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Opening a New Account

Vijay Shekhar Sharma is looking beyond financial inclusion with Paytm Payments Bank. Will he succeed?

“Main gareebi hoon (I am poverty), 
Main tumhe pyar karti hoon (I love you), 
Main tumhe chod nahi sakti (I can’t leave you), 
Kyunki tum mujhe usse zyada pyar karte ho (’cause you love me more than I do)”

Vijay Shekhar Sharma wrote this poem in school on seeing that his classmates didn’t even have slippers to wear. Not that life was any better for Sharma. Born in Aligarh to a school teacher — who was so upright that he never took to privately tutoring his students and was adamant about making ends meet with his school salary — Sharma had seen from close quarters what it meant to live life as a have-not. That was nearly two decades back.

Today, as Sharma embarks on a new journey as a banker, the 38-year-old, ranked as the country’s youngest billionaire, feels life has come full circle — Paytm Payments Bank, the new avatar of the e-wallet business, is soon going to set up a branch in Aligarh and, more importantly, begin operations from a state from where Sharma’s tryst with destiny began. “Back then, the poor were more accepting of their financial status, but that’s no longer the case. Even if there are no jobs, they want jobs; even if they don’t have money, they want to spend it. I am trying to find a way to create a set of opportunities for the underprivileged,” says Sharma, sitting out of his multi-storey office in Noida, which also houses Paytm’s first bank branch. A payments bank cannot lend but can accept deposits from individuals and small businesses of up to Rs.1 lakh each, besides offering third-party products.

The RBI’s innovative step towards financial inclusion has only fuelled the momentum that Paytm’s digital wallet business got when the government demonetised 86% of the currency in circulation in November 2016. That trigger led to the platform’s daily transactions doubling to 5 million within 10 days of the event, and has since risen to 25 million transactions. By next year, Paytm Bank is looking to set up over 3,000 ATMs and over 31 branches. To begin with, the bank is concentrating on the north, north-east and central regions as they account for a chunk of the country’s population, and more importantly, have lower bank penetration (see: The holy grail). Despite the presence of 27 public sector banks and 19 private banks, the savings bank penetration across all states stands at a mere 46%.

While the restrictions on lending saw three payments bank players giving up their licences, Sharma is more than happy treading the path of uncertainty. “The licences were given with a clear message — we won’t let you lend and that you have to discover a business model. That’s what is forcing us to think out of the box,” says Sharma, who owns 51% stake in the bank, while the parent, One97 Communications, owns the rest.

Before the commencement of its banking business last May, Paytm had transferred its e-wallet business to the new entity. Consequently, Sharma coined a new banking term called ‘WACASA’, which stands for wallet, current and saving accounts. A dedicated ‘bank’ section has been incorporated within the Paytm app through which a range of banking services are being offered to customers. It comes as no surprise that traditional brick-and-mortar banks — both public and private — are not exactly comfortable about the new kid on the block. Though they have not been allowed to lend, bankers are questioning the rationale behind allowing payments banks. Former State Bank of India (SBI) chairman Arundhati Bhattacharya, who during her tenure had blocked Paytm from its ecosystem, says, “You have to ask the central bank as to what was its thinking behind payments bank since traditional banks such as SBI are already doing a good job at financial inclusion through the Pradhan Mantri Jan Dhan Yojana (PMJDY) initiative.” That’s true. The country’s largest public sector bank has opened the highest number of Jan Dhan accounts — over 8.5 crore — since the scheme’s launch four years back. As of December 2017, more than 30 crore Jan Dhan accounts have been opened, but what is not clear though is how many unbanked customers have actually come under the fold. Concerns have been raised over duplicity of accounts, that is, existing account holders, too, have got Jan Dhan accounts. Sharma believes that by virtue of their ownership structure, state-run banks had little choice but to oblige the government in creating the Jan Dhan ecosystem. “Banks in our country do not want every customer, but we would like to take up every Jan Dhan customer on to our banking platform and serve them better.”

While the nationalised banks’ heft came to fore with Jan Dhan, it has come at a huge cost. In early 2017, the Minister of State for Finance, Santosh Kumar Gangwar, told Parliament that SBI alone was incurring operational costs of close to Rs.780 crore on Jan Dhan accounts. Not surprising then that to subsidise these accounts, the bank had to tinker with maintenance charges for its regular customers. Banks have no other option as the cost of customer transaction at a brick and mortar branch is the highest compared with transacting on a mobile. (see: Cheap, cheaper, cheapest). Paytm Bank is looking at a huge digital opportunity given that smartphone penetration is expected to improve and match the number of active savings bank accounts in the country at 625 million by FY20, according to BCG. “While PMJDY is a nice curtain-raiser on financial inclusion, payments bank is akin to a theatre where the possibilities are immense,” feels Sharma, who has his script ready – to reach out to over 500 million individuals by 2022. While the potential is humongous, Paytm Bank has its task cut out of creating a new business model in banking — from scratch.

