Payments Bank License: Does it seem like the Regulatory Authority forgot to give them Teeth?

Several Founders, Co-Founders, CXO Bankers, CXO Fintech professional & people who participated in the ePanel discussions:

Mr. Manish Khera, Former MD & CEO, Fino, Airtel Payment Bank
Mr. PN Vasudevan, Managing Director & CEO, Equitas Small Finance Bank
Mr. Sunil Kulkarni, Joint Managing Director, Oxigen Services (India) Pvt Ltd
Mr. Rishi Gupta, MD & CEO Fino Payments Bank
Mr. Vijay Shekhar Sharma, Founder, Paytm
Mr. Parag Mehta, Founder & CEO, Evolute Group
Mr. Ravi Shankar, Co-founder & CEO, Active Intelligence Pte Ltd.
Mr. Sandeep Todi, Co-founder, Remitware Payments Inc
Mr. Probir Roy, Co-founder, Paymate
Mr. Ram Shriram, Founder, & CEO, Mahagram
Mr. Amit Balooni, Founder-FrankBanker Consulting
Mr. Taron Mohan, CEO & Promoter, NextGen Telesolutions Pvt Ltd
Dr. Bhaskaran, Former Chief Executive Officer, IIBF
Mr. Neeraj Chandra, Head of Operations, Abu Dhabi Commercial Bank
Mr. Sameer Nemavarkar, Former CEO, Atos Worldline India
Mr. Sharad Goklani, Senior Vice President- Technology, Equitas Small Finance Bank
Mr. Dendukuri Raghuveer, Product Owner, Intandemly
‪Mr. Sukhdeep Singh, Vice President- Banking And Business Development Oxigen Services (India) Pvt Ltd
Mr. Salil Chugh, Global Consulting Practice(APAC) at Experian
Mr. Ishan Vaish, India Partnership Manager – Worldwide Developer Relation, Apple
Mr. Ravikanth Pynda, Founder, Happi-pay
Mr. Aneesh Khanna, Former Executive Vice President – NSDL Payments Bank
Mr. Shirisha Ghosh Torit, Co-Founder, Torit Innovation
Mr. Suman Gandham, Tech & Innovation Director, Nekko Capital
Mr. SK Datta, Former Advisor & Chief General Manager, Bank of India
Mr. Naazish Munshi, Merchant Acquiring Lead, NSDL Payments Bank
Ms. Kaunain Esmile, Vice President-Country Lead Customer Experience, DBS Bank
Mr. Vineet Tiwari, Crescent Payments Pvt Ltd
Mr. Viswadeep Chavali, Vice President, Equitas Small Finance Bank
Vikas R Panditrao, Co-Founder, Forum of Industry Academic Knowledge Sharing (FIAKS)
Anuradha Panditrao, Founder, Forum of Industry Academic Knowledge Sharing (FIAKS)
Many other CEO/CXO Bankers & Fintech professionals on FIAKS Forum requested to remain anonymous

Following is a text message received by customers from Aditya Birla Payments Bank.“Dear customer, Thank you for your business and patronage of Aditya Birla Idea Payments Bank Ltd. We are grateful for the faith you placed on us. We regret to inform you that we intend to discontinue our banking services. However, we would like to assure you that the bank has made full and complete arrangements for the return of your deposits. We request you to transfer the balance through online/mobile banking/nearest banking point. We will be restricting any further credits (add money) to your account from 26th July 2019. For any queries call us on 18002092265 or write to us at vcare4u@adityabirla.bank.”

This message has aroused an important discussion in the FIAKS community as to Why and What actually has caused Aditya Birla Payments Bank to shut down? Are the regulations imposed on payments banks too harsh? or Was it just an inefficient not properly formed business model ? or Are there any other reasons which have resulted in them shutting shop?

Discussions gathered from around the FIAKS community has resulted in various different arguments and before you draw a conclusion it’s important to view this topic from two different perspectives one is from the payments bank point of view ie a business point of view another is the Governments point of view, their motive, and purpose for releasing the payments bank model in India. Before we begin, let’s first look at what was the Government’s idea behind releasing the payments bank model?

