Comprehensive Project Report

On
“Alternate Revenue Sources of the Payment Banks”

Submitted to:

Som – Lalit Institute of Business Management (778)

Under the Guidance of

Prof. Ayushi Trivedi

In partial Fulfilment of the Requirement of the award of the degree of

Master of Business Administration (MBA)

Offered by:

Gujarat Technological University

Prepared by:

Sr No. Name Enrollment No

1. Nagar Mayur Ashokkumar 177780592051

2. Nirmal Shruti Amitbhai 177780592054

MBA (Semester - 4)
April 2019

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 Student(s)’s Declaration
We hereby declare that the Comprehensive Project Report titled “Alternate
Revenue Sources of the Payment Banks” is a result of our own work and our
indebtedness to other work publications, references, if any, have been duly
acknowledged. If we are found guilty of copying from any other report or
published information and showing as our original work, or extending plagiarism
limit, We understand that We shall be liable and punishable by the university,
which may include ‘Fail’ in examination or any other punishment that university
may decide.

Sr No. Name Enrollment No Signature

1. Nagar Mayur Ashokkumar 177780592051

2. Nirmal Shruti Amitbhai 177780592054

Place: …….. Date: ……..

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Institute Certificate

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Plagiarism Report

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 Preface

India has traditionally been a cash-based economy with limited penetration of formal
banking and financial services. Access to formal financial services such as domestic
remittance, micro-credit and micro-insurance has been extremely limited, especially
for the low-income groups in India, mainly because the banking sector considers these
groups low priority considering the high costs of acquisition associated with them and
small deposit and transaction amounts. As a result, either they are forced to approach
unorganized service providers and avail these services at steep rates, or they are
completely deprived of access to such services. Apart from individuals, micro
businesses also face similar challenges in accessing credit through formal banking and
financial services channels.

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 Acknowledgement
The small but an important and timely help can prove to be a milestone in
one’s life. Every human being has such kind of experience and we also receive the
same feeling as today we have achieved an important milestone in our college life
“The completion of this project.”

First and foremost, we express our thanks to college “Som – Lalit Institute of
Business Management” and its director Dr. Supriya Bhutiani for giving us golden
opportunity of making the project so as to learn the various aspects practically.

We are thankful to our project coordinator Prof. Ayushi Trivedi who

continuously guide us till the last word of this project report and provide an excellent
guidance and encouragement to us. We take this opportunity to express gratitude to all
of the faculty members for their help and support.

Thus numbers of individual have contributed to this project and hence we are
highly thankful to all of them. Undoubtedly, the practical and the theoretical
knowledge that we have gained from them will help us enhancing our career and
managing things in a better way.

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 Executive Summary

The Government and the Reserve Bank of India (RBI) have taken various measures to
address the needs of financial inclusion and financial access in India — an important
one being the conceptualization of Payments Banks. Payments Banks will be
restricted in the types of services they are allowed to offer: they can accept deposits,
facilitate remittances and bill payments, and provide basic banking services to
individuals and small businesses, but cannot offer credit or lend. The RBI has recently
given in principle approval to multiple entities to set up Payments Banks in India.

Payments Banks are currently in an operational phase, where they are

developing their operating models. Therefore, they need to address the challenges of
the Indian payments landscape and adopt key learning from global players. Payments
Banks also need to look beyond just remittance-led services because there are already
quite a few payments and remittance-led businesses catering largely to the migrant
population, assisting them with domestic money transfer services. However, most of
these remittances-led businesses have catered only to the very basic elements of the
financial services maturity curve and as a result not benefited the financial system
significantly. Payments Banks need to look beyond and offer services that help people
graduate from financial access to financial usage.

Considering the restriction on Payments Banks to lend, it is imperative for

them to focus on adjacent revenue opportunities in the build-out phase itself.
Payments Banks built on traditional banking and remittance-led models alone may not
be able to create the long-term value envisaged by the regulator. Instead, Payments
Banks can take a long-term view of building an ecosystem of customers and
merchants where transactions within the ecosystem are affected at a near zero cost
and cashing out is chargeable. This can create enough of an incentive for customers
and merchants to transact on a cashless basis within the ecosystem.

A case in point for adjacent revenue opportunities for Payments Banks would
be to explore expanding this ecosystem by partnering with e-commerce players and
offering assisted services to the customers through their business correspondent
network.

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 In this paper, multiple successful models have been evaluated across mobile
financial services and within the Fintech space to identify the opportunities for India.
As most Payments Banks are in the build-out phase at the moment, this is the time to
think beyond the existing remittance-led and traditional banking models, and build an
innovative strategy.

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 Table of Contents

Particular Page No
 Title Page 01
 Declaration 02
 Institute Certificate 03
 Plagiarism Report 04
 Preface 05
 Acknowledgement 06
 Executive Summary 07
 Table of Contents 09
1. Background of the Study 10
2. India’s Payments Bank Ecosystem 12
3. Review of Literature 14
4. Research Methodology 17
5. Research Objectives 18
6. Identifying the revenue adjacencies 19
7. A background to Payments Banks in India 21
8. Payments Banks: Progress And Trends 24
9. A step toward ubiquitous banking access and cashless society 25
10. Alternate revenue models for Payments Banks 30
11. The business case for Payments Banks 37
12. Illustrative financials 44
13. Key revenue and cost drivers for payments bank products 46
14. The impact of direct costs and overhead costs 48
15. Adjacent Revenue Streams 49
16. Case Study on PayTM 57
17. INDIA POST PAYMENTS BANK (IPPB) 59
18. Limitation of the Study 63
 References 64
 Bibliography 65

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 1. Background of the Study

The Government and the Reserve Bank of India (RBI) have taken various
measures to address the needs of financial inclusion and financial access in India —
an important one being the conceptualization of Payments Banks. Payments Banks
will be restricted in the types of services they are allowed to offer: they can accept
deposits, facilitate remittances and bill payments, and provide basic banking services
to individuals and small businesses, but cannot offer credit or lend. The RBI has
recently given in principle approval to multiple entities to set up Payments Banks in
India.

