JOIN USAs the euphoria of the RBI allocating 11 Payment Bank licences dies down, the discussion has shifted to whether and how these banks can be game changers in the Indian banking sector. What we do know is that Payment Banks have the benefit of certain highly favourable factors that can enable them to shake up the banking business in this country. That is giving them an unprecedented advantage, a privilege that no bank has enjoyed so far. And this is why the payment bank could be a very significant milestone for the country.
At the outset; let’s discuss the rules of the game that are going to decide the winners. The focus of the Payment Banks is going to be on un-banked or under-banked populations in the semi-urban and rural areas. Keeping costs low will be paramount in attracting clients, and simultaneously, the ability to capture high volumes (both by way of market share, but more importantly, in creating that volume), will be key to future profitability. There are three pillars that will help newly set up Payment Banks to maneuvre the landscape and create sustainable value for all the stakeholders.
Using cutting-edge digital technology
There are four key technologies which will create competitive edge for the Payment Banks:
Mobility: Most of the Payments Banks will offer their services through mobile, and which will be the primary channel for the end clients to interact with the Payment Bank. Such a mobile offering has to be easy to use, secure, and should be integrated with the ecosystem of payment channels, wallets, BCs (banking correspondents), and social networks.
Cloud: As Payments Banks struggle initially on profitability parameters (some could achieve break even after 5-7 years too); it is important for them to keep costs under control. Cloud technology provides multiple benefits such as low cost, pay-per-use pricing model and unmatched scalability (important for rapidly scaling volumes).
Advanced analytics: Though Payments Banks are likely to charge clients for each transaction that charge per transaction is not likely to be significant. It is important for them to look at alternate revenue streams, and for that advanced analytics remains key to understand client behaviour.
Automation: Payments Banks are likely to depend more on technology and less on manpower to operate business — remaining a truly digital offering. Technology plays an important part in automation; linking different pieces together.
Gaining customer trust
While not widely discussed and understood, this is one of the most important points that will make or break a Payments Bank.While it is expected that Payment Banks will take away some of the existing bank customers, a majority of their customers are likely to be under-banked or un-banked. One can safely assume that most of them will be less-educated and may not be well-versed in English. These customers may not be proficient with banking practices such as KYC and multitude of steps that a customer goes through in a banking operation.
In a recent policy paper from CGAP titled “Doing Digital Finance Right” published in June 2015; the authors identified the below 7 key consumer risk areas:
Inability to transact due to network downtime
Insufficient agent liquidity
User interface that is complex and confusing
Poor customer recourse
Non-transparent fees and other terms
Fraud that targets customers
Inadequate data privacy and protection
Many of the above areas are impacted by technology. For example, making user interface (on mobile device) that is simple and available in a language the users understand, can go a long way in increasing adoption. Fees can be displayed very clearly as a part of the transaction. Technology can help providers reduce fraud and improve data privacy.
Partner network and innovation
Given that Payments Banks have a restricted business construct, it is very important for them to carefully choose the options for additional revenue generation. Two options can be considered, both of which need technology support to achieve the objective. The first one relates to cross-sell of no-risk products, such as insurance and mutual funds. Ability of the Payment Bank to be successful here, primarily depends on gaining consumer trust. However, they also need required functionality to support transactions in insurance and mutual funds.
And the needs are not restricted to selling, but also servicing. Second option relates to the use of the customer franchise to refer these clients to partner institutions (e.g. banks) for onward sell of that bank’s products. Lending is one prime example wherein Payment Bank can refer a client to the partner bank for onward lending, and in the process earn commission. Technology needs to support the interface and the process of referral and commission calculation on consummation of such transactions.
(The author is Product Business Manager, Infosys Finacle)