It is important here to understand how the government views the payments bank model and what are its objectives and purpose for creating and conceptualizing this mode of banking. In 2013, the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households was formed by the RBI and it is led by the Nachiket Mor Committee headed by Mr. Nachiket Mor who is a member of the Central Board of RBI. It’s main purpose as per a circular released by RBI for press releases states that “The objectives of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labor workforce, low-income households, small businesses, other unorganized sector entities, and other users.” ^[2]As we can see that the governments focus here on releasing payments bank model is on people living in rural and undeveloped areas in our country, these are people who do not get to avail normal banking facilities like many of the urban class societies in our country gets to do. By doing this the government wanted to encourage the low-income groups of our country to engage in saving activities. Which is why on February 4^th, 2015 RBI released the names of applicants and the advisory committee for payments banks in India. What this also meant is that the government wouldn’t allow lending activities to be conducted by the bank so that these low-income groups of people could avoid being in debt.

Here is RBI Circular which will help to better understand the business model of payment banks. Click on this link RBI releases Guidelines for Licensing of Payments Banks

Activities that can be conducted Payments Bank

Acceptance of demand deposits. The payments bank will initially be restricted to holding a maximum balance of Rs. 100,000 per individual customer.
Issuance of ATM/debit cards. Payments banks, however, cannot issue credit cards.
Payments and remittance services through various channels.
BC of another bank, subject to the Reserve Bank guidelines on BCs.
Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.

Funds that can be deployed

The payments bank cannot undertake lending activities.
Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75 per cent of its “demand deposit balances” in Statutory Liquidity Ratio(SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25 per cent in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.

In summary, although these rules set by the government seems to be beneficial or in favor of the low-income groups, labor workforce, small businesses it has made it extremely difficult for the payment bank companies to earn any profits and continue their business for a longer period of time. Our members also say that we have been fighting with media on the obituaries they have been writing, talking about payments banks even before the first bank came up. When any Payments bank decides to stop business we are questioned why have they decided to surrender the license? At some levels, we are still fascinated by license raj and the riches associated with those who got the license through hustle or muscle. RBI intended to create a framework where the business model doesn’t seem well defined and set the ground for the discovery of a viable business model for payments bank. This is not the RBI that we know of. The model was flawed at the very outset and the ground rules kept changing. That’s not a good foundation for encouraging innovation.

Also, there were 41 applicants that had originally applied for the payments bank license out of which the RBI approved the license demand of only 11 companies. Out of which 18 months later they eventually returned the license of 4 companies resulting in only 7 active payment bank companies, of which Aditya Birla payments bank who was one of the seven has decided to shut down its activities and has sent its customers the above-highlighted notice requesting them to transfer their account balance through online/mobile banking/ nearest banking point. This caused a number of banking and fintech professionals to question the rules set by the RBI. A number of professionals are also questioning the business model of these payments banks.

The difference in opinion and viewpoints has caused many professionals to express their concerns regarding this matter in different ways, while some professionals say that what the government is doing in terms of payments bank is great for the nation, some say that the rules set by the RBI is a burden and are causing payments banks to shut down.

To demonstrate further let us look at the following points from the business perspective

Cost

The payments model works on low equilibrium which means that you will have to build high velocity with least cost otherwise you will end up losing money on every transaction. Needless to say that you have to pick up the right business opportunities rather than high visible costly options. In the initial stages for payments banks it’s almost impossible to make any profits and adding the branch setup costs, the input costs like tech, operations, regulation/compliance are very high which is putting pressure on cost per customer not only are the payments banks unable to make profit but they are also unable to recover costs. Evolving expenditure models like opex, annuity payment methods are also not working in favour as they insist on minimum fee commitment. This is a disincentive to other smaller banks also operating in the ecosystem to pursue tech-based services. The mandate for payments banks was to deepen the reach of basic banking services to the underprivileged of our society but with such heavy costs, it becomes extremely difficult for the payments bank to continue rendering their services for a long time. The costs on distribution, operations, and supervision on a per-customer basis are prohibitively high given the low volumes and values per location. The DMT, AEPS, Card+Pin led interoperable businesses are not sustainable either since the banks servicing the customers do not own relationships thereby limiting revenues per customer. The key for payments banks is to find a model that would enable in bringing down the cost of owning and servicing customer for which they have to come up with an innovative approach which is completely missing. In the past, DD and MT charged were reasonable for both banks and customers. To encourage the use of cashless payments regulator has made all remittances free. Facilitation fees are curbed. Commercial banks are also active in payment and settlements. Technically they have interest and fee income and are not dependent on transaction fee for remittances. Yet due to the micromanaging of interest through MCLR route and inability to manage credit risk, they have less than 50 paise profit margin. Payments banks have limited asset products and cannot cross-subsidize loss in remittance business.