Payments Banks are currently in an operational phase, where they are

developing their operating models. Therefore, they need to address the challenges of
the Indian payments landscape and adopt key learning from global players. Payments
Banks also need to look beyond just remittance-led services because there are already
quite a few payments and remittance-led businesses catering largely to the migrant
population, assisting them with domestic money transfer services. However, most of
these remittances-led businesses have catered only to the very basic elements of the
financial services maturity curve and as a result not benefited the financial system
significantly. Payments Banks need to look beyond and offer services that help people
graduate from financial access to financial usage.

Significant progress has been made in expanding access to formal banking in

India through a host of reforms by the Government of India. Through the Pradhan
Mantri Jan Dhan Yojana (PMJDY), there has been a significant increase in access to
banking across households. Subsequent schemes for insurance and pensions have
attempted to extend access to a wider gamut of financial products – the Pradhan
Mantri Suraksha Bima Yojana (accidental death and disability insurance), the Pradhan
Mantri Jeevan Jyoti Bima Yojana (life Insurance) and the Atal Pension Yojna
(pension). While these schemes have focused on financial access, increasing financial
usage still remains a challenge for both individuals and micro and small businesses.
Most small business owners continue to rely on unorganized sources for financing
their daily working capital at extremely high rates of interest. Lack of access to formal

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financial services not only acts as a growth inhibitor, but also creates a poverty spiral
for the impacted segments of the population.

Conceptualization of Payments Banks is a bold policy reform well suited to

both broadening access to and creating usage of organized financial services.
Payments Banks are permitted to offer basic bank accounts (current and savings with
a balance limit of INR 100,000) but are not permitted to extend credit or accept term
deposits. They can accept demand deposits, pay bills, facilitate remittances and
government welfare payments to their customers, and provide other basic banking
services to individuals and small businesses.

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 2. India’s Payments Bank Ecosystem

To build a comprehensive suite of basic low-cost banking and payment

services for a large customer base, India’s payments banks will need to collaborate
with an ecosystem of partners across distribution networks, the national payments
infrastructure, technology providers, and banking and payments providers. As part of
this ecosystem, payments banks will rely on various interoperable payments systems
through services enabled by the National Payments Corporation of India (NPCI) or
the RBI.

National Payments Infrastructure – The national payments infrastructure (managed

by the NPCI) shapes India’s payments landscape. Immediate Payments Service
(IMPS), RuPay (India’s domestic card scheme), Aadhaar Payments Bridge, and recent
additions, Unified Payments Interface and Bharat Bill Pay System, will all shape the
ecosystem opportunities available to payments banks.

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Immediate Payments Service (IMPS) – IMPS allows for instant 24/7 interbank
electronic fund transfer payments up to INR 200,000 (USD 2985) and facilitates
account to- account interoperability across banking players.

Unified Payments Interface (UPI) – Riding on the NPCI switch infrastructure, the
UPI allows banks to instantly transact with each other using virtual addresses,
eliminating the need for customers to share their banking details.

Bharat Bill Payments System (BBPS) – India’s interoperable bill payments system
aggregates a large number of billers and enables customers across the country to pay
their bills through an integrated platform.

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 3. Review of Literature

1. DeYoung and Roland (2001)

DeYoung and Roland provides three reasons why non-interest income may
increase volatility.

First, revenues from fee-based activities might be more volatile than interest
income because the customer-bank relationship is stronger in the traditional lending
business. Therefore, for many of the new fee-based activities it is easier for customers
to switch to another bank.

Second, expanding into fee-based services can considerably increase fixed

costs for example, investments in technology and human resources whereas, if a
lending relationship is already established, the only cost of an additional loan is the
bank’s interest expenses.
Third, in contrast to the lending business, fee-based activities require less regulatory
capital, which suggests a higher degree of financial leverage and therefore leads to
higher earnings volatility.

2. Markowitz (1952)
Markowitz quantifies the benefits of diversification also known as not putting
all your eggs in one basket. All else equal, an efficient bank should generate higher
amounts of noninterest income.

For example, a well-managed bank will set its fees to fully exploit market
demand, and will cross-sell additional fee-based products to a larger percentage of its
core customer base. Thus, holding product mix and banking strategy constant, the
intensity of non-interest income is likely to be a forward-looking signal of a bank’s
financial success.

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3. Kimeu (2012)
According to Kimeu the benefits of evolution of non-interest income do not
seem to fully offset the increase in risk that come with fee based income. A positive
correlation between net interest income and non-interest incomes seems to exist, a
finding that suggests non-interest incomes may not be used to stabilize total operating
income.

