Can Paytm’s Vijay Shekhar Sharma Disrupt Indian Banking?
Vijay Shekhar Sharma, Founder, Paytm (Photographer: Kuni Takahashi/Bloomberg)

Can Paytm’s Vijay Shekhar Sharma Disrupt Indian Banking?

He doesn’t look like a banker. He isn’t one. Not yet.

Dressed in a blue shirt, which bears the logo of the company he founded, Paytm chief Vijay Shekhar Sharma carries none of the trappings of a banker. Yet he is someone many in the banking sector are watching closely.

At the India Retail Forum in Mumbai earlier this week, Sharma was a sought-after man. In the course of a 20-minute conversation, two top retail sector chief executives stopped in to chat with him. But Sharma says he sticks to his pre-planned appointments.

“Pre-defined appointments should get priority. I really feel bad when I go to a doctor and some walk-ins are accepted even though I have been sitting there with an appointment,” he said when asked whether he needs to leave.

It’s not surprising that senior retail honchos want to connect with Sharma. One97 Communications Ltd, the entity which holds Paytm, has an e-commerce business under its umbrella along with its payments business which offers the successful Paytm wallet.

Soon a payments bank, possibly India’s first, will be added to the portfolio.

We have to build something technology wise, operations wise and system wise. We are in the last leg right now where testing and dry runs are part of the process. Shortly, we will hand over to the RBI for final application. My wish would be that we get it done before Diwali because we will be ready.
Vijay Shekhar Sharma, Founder, Paytm
Can Paytm’s Vijay Shekhar Sharma Disrupt Indian Banking?

India’s Experiment With Payment Banks

Sharma was among the eleven who were given an in-principle approval in August last year to launch payment banks. The concept of a payment bank was being introduced to the Indian banking sector for the first time and the Reserve Bank of India picked a wide variety of entities that could bring innovation to the banking sector. Along with Sharma, telecom firms, technology companies, and an entity with a wide reach like India Post was picked. The idea was to further the cause of financial inclusion by offering digital remittance and payment systems in the hinterlands.

As these 11 firms started to plug their powerpoint models into excel sheets, the hard numbers didn’t work out for some, and three of them exited.

“The nature of the challenge is huge because you have created entities which are very niche, which can’t lend, and that is where banks make most of their money. This may work best for large telecom companies which have an existing base of clients,” said Alok Prasad, former CEO of the Microfinance Institutions Network (MFIN) and a veteran professional in the area of rural finance.

Can Paytm’s Vijay Shekhar Sharma Disrupt Indian Banking?

A Differentiated Product

Sharma, however, does not look like a man who will throw in the towel easily when faced with a challenge. He has a strategy in place, based on which he has built the technology platform.

Our strategy is very simple. We will offer zero balance accounts to consumers and businesses. So today a zero balance account is a feature but it should not be a feature and should be for everyone.
Vijay Shekhar Sharma, Founder, Paytm

“Also consumers today get a savings account and a savings interest rate. We are going to add a wealth management piece to it. So the consumer’s money, once it comes to the account, will automatically move to a money market fund. So a consumer can get up to 8 percent return,” Sharma added.

To put this in context, most commercial banks offer 4 percent interest to their savings account customers. When the savings account interest rate was deregulated in 2011, a few private banks started offering up to 6 percent interest to draw depositors. While the strategy succeeded to some extent, it didn’t make a dent in the savings account base of larger banks who didn’t push up their savings deposit rate.

Will Paytm and other payment banks have to offer more if they want to draw depositors? And will they earn enough to make that offer?

Sharma said they haven’t decided on the exact interest rate for the savings account facility.

His idea, though, is different.

If the Paytm payment bank can convince a customer to sweep the money out of the savings account straight into a money market fund, the customer can earn more than just the basic interest rate on the account.

We have a partnership with ICICI Prudential on day 1. Over time we will give customers a choice and tie up with HDFC and Reliance. We don’t have any intention to keep the money in the savings account. It will go straight to the money market fund and when you go to withdraw it, we will not charge any breakage fee.
Vijay Shekhar Sharma, Founder, Paytm

Sharma’s argument is that traditional savings accounts don’t yield enough for customers and his plan will help them beat inflation and get a positive real return.

In addition to this, the payment bank will also offer its network to banks and financial services firms who may want to sell products like insurance and mutual funds. This, said Sharma, will be done selectively to try and curb any concerns about mis-selling.

“It’s like an Apple platform and not an Android platform. It’s not free for all and open for all,” he said while adding that ‘no fear; no greed; no entitlement’ will be the mission statement of the bank.

Is there enough demand for such products at the bottom of the pyramid? The answer to this is not clear.

“What these companies are trying to do is get a larger share of the wallet by selling insurance, mutual funds or money market products. But these are clients who are barely accustomed to using bank accounts and you are offering them these other products. It remains to be seen if it works,” said Prasad, former CEO of MFIN.

Safety and security are more important for these customers compared to returns. At that level of savings, returns don’t translate into much in real terms.
Alok Prasad, Former CEO, MFIN

Where Will The Profits Come From?

The question that remains is whether payment banks can be profitable. Sharma, backed by investors like Ant Financial, SAIF Partners and others, has probably spent a lot of time thinking about that.

Profitability was among the key concerns that drove three firms to give up on their plans. While telecom companies can see payment banking services as add-ons to their core business, others like Paytm may need to make sure that the operations are on course to deliver returns.

This is how Sharma sees it play out.

“Customers will come to us and we will open a wallet, a current account, and a savings account. There are three use cases for money in these accounts. They can make payments using it and we make money in payments. Second, they can use that money to consume something and maybe buy on the Paytm marketplace. We make a larger amount of money there. Third, we also offer them financial services and we make money on that.”

We are building a new business model for banking at large which is not about converting deposits into assets. This model is about creating use cases for deposits and making money on transactions.
Vijay Shekhar Sharma, Founder, Paytm

Towards A Less-Cash Economy

The payment banks that Sharma and other are trying to launch are part of a larger experiment of making India a less-cash economy.

In a report released earlier this week, McKinsey & Co. noted that financial services delivered over a digital infrastructure could increase India’s gross domestic product by 11.8 percent, adding $700 billion to the economy by 2025. According to the report, India hasn’t tapped this potential of digital finance as more than 99 percent of transactions by volume are still cash payments.

Can Paytm’s Vijay Shekhar Sharma Disrupt Indian Banking?

While digital finance products like mobile wallets have become popular and new innovations like the Unified Payments Interface have been brought in to enable digital payments, there is nothing to suggest that the use of cash is coming down.

That is not surprising at this stage, said Sharma.

“Right now we are creating use cases for digital at few places but what is the percentage of transactions that you can do with digital. So these are very early signs that consumers and merchants would like to move to digital payments but there is no sizeable impact yet,” he said.

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