Creating the supply chain 

It’s noon time and 30-year-old Abhishek Gupta is manning the counter of a nondescript store in one of the bylanes of Sector 9, an industrial settlement in Noida, helping customers sign up for Paytm Bank’s savings account by validating their KYC documents. “I have already completed 500-plus KYC validations, and activated over 50 savings accounts,” says Gupta. For every KYC validation, he gets Rs.20 as a fee and if the customer ends up opening an account, he gets an additional one-time incentive of Rs.20. KYC is a big investment that Paytm Bank has to incur as it looks to migrate its e-wallet users into bank customers. A large chunk of its over Rs.3,000 crore outlay has been earmarked towards KYC compliance verification over the next three years. “We will continue to incur costs on KYC till we reach our stated customer target,” mentions Renu Satti, CEO of the payments bank. A long-time confidante of Sharma, Satti had joined One97 in 2006 as a HR professional, before taking over as the head of ticketing and events at Paytm.

Interestingly, Paytm is banking on its own ecosystem of 6 million retailers and merchants to achieve its goal of creating a 100,000-strong ATM network. Currently, there are over 2.20 lakh ATMs in the country, but given that the machines don’t come cheap — ranging between Rs.2.5 lakh and Rs.3.5 lakh on an average, excluding the cost of maintenance, electricity and allied operations — Paytm Bank is working on incentivising merchants to partake with their daily cash flows. As part of its pilot project, willing merchants are being asked to set aside Rs.5,000 in cash and Rs.5,000 in digital form in their Paytm business account. For every amount transferred to a customer’s Paytm Bank account or a deposit made by a holder at the retailer’s counter, the merchant gets a commission of 0.5% on the amount deposited. For the customer, while there are no charges for depositing or transferring money from the retailer’s Paytm digital account, any physical cash withdrawal will incur a 1% charge. Though, in the initial launch phase, the bank is unlikely to charge its customers, eventually any cashout will incur a transaction fee. That’s on expected lines since Paytm Bank’s interest lies in encouraging the use of digital money. To create that X factor for small retailers and generate additional revenue, interested merchants can also sign up with Paytm’s e-commerce entity to offer a range of services for customers.

It’s a strategy that is working well. In Sector 12, a residential-cum-commercial complex in Noida, 33-year-old Rohit Kumar of Happy Communications, a mobile refill and repair shop, doesn’t mind blocking Rs.10,000 as long as he gets business. “I am already making money from KYC-account validation and I look forward to see how the new business takes off,” he says. While Paytm Bank is finding it easier to convince smaller retailers, on-boarding bigger merchants, however, isn’t going to be easy since the margin these players earn selling other products is much more lucrative. However, Sharma is not too worried. “We don’t want our entire 6 million merchant network to double up as ATMs,” replies Sharma.

Besides creating a retail ATM network, Paytm Bank is also setting up branches. “Our average branch size will be about 350-400 sq ft. While the biggest branch could be three-member strong, the smallest will be manned by just one employee,” reveals Satti. The payments bank is also looking at the concept of shop-in-shop where its branches could operate out of in a modern retail store. Even as Paytm Bank is going about creating its branch network, the lynchpin of its growth lies in the choice of its customers.

Customer approach

Early last year, at the Nasscom India Leadership Forum in Mumbai, HDFC Bank MD Aditya Puri sounded skeptical about payment banks and flagged off customer acquisition as a big challenge. “As far as new banks are concerned, they will have to spend on getting customers, like the others. It is like making chicken curry without the chicken! Get the chicken and I will tell you how much competition there will be.” But it seems Sharma has found his chickens.

Based on current statistics — across the three broad geographies that Paytm Bank is focused on — the average balance in every PMJDY account is around Rs.4,300. This figure might not excite traditional banks, but Sharma is willing to deal with customers even with a three-digit balance. “Given that our tech-reliant business model is ensconced in a smartphone, a customer even with Rs.100 deposit can make money for us. We are looking at those earning around Rs.5,000 a month as our sweet spot,” mentions Sharma. 