However, liberalization and growth in information and communication

technology has led to commercial banks exploring non-interest incomes so as to
remain competitive. Thus effect caused by non-interest incomes on bank performance
cannot be ignored. In order to maintain the relative optimal level in cost efficiency,
banks might not only focus on the non-interest incomes related activities, but also
emphasize the traditional interest related incomes activities.

4. Kallur and Bhatt (2009)

He examined how net interest margin, non-interest income, profitability,
overhead expenses and non-performing loans of Public sector banks are affected due
to the presence of foreign bank. The empirical result reveals that foreign bank entry
usually increases competition in the banking industry as is evidenced by increasing
profitability of banks. The increased competition seems to be deteriorating the5 loan
quality as evidenced by increasing default loans. Foreign bank entry also increases the
overhead expenses of Public sector banks. Besides, foreign bank presence is
negatively associated with net interest margins and non-interest income of Public
sector banks, even though the relationship is statistically weak. Therefore, the
empirical results, in general, suggest that foreign bank entry in the Indian banking
system adversely affects the operations of Public sector banks.

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5. Jain Ravi Kumar (2007)
He has concluded that banking industry all over the world has greatly
benefited by the ongoing IT revolution. They have cited several articles focusing on
IT interventions in the global banking sector. They have also mentioned emerging
trends in IT with mobile banking. Their study mentioned different risk and challenges
involved in IT enabled banking, with exponential growth of cybercrimes, banking
online have several drawbacks that can prove to be detrimental in the development of
online banking. He also advocated certain tips for the use of safe online banking
experience, there are different dimensions of paperless banking in a globalized
scenario, with various advancements in technology.

6. DR. GUDIPATI VIJAYUDU (2014)

The financial inclusion drive, apart from developing various elements of the
banking infrastructure, succeeded in increased the penetration of bank branches to
1,15,350 villages with a population of over 2,000, and led to the opening of tens of
millions of NFAs, later re-designated as BSBAs. Overall, the electronic payment and
settlement systems registered a healthy growth in volume at 23.2 per cent during
2013-14. However, around half of these accounts have been non-operational, and the
vast majority of the remainder only has access to minimum savings facilities with a
single bank. The product offered is NFAs savings account, and technology is not
interoperable, meaning that the customers can only perform transactions with a single
bank. The commercial banks have generally quite indifferent to financial inclusion.
They have not benefited from financial inclusion in terms of deposits and have not
had the revenues from any appreciable volume of transactions. BC organizations
which manage BC agents have made losses and had to scale down operations while
the agents themselves received low salaries and commissions with many of them also
opting out of performing this activity.

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 4. Research Methodology
1. Research Design
This research adopted descriptive design as the information was collected
from secondary sources. The design is deemed appropriate because the main interest
is to explore the viable relationship and describe how the factors support matters
under investigation in the banks in India. A descriptive method presents an
opportunity to fuse both quantitative and qualitative data. Information was drawn
from published journals on insurance, mutual funds, in house magazines of the bank,
Files maintained by the bank etc. Information was also gathered from newspapers and
magazines. The data was also downloaded from the Internet.

2. Data Collection
● The data which is to be used for the analysis is the secondary data.

3. Research instrument
● Case study is used for the analysis purpose.

4. Significance of the Study

● To know that to what extent the alternative sources of revenues for the banks
help them to recover the NPA’s.
● At the end of the studies we will come to know about how these alternative
sources of revenue help the banks to gain profits.

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 5. Research Objectives

● To study the current revenue sources for banks in India

● To study the alternate sources of revenue for various banks.
● To study the contribution of each alternative source of revenue to banks in
India.

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 6. Identifying the revenue adjacencies

We have identified six paradigms around which Payments Banks can look at building
alternate revenue streams:

1. Micro savings: While savings is core to banking, very few banks have taken an
approach toward encouraging micro-savings, i.e., making acceptable savings amount
to near zero. Low-value investment and goal-based savings products, which also
provide a savings target, can inculcate a savings habit, which in turn is beneficial for
Payments Banks and the financial system. Customers that save and invest regularly
are more likely to remain active with banks.

2. Creating large-scale access to credit: Although Payments Banks are not

allowed to lend, they can act as a platform for an alternate mode of credit assessment.
Payments Banks could analyze and profile customers on the basis of the stability of
transactions and outflows to arrive at an assessment of risk. Thus, they could enable
lending agencies to identify financially excluded but qualified leads in a targeted
manner with significantly lower costs of acquisition.

3. Merchant acceptance: A ubiquitous merchant acceptance infrastructure is

essential for achieving the long-term objective of a cashless society in India. Thus, a
merchant-acceptance model that would incentivize customers and merchants to accept
cashless payments and enable Payments Banks to increase bank balances would be an
effective achievement strategy.

4. Marketplace for financial services: Payments Banks could, with minimal

effort, cross-sell financial services to their existing user base — through their business
correspondent network and digital channels — to generate additional revenue streams.

5. Data: Upon reaching critical scale, Payments Banks will generate huge volumes
of transaction data, which can be monetized to build an alternate stream of revenue.

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6. Payments as a platform: A platform approach could be adopted by Payments
Banks as an innovative means to provide API access to the developer community and
other players to build apps and use-cases using the payments platform.

Until now, banks in India have not proactively taken an approach that opens up
platform access to outside entities. Payments Banks can enable participation from
non-banks and technology companies, which will speed up innovation in banking,
which has so far been limited.

