Payment Banks -- Disruption or Disaster knocking on the door?

 

With 3 out of the 11 Payment Bank players opting out even before setting up their shops, an obvious question looms in everyone's mind ---Is the Payment Bank model actually viable?

This article does not aim to discuss in great details the constraints of a payment bank -- lack of credit, thin spread, 75% investment in Govt Securities, size of deposits less than 1 Lakh etc. 

It basically aims at trying to understand why the customers would go to the payment bank to solve their financial needs that in turn would give answer to the question with which we started this article.

We start the analysis, with the fundamental principle of customer behavior

Customer Satisfaction = Perceived Value/Perceived Cost

Banking no matter whatever innovative technology you may use still stands on the element of trust. 

Ask yourself the question – would you trust the Brick and Mortar structure of a branded, established familiar bank with visible infrastructure in parting with your hard earned money or would you prefer your nearest panwala/ kirana shop owner?

 

Given the structure, the payment banks cannot set up high cost branches all around the way the universal banks do nor should it be a part of their model. To build the trust element, the payment banks would require a lot of time and experimentation – something that some of them may ill afford.

Thus, it is a no brainer, in terms of perceived value the universal banks would be miles ahead that of a payment bank. An SBI logo that has stood the test of time would anyday be much more trusted compared to their Payment Bank counterpart.

With the numerator strongly tilted against the payments bank, the payment banks are thus left with the denominator i.e. perceived cost to influence the customer behavior.

Perceived Cost has mainly two components viz. monetary cost and convenience cost

In terms of monetary costs, the payments bank business model does not give them much of an opportunity. With the returns from the Govt securities hovering around the 7 % mark, they have only a 3 % spread (assuming interest paid to customers being 4%). The new age private banks are already offering higher incentives for the customers to bank with them (DBS Bank offering 7% interest on savings less than 1 Lakh), so in terms of monetary costs also the payment banks cannot offer any major advantage making the equation even more tilted towards the universal banks.

Payment Banks may try special offer and freebies but only upto a certain extent --- where is the margin to do all this?

 

So here comes the last component of this puzzle: Convenience cost

It is true that despite efforts since late 1960’s the demand-supply gap that exists for banking in the rural hinterland is huge and creates a space for more players. The said customers need to be indeed served by cost effective yet secure and innovative technology model – the traditional models pursued by the universal banks have not and will not work here. 

Any model with robust distribution architecture that can take banking to the next door proximity would be an automatic recipe for creating a convenience advantage – and all residual payment banks would off-course be gunning for it.

However since the beginning of the decade there has already been a lot of pressure on the universal banks to set up a robust Business Correspondent network. The way the Pradhan mantra Jan Dhan Yojana has been pursued by the Ministry deserves special mention here. While it’s true that there’s a lot of work still left, the way the universal banks have responded in scaling up their rural branch networks and their BC channel in the recent days; payment banks should not consider this convenience advantage of distribution to be theirs so easily. Moreover with money and development now moving rural (electrification project, free LPG, affordable housing, Skill Development, Mudra, high budgetary allocation towards irrigation and NREGA etc expected to rapidly scale before the 2019 elections) and all government benefits now being parked in bank accounts through Aadhaar; the established universal banks would not forego this till-date ‘disregarded’ portion of the pie and the payment banks ned to be ready for stiff competition here also.



 

There has been a lot of experimentation on the technology front – smart card- biometric/ cardless-biometric/ mobile phone – pin/ kiosk – biometric/ Mobile phone – Voice biometric etc with all the banks trying some indigenous technology of their TSPs.

But with the advent of PMJDY and the recent Aadhaar legislation, it is now eminent that such experimentations by individual banks on their indigenous technology is no longer in vogue  – whatever innovation you may provide needs to be based on Card and Aadhaar interoperability.

So in terms of technology also the opportunity for the payment banks to create a convenience advantage has narrowed down – at the onset whatever disruption you may try to do have to be on the Card-Aadhaar interoperable front.

Of course you may build fanciest of App Based/ Web based services but its success is solely dependent on the momentum of digitization of cash which involves a basic change of customer behavior and thus can be time consuming. Whether the payment bank has this type of time appetite would be an interesting item to watch out for. Also with the introduction of UPI by NPCI, the scope of creating an unique convenience advantage herein by any particular payment bank has also got limited.



 

More importantly till the time this change does not happen, all the players need to have a card-aadhaar interoperable solution to allow customers transact on their much-loved physical cash. Apart from network, chances of payment banks creating any special differentiating advantage here seem to be apparently bleak.

In fact excess focus on disruptive technology actually may make the payment banks move away from the basic requirement of the financially excluded mostly illiterate populace – Simplicity.

The experience with the Telco Prepaid wallets is a clear example in this regard.


 

Despite a lot of BTL advertisements and a highly spread distribution architecture, the transaction medium on the Telco model was highly sophisticated USSD platform. Expecting the target populace to decipher flashy time bound messages in a foreign language and proving a correct response within the stipulated time was slightly utopian, resulting in the model remaining restricted to the retailer assisted space only and thus failing to gain the desired traction.

So is it all over for payment banks?

To succeed, the payment banks need to have a clear focus on the individual items of the fundamental equation of customer behavior on which the article is based.

Be it creation of trust or experiencing the convenience advantage, the major challenge before the payment banks would definitely be in getting the customers adopt their offerings. Whatever convenience advantage (perceived cost) the payment banks may provide need to be experienced by the customers first before you may expect them to trust (perceived value) you and thereby be loyal to you.

‘ Pehle Istemaal Karo Fir Bishwas Karo’ was the tagline of a popular detergent a few years back.

 The same thus would be extremely valid for the payment banks.

Here comes the room for disruption.

PayTM ‘s strategy of providing free PayTM cash with totally unrelated products like biscuit, chocolates or cola is a best example of disruption.

You buy the biscuit because you want to eat the biscuit only, for a layman the Pay TM cash does not initially tempt him to buy the biscuit. Once however he buys the biscuit, he would automatically be tempted to try the Pay TM Cash (after all we all would like to have that biscuit free of cost).

He would thus be tempted to download the wallet, load the cash, and thus use it thereby experiencing it.

If he likes it and feel it’s convenient, he would perhaps be tempted to use it even more (maybe by searching for some other product where such cash is given free – thus now making such co branding with totally unrelated brands a ‘win-win’ for both !!!). Such regular usage would bring about a habitual change in the customer, making him understand the convenience advantage and also build trust. 


 

The pitfall of this model is however it is too urban centric (150 mn of our population has a smart phone, expected to move upto 500 – 600 mn by 2020). In rural, getting this frequent usage use case would require some more innovative thinking. After all, apart from Karan Johar's movie, a distressed illiterate rural farmer munching KitKat and uplaoding PayTM Cash on his wallet through a smartphone does not really strike a chord in our imagination.

But one thing clearly stands out here --- is that disruption in existing thought processes have arrived. Else a few months back also who could have thought of a tie-up between a payment service provider and totally unrelated FMCG brands?

Such ‘out-of-the-hat’ thinking is what would make a payment bank succeed if at all….else the equation is strongly against them currently!!!

All views are personal and in no way represents the views of the organization to which the author may be associated