What prevents other banks from reaching out to such a customer is the prohibitive cost per transaction, which payments banks believe can be exploited. Kalpesh Mehta, partner, Deloitte India, says, “It’s going to be a model where through analytics Paytm Bank can serve a larger pool of customers, identify and customise needs of those particular individuals.”

Besides Paytm Bank, Fino Payments Bank, India Post Payments Bank and Airtel Payments Banks are the other players looking to make their mark. Fino, which began operations as a payments bank from June 2017, is looking at strategic associations and its existing business correspondent (BC) route to widen its customer base. Rishi Gupta, CEO, says, “We want to be a mass-market bank, but we are not opening an account for every customer; we are seeing who are transactional customers and who are our banking customers.” 

Fino, which earlier functioned as a BC for banks, is also entering into strategic tie-ups to create its own ecosystem. For example, it has tied up with BPCL to set up BC points at its fuel stations in six states — Uttar Pradesh, Madhya Pradesh, Bihar, Rajasthan, Tamil Nadu and Maharashtra. At these points, people can remit money, deposit and withdraw cash, make payments for utility bills, recharge mobiles, and pay insurance premiums. Fino has launched its services across 14 states, covering 126 districts, with 410 branches and 25,000 touch points. Relying on strategic tie-ups, Fino has entered into an agreement with Mother Dairy and Gokul Dairy where payments of milk pourers will be digitised. The payment will be directly credited into their accounts, which can be withdrawn from the milk collection centres or from any ATM using RuPay debit cards. Besides, customers can use Fino’s app, BPay, to make digital payments and other banking transactions. In rural areas, Fino has opened branches along with its existing NBFC business, so now they do both payments bank business and lending business.

In the case of India Post Payments Bank (IPPB), the government is looking at opening 650 branches in the near future. India Post has the largest rural reach with 154,000 post offices, of which 139,000 are in rural areas. But currently, IPPB only has eight access points in total — in Raipur, Chhattisgarh, Ranchi and Jharkhand.

Airtel Payments Bank, which began operations last January, has also entered into a tie-up with HPCL to use its fuel stations as banking outlets, besides leveraging its existing retail outlets. However, the Unique Identification Authority of India (UIDAI), the nodal authority for Aadhar, has temporarily barred Airtel from signing on customers following complaints that accounts were opened without consent under the pretext of using e-KYC for SIM verification. It has been alleged that Airtel opened over 31 lakh accounts and linked them to LPG subsidy, with over Rs.167 crore being deposited in these accounts. The company’s official statement is that it is working with the authorities to sort out the issue. According to the UIDAI, customers in rural and remote areas were put to inconvenience as they were also unable to withdraw the subsidy amount credited because the payments bank did not have enough branches or cash out points. Following the development, Paytm Bank has taken a call to disable the direct benefits transfer validating option from its BC network. “We want to be on the right side of the regulator and give a message to RBI that we are serious player,” points out Sharma.

Making money

While IPPB is yet to set the ball rolling, Airtel Payments Bank is generating revenue through interest on investments; and fee on cash withdrawals made from savings accounts. Any cash withdrawal over Rs.4,000 incurs a charge of 0.65%, while withdrawal between Rs.10 and Rs.4,000 incurs charges between Rs.1 and Rs.25. Investments are made from deposits that the company receives across its savings bank accounts. As per norms, 75% of customer deposits have to be parked in government SLR securities. Incidentally, while Paytm Bank and other payments banks are offering an interest rate of 4% on deposits, Airtel is offering the highest at 7.5%, much more than what traditional banks are offering on savings accounts. Sharma believes that a higher interest rate is not what will define a payments bank’s growth strategy. “First of all, our customer acquisition is not based on 7% versus 4%. It is based on the services that we offer. We have a product where you are taking home your entire interest free.”

Cross-selling financial products is a primary stream that payments banks are looking at. “It’s a deposit-cum-transaction model. A person keeps a deposit and makes transactions like buying insurance, investing in a mutual fund and making bill payments,” says Gupta. Fino, which has close to 5-6 million customers, is seeing more takers for health insurance, which fetches a commission of 15%, excluding GST.

Remittance business is another stream that Fino is already catering to with an average ticket size of Rs.4,000 to Rs.5,000, which incurs a charge of around 1% of the amount sent. It has also partnered with ICICI Bank to sell its term deposits, and loans. In the case of payments banks with a strong rural reach, Mehta of Deloitte feels the growth strategy won’t be multipronged. “It will be more a payment game and not about alternative revenue streams such as e-commerce. They can use their strong rural outreach to cover grocery purchases, inputs for farms, and microfinance lending.” In the case of India Post, it can also gradually morph into a universal bank by taking over the entire deposits business. 