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 7. A background to Payments Banks in India

India has traditionally been a cash-based economy with limited penetration of

formal banking and financial services. The financial sector in India is witnessing a
transformation: new banks are coming up in the country and the dream of a fully
banked society is now nearing reality. Currently the world’s 12th largest consumer
market, India is set to experience tremendous growth in private consumption in the
coming years.

The need for financial services among low-income groups in India is high,
consisting of a variety of services such as domestic remittances, access to credit,
receiving government welfare payments and utility payments. The willingness to pay
for such services is also clear from the high dependency on money-lenders, whose
charges far exceed those of banks. Additionally, other routes of payments services –
transfer through informal networks of friends and relatives or couriers – are slow,
expensive and risky. There is a clear need among low-income groups for the ability to
transfer money securely and instantaneously at a low cost.

However, despite this need, the access to financial services for low-income
groups remains limited. With high costs of acquisition and small deposit and
transaction amounts, low-income groups have been low priority for the banking
sector. Therefore, the limited presence of organized banking has led to fragmented
financial service offerings to these groups, dominated by localized moneylenders or
informal networks. Apart from individuals, micro businesses in these groups also face
similar challenges in accessing credit through formal banking and financial services.

The target groups for Payments Banks are mainly India’s migrant laborers,
low-income households and small businesses to whom savings accounts and
remittance services can be offered at lower transaction costs. It is envisaged that
Payments Banks will accelerate the penetration of financial services among the low
income customer segments by leveraging technology and building a large
geographical footprint.

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1. An inflection point for financial services in India
At present, the environment in India is very conducive to further financial
inclusion in the country. The Government, regulators, banks and supporting
institutions have come to a consensus on innovation that could significantly accelerate
the drive toward achieving complete financial inclusion in the country.

Against this backdrop, the RBI has provided in-principle approval to multiple
players to set up Payments Banks in India. These banks have been conceptualized to
address the basic banking (bank accounts), remittance and payments requirements in
the country and are expected to use technological innovations to reduce operational
costs. At present, Payments Banks are at different stages of build-out. Strategy
formulation and innovation brought into the financial services industry and the growth
of the newly licensed Payments Banks will be important parameters to track.

These two concepts, if realized could potentially introduce large sections of

under banked and under focused population to formal banking and payments services.
The success of the Payments Banks hinges on redefining the way traditional banks
approach the key components of the banking lifecycle, including customer
acquisition, on-boarding, keeping customers actively transacting, assessing their
financial needs and providing the appropriate solutions and thereby assisting them to
become a part of the mainstream economy.

Acquiring a critical mass of customers will be a key factor for the success of
Payments Banks. These banks could save time and effort by leveraging established
government initiatives, programs, and platforms to achieve the required economies of
scale.

2. Enabler for broadening reach of financial services in India

Payments and remittances have traditionally been a part of the service offering
of banks and post offices. Over the last five to seven years, non-bank players such as
telecom companies (through mobile money services), business correspondents (BCs,)
— entities that assist banks in providing basic banking services in rural areas — and

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prepaid payment instrument issuers (PPIs) have made significant contributions toward
making domestic remittances widespread in India. In a country where significant
migration of workforce occurs from rural areas to industrial centers and large cities,
domestic remittance corridors have emerged between these employment hubs to the
hinterland. While the emergence of non bank players has helped in making domestic
remittance accessible for many within the country’s migrant workforce, the impact on
the extended financial system has been limited.

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 8. Payments Banks: Progress And Trends
RBI has said that at the end of March 2018, other liabilities (such as unspent
balances in PPIs) and provisions of the five Payments Banks in operation accounted
for more than half of their balance sheets as compared to the previous year when for
two operational Payments Banks, total capital and reserves formed the major share of
the liabilities.

The report does not explicitly mention the names of any Payments Banks.

Here are the trends the RBI observed:

● The share of deposits increased from 5.7% to 9% between FY17 and FY18
● The operating loss for FY17 and FY18 was $34.5 Mn (INR 240.7 Cr) and
$74.84 Mn (INR 522.1 Cr) respectively
● The net loss was $34.72 Mn (INR 242.2 Cr) and $74 Mn (INR 516.5 Cr) for
FY 17 and FY18 respectively
● The net interest income improved from $21.65 M (INR 151.1 Cr) in FY17 to
$44 Mn (INR 30.7 Cr) in FY18
● The total liabilities/assets rose to $701.1 Mn (INR 4,891.6 Cr) in FY18 from
$171 Mn (INR 1,193.9 Cr) in FY17
● About 81% of the business the payments bank made was on account of inward
and outward transactions through mobile and e-wallets
● During H1 2018-19, payments banks were making losses and it may well
continue for many quarters
● The performance of payments banks has improved in terms of various
performance metrics such as NIM and the cost to income ratio

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 9. A step toward ubiquitous banking access and cashless society

As Payments Banks scale up and diversify their customer base, the end state
visualized for consumers will be one of a financial services provider becoming
accessible to everyone and moving to self-serve channels. It is expected that once
financial access, financial literacy and usage become wide spread; customers will be
proficient enough to create authenticated accounts, make investment decisions and
apply for loans on their own through their Payments Banks. Hence, Payments Banks
could take the financial-inclusion effort beyond merely owning and operating
accounts, to creating financially literate society in India.