Revenues

This lays to rest all the initial hype around payments banks, Airtel and Jio have good plans around this model. Maybe because of their customer reach and their user base, it gives them an edge to the services. The best fitment for payment bank seems like a ‘free value-added service’, layered over UPI and those with large customer base may provide this for stickiness and customer delight. Seems very difficult to be profitable as a standalone business or a significant revenue generator. More so with directionally a ‘free digital payment’ push from the government in the recent budget. Some of the existential issues of payments banks also exist for other banks too. What are the revenue avenues for banks when NEFT/ IMPS/ RTGS charges, MDR, ATM transaction charges are shrinking! so there can be commissions for selling insurances, mutual funds, forex, etc. But these have instances of misselling so multiple regulators get involved, thus putting the focus on that, rather than the business. Eventually, will it perhaps be only NII? But then there are NPAs to manage which further crunch the profitability levels. What will banks do? Charge customers for keeping their money in the bank, instead of paying interest? Not exactly, but for the latter, people generally think it is SMALL (finance) BANK, rather than SMALL FINANCE (bank). We could be looking at it from the wrong perspective for PayTM, do we ask the same question or for that matter, Uber, Ola, GooglePay, Amazon, WhatsApp pay Wallet companies, etc. But if profit was the only criteria, how is Uber/ Ola/ Google Pay/ Amazon Pay/ WhatsApp Pay models which do not have profits in the foreseeable future going to continue. If it’s not making a profit it must at least be able to recover expenses. It isn’t difficult to agree with this concept and no one seems to be in disagreement with the same, the only submission here is to use the same criteria for all. Any fintech/ wallet/ payments provider who is not making profits must be treated in the same and declared a failure. What we need to understand here is that Uber etc. are in the wallet business and not in banking. The money they transfer is not in their books. They have other business income and payment is a method of attracting business and volume. Their play is VOLUME. They will also be unviable if they are exclusively in the transaction. Another angle is like venture investment. They may be hoping for a change in policy and bailout when they fail! If RBI says don’t charge they will also find payment business unviable. RBI is aware that the cost of cash is nearly 2% or so of GDP. As such they should encourage every type of e-pay and make it viable for banks and wallets. Unless their no fee mandate is a strategy to get the buy-in from customers. It’s again about perspective, the regulator saw insane amounts being charged to migrant labor for remitting money, lots of companies are doing it, therefore they have turned it into a license. Is it the regulator who has to blame if they could not take the initiative. We look at gross book value for all the Fintechs now we must start looking at the payments banks in the same light and do the valuation on this basis and payments banks will be considered a success.

Unavailability of Credit-lending activities: Is the unavailability of credit lending activities causing Payments Banks to fail? Could NSDL payments banks be next after ABPB?

Aditya Birla surrendering license exposes the failure of policymakers/regulators who are remaining adamant, it is really sad that ABPB had to close its operations. Maybe the impact on the core telecom business forced them to concentrate all their resources there. However, ABPB shutting down does not mean one should speculate about the next one being NSDL Payments Bank, as the rules issued by the government for payments bank say that credit lending activities are prohibited it raises a major concern as to how are payments banks supposed to earn profits, let alone earn profits they must at least be able to recover costs. Not allowing payment banks to lend up to at least Rs. 1 Lakh, how incorrect it is on the part of the regulator to remove mini KYC up to 10k. KYC concerns were blown out of proportion for small value which typically is done by cash also how wrong is the policy of not giving payment banking license to PPI instead of that they’re giving it to the High Net worth individuals. Anti-home grown wallet policy of regulators. Allowing these PPI’s to die by offering the market created by wallet players to MNC Giants. Again the question arises as to why isn’t anyone questioning the business model that RBI envisaged through an intellectual committee who proposed the payments bank model. If JIO has taken so long to launch, it’s obvious that the model was dead on arrival. Someone in RBI should be held accountable for the waste of time and money. It’s a miracle Fintech survives in India.

