Payments banks struggle to move beyond payments

The first time around, payments banks—the country’s central bank’s biggest experiment in creating a half-bank half-payment entity—bombed. In the short two-year history of payments banks, everything that could possibly go wrong for them did. Crippling rules from the Reserve Bank of India (RBI). Check. Companies backing out. Check. Regulatory flip-flops on know-your-customer (KYC) norms. Check. Frauds. Check. Suspension and fine. Check.

Payments banks run by Airtel, Paytm* and Fino were asked to suspend operations in 2017 and 2018 for serious transgressions—ranging from not taking explicit consent to opening a bank account while doing KYC to not adhering to the Rs 100,000 (~$1,447) deposit limit that the RBI imposed on payments banks. Before 2018 ended though, the suspension was lifted from all three.

And now, when they have a second shot at this, they’re walking on eggshells. The banks hired an army of banking correspondents (BCs) to go out on the streets and get people to open payments bank accounts. But the kind of action they are now seeing is a tell. Agents we spoke to now do two to three account openings a day, as compared to the hundreds they were doing before the RBI stepped in.

In the bylanes of Mira Road, a suburb in Mumbai, The Ken visited at least seven mobile retailers who are banking correspondents. And all of them have resumed doing KYC, though this time they are sticking to the traditional paper-based KYC. Not the Aadhaar-based electronic KYC (or e-KYC), which allowed banks to play fast and loose while taking consent.

The Supreme Court first banned the use of Aadhaar for e-KYC by companies in September 2018, and then, in a total volte-face, the government introduced a bill in the Parliament in January, which would amend the Indian Telegraph Act of 1885 and the Prevention of Money Laundering Act (PMLA) of 2002 to make the use of Aadhaar during KYC voluntary. On 13 February, the ministry of finance released the amendments to the PMLA.

This did bring cheer to payments banks, as the new amendments allowed voluntary e-KYC for banks and telcos.

However, this joy was short-lived. Earlier this month, the Unique Identification Authority of India (UIDAI) announced that private entities will have to pay for the e-KYC and authentication services provided by the Authority.

“We could scale faster with e-KYC as it costs less compared to physical KYC, but to some extent, the UIDAI has nullified it because now they are going to charge for it,” says Shailesh Pandey, head of strategy and marketing at Fino Payments Bank.

Though the Aadhaar ordinance has now been approved, payments banks are not going ahead with voluntary e-KYC as they are waiting for a formal circular from the RBI, Pandey says. The retailers, meanwhile, are also holding back on Aadhaar-based e-KYC as they have not been told by banks yet to resume it.

“We are very careful now when we do KYC. And moreover, now we are not trying to bundle it to anyone who wants some other service,” said Sandip Panday, a BC in West Bengal’s Hooghly district, over the phone.

And whatever little account opening action is seen, seems to be among Paytm Payments Bank agents. Airtel Payments Bank is not on the radar among the retailer we spoke to. The Ken visited three locations based on the company’s website. Out of the three, two seemed to have been permanently shut and the third retailer, who also runs a remittance operation from his shop, said that he had stopped doing KYC for the company last year. The hassle of all the documentation and onboarding was too much for the Rs 20 (~$0.29) that he was getting to open each account.

Panday, too, said that most people who came into his shop in Hooghly were for the Paytm Bank account. He is a BC for both Paytm and Airtel. He says after the incident in which people’s subsidy payouts from the government went into their Airtel Payments Bank account, the bank has not been able to win back customers’ trust. It is another matter altogether that Paytm, too, violated the trust of its customers. (We wrote about that in Inside the Paytm Payments Bank fiasco.)

The trust deficit is not just because of the banks’ cavalier attitude towards consent to open bank accounts. These banks are also digital. For customers who are used to walking into a branch in their neighbourhood, reconciling with the fact that they can’t meet a bank official in person is to take a big leap of faith. Also, the discovery and use of payments bank accounts is closely tied to how loyal a user is to the core service. For instance, an Airtel Payments Bank account user could also be using Airtel for mobile or DTH. A crack in one service can quickly spread to other services. Then there is the whole issue of not being allowed to lend, which time and again returns to haunt payments banks.

Together, these are bigger fish to fry in their second coming than KYC and customer onboarding, which, in comparison, looks like the least of payments banks’ problems.

A better wallet

Three months ago, Atul Amit, a Pune-based sales and marketing employee at a large battery company, was looking to change his bank account from State Bank of India. He said their service was becoming “unbearable.” And when he had to choose an alternative account to move all his deposits to, he picked HDFC Bank. Not the two other payments bank accounts of Airtel and Paytm he already holds.

A lost opportunity for Airtel and Paytm Payments Bank.

The reason he didn’t pick either of the two banks to move his savings deposit he says was trust.

“None of these banks have enough physical branches. Every time I have something to take up, I can’t launch a Twitter battle,” he says. Not having a physical presence means he feels the companies can’t be held accountable. “If there is a branch they have to give me an answer as I’m in their face. With social media, there is an easy escape route,” he says.