1. Instant documentation and on boarding process

One of the reasons for low levels of banking access in India is a lack of
identity and address proof documents, especially for people migrating to cities.
Collection and maintenance of multiple identification proofs make the customer on-
boarding process difficult for both banks and customers. Aadhaar based e-KYC
promises a solution for simplification of the customer on-boarding process. Over 1
billion Aadhaar cards have been issued in India. Aadhaar could be used for instant
KYC and customer on-boarding and banks can process quicker, paperless on boarding
through Aadhaar-based authentication in three simple ways.

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 Aadhaar- and OTP-based authentication for KYC could be the most simplified
kind of authentication, that allows banks and other entities to authenticate customers
through an OTP delivered to their registered mobile numbers or email address. The
OTP would be generated when a customer initiates the on-boarding, and the KYC
would be performed through easy-to follow steps. These could be done online or in
person at a branch or any other physical touch point and does not necessarily require
any assistance. However, this can be used only by those Aadhaar users who have
correctly registered their mobile numbers.

The second approach involves going a step further and building an Aadhaar
consumer app through which customers could push their details to a Payments Bank
or a financial service provider for completing the KYC.

The third approach involves a consumer using a bank’s mobile application and
using it to scan the QR code of the Aadhaar card and taking a picture of the PAN
card. The bank can then verify the information through backend integration with the
information repositories for Aadhaar and PAN and take decision on on-boarding the
customer. Adopting the Aadhaar-based KYC model will benefit the Payments Banks
during expansion as the involvement of biometrics will overcome documentation
constraints for customers, especially in the rural hinterlands and semi-urban towns.

2. Near zero marginal cost of transactions

At present, cash transactions are free for customers and merchants, and that is
the proposition that needs to be made for digital payments as well. Payments Banks
will need to push the adoption of low-cost digital channels right from the start of their
banking relationships to reduce their own and consequently their customers’ costs. A
critical aspect of the relationship will be to incentivize customers to transact within
the system, reducing the cash out requirements and managing low-cost cash
operations.

It will be critical for new Payments Banks to build a technologically advanced

payments ecosystem that allows customers to access various options for payments,
transfers and investments while ensuring that funds remain within the Payments

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Banks ecosystem. This would require tie-ups with multiple parties, such as banks,
third-party aggregators and vendors, PPIs and merchants.

Payments Banks could facilitate this implementation by making transactions

or transfers within the ecosystem almost free. In effect, a very large closed user group
could be created by Payments Banks with suitable disincentives for a cash-out such as
withdrawal charges.

Merchants will play a major role in ensuring that cash is retained within the
system, thus reducing the values and volume of cash-out transactions. Payments
Banks will have to simplify the acquiring process and move ahead of the traditional
cost structure of merchant acquiring, where a merchant is charged a transaction fee,
which is a percentage of the transaction (the transaction fee varies based on the card
type — debit or credit — and is higher for credit cards).

3. Adopting a digital first approach

India has a high mobile density with total subscriptions touching 1 billion.
More recently, there has been an increase in the penetration of smartphones and the
level of data usage on mobile. In both urban and rural India, the mobile internet user
base has grown significantly over the years. Further, an increasing proportion of
active internet users use mobile phone as the primary channel for internet access.

As a result, the Indian consumer market will not only leapfrog many
technology adoption trends (such as bypassing desktop and going mobile), but also
adapt to new disruptive ideas (such as the evolution of India’s digital landscape into a
hyper-local and on-demand market). Several major players such as on-demand cab
aggregators, e-commerce giants and digital wallets have already flagged off the dawn
of a new era of digital transactions.

Hence, it is imperative for Payments Banks to adopt a digital first approach

toward their consumer offerings and internal processes. There should be substantial
focus on developing paperless processes, digitizing transactions and building a true
digital experience. Smart phones can be one of the means to achieve this. However,

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there is a large base of unbanked and semi-literate customers who may not be
conversant with smart phones, and hence enabling services through feature phones
should also be explored.

Payments Banks can benefit significantly by becoming one of the first-movers

and riding this mobile wave to reach out to a wider customer base across the country.

4. Complete interoperability across all systems participating in a

transaction
Fragmented financial infrastructure and low ticket size of transactions are
compelling reasons for banks to serve the unbanked and the under-banked population
through digital channels. However, most digital services are restricted in a certain way
and there is no uniformity of banking services across the various platforms that banks
employ. In order to overcome such challenges, enable scale and develop multiple
touch points within the bank’s ecosystem, interoperability is a critical aspect that
Payments Banks must factor in while developing their solutions.

5. Solutions designed for everyone, across customer segments

Across the overall consumer spectrum covering both individual and small
business, there are segments that have received less focus from mainstream banks.
Payments Banks have the opportunity to address these segments and need to develop
products and solutions for all. Being legacy free, Payments Banks are better equipped
than other banks to offer digital services to the under-banked rural segments and low-
cost acceptance services to merchants. Hence, a multi-pronged approach needs to be
adopted by Payments Bank for catering to the requirements of a wider customer base.