Paytm Bank, on the other hand, is not looking at making money off the payment business, as much as it is looking to milk alternate revenue streams such as offering basic wealth management solutions, ticketing services, e-commerce deals and employee benefits, that includes food meal vouchers and reimbursements. “Even for an auto rickshaw driver we can offer him a solution that is more than just a plain savings account as the 4% interest rate will not even help him beat inflation,” points out Sharma. The solution that Sharma is alluding to is wealth management but not of the HNI type. For example, an account holder can transfer funds from his account to a flexi deposit account that will fetch higher interest rates. “Till now, this was restricted to only a particular class of bank customers, we are democratising it,” says Sharma. The bank is offering what it calls a swipe out arrangement through its tie-up with IndusInd Bank. The deposits can be as low as Rs.100 and can be withdrawn anytime with no timeframe or charges. “We aren’t trying to make money on the corners, by inserting in fine-print that says ‘charges won’t apply only if it is held for a minimum of seven days’, which most banks do,” points out Sharma. Paytm Bank will get a commission for the FD from IndusInd bank and neither the customer nor Paytm Bank will incur any charge if the customer pulls out money. It has also tied up with ICICI Bank to offer short-term credit. “By looking into a customer’s banking transaction trail, we can clearly assess what his monthly income is and based on that can offer customised loans,” adds Sharma. 

Pandering to Indians’ craze for the yellow metal, Paytm Bank has ventured into the bullion business as well. The bank’s customers can buy digital gold of 24K 999.9 purity and store it in vaults of MMTC-PAMP, the country’s only internationally accredited refiner, for free. The digital gold can be stored for a maximum of five years from the date of purchase after which it has to be either sold back or converted into gold coins. In the six months since its launch last April, Paytm Bank  claims to have sold over Rs.120 crore worth of gold on its platform with Tamil Nadu, Maharashtra, Karnataka, Andhra Pradesh, Jharkhand and West Bengal registering maximum demand. A majority of the customers purchased gold worth up to Rs.500, while more than 70% customers were millennials. 

“We are not even talking of mutual funds or stock broking; for now, our target customers need simple wealth products such as gold, which they can save up for marriage, education or anything else,” feels Sharma. According to the World Gold Council, around 1,250 tonne of gold was used in India as collateral, largely (around 60%) with informal lenders such as pawnbrokers, to raise funds. Payments banks are also seeing this as an avenue to channelise lending products as well. Fino has partnered with banks to source gold loans on their behalf and has already sold loans worth Rs.200 crore for around 30,000 customers with an average ticket size of around Rs.1 lakh. This fiscal, Fino expects 20% of its total revenue to come from third-party product sales. Going forward, it would also look at offering auto and consumer durable loans.

While Fino is relying on partnerships to drive revenue, Paytm Bank has the advantage of using its entire online ecosystem, comprising ticketing and e-commerce to good use (see: Building blocks). “We don’t want to make 1-2% margin on payments, we will earn our 10% on movie tickets and 10-15% on ticketing and travel. We will make some money on float income as well,” points out Sharma. His view is not surprising considering that Paytm had sold more than 10 million train tickets in FY17 with the five biggest tier II and tier III markets — Ahmedabad, Kanpur, Chandigarh, Varanasi, and Allahabad — accounting for a chunk of the sales.

Going beyond traditional banking and cross-selling of financial products, Paytm Bank is also venturing into newer segments. It has entered the employee benefits space with the launch of digital food coupons, after the RBI mandated that all prepaid meal vouchers have to go digital by 2017-end. As per the Income Tax Act, an employee can get annual meal vouchers up to Rs.24,000 based on salary of which, 30% of the amount can be tax exempted. Paytm  Bank has grabbed the opportunity to stitch up alliances with over 500 companies by offering Food Wallet, an interface where employees can see real-time balance and locate the nearest food outlet. Treebo Hotels, the online budget hotel chain which has 300 hotels spread across 60 cities, has already signed up with the bank for the service. Pradeem Sriram, head of finance, Treebo, feels the digital offering has helped bring in more efficiency, “The earlier process of holding and deploying physical vouchers across different centres was cumbersome and involved administrative hassles.” The digital vouchers besides office cafeterias can also be used at a range of online and physical merchants, including small standalone outlets. Mehta believes the move makes immense sense. “Even if the amount ranges around Rs.1,000-2,000 a month, it can add up to a sizable Rs.24,000 a year. It will give Paytm Bank the heft to negotiate with merchants by stating that we will get you so many customers in a particular geography.”

