The multiplicity of market players. Payment banks will be competing with different participants in the financial value chain (like banks, PPIs, BCs, small banks, RRBs, Cooperative bank etc) for same set of customer. The regulatory frame work, corporate objective and goal would differ amongst various participants. This could create chaos and fierce competition leading significant pricing pressure.
Robust risk management process. Dealing with small ticket multiple transactions would require robust IT infrastructure. The customer transaction would largely be biometric enabled which would require superior infrastructure to process this. Since the access point would not be owned by the bank, ensuring quality customer services would remain a key challenge
Rising customer expectations. Customer expectations are currently being shaped by experiences outside of the banking industry, where content, ease of use, interactions and features deliver a more engaging and rewarding experience. This means that new services and related technology would need to work properly once launched, as any technical issue potentially leading to fraudulent activity or data leakage, could have a significant impact on the reputation of the financial institution.
Device fragmentation and tablet popularity. Mobile banking platforms will need to continue to be developed for multiple platforms, supported by the current and future smart-phone market. Apart from the established operating systems iOS, Android, as well as Windows and Blackberry, new operating systems such as Tizen are emerging. Depending on their market success, these platforms will also need to be serviced. In addition, the growing success of tablets means that mobile app developers will also need to adapt the banking solutions to the tablet experience of a wider screen, similar to that of a PC.
Lack of lending activity. Restriction in lending activity would keep the compress the margin. Also from customer point of view, absence of loan product may hinder customer acquisition. Though payment banks can act as a business correspondent for loan product but this would throw up other challenges.
Market segmentation and understanding customer needs. Banking needs of urban areas would be different from those of rural areas. Services such as tailor-made reporting and real-time information, provided by a client-relationship manager should help a bank to differentiate itself from its competitors. Retail banks could primarily consider the development of solutions to automate common banking activities such as transfer payments, transaction histories and automated notifications related to negative account balances or security concerns.
Brand protection. Trust and good service are fundamental brand values of any bank. Payment banks appointing merchant establishment / corner shop as cash merchants are not only delegating the handling of customer transactions to third parties, but also placing their brand logo in an environment they don’t directly control. They must find ways to ensure that trust is never undermined. In return for the use of the logo and access to its transactional platforms, banks must insist on proper contractual terms with cash merchants. The contract should define the roles and responsibilities of both bank and store. The establishment / shops must be required to maintain confidentiality of customers’ transactional data, and to post adequate information so that customers are informed of services available, fees, customer complaint procedures and the like. The bank will need to supervise compliance with contractual terms and monitor the levels of customer service attained, both through frequent scheduled visits and mystery shopping programs. The bank must also put in place information systems to track reported incidents at cash merchants, and must be prepared to take prompt action (including contract termination) when a pattern of misbehaviour or abuse emerges. Beyond ensuring the safety of transactions, managing store branding and agent processes is essential to maintain a consistent customer experience and build trust in the new channel.
Incentivizing the channel of cash merchants. Payment banks need to incentivize the cash merchant channel adequately in order to ensure that the stores maintain a proper level of liquidity at all times, visually protect the bank’s brand presence within their store, actively promote the service with the public, and take the time to train customers unfamiliar with electronic transactions. If the bank has a transaction-based revenue model, customer transaction fees can be used to compensate the cash merchant. Increased foot-traffic and branding advantages from this new line of business may help the store, but it will still expect to be directly and sufficiently compensated for the service.
Channel management hierarchy. Payment banks will need an effective channel to select, sign up, train, manage and monitor a rapidly expanding network of stores. One approach is to manage the new merchant channel in a decentralized fashion through the existing branch management structure. In this case regional and branch managers’ targets and reward structures will need to incorporate adequate performance measures for the new cash merchants. If the payment bank does not have enough staff at branch level to be able to take on this additional role effectively, a second approach is to have the new cash merchant channel managed by a centralized team set up in parallel to the branch management structure. In this case there will need to be an effective
mechanism for capital allocation and business planning to trade off the capabilities and aspirations of the competing channels. Alternatively, the management of the cash merchant channel itself may be outsourced to one or more third parties. In this case, the payment bank will need to ensure contractually sufficient control over the character and growth of the channel.
Speed of roll-out. Payment banks will have substantial flexibility in terms of how to sequence the roll-out of cash merchants, in terms of speed to scale and geographic coverage strategy. They might start with a presence in the vicinity of areas with migrant workers. The experience gained can help them to spread.
