Horses gallop on the track during a race. (Photographer: Justin Chin/Bloomberg)

Exclusive: It’s A Two-Horse Race Among India’s Payments Banks

India’s payments banks, intended to take small deposits and reduce financial exclusion in the country, saw a pick-up in business in 2018, shows RBI data. However, more than 90 percent of the deposits were held by just two of the seven payments banks currently operational.

Payments banks had mobilised around Rs 780 crore in deposits, spread across savings and current accounts, as of December 2018, shows RBI data accessed by BloombergQuint via a Right To Information request. This is an increase of 77.5 percent over the Rs 440 crore in deposits held by these banks in March 2018, the data showed. More recent data until March 2019 was not available with the RBI.

A break-up of the deposits held by individual banks shows that Paytm Payments Bank and Airtel Payments Bank hold 90 percent between them.

Paytm saw deposits more than double to Rs 371.4 crore in December 2018 from Rs 107.3 crore in March. Airtel came a close second with Rs 320 crore in deposits, a 10 percent increase over March.

India Post Payments Bank, which launched operations in September 2018, held Rs 33.6 crore in deposits as of December, the data showed.

Paytm Payments Bank, Airtel Payments Bank and India Post did not respond to queries sent by BloombergQuint.

Vivek Iyer, partner for financial services at PwC said the payments bank model was brought in to improve access to financial and banking services at a low cost. While the success of the Jan Dhan Yojana has helped turn the focus away from opening accounts and towards providing better services, some companies have a natural advantage in acquiring customer deposits.

For companies like Reliance Jio and Airtel, who provide telecom services, or for IndiaPost, which has a massive network of post-offices, the cost of operations is far lower as they have a captive customer base, said Iyer.

In the case of Paytm, the successful e-wallet business helped create awareness about the payments bank services among its users, many of whom are merchants or small retailers. Therefore, it has been more convenient for them to migrate to a current account with Paytm’s payments bank.

Paytm and Airtel have been able to garner more deposits than other payments banks because of their innate ability and experience in marketing products in the e-wallets and telecom space, which are far more competitive environments than financial services.
Vivek Iyer, Partner - Financial Services, PwC

Hiccups In 2018

Last year, the RBI temporarily banned Paytm Payments Bank, Airtel Payments Bank and Fino Payments Bank from opening new accounts due to irregularities in complying with know-your-customer guidelines. The restrictions were later lifted.

This slowed deposit mobilisation and new account opening for the industry, said Rishi Gupta, chief executive officer, Fino Payments Bank Ltd, which saw a marginal fall in deposits between March and December 2018.

Iyer said that the payments banks had followed KYC rules in spirit but not in letter. “They took some leeway in terms of what constitutes a customers’ KYC requirement, which is why the regulator stepped in and said that by doing a limited KYC, the risks of money-laundering opened up,” he said.

The Profitability Challenge

While deposit mobilisation has picked up, profitability remains a challenge for payments banks.

RBI guidelines place a cap on deposits at Rs 1 lakh per customer and prevent any direct lending. As a result, these entities earn no interest income on loans. This means that payments banks are solely reliant on the fee income they earn for processing transactions and cross-selling third-party services.

A regular bank can build assets on the deposits they mobilise, but since payments banks are restricted from lending, our focus has been on improving access to services and on the value-added per customer, said Gupta. Payments banks earn around 40 to 100 basis points, on average, per transaction which means the entities’ profitability relies on transaction volumes to keep rising, he added.

It would be beneficial if the regulator relaxes some of the guidelines which would open-up their product suite to retail and merchant customers.
Rishi Gupta, CEO, Fino Payments Bank Ltd

These changes could include allowing payments banks to offer fixed-deposits and recurring deposits, while increasing the limit on current accounts and introducing micro-loans for their merchants.

At present, a majority of payments bank customers are using it for remittances, cash withdrawals and bill payments. Third-party product sales remain slow for most except the larger entities operating payments banks. This is because the established players like Paytm, Jio and Airtel are better at pricing third-party goods and services with incentives or “cash-back” schemes, said Iyer.

The restrictions have meant that payments banks were reporting losses as per the last available data. In 2017-18, payments banks reported collective losses of Rs 516.5 crore, showed data included by the RBI in its ‘Trends and Progress In Banking’ report released in December 2018. Data for 2018-19 is not available.