When the Reserve Bank of India (RBI) last year granted in-principle approval to 11 entities to start payment banks, the general opinion was that it would go a long way in driving financial inclusion. The initial euphoria has ebbed now with three of the 11 scrapping plans to enter the segment.

Although there were apprehensions all along about the road to profitability for payment banks, Tech Mahindra Ltd's decision last week to drop out of the race said it all. While Tech Mahindra CEO and MD CP Gurnani cited “changed market situation” since last year's approval as the reason for the company's decision, experts have been pointing out that payment bank aspirants, especially brick-and-mortar companies which do not have a distribution network to give and take cash, will not have it easy.

The first to opt out was Cholamandalam Investment and Finance Co. in March. The Murugappa group company said that the long gestation period for banks to turn profitable forced it to abandon its plans. This was followed by Sun Pharma promoter Dilip Shanghvi and his partners IDFC Bank Ltd and Telenor Financial Services withdrawing the application for a payment bank earlier this month.

This leaves only eight entities in the fray to set up a payment bank. These are Bharti Airtel Ltd, Vodafone India Ltd (Vodafone m-Pesa), Reliance Industries Ltd, Aditya Birla Nuvo Ltd (Idea Cellular), Fino Paytech, Paytm's Vijay Shekhar Sharma, National Securities Depository Ltd and India Post.

Sharma's Paytm Payment Bank Ltd, which earlier planned to roll out its services in August this year, has now said it would launch its business “before November”. The Bharti Airtel-Kotak Mahindra Bank joint venture, Airtel M Commerce Services Ltd, is likely to commence its payment banking operations by the second quarter of this financial year. India Post is likely to start its payment bank by March 2017, close to the 18-month deadline set by the RBI.

However, as the deadline draws closer, the players are realising the odds are stacked against them. Paytm’s Sharma, in an interview to Mint said, “It is not an easy business and is a long-term game. It should take any payment bank three to five years to make money. If you have enough volumes, you could reach there faster.”

The long road to profitability for payment banks was also a recurring theme at the recent Techcircle Payments Forum. “It's going to be like running on a treadmill – either you run very fast and reach where you want to go or fall off,” Mihir Gandhi, associate director of payments transformation, PwC India, said at the forum. “We don't think all 10 (the number of aspirants at that time) are going to make it. There will be a lot of consolidation that will happen after a few years -- some players will rethink their plans, and three to five players at most will profitably grow and sustain in the long term.”

Obstacles to profit

The RBI's guidelines (See chart: Do's and Don'ts) on the kind of business these payment banks can undertake is the first obstacle to quick profits. These entities can’t undertake any lending businesses. They can cross-sell banking products, but given the profile of the customers of these payment banks, selling mutual funds or insurance policies will be a difficult task.

Competing with universal banks will also not be easy. Their rural banking networks have become formidable over the years and payment banks will have to offer a differentiated proposition to lure the customer. "There will be some kind of competition emerging in the future between universal banks and payment banks for the same customer segments,” said Gandhi.

Perhaps the newest obstacle is the Unified Payment Interface (UPI). Introduced last month, the app virtually turns bank accounts into mobile wallets, thus removing the need for a payment bank. That is what the Tech Mahindra chief may have meant when he said that the market had changed considerably in the last six months.

As of now, the telecom companies and mobile wallet company Paytm seem to have the advantage. The telecom operators can ride on their existing distribution network, with payment banking as an add-on business. Pre-paid mobile connection users would be the likely target customer. Airtel and Vodafone have already cut their teeth on digital payments through Airtel Money and M-Pesa. Paytm, which has close to 130 million mobile wallet users, already reaches out to a customer segment similar to that which a payment bank is targeting.

Having a good customer base is the first essential step, but is not enough given this segment comprises the unbanked sections at the bottom-of-the-pyramid. A way out could be in assisting traditional financial institutions in reaching out to this section of customers with loan products.

“If payment banks have customer data, they can partner with another lending institution to be able to help in the loan origination process,” Sohini Rajola, head of digital banking, Axis Bank, had said at the Techcircle Payments Forum. How innovative payment banks are, in monetising their customer data, will determine the final list of survivors.

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