Paytm has plans for 31 physical branches and 3,000 specially branded outlets called Paytm Ka ATM. Airtel has 500,000 banking points. But when payments banks were allowed by RBI, the digital nature of these banks was the part that excited the regulator—precisely what is going against it now.

But if users like 35-year-old Amit have such low trust, why does he hold an account in the first place?

Simple answer: cashbacks.

Every business in the Indian internet economy has been fuelled by cashbacks. Especially the likes of Paytm. In 2015, it spent Rs 600 crore (~$86.8 million) in cashbacks and it kept that up by spending another $33.7 million during a six-day sale on Paytm Mall.

It helps them that the users of payments banks are using these bank accounts with offer-struck eyes. Amit calls himself a social media activist. He helps people on the internet fight their battles with companies with respect to refunds, bad service, etc. As a function, he also knows where all the best cashbacks are. That’s how he discovered the payments banks.

When he shifted his telco service to Airtel from Vodafone, a year ago, he came to know that if he made his Airtel prepaid mobile recharges and did his DTH recharges for his Airtel set-top box from an Airtel Payments Bank account, he would get better cashbacks. So he got himself a bank account.

Similarly, for Paytm, he figured that the quantum of cashbacks varies when he uses the Paytm wallet, the Paytm payments bank account and the UPI version of Paytm. “I use the payment option where I get the best deal,” he says unapologetically.

So does he do anything else using his payments bank account? No. I don’t want to expose my main bank account to all digital payments I make. “So I transfer Rs 1000 (~$14.47) to Rs 2000 (~$28.95) to the bank account, my monthly payment needs,” he says. This is an insight that is uniform across users. Even in Hooghly, Panday says that most of his users are 16- to 20-year-olds, who open a bank account to manage bill payments for their parents.

This generation is savvy. They want to make digital bill payments. But by putting money in wallets they know they can’t cash out; but in a bank account they can. That’s why they are using it

-Sandip Panday, the business correspondent

The cashbacks in the ecosystem have shot any expectations that these payments banks can make money out of payments. In fact, the RBI did envision payments as a standalone revenue stream. R Gandhi, a former RBI deputy governor and an advisor to Paytm, said there was an expectation that payments banks will make money out of payments and remittances. “But there is a change with the entire payments ecosystem as no one is willing to pay for payments.”

Besides, this is a wallet that isn’t easy on the wallet. “Payments banks are a digital wallet that is significantly more expensive to maintain, that is only the difference, because otherwise, the capabilities are the same,” says Bipin Preet Singh, founder and CEO of the digital wallet company MobiKwik.

According to the latest data available from RBI, in the months between April and September of 2018, the five payments banks that are operational earned an interest income of Rs 175.6 crore (~$25.4 million) up from Rs 31.4 crore (~$4.5 million) a year ago, when there were only two payments banks. Losses also rose from Rs 24 crore (~$3.4 million) to Rs 51 crore (~$7.3 million).

“The original revenue model has gone into disarray, it is no longer valid and they need to rework their maths,” says Gandhi. So the original revenue paths like remittances are longer in the consideration set. They need something better. Airtel Payments Bank and Paytm Payments Bank did not respond to an email with questions.

Searching for revenue

In payments banks’ search for better revenue, they found themselves face-to-face with merchants.

As per a survey from last year, over 80% of the small business owners surveyed used a smartphone and 70% had access to internet services. Still, only about one-fourth of merchants used their phones for financial transactions and most still rely on cash to transact with customers and suppliers. These “micro-merchants” account for 92% of the retail market in India and transitioning them to digital payments provides an opportunity to significantly further India’s financial inclusion agenda, the survey said.

“In India, individuals and small entrepreneurs need banking services, right from a current account to all other services related to payments etc, which cannot be serviced by the existing large commercial and scheduled commercial banks,” says Naveen Surya, chairman emeritus of Payments Council of India (PCI). Surya is also the chairman of Fintech Convergence Council (FCC) and the former CEO and MD of ITZ Cash.

Only 2%

Razorpay, a payment gateway that processes transactions for various online merchants, said that it sees only these many of its transactions happening through payments banks

Payments banks have realised this.

Paytm announced the launch of its zero-balance current account facility, a move aimed at small and medium enterprises (SMEs), who do not have access to free current accounts.

42 million

Paytm Payments Bank will now allow these many customers to invest in mutual funds through Paytm Money, enabling the cross-selling of investment products from its own subsidiary

Jio Payments Bank, too, seems to have realised that the real opportunity lies with the merchants. As a pilot, Jio has rolled out 150,000 PoS (point of sale) machines or 5% of the current PoS base—within the first six months of 2019, it plans to open payments bank accounts for all the merchants. With this move, telco Reliance Jio gets inventory and financial data. Also, the thing with merchants is that they always have a small working capital requirement which can be fulfilled by State Bank of India, Jio’s partner bank. A payments bank is not allowed to lend from its own books, but it’s allowed to help commercial banks or non-banking financial companies find loan customers.

