KOLKATA: Success of 11 payments banks, which promise to revolutionize the way money will flow across India by bridging the last mile gap between bank branches and customers in the hinterland, would depend on how they scale up their business and reduce transaction cost, experts said, since they would not enjoy the prospect of lending and make high-yielding investment.
The entities with the prize licenses from Reserve Bank of India to set up payments banks will be chasing a volume game with focusing fee-income for the services they offer as would need to restrict investment only to unfancied one-year government securities and banks' savings and term deposits.
Profitability metrics for payments banks will depend upon scalability and ability to maintain lower operating cost to serve customers, rating company ICRA said in a note. High leverage ratio may help to achieve reasonable return on equity, it said.
"This is a high-volume low margin game and the key is to use scalable technology to reduce cost of customer acquisition and service delivery. Payments banks have to adopt a nimble cost structure to make this business viable in the long run," said Anand Ramachandran, chief financial officer with TechProcess Payment Services Ltd, an electronic payment firm.
According to RBI rules, payments banks can invest minimum 75 per cent of money raised from public in one-year government securities and hold maximum 25 per cent of it at saving deposits and fixed term liabilities of other commercial banks. They will be barred from lending as was the case for Peerless or Sahara.
"Given the no-lending restriction and requirement to invest savings balances only in one-year risk-free government securities, the net interest margins will be too low to even recover overheads. Hence the only other revenue streams available are fee income from remittances, merchant fees for digital payments and distribution of insurance and mutual funds," Ramachandran said.
RBI has selected entities with experience in different sectors and with different capabilities so that different service models can be tried out and they do not face the same business risks as a full-service bank. Of the 11 entities selected, five are telecom companies, one a mobile wallet company, one an IT company, one a non-banking finance company, two entities with good delivery channels and India Post.
It would be important for these entities to tie up with banks and government entities to improve financial product distribution for boosting fee income.
"With over 90,000 'M-Pesa' agents, we are already providing people in remote areas a convenient way to, transfer money and make payments in a safe and secure manner. We have partnered with several government bodies to run pilots for enabling direct transfer of wages/subsidies," said Sunil Sood, MD & CEO, Vodafone India.