A number of professionals in the FIAKS community have said that payments banks must be allowed to lend loans up to at least 1 lakh Rupees as interest recovered from loans are a major portion of revenue for banks. They could have allowed personal loans, credit cards and relaxed the limits for holding balances up to 10 Lakhs and FD’s up to 100 Lakhs. The target segment of the same could have been youth who would fancy digital payments. However, the hope was that RBI will progressively increase deposit limits in operations and provide small lending and financial services. Also, the money that Payments Banks holds is restricted to be invested in Government bonds. By any simple math, the model is completely not justified when banks are paying 6% as deposits. On the other hand, there are also some professionals who say that not being able to lend credit cannot be the reason for bailing out payments banks either because payment banks are claiming they have an unviable business model and want to do lending. We are living in a phase where all NBFC’s are under stress and many are failing. Asset quality and ability to assess credit has always been a question in the Indian financial system. It was not long back that we celebrated banks with higher CASA and made banks like HDFC as role models for being conservative on lending while banks like ICICI and Axis suffered.

The problem is not external or model or license. The problem is internal. Payment bank was a license given after evaluating a submission. The submission was choice based, not even invitation-based. The same Boards/management/ investors approved and submitted the applications. How come there is a problem post getting the license, not prior? The construct of license was digital and innovation for inclusion. Out of the 11 licenses granted, a few did not start, a few started and are struggling and only one – PayTM seems to be succeeding. One look at the reasons will show because they stayed with digital and innovation. It’s a reflection of Mr.Vijay Shekhar Sharma’s vision, design construct, and support of Board in its strategy. The same year 2013 when PayTM was launching wallet (one of the last companies to get a PPI license), some boards were approving a 1-page memo to shut down their existing business which was poised for explosion. For every pocket and chiller which has died a quite death, there is a PayU and Freecharge and PhonePe. Models succeed not because of license terms but because of management vision and execution capacity.

Everyone seems to be looking to RBI for the bailout. This is a typical old fashioned banking strategy. Inefficient PSU banks have always had to be capitalized, including the current year, failing private banks were forced to be taken over by healthier private banks. RBI literally feels obliged to save bad banks. RBI shouldered it’s the responsibility to take care of it small depositors and has succeeded in creating a stable banking system in India. Payment Bank construct has a beautiful design of capping deposits at Rs 1 lac to save the depositor and leave the responsibility of success to management/board for choices, decisions they have made post getting the license through an application process. The money they have garnered today is safe in government securities. If they fail, small depositors’ money is safe, unlike other models. In fact, if failing and non-profitable payment banks are allowed to lend, this money would not be available any longer increasing the small depositors risk and RBI’s responsibility. Small finance banks had a proven viable profitable model of lending as NBFCs. They were allowed to be banks to lower their cost of borrowing. All 10 of them have built liability franchise in varying degree of success and are on right path. Payment banks have no previous history of the successful credit assessment. By allowing them to lend we will put the meager customer deposits they have mobilized to risk putting further burden and strain on RBI (deposits are guaranteed by RBI/govt).

Instead of looking at conversion as a bailout approach we should look at conversion as a growth strategy. We should look at only strong successful payment banks need to be allowed to convert to Small Finance Banks. Definition of success being digital and innovation leading to inclusion, the very criteria on which their submissions were evaluated. Definition of strong being support from existing investors like post bank and telco parents or promoter himself. In some cases it’s available. If not, not only is it unfair to the applicants whose applications were rejected, it is also a disincentive to the models and companies who have worked hard in building success competitively. And lastly, it would put the financial burden on RBI besides the moral obligation it is currently under. The non-successful payment banks need to be allowed to fail rather than being bailed out.