HDFC Bank's Managing Director Aditya Puri takes potshots at Paytm for using cash-backs to lure customers. He says it may be a clever thing to do, but it cannot be a business model for sure.
It’s only a matter of time before Paytm sets a new record – for the biggest ever loss posted by a firm in our financial services mart. It now stands to the credit of Indian Bank which in 1996 ran up a loss of Rs 1,712 crore. It’s then boss M Gopalakrishnan – a disrupter and thought leader of his times – told us: “NPAs are a matter of perception.” Paytm, with its current loss of Rs 1,651 crore, will soon erase the Chennai-based bank’s claim to the honour. And you are not to grudge its creator, Vijay Shekhar Sharma, if he were to turn around and say, profits are also a matter of perception; it’s only fair.
Last week, Aditya Puri, Managing Director of HDFC Bank, spoke – disparagingly, some would say – about the “Emperor” and his subjects.
“The current loss reported by Paytm is Rs 1,651 crore. You cannot have a business that says pay Rs 500 bill and take Rs 250 cash back. So, come up with something else.”
What Puri didn’t say was it’s hard to come up with “something else”. And if he knew what it was, he was simply clever enough not to tell us about it.
If – as it’s claimed – technology helps you to chew up new frontiers, how’s it that the torchlight is only on how going ahead fintech and the newly wired will eat the grub of legacy banks? Just what’s the basis of the assumption that the entrenched will simply roll over and die?
Let’s situate our banks. As on date, they are regulated in a peculiar kind of way. In the sense, nowhere in the world – and nowhere in the world – do you get to see what we have on our turf by way of regulation.
You have heavy preemptions by way of reserve norms – a four percent cash reserve ratio and 20.50 percent by way of the statutory liquidity ratio. In effect, Rs 24.50 of every Rs 100 in bank deposits is off the table upfront for commercial India. Then you have the 40-odd percent that’s to be given to the priority sector; all kinds of rules to make you a partner in nation building. (As to whether they are valid objectives or not is a different subject.) Add on the deadweight of non-performing assets (in large part due to political interference), Basel-III capital norms which kick in from 2019 and operational expenses. And at the end of all this, you are also expected to keep something on the plate for your shareholders.
Simply put, you have to be a Houdini of a banker to pull it off. Of course, the “cheery” side to these handcuffs is you are seen as “safe” and have access to cheap current and savings account deposits.
But this is how you intermediate the way you do as a bank now.
You have to agree that no fintech firm – whatever be its avatar (e-wallets, P2P or payment banks) –has to jump through so many loops; and, therefore, appear, at first glance, to be smarter and nimbler than your neighbourhood bank. You can’t also just strip one part of what a conventional bank does, blow it up like a balloon and ride on valuations.
Are we to conclude that part of a bank’s business is more valuable than an entire bank? If you, as a sensible reader, were to say it’s not so, then you will have to concede that some of our private banks are grossly undervalued – relative both to their fintech firms and state-run bank peers. If the chief executives of some of these banks are not saying so in public, it’s because they cannot be seen or heard as “talking up their stock”.
Worse still, the bank versus fintech debate has been reduced to merely a case of airy-fairy valuations.
Let’s take the case of payment banks. (You will soon hear about their valuations also.) It’s said they have the potential to cannibalise legacy banks; for starters, at least a good part of their low-cost deposits. Now it’s one thing to argue they will grow the market or do it much faster (coming off a zero base it’s to be expected anyway and is a no-brainer), entirely another to say they will be had for lunch.
A few offer savings banks deposit rate in excess of six percent. Just about everybody in town knows that given a payment bank’s business model, it’s just not sustainable (more so at a time when secular interest rates are headed southwards) – they are not allowed to lend and are supposed to park 25 percent of their liabilities in government securities which offer low returns. Will cross-sell income on these platforms make for these high-cost deposits? No. Yet it makes sense as a marketing gimmick to save on advertising costs – and that again is just being clever; justifiably so.
Think about it in another way. It’s fine for a telco to hook into its payments bank arm to cross-sell data packs and airtime (a good part of it even free), hawk its own or third-party financial services and products. But that’s not the same as offering cash-back when you order pizza, dosas or book cinema tickets. You are in effect “buying” a customer’s transaction in the hope she will continue to do more of the same.
Mint Road is also at fault here. In the mid-90s, it cracked down on some of the then newly-minted private banks from “gifting” gold coins to depositors; it was nothing but bribery after all. It’s hard to fathom why a new entity – licensed and regulated by it – is not seen through the same lens when it comes to cash-backs. The point here is not to pick on any one firm, but it makes sense to nip these bad habits in the bud. As it may well lead to a situation wherein entities licensed to deepen and broaden financial inclusion resort to practices wherein it’s met more through default than by design. And this writer is of the opinion it’s headed that way.
Truth is there’s nothing that a fintech firm can do that a bank cannot. This is not to suggest that all will be good at it; some will remain all things to all comers, as is the case on date. It may appear that these newbies will eventually outsmart banks – as on date they appear smarter, that’s about it. Yet another reason is also the media mileage they get which is largely uncritical and not much different from a big deo advertisement for men.
You have banks, startups, and upstarts – all are not the same thing.