When RBI approved payments bank licenses for 11 entities last August, it was widely hailed as the arrival of new and agile era of banking. However, since then, the euphoria seems to have given way to pessimism – so much so, that 3 players have dropped out of Payments bank race. The latest one being Indian IT firm Tech Mahindra.
In an announcement filed with BSE as the outcome of the board meeting, Tech Mahindra stated, “With reference to the earlier communication dated August 20, 2015, about the In principle approval granted by RBI for setting up a Payment Bank, Tech Mahindra Ltd has informed BSE that the Board of Directors of the Company at its meeting held on May 24, 2016, have decided that the Company will not pursue this opportunity.”
Last week, Sun Pharma founder Dilip Shanghvi who along with IDFC Bank and Telenor got in-principle approval were the second company to pull out of the race. In March, Cholamandalam group too announced that they will not be setting up Payments Bank.
Tech Mahindra reasoned that it will be a long road ahead for Payments Banks to achieve profitability. C P Gurnani, Managing Director and CEO of Tech Mahindra said, “It was a conscious decision that we wanted to be in this business. We still strongly believe that it is a very large unversed market. Over a period of time, we realized amount of aggression that has come to the marketplace which only erodes the margin because it was anyway more about transactions and the volume of transactions with a razor thin margins. We realized that the business profitability will take a much longer period than what we were willing to invest into and that is the reason”
RBI is obviously not happy about players, who have got in-principle approval, dropping out of the race. BI deputy governor S S Mundra said, “We would certainly feel little aggrieved because lot of efforts from the part of RBI go in processing these applications,”
Among the eight remaining entities who got in-principle approval, only Paytm, Airtel and Reliance Industries seems to be pursuing the plan aggressively. Infact, Paytm founder, Vijay Shekhar Sharma in September of last year boldly predicted that Paytm will be the first company to start Payments bank operations in India. Showing their commitment to the plan,, earlier this month, Paytm partnered with IT major Wipro for development of their core banking solution.
Airtel Money, who had forged partnership with Kotak Bank, were the first ones to get the final approval from RBI. Reliance Industries on their part have partnered with State Bank of India for Payments Bank and are moving ahead their plans as well! It is expected that the new RIL-SBI payment bank will be able to leverage Reliance Jio’s telecom network and retail business’ online and offline presence.
Payments Bank – A viable business model?
Interestingly, SBI Chairperson Arundhati Bhattacharya had said earlier last month that these banks have not yet come up with any viable business model as yet.
One of the main sources of income for Banks is interest they earn on loans or credit that they offer to customers. With Payments Bank being restricted to offer loans, they cannot earn money through interest. Even the Deposits have a limit of 1 Lakh making it difficult for Payments bank to make investments in other instruments that can generate revenue.
Purely, P2P money transfers or debit transactions are not enough for these banks for make significant revenues.
Having said that, these new age Payment Banks are bound to be flexible and nimble. There is still a very large population that is unbanked in India. With use of technology, these banks can keep their costs much lower compared to traditional entities.
We will have to wait and see how Payments banks make a dent in this overcrowded-but-still-with-immense-potential Indian Banking space.
