BL Research Bureau

When the RBI doled out as many as 11 payments bank licenses four years ago, it intended to widen financial inclusion and ride on low-cost digital payment systems to chip away at the physical cash transactions. But with only 6 out of the originally 11 intended players operational currently — few had dropped off within months of being granted licenses — the initial hype around RBI’s payments bank licenses has quickly fizzled out.

Airtel Payments Bank, Aditya Birla Idea Payments Bank, Fino Payments Bank, India Post Payments Bank, Jio Payments Bank, NSDL Payments Bank and Paytm Payments Bank — were the seven players operational until recently. With Aditya Birla Payments Bank, announcing its decision to shut operations in July, the tally is down to six.

Of these, only three have seen active transactions going by RBI’s statistics on mobile and NEFT transactions — Airtel Payments Bank, Fino Payments Bank and Paytm Payments Bank. India Post Payments Bank is also evaluating options on how to convert to a small finance bank (SFB).

Why have the Indian payments banks failed to live up to the initial expectations?

It appears that limited revenue streams, challenging business model and small margins have made it difficult for payments banks to carry on viable operations.

Inherent challenge

According to the RBI’s report on ‘Trend and progress of banking in India 2017-18’, payments banks continued to incur losses in 2017-18 (after a weak performance in 2016-17). From a net loss of ₹242 crore in FY17, losses climbed to ₹516 crore in FY18. High operating expenses and weak revenues led to the losses.

Also, other liabilities (such as unspent balances in prepaid payment instruments) of the payments banks in operation then accounted for more than half of their balance sheets. The share of deposits, while inching higher, was still low at 9 per cent (of total balance sheet) in 2017-18.

The aggregated numbers for FY19 are not yet disclosed.

But the still weak performance of Airtel Payments Bank — as disclosed in the Bharti Airtel’s subsidiary statements — suggest that pain still continues for these players.

In 2018-19, Airtel Payments Bank has incurred a loss of ₹338 crore, as against a loss of ₹272 crore in 2017-18. The payments bank had earned an income of ₹254 crore in 2018-19, but bore expenses to the tune of ₹593 crore, which led to losses. Deposits have fallen to ₹270 crore in 2018-19, from ₹290 crore in the previous year.

Paytm Payments Bank, however, managed to report a ₹19 crore profit for the fiscal 2018-19, the first payments bank in India to make a profit.

To be fair, payments banks are challenged by their underlying business model. Unlike traditional banks that lend money raised from deposits, payments banks have little scope to earn good margins.

For starters, payments banks cannot engage in any lending activity. Their income comprises mostly of interest from investments in safe government securities and fee income, that they can earn by distributing simple financial products such as mutual funds and insurance.

Such niche banks can provide payment and remittance services through various channels and can issue debit cards. But these banks cannot lend money.

Wafer-thin margins

As per the RBI guidelines, payments banks are allowed to take deposits only up to ₹1 lakh per account. They also need to invest 75 per cent of their deposits in government securities with maturity up to one year and the balance 25 per cent can be parked with commercial banks.

In the recent 3-4 years, the yield on one-year G-Sec has been in the 7-8 per cent range. But in the past few months, the yield on one-year G Sec has fallen sharply, and is at 5.6 per cent currently. This will only squeeze payments banks’ wafer-thin margins further.

To compete with traditional banks, payments banks will have to offer attractive interest rates on deposits. Most banks offer 3.5 per cent for their low-value savings deposits (for deposits up to ₹25-50 lakh). But, few private banks such as YES Bank, Kotak and IndusInd Bank offer 4-5 per cent for deposits up to ₹1 lakh and a higher 5.5-6 per cent for higher value deposits (up to ₹1 crore).

Some of the small finance banks also vying for the deposits pie have been offering higher rates of 5-6 per cent.

Hence payments banks have to offer aggressive rates to woo customers. But given the yield on G-Sec, offering higher rates on deposits may lead to margin erosion.

Many players have thus not been able to offer more than 4 per cent interest on deposits. About three years ago, Airtel Payments set the rate on its savings deposits at 7.25 per cent. This had meant the bank incurring a loss on each deposit, which it could not absorb for long. The interest rate the bank offers now is 4 per cent.

Paytm Payments Bank also offers 4 per cent.

To address the issue of cap on the amount of deposits, Fino Payments has tied up with Suryoday Small Finance Bank, offering a sweep facility. The excess over ₹1 lakh deposit is transferred into Suryoday account.

Here, Fino Payments also offers a higher rate on deposits, 6.25 per cent up to ₹1 lakh and 7.25 per cent above that.

Coming up with such innovative offers and tie-ups can help these banks. Pushing third-party products — such as offering credit, insurance and investment products — can also become alternate sources of revenue.

However, with traditional banks investing heavily on digital initiatives and offering mobile banking services and technology such as unified payments system enabling cheaper transactions, customer acquisition will remain a big challenge for payments banks. The underlying weak business model only makes it more challenging for these players to compete with traditional banks.