Account opening and product sales. Beyond the provision of liquidity, cash merchants will likely play a significant role in facilitating account opening for prospective bank clients. The new channel will not result in rapid market expansion if account opening is onerous and limited. It is important to make account opening as easy and quick as possible. Going a step further, thinking through the mechanism for product cross-selling and up-selling is necessary from the start, as new product placement is a key revenue driver. Separating the sales and service channels is one of the reasons the use of cash merchants is appealing, and it is possible payment banks may decide cash merchants play no role in product sales initially, strictly processing deposits and withdrawals.Nevertheless, payment banks should consider to what extent cash merchants could support the product sales process, if at all.
Strategic partnership. Strategic cooperation could be considered for specific projects. For example banks could join forces to identify a suitable IT supplier to provide an established mobile banking platform and share the development costs and resources necessary for the development of new solutions.
Ongoing assessment and continuous improvement through customer feedback. Seeking direct feedback from customers via a mobile banking app or social media platforms is a crucial source of information to assess if expectations are met. Individuals use them to express their opinion, which should help banking institutions to continuously improve their services.
The idea of payment banks was mooted with the sole objective of including small businesses and low income households in formalised banking channels. The previous experience of SCBs, RRB, co-operative banks, and business correspondents has not been very encouraging owing to credit risks and the high cost of service. The objective of the payment bank is to provide basic deposit and payment solutions in a cost effective manner.
The payment bank’s business model would evolve around payment solution. The total market opportunity in remittance and cash ins-cash outs is pegged at Rs100bn. The margin from intermediation business will remain narrow ranging from 50bps to 100bps. Given the number of interested applicant, the sheer size of market opportunity does not seem to be very exciting. The object differs amongst various applicant of payment bank license. The telco and banks objective will be customer stickiness or customer acquisition and branch de-congestion whereas it will be a natural upgradation for pre-paid payment instrument (PPIs) and business correspondent (BCs). In such a scenario, the industry will be impacted by fierce competition.
Focus on developing business in new locations. Signing up merchant establishment is a low-investment, low-risk way to test the waters in new geographic markets. Payment bank can act as business correspondent of commercial banks for loan product but is not allowed to carry lending operation on its own. This would provide commercial bank access to potential customer segment for loan product.
De-congest Branches. Crowded banking halls and long queues are a common part of customers’ experience in India. Commercial banks can offer a better service to their existing customers by allowing them to conduct basic transactions at a range of merchant establishments / corner shops. In this fashion, commercial banks can offer more choice and convenience to their customers; they can make their branches more appealing for higher-end customers with more sophisticated needs; and they can reduce the average per-transaction cost by shifting low-value transactions (including over-the-counter bill-pay transactions of non-customers) to a cheaper, variable cost channel. Today commercial banks see transactions largely as a cost and operational burden, while most corner stores / merchant establishments would like more transactions to increase foot traffic. It’s a win-win for corner stores / merchant establishment, commercial banks and their customers. Increased rural outreach by payment banks can provide a platform to commercial banks to shift its low value high volume transaction and focus on core activity. Cost per transaction through alternate channel is 30%-40% of cost per transaction through brick and mortar branch. The cost to asset ratio of payment banks is expected to be 0.6%-0.8% compared to ~2% for public sector bank like State bank of India. State bank of India has highest operating cost amongst public sector bank owing to its wide presence in unbanked area. De-congested branches will improve efficiency and aid the public sector giant to cut operating costs. If State Bank of India can shift even 30% of its transaction to alternate channel like payment bank, it can reduce its overall cost by huge margin. Rough estimates suggest that cost to asset ratio of public sector giant State Bank of India, can decline by 35bps to 40bps aiding to its return ratio.
Payment bank saving deposit offering will not impact existing interest rate in saving deposit. A competitive deposit product is a pre-requisite for customer acquisition, which is a key for a stable remittance business. The deposit product offered by payment banks is expected to provide interest rate higher than the prevailing market rate in saving deposit. Depending upon individual’s entities competitive intensity and objective, the interest rate which is likely to be offered by payment banks on its saving product can be anywhere between 5% to 6%. This will not distort the market pricing of saving deposit product as payment bank will not be able to command significant market share due to late entrant in the deposit acquisition space and operational challenges.
The outreach to small businesses and low income household by payment bank will provide an access to commercial banks to market micro credit product. The low cost of transaction, proximity to customer will address the larger issue of reaching out these customer segments. Payment bank can act as collecting agents for commercial bank which will bring down the cost of operations. The loan origination can still be done by commercial bank in order to reduce credit risk. As commercial banks enjoys advantage in terms of funding cost, micro finance institutes cannot compete in terms of pricing.
The government’s thrust to include the small businesses and low income household to formal channel will create competition for micro finance model. Major reason why MFIs are desiring to enter the mainstream banking channel. Bandhan has secured universal licence and SKS Micro intends to apply for small banking license. Securing a small bank licence will be crucial to SKS Microfinance’s long-term business prospects.
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