Paytm launched its Payments Bank today, the country’s third payments bank after Airtel Payments Bank and India Post Payments Bank. It will now convert 220 million mobile wallets (i.e. its entire user base) to payments bank accounts. Also Read - Fake WhatsApp message claims free internet for three months, don't fall for itAlso Read - Alert! Paytm cashback scam: Fake Paytm website, it's a trick to steal your money
While this could herald a new chapter in ‘financial inclusion’ in India, serving close to 233 million unbanked customers (according to a PwC report) wouldn’t be easy for Paytm or any payments bank for that matter. Also Read - Prepaid to postpaid and vice versa with OTP: Operators propose simple conversion process
For Paytm as well as Airtel, which rolled out its payments bank last November, there lies the advantage of a huge user base, which could help them sign up millions of customers early on. Airtel even allows non-Airtel customers to open a payments bank account. And Paytm’s ease-of-use might drive initial adoption.
“But how does a bank make profit from a customer whose average wallet balance is Rs. 87?” says a digital payments expert, whose firm is one of the partners of a prominent payments bank.
That’s an abysmally low figure for a bank account but that’s the balance Indians maintain on an average in their e-wallets.
And that is why “payments bank is a low-margin, actually a no-margin, business for five years at the best. It is yet to take off in India,” according to the expert.
For now, the cost of maintaining zero-deposit accounts will have to be borne by the companies themselves. Though Paytm is flush with funds at the moment, with its most recent capital infusion being the highest ever for any Indian startup, it needs to arrive at a sustainable business model for the long run.
While attractive interest rates offered by these payments banks Airtel Payments Bank offers 7.5 percent interest at a time when traditional banks are lowering their interest rates could motivate people to open an account, the RBI restrictions on transaction limit (capped at Rs. 1 lakh) as well as loan disbursement could act as a deterrent.
However, payments banks have something to rejoice about.
Their licence permits them to act as financial correspondents between customers and conventional banks, and lets them sell products like insurances and mutual funds. Paytm, for instance, has already tied up with IndusInd Bank, ICICI Prudential and HDFC Mutual Fund for such purposes.
“I think there could be an explosion of corespondents in the rural areas now… much like demonetization leading to an explosion of merchants signing up on Paytm,” says the payments expert.
Will payments banks disrupt traditional banking then? Surely not in the immediate future, primarily because Indians have a trust problem. And a comprehension problem too. A payments bank is not a mobile recharge. Most rural customers wouldn’t know how it can add value to their lives.
It is one thing to say that hundreds of thousands of unbanked Indians will own bank accounts now but it is another ballgame to make them transact, especially when the bottom-of-the-pyramid customer, the primary target group for payments banks, is used to depositing money with moneylenders.
“It is driven by convenience and pricing, with little customer stickiness, says Amit Balooni, former banker and present digital payments observer.
And in order to make a large-scale impact, as Paytm’s Vijay Shekhar Sharma has been promising, one has to expand to middle-income customers too. In their lives though, a payments bank account could only mean adding to the clutter.
“Thus, old banks are not as threatened as one would expect,” says the payments expert.
For now, the primary purpose of payments banks, seven more of which will come up soon, is to induct rural unbanked customers into the formal economy and add to the GDP in the process. As for their own profits, they’ll have to come up with a new business plan.