Seven Years On, Payment Banks Survive On Thin Margins

Payment banks have had a bit of a scattershot past. India's experiment with differentiated banking licences—like small finance banks and payment banks—began seven years ago but seems to have faltered, especially for the latter.

Launched with the idea of furthering financial inclusion, they've managed to gain customers, but their revenue streams have a scaling problem. Of the 11 entities granted in-principle licences to run payment banks in 2015, only six remain operational today.

Of the licences granted, three were surrendered within a year by Cholamandalam Distribution Services, Sun Pharmaceuticals, and Tech Mahindra. Of the remaining eight, two entities have become defunct, including Aditya Birla Idea Payments Bank and Vodafone m-pesa.

Long gestation periods to profitability, thin margins, and intense competition were among the factors cited by the entities that withdrew. Cholamandalam, for instance, cited "competition and other factors, including a long gestation period for payment banks to become profitable," when it decided to surrender its license.

“Typically, as a payment bank, we only really have spaced four or five,” R Gandhi, a former deputy governor at the RBI, told BQ Prime. The central bank granted 11 licences so that market forces could determine which ones should survive, he added.

"Their customer base is yet to develop fully, making break-even challenging. As a result, since inception, they have been suffering losses," the RBI noted in the report on the trend and progress of banking in India for 2020–21.

The likes of Paytm Payments Bank, Airtel Payments Bank, and Fino Payments Bank have also been penalised by the RBI in the past due to failures in their know-your-customer processes.

India Post Payments Bank, on the other hand, has also had its share of struggles as it failed to meet a key licencing condition requiring a partial transfer of deposits from the Indian Post. Even as payment banks have built up a customer base and attracted some deposits, their cumulative net loss stood at Rs 798 crore in March 2021, the report added.

Of the six payment banks, Fino Payments Bank is the only one that is publicly listed.

Where Payment Banks Stand

Payment banks can hold up to Rs 2 lakh each in customer deposits, but they are not allowed to do any lending. They can earn treasury income on the deposits and are required to park 75% of them in government securities with a tenure under one year.

The relatively small size of deposits they're able to mobilise caps that revenue, an executive at a payments bank told BQ Prime on the condition of anonymity.

This makes them reliant on payment and remittance income, but there's limited scope beyond that unless they monetise the licence using partnerships, this person added.

“All of us together would be touching around 10 to 15 crore customers on a monthly basis,” Rishi Gupta, chief executive officer at Fino Payments Bank, told BQ Prime.

In addition to payments and remittances, the bank offers a deposit account on a subscription model, where the customer pays an annual fee for maintaining the account. Fino Payments Bank alone serves 2.5 crore customers a month and had a total account base of 59.5 lakh as of the second quarter of the financial year 2023.

The bank held deposits worth Rs 633 crore as of September 2022, according to the bank's financial results for the second quarter.

Fino Payments Bank recorded a 25% jump year on year in its revenues, reaching Rs 303 crore in the second quarter. Its net profit stood at Rs 13.8 crore for the quarter.

Airtel Payments Bank, on the other hand, has a transacting user base of 5 crore people, Anubrata Biswas, chief executive at Airtel Payments Bank, told BQ Prime in an emailed response to queries. The bank holds customer deposits worth Rs 1,304 crore as of March.

In many ways, Fino is an outlier among payment banks. "It has managed to build a sizeable customer base and has eventual plans to transition to a small finance bank," Gupta said.

“For us, SFB is a regulatory approval to do credit as a product, and we don't intend to be very asset-heavy,” he added, noting that payments will remain Fino's core focus even after the transition.

Airtel Payments Bank is not considering a conversion to a SFB, Biswas said.

Future Uncertain

With the exception of Fino, other payment banking units haven't really taken off, according to Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services.

While telecom operators realised there was more money to be made in providing telecommunications services to banks instead of worrying about a licence of their own, others like NSDL Payments Bank have remained peripheral, he added.

“Both the models have failed,” he added, referring to both types of licences that emerged out of the RBI committee's recommendations, i.e., payment banks and small finance banks.

“Without lending being able to funnel the various business activities, it's very difficult for these kinds of entities to remain financially viable,” Monica Jasuja, head of money management at GoTo Financial, told BQ Prime.

"The whole idea is to be able to set up the consumer side of the business and then be able to move into the lending side with a small finance bank license," she said.

Although Fino sees that as an eventual goal for itself, other payment banks haven't publicly declared an intention to move in that direction.

All in all, while payment banks began with a commendable intention, their business models appear to have hamstrung them. Although an eventual transition to a universal bank may have been part of their vision, it also exposes them to bigger, better competitors who have made substantial investments in their technological capabilities and aren't likely to cede any ground.

“Why would commercial banks give any space to small finance banks and payment banks?” Parekh said, referring to the competitive landscape such banks face. To assume that differentiated banking—via payment banks and small finance banks—could coexist with universal banks was the faulty assumption to begin with, he added.

(Corrects an earlier version which misstated that Fino Payments Bank offers 6.25% interest on savings account deposits)