6. Data-led near real-time decision making

Traditionally, most decisions in a bank are made through manual analysis and
operationally intensive processes. Incorporating real-time analytics into a bank’s
structure could significantly improve the quality and the turnaround time for such
decisions. Analytics tools can help Payments Banks carve out a differentiated
proposition for their customers and can influence their customers’ financial decisions
by assessing multiple patterns relating to their expenses, upcoming obligations and

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due payments. These tools can even provide information on sellers providing the best
price for their upcoming purchases - something that can be extended to goal-based
savings, where a goal is linked to a product or a value target. Additionally, focus on
analytics and data-led decision making can help Payments Banks develop
propositions around the management of household expenditures, investment and
savings advice.

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 10. Alternate revenue models for Payments Banks

Most mobile financial services and wallet businesses have been built on the
assisted transactions model, characterized by high charges levied upon customers for
using services such as money transfers, cash-in and cash-out. While these services
have been in place for a long time, they have not yielded the desired results.

Mobile money systems across geographies face similar challenges: high

operational costs, significant time frame to scale-up, substantial efforts to popularize
the services in local markets, engagement of agents to keep them active, commission
costs and so on. However, attaining a sizeable mass of customers is critical to the
success of the mobile money business, as the cost to customer ratio decreases with
scale. And with scale come other potential benefits such as the opportunity to generate
adjacent revenues through the distribution of financial services, reduction in customer
attrition in the hyper-competitive market and increase in customer lifetime value.

Payments Banks should focus on providing products and services that enhance
long-term customer value by facilitating their participation in a larger transacting
ecosystem. Additionally, these banks should also explore building alternate modes of
revenue through services adjacent to the core banking offerings.

A close parallel can be drawn with examples from technology and online
businesses where revenue is not generated from the core products or core businesses
but instead from alternate streams: for example, technology platforms such as mobile
operating systems focus on generating revenue from applications and services.
Similarly, the core offerings for services such as search engines, social media, and
travel forums are free for customers, with very strong adjacent revenue models
developed through advertisements and data-led services.

In other consumer-centric businesses as well, players are constantly

expanding the revenue opportunities in adjacent space — for instance, social
messaging platforms are looking at payments to become an integrated offering. Apple
Inc., through Apple Pay, now participates in the transactions value chain and makes

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revenue from services through fee sharing. Payments Banks should focus on
identifying revenue opportunities from adjacent financial and non-financial services
by leveraging digital banking channels as consumer-facing assets and utilizing the
physical-distribution footprint for services outside of banking and payments. For
example, Payments Banks can use its BC network to offer assisted e-commerce
(facilitating purchase and delivery of products through online marketplaces) in
partnership with leading marketplaces in the country or act as a collections centers for
NBFCs or MFIs for loan repayments.

1. Facilitate micro savings

Most under-banked/unbanked households in India store their savings at home
in the form of cash or non-revenue generating assets such as gold. This not only limits
the total savings potential for such customers, but also keeps money out of the
banking system. A majority of individuals and households in low-income groups
have a tendency to make small and infrequent savings due to low levels of financial
literacy and lack of access to organized financial services.

While savings is core to banking, very few banks have taken an approach
toward encouraging micro-savings, i.e., making acceptable savings amount to near
zero. Payments Banks need to focus on developing products that significantly reduce
the minimum denomination that needs to be accumulated to be put into a savings
product. Furthermore, offerings such as sweep in accounts, which align with the goal-
based savings concept, can also be developed to further simplify investments for the
large-scale adoption of micro savings

2. Create large-scale access to credit

Availability of credit, for both individuals and small businesses, is an
important dimension of financial inclusion. The situation is significantly worse in
rural areas, where despite numerous government and regulatory efforts to promote
lending for the development of farmers and micro merchants, there is a lack of full
access to formal financial services as basic as low-cost borrowing.

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 Although Payments Banks are not allowed to lend, they can analyze and
profile customers on the basis of the stability of transactions and flows to arrive at an
assessment of credit eligibility. On a case to-case basis, the assessment report could
be shared with partner banks and MFIs for risk assessment. The Payments Banks need
to focus on creating as many transaction avenues as possible, creating datasets that
can act as proxy parameters for credit-eligibility assessment of customers.

Payments Banks can establish themselves as service providers for an

analytics-driven credit assessment platform for customers. The platform can then be
extended to NBFCs, MFIs, banks (co-operative and scheduled commercial) and, if
permitted, individuals for peer to-peer lending.

Payments Banks can build a marketplace for loan origination through multiple
partnerships, where customers can evaluate multiple options around repayment
conditions, the rate of interest etc. and also decide whom to borrow from. Payments
Banks can also assist partner lenders in managing the document-collection process,
collateral management and repayments.

3. Merchant acceptance: provide “acquiring” as a bundled service to

merchants with a focus on low-cost acceptance
The Indian retail sector is highly fragmented, unorganized and dominated by a
large number of small stores, which primarily transact in cash. The traditional
payment infrastructure has been built around card payments and POS terminal—led
acquiring models, with limited merchant acceptance — mostly in urban areas. The
transaction economics of traditional acquiring, in most cases, does not prove cost
effective for small retailers operating on low margins.

Hence, in order to address these challenges, Payments Banks can develop

alternate merchant payments models with low transaction costs for merchants or
customers. Payments Banks can define the transaction-charging mechanisms that
incentivize transactions within the bank (i.e., having a near zero cost structure for
transactions where the customer and the merchant are part of the Payments Bank) and

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focus on incremental revenue generated through fees for cash withdrawal at POS and
for value-added services for merchants such as MIS and analytics.

