to be jumping into this to create stickiness with their customers. Also, I’m less convinced the digital/ traditional banks will rely on payments bank, with them already getting the support to do almost everything. It definitely has shaken things up.

But what payments banks seem to be offering is non-reliability on smartphones along with interest rates for deposits. For example, Airtel Bank’s services can be accessed by Airtel customers on their mobile phones through the Airtel Money app, through USSD by dialing *400#; or via a simple IVR by dialing 400. Hence, this completely removes the dependency on smartphones and opens a gamut of services to a whole wide audience.

However, the industry doesn’t think of this as a massive advantage. Sanjay adds,

“People will move to digital wallets faster than they’ll move to payments banks. India has leapfrogged a lot in the past and moved to most digital technologies. The cost of smartphones is becoming cheaper by the day. Also, we usually work with audience, who are at the bottom of the pyramid, and let me tell you that 30-40 percent of them have smartphones with many more to add in the coming year.”

He also claims that the provision of interest rates at payments banks for the deposits will not really change the mindset, since the matter is more about convenience and safety – an area where wallets seem to have a better market perception.

Further, with digital wallets already struggling to get KYC done from customers, experts believe that it will add further to the friction of enrollment, owing to a weak use cases.

But this isn’t the ultimate judgment for these banks, Lizzie says,

“This is just the first cut from the RBI. It also could be RBI’s way to test and work with players who are really interested in working. But depending on how successful these pilots are, followed by the level of inclusion which will lead to relaxation of norms for these payments banks.”

However, payments seem to be a home ground for telcos firms and they need to adopt newer business models to be ahead of the curve. Sanjay adds,

“There is a big synergy between telcos and payment companies. If you see most of the payment companies today have grown from agent companies for recharges. The actual infrastructure which e-wallets were once riding on was nothing but telecom infrastructure. And these telecom companies have a huge advantage because they know their own infrastructure.”

Some silver lining?

But there seems to be an added advantage which the payments banks will have over wallets. Some sources close to the development claimed:

Payments banks will position themselves as wallets and will offer high rates of interest for the savings stored in them.

They will also allow customers to open Basic Savings Basic Deposit (BSBD) account which doesn’t require KYC done for six months of opening them. After six months, after KYC is done, the accounts turn into a savings account.

Further, customers can enjoy the benefit of the ‘cashout’ feature where they can physically take out the money from their savings account through the large distribution network of these telcos.

But considering the rocketing interest rates provided and no volumes to show, the unit economics of the business is still questionable.

Another viable business model is that of making consumer transaction data available to banks in order to lend credit to these customers. However, telcos need to operate in this space for two years or more to generate that much of data about a particular consumer. Kotak Bank already has a 20 percent stake in Airtel Payments Bank, making the suggested business model a little obvious.

Perhaps, for the likes of Vijay Shekhar Sharma, Founder and CEO of mobile payments company Paytm, picking up a payments bank license seemed like a lucrative option a year back. But with the recent demonetisation announcement and their core business yielding such high adoption and growth for the business, the entity might have to rethink a smarter move to market.

At present, in the telcos segment, Airtel seems to have a headstart giving it some early mover’s advantage as customers are highly unlikely to take more than one payment bank.

But for the moment it is safe to say that payments banks is expected to move the needle ahead in making banking omnipresent.

As Bill Gates famously said, “Banking is necessary, banks are not!”

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