On the other hand, Fino Payments Bank and India Post Payments Bank (IPPB) are focusing more on the direct benefit transfer (DBT) customers. That is, people receiving government subsidies directly in their bank accounts—a user base that was not impacted by the Supreme Court verdict last year and for which e-KYC has always been open for starting accounts. “For us, our 70-80% customers are typically DBT customers only. We want to target this mass market consumer segment with income levels between Rs 1-5 lakh (~$1,447-7,237),” Pandey says.

“We are looking at DBT in a big way to service it, both for existing users and also those who are opening accounts with us for the first time,” says Suresh Sethi, MD and CEO, IPPB.

Given their huge distribution network, both Fino and IPPB are figuring out last-mile accessibility for their user base. Both the companies believe that the nearly 320 million bank accounts opened under a government scheme—the Prime Minister’s Jan Dhan Yojana (PMJDY)—have not solved the customers’ ability to transact either.

At present, Fino has over 400 branches and close to about 85,000 merchant partners as BCs and remittance-service providers. And IPPB has the largest distribution network in the entire country. The official postal ecosystem has 155,000 points of service, out of which 135,000 have been made operational as IPPB outlets, says Sethi.

We have trained and certified almost 250,000 postman and postal assistant towards our banking services. And with smartphones and biometric devices we are to provide you banking at your doorstep

-Suresh Sethi, MD and CEO, IPPB

IPPB also offered “doorstep banking”—but not for free. “Like Uber, users could call postmen for doorstep banking by paying a fee,” Sethi says.

Also, both the players have partnerships with larger banks and insurance companies for cross-selling other banking products to their customers. They’re also eyeing the merchants as an important focus group for growth going ahead.

Gold loans

As part of cross-selling, the gold loan referral business for Fino has doubled since the year ended March 2018. For this financial year, they are clocking a monthly average of around Rs 65 crore.

But in their race to find revenue streams, they might shoot themselves in the foot. To open a bank account, Fino says, a customer needs to deposit Rs 1120 ($16.21) into the account. And here, Fino takes the Rs 120 ($1.74), says Panday, the Hooghly-based BC. “Nobody wants to deposit Rs 1000 and then pay a charge of Rs 120 ($1.74) to open an account.” He says he saw no demand for it, so he didn’t become a BC for Fino.

Unlike startups that can run for years making no real revenue, banks can’t. And much of the fix has to come from the RBI, and not just banks themselves.

Saving payments banks

The viability of business largely seems to lie in the hands of the RBI. The RBI had initially given payments bank licences to eleven companies, and now we’re down to six. The Ken sought expert views on what can help save the payments banks. And, with it, the agenda of financial inclusion that they were supposed to address.

The first was to allow payments banks to get into lending and insurance.

Consumers need three key financial services always—payments, emergency credit and basic insurance, says Surya, the former ITZ Cash CEO. “The challenge with the payments bank model is that while we are calling them a financial inclusion player, credit is completely excluded (and without that, financial inclusion is incomplete),” he says. And he believes payments banks, beyond the RBI, should also get support from the insurance regulator for delivering other services.

The other demand from the industry side has been on increasing the Rs 100,000 deposit limit and to have seamless portability of KYC. “There is no doubt that, for a current account, Rs 100,000 limit is less,” says Vijay Chugh, former chief general manager and head of the department of payments and settlement systems at the RBI. He adds that “the structure of a payments bank is built around the maximum level of insurance cover extended to accounts by RBI’s subsidiary the Deposit Insurance and Credit Guarantee Corporation. For any enhancement of the limits, the industry would need to discuss with the regulator”.

Gandhi, the former RBI deputy governor, agrees. “There is no strong argument for the Rs 100,000 limit,” he says. The limit was put in to ensure they serve the low-end of the customers. But even these customers cannot forever remain in that bracket, so that limit should be enhanced periodically, he adds.

With regards to customer onboarding and KYC duplication, Surya says that they are working on solutions. “When you are dealing with a small ticket client, you cannot afford KYC duplication costs every time you offer a new service.”

“We [FCC which is working along with the RBI] are also talking about a KYC bureau which will remove the unnecessary duplication of KYC,” he adds.

“Being a distributed model, operational costs are always going to be very high; we need to discover new ways of bringing viability to the business,” Sethi of IPPB says.

If none of this works, in what could be the biggest step down of this experiment, payments banks will end up becoming a banking agent for other banks, where they help originate loans that will be fulfilled by another bank.

But for that, one needn’t even be a bank, really.

Plus, there are other pressing concerns. Most of users’ payments banks experience is closely tied to the user’s experience with the core business. Lose a customer in one, it is likely to be across all services. Take Pune-based Amit for instance. He says where he lives, the Airtel network is not great. And is now looking to change networks. “If I move out of Airtel, I have no reason to have the bank account.”

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