In the Indian context, a cashless payments ecosystem can only be achieved

when low-value merchant payments can be made in an electronic form. A ubiquitous
solution for this can be developed that addresses the key concern of merchants: the
high cost of the merchant acquiring set up. Telesom ZAAD in Somaliland has created
an ecosystem of services and merchants where digital payments are accepted and all
customer transactions are free.

Launched in 2009, Telesom ZAAD has significantly changed the way people
in Somaliland access banking and payments. It laid an early emphasis on alliances
with merchants, government bodies and other entities with a vision to have a
ubiquitous payment and remittance solution. It has also partnered with World Remit
to enable all its customers to receive instant credit for foreign inward remittance into
their ZAAD accounts.

ZAAD also uses a wallet-based mobile money service with a focus to keep
cash circulating within its system. To do this, it has focused on developing a strong
mobile money ecosystem around services, along with an emphasis on salary credits to
the account and merchant payments. The idea was to create a mobile money system
that did not require users to repeatedly cash-in and cash- out. The following are some
of the key highlights of the model.

4. Marketplace for financial services and local commerce

Traditional cross-selling by banks in India has hitherto focused on financial
products such as insurance, mutual funds and pensions products. However, Payments
Banks can also consider partnering with e-commerce companies for creating an
additional revenue source.

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4.1 Financial services
While Payments Banks will cross-sell financial products such as insurance,
investment and origination of loans, it can also focus on analytics-led contextual (to
the consumers) cross-selling. Additionally, the focus of Payments Banks should
revolve around the following imperatives:
• Building strategic partnership with financial services companies, AMCs and
insurance companies
• Customizing products to meet the requirements of its customer base — a
one-size-fits-all approach cannot be adopted
• Profiling customers by analyzing demographic and transaction related
parameters to be able to offer targeted products that are relevant to the
customers.

Payments Banks will have an important role to play in leading their customers
upward on the financial services maturity curve.

4.2 E-commerce
Many BCs lose focus on providing banking and payments services because of
the low commission income they earn. As a result, they find it difficult to manage the
business, leading to inactivity and eventual closure of business. While Payments
Banks should attempt to reduce the transaction fee, they must also focus on providing
additional revenue opportunities to their agent networks. Assisted e-commerce is an
opportunity that can be explored in partnership with leading e-commerce players.
Such alliances could be potential revenue sources for BCs and at the same time enable
Payments Banks to cross-subsidize transaction costs.

BC networks can be utilized for making e-commerce transactions and orders

(in an assisted mode) and BCs can also act as delivery or pick-up points. BCs can also
be trained to on-board sellers onto the e-commerce platforms for which they can be
compensated in addition to the commission earned from banking services.

In China, large ecommerce and payments players together have created an

ecosystem for commerce and payments, thereby bringing merchants, small and large

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businesses and customers on the digital platform. A similar model can also be
extended by Payments Banks in India in partnership with e-commerce platforms and
coupled with payments services.

5. Data
Once operationalized and on reaching a critical mass of customers, Payments
Banks will have access to a considerable amount of transactions data of customers
and merchants. Analyzing this data along with additional customer profile parameters
can lead to valuable insights about spend patterns and preferences. These insights can
enable Payments Banks to explore new revenue opportunities.

Payments Banks can build better value propositions for businesses by using
analytics and consumer insights to connect service providers with consumers. For
instance, Meniga has developed a proprietary analytics technology powered by
consumer spend patterns that helps advertisers and banks to target and engage with
their customers better.

Similarly, data-led credit risk assessment can be done based on models similar
to those used by Cignifi and Lenddo. Cignifi is an alternative-lending assessment
platform to evaluate parameters and metrics beyond the credit scores used by
traditional lenders (e.g., social data and telecom usage) and also refine their risk
engine more frequently. It has developed algorithms that recognize trends in the usage
of mobile phones (including calls, SMS, recharge frequency and data usage) to profile
an individual. Lenddo has enabled the population at the bottom of the pyramid to
claim their creditworthiness and access loans from the formal financial system. It uses
more than 12,000 data points to manage risks and make better decisions.

Payments Banks can also generate data-led insights and explore other
adjacent revenue streams such as targeted marketing to its customer base.

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6. Platform approach toward banking and payments
Until now, banks in India have never taken an open architecture approach that
provides access to their systems to outside entities. Legacy systems, internal processes
and other business priorities limit the speed at which traditional banks innovate.
Payments Banks should develop the payment interface as a platform with capabilities
to provide standardized API access and allow third party developers, with thorough
due diligence, to easily build and integrate customer and merchant-centric services
around it.

Providing public and private APIs can create an ecosystem where other non-
bank players can develop payment apps and functionalities that would bring further
innovation into the banking and payments space.

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 11. The business case for Payments Banks

Note on scope of the analysis

The illustrative business case and financial model is not representative of any
one payments bank player.

It is assumed that:
• The payments bank is run as a standalone business as per the regulatory
requirements.

In this study, we consider two viable business cases for a new payments bank:
1. A Base Strategy with accounts and wallets as core products and a focus on basic
payments and savings services; and
2. A Mature Strategy with an emphasis on developing adjacent revenue streams.

Both models represent a viable go-to-market approach that targets a mass

market segment with basic financial services and relies on cash-in/cash out networks
to reach the unbanked. The mature strategy builds incrementally on the base strategy,
as developing adjacent revenue streams first require building an active customer base.
MNO-led payments banks will evolve from a single product, single channel strategy
to become mainstream players with a multiproduct, multi-channel strategy.