Building on its new-found appetite, Paytm Bank is also looking beyond meal vouchers — it wants to target the Rs.25,000 crore tax-free allowance market, which includes employee reimbursement. The grand idea for Sharma is that by getting corporates on board, it will eventually lead to employees opening savings bank account, as more and more staff-benefits go digital. However, it will not come easy. Sriram says, “For now, we are only looking at meal vouchers and reimbursements. Opening bank accounts will be at the employees’ discretion.” 

Game on

Even as Paytm Bank is going about creating a huge ecosystem to thrive upon, the country’s largest bank, SBI, too, has launched its all new digital platform called YONO (You Need Only One). Besides e-commerce, the app offers financial services products from SBI and its subsidiaries, and allows customers to open accounts digitally, avail of pre-approved personal loans without paperwork and overdrafts against fixed deposits. But unlike Paytm Bank, it is not integrating its e-wallet, Buddy, into the app. “We can integrate Buddy or we can discontinue it; so all options are there as far as mobile banking are concerned,” says, Rajnish Kumar, chairman of SBI. The bank, which has over close to 2 crore mobile banking customers, has also partnered with over 60 e-commerce players but it won’t be offering any incentives such as cashbacks. Kumar says: “This will be coming from merchants and not from us. That is how you build an ecosystem, right? Our customer benefits from what the merchants have to offer, plus we have our own rewards program.”

Similarly, Axis Bank, too, in a bid to scale up its digital business, last July bought Freecharge for Rs.385 crore. The idea behind the acquisition was to gain access to the company’s 5.4 crore registered users compared with Axis Bank’s 2 crore savings bank account holders. At Rs.80 crore revenue, the acquisition cost works to around 5x sales — one of the reasons why Sharma believes Paytm Bank has an edge over other banks. “Traditional banks can do nearly everything that we can but, we have built our business bottom-up without any obligation of cost that the banks are built with.”

As things stand today, Paytm Bank is already gaining traction over its peers and that is visible in the NEFT data. While Paytm Bank has seen credits and debits worth Rs.2,377 crore and Rs.3,861 crore in November, Airtel and Fino numbers are just around 13% of Paytm’s (see: Fastest finger first). Importantly, numbers shared by Paytm Bank show that it has already managed to create an impact by merging its wallet business with the banking business. The bank today has deposits of over Rs.1,000 crore, including flexi deposits, spread across its 170 million WACASA customers. According to reports, Airtel Payments Bank, as of September 2017, had Rs.224 crore of deposits, while it was Rs.7 crore for Fino. Given that all the payments banks will be completing their first full year of operations somewhere in mid-2018, detailed financials are not available.

In the case of Paytm Bank, a substantial sum is being spent on KYC and building up its branch presence. “We have a three-year runway and are well capitalised beyond 2020. A chunk of our costs is going towards KYC, which is being shared with the parent, and on our distribution reach. We should breakeven in two to three years,” feels Sharma.

Fino, which recently raised Rs.400 crore, is not taking the cash burn route to grow. “We still have over 50% of the funds raised and our idea is to set up more branches with an efficient distribution network. But we are working towards achieving a breakeven at the branch level first,” reveals Gupta. With Airtel being caught on the wrong side of the law, it will have its task cut out just regaining its credibility with the regulator and potential customers.

Even as payments banks find their way through the banking landscape, the brick-and-mortar giants do not see a reason to worry. “Whichever way you look at it, our market share is more than 30%, customer deposits are 23% and market share in the alternate and digital channels is more than 35% in everything. That’s the power of SBI,” mentions Kumar. However, former chairman, Bhattacharya still has a niggling concern: “We don’t know what next the payments banks will be allowed to do, but as long as they operate in the role that they are in, it will be a good complementary play for traditional banks.”

But that clearly isn’t what the RBI has in mind given that the former governor, Raghuram Rajan, had mentioned that the rules for payments banks will be made as they go along. Rajan had then remarked, “We are taking a bet on payments banks. Paytm is an innovative firm and innovative firms are not always comfortable with the regulators. But we want to see where they push the system and then we will know what more structure needs to be put in the system. For a number of years, we have been saying that a banking revolution is needed. The revolution is upon us today!” While the jury is still out on whether payments banks will indeed deliver on the grand financial inclusion dream, for Paytm Bank a revolution is clearly underway.