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Paytm’s payment bank journey may not be a dream run

Paytm, the fast-growing mobile wallet service owned by Noida-based One97 Communications, already has more users for its mobile wallet service than the total number of credit cards issued in the country.

But despite having over 20 million mobile wallet users, Paytm, if the Reserve Bank of India (RBI) grants it a licence to operate as a payment bank, is likely to face stiff competition from telecom operators such as Bharti Airtel, who are also vying for payment bank licences.

The major advantage that telecom operators like Bharti Airtel have over Paytm, is the huge physical distribution network they have created for selling their products, especially in rural areas. Even though the RBI guidelines specify that ‘other financial and non-financial activities of the promoters’ be kept distinctly ring fenced, these companies can easily leverage their existing networks, if not directly.  

In contrast, companies like Paytm, which are essentially technology companies, operating in the virtual transactions space, do not have any physical network in retailing, especially in rural areas where a large section of the currently unbanked population resides. 

As the purpose of providing differentiated licences is to bring the unbanked segment into the ambit of the formal financial system, building the physical network will be crucial to solve the last mile problem. RBI guidelines mandate payment banks to have a minimum 25% of their physical network in the rural areas. While, both telcom operators and mobile wallet operators like Paytm can leverage the existing mobile user base across India to bring the unbanked into the ambit of the formal financial system, about 40% of India’s 1.2 billion people are unbanked but 80% use a mobile phone, building the physical network will be critical. 

Vijay Shekhar Sharma, chairman and managing director of One97 Communications, which operates Paytm, believes establishing a robust physical distribution network won’t be a major hurdle for the company.

“We’ll have to build the physical network. We already work with major fast moving consumer goods companies like ITC and PepsiCo. We can always make some arrangements to leverage their networks besides our existing networks,” said Sharma.

Sharma believes that Paytm can create better infrastructure and network compared to companies like telecom operators as Paytm will be focussed on payment related businesses while payment banks will be just an extension for the telecom operators.

Analysts estimate that payment banks are likely to contribute only a miniscule percentage of the total revenues of telecom operators. Equity research firm Credit Suisse has pegged mobile payments to be only 1-1.2% of telecom sector revenue. Under more optimistic assumptions there could be a “7-8% revenue upside”. CRISIL Research also agrees, though telecom operators are ideal candidates to set up payment banks considering their customer base and distribution networks in rural areas, even five years after launch, the contribution of payment banks to their overall revenues would be less than 1%.

Even though technology is core for Paytm, Sharma says that if his company gets a payment bank licence, it will have to buy new technologies to provide banking services. 

“It would be like a normal bank. So, we’ll need additional technologies. We have already started exploring opportunities for potential buys. We would take a call once we get a licence,” says Sharma, adding that Paytm may spend upwards to $ 50 million in acquiring additional technologies over the next two years.

Besides offering standard banking services, Paytm has plans to offer a bouquet of financial services such as insurance and investment products to retain and hook customers.

From 20 million users, Paytm aims to cross the 100 million mark by 2016, and getting into the payment bank business will help the company, says Sharma, adding that more than 40% of its users are from tier-II and tier-III cities at present. Some of its users don’t even have credit cards or internet banking exposure. “Some independent shop-keepers create mobile wallets for the unbanked people using their own credit cards or online banking facilities, while physically accepting cash for the amount they deposit in the mobile wallets,” he notes.

One97 Communications, which as reported in the Financial Times is in advanced talks with Alibaba to raise roughly $ 500 million, is planning to invest more than $ 100 million to establish its payment bank in the first phase. It would definitely go up as it scales up, says Sharma. “We are looking at a break-even period of three to five years,” he adds.

The company will have to set up an Indian subsidiary for establishing the payment bank, if it gets a licence as the parent company is already majority owned by foreign investors. According to RBI guidelines, ownership of banks should rest in Indian hands. Paytm, which has an annualised transaction value of $ 600 million, is currently funded by SAIF Partners, Intel Capital, Sapphire Ventures and Silicon Valley Bank.

Mobile wallet providers such as Paytm follow a semi-closed model, according to which users load money in the wallets and make payments to only those merchants that have operational tie-ups with a mobile wallet service provider. However the Mobile wallet licence does not allow the company to offer cash out options that enables users to take out cash from their wallets. Thus mobile wallet users can only use the deposited amount to pay bills and purchase products. But a licence to set up the payment bank will give the cash out option operating like a standard bank.

Obtaining a payment bank licence will also increase the money that individuals can deposit. Currently, deposits are below Rs 10,000 as KYC (know your customer) is mandatory for higher amounts. But under a payment bank licence, the company could hold a maximum balance of Rs 1 lakh per individual customer

Also, as a Mobile wallet operator, Paytm can’t use the cash deposited by its users in their wallets. The money is deposited in an escrow account at a nationalized bank. But as payment banks are allowed to invest 75% of their total deposits in government securities, this would enable it to increase its earnings.

At present, Paytm earns just about 1-1.5% as transaction fee. But through its mobile-commerce business, where it works as a marketplace for merchants to sell their products, Paytm earns higher transaction fee at up to 5%. It has about 10,000 offline and 16,000 online merchants currently registered on its mobile-commerce platform.

A deal with Alibaba will provide Paytm an edge in the mobile commerce space giving it access to deep pockets. The company is likely to use the funds to support establishing its proposed payment bank, enhancing its marketplace and strengthening technology and security.

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