The strategy for this model is to build a large base of wallet and bank account
customers by heavily leveraging the MNO distribution network and to provide
business correspondent (BC) services for payments banks. The payments bank will
grow as the BC network rapidly scales up and acquires customers in the first five
years.

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The evolution of payments banks can be understood as three stages of growth,
defined largely by profit margins.

1. In the start-up phase (Y1–Y3), the bank will focus on rolling out basic banking
services, building the agent network, and ensuring the necessary regulatory
infrastructure is in place.

2. In the growth phase (Y4–Y7), the bank will focus on growing of its customer base,
increasing agent activity levels, and promoting account and wallet based transactions
through digital channels. (50% - 70% of transactions to be digitized).

3. The long-term objective (Y8+) the long-term objective (Y8+) is to achieve a

predominantly digital ecosystem (with 70%-80%+ of digital transactions) and to reach
a high number of active SA and wallet customers (60m+).

As the customer base grows, transaction options also expand, driving the
volume of digital transactions up and the number of cash-out operations down. In
turn, the bank’s total account balances increase.

A focused account and wallet strategy can develop lasting customer

relationships, progressively increase the value of these relationships as the bank
matures, and make it possible to grow the ecosystem and offer additional services to
customers.

Customer segments
Payments banks will focus on three key customer segments with different
value propositions: the unbanked and under banked, small business, and the upwardly
mobile. While in the early years the primary channel will be agents, even for the
under banked and small business segment, payments banks will encourage customers
to shift to self-serve digital channels.

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Products and services
Payments banks will offer multiple products to cater to different customer
segments and customer needs. This will require building a transacting pool of
customers, strengthening customer relationships, and designing products that not only
meet regulatory requirements and compete with existing market products, but also
remain viable over time.

Payments banks will offer four main products and services to its customers:
1. Savings accounts,
2. Current accounts,
3. Wallets, and
4. OTC services.

Since each product brings its own costs and benefits to customers and the
financials of the payments banks, a mix of products is best suited to payments banks.

For example, savings accounts bring more costs to the bank than wallets and
current accounts (free ATM transactions, interest payment etc.) but offer interest and
are familiar to customers.

Similarly, wallets are envisioned as the primary channel for digital

transactions and online spend, and payments banks will focus primarily on driving
uptake of wallets and accounts. Existing PPIs will be migrated to the bank, and since
wallets can be paired with bank accounts, self-serve digital users can graduate to
account customers.

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Distribution
Payments banks will aim to build a low-cost physical distribution channel,
which is a combination of branches and BCs. Controlling offices are also required to
provide oversight.

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 Bank branches typically have high costs associated with them, so there will
be a limited focus on branch rollout. Ten branches will be added every year for the
first five years, then stabilize at fifty. Branches will be responsible for the overall
management of the BCs and controlling offices in the area and provide a face-to-face
opportunity for customers. Branches may also double as local operations centers,
distributing forms, scanning and archiving customer documentation, facilitating cash
management for BCs in its coverage area, and other tasks. Unlike scheduled
commercial banks, branches are not the primary sales and customer service points but
will be more focused on consumer protection and grievance management.

BCs will be the primary channel for customer service and acquisition, and
it is expected that payments banks will add 60,000 new BCs to the network every
year, reaching 300,000 by the fifth year. The rate of growth of the BC network is
expected to slow down in the maturity phase and stabilize at 450,000 BCs by year ten.
Payments banks will set up a special rural network of BCs in key destinations in
India’s domestic remittance corridors. Thirty percent of the BCs will be in rural areas.
This will also help payments banks meet their regulatory requirement of maintaining
25% of its access points (branches, BCs) in rural areas.

Aadhaar-enabled e-KYC will be the preferred mode of customer on-boarding

to reduce costs and introduce efficiencies. While the bank will facilitate the
procurement of biometric devices, the costs will be borne by the BCs. Setting up
controlling offices is a regulatory requirement for payments banks to supervise and
control their BC networks effectively. In line with current market practices, it is
assumed there will be one controlling office (with three officers in charge of
oversight) for every 300 active BCs. Controlling offices are required to be managed
by on-roll employees of the bank.

The product level profitability provides insight into profitability drivers for
the bank. As mentioned earlier, payments banks will have four product lines, each
with a different cost and revenue structure and varying gross margins.

Savings accounts are an anchor product for payments banks and will support
the growth of the deposit base over time. However, the high costs associated with

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savings accounts and the market practice of paying interest delays positive gross
margins for savings accounts until the sixth year of operation.

In contrast, current account and wallets begin contributing positively to the

gross margin earlier due to zero interest rate on funds held in these accounts.

As a result, current accounts and wallets become profitable much sooner—by

year two. It is important to note that while margins on wallets and accounts increase
over time, expected margins on OTC services (domestic remittances and other
assisted services) remain flat year on year and may also decline slightly over time as
the market becomes more saturated.

While current accounts contribute only 10% of revenue by year ten, they
represent 23% of gross margin contribution of the bank. Similarly, wallets represent
32% of revenue and contribute 43% to gross margins of the bank. In contrast, savings
accounts are a significant revenue contributor, but do not proportionately add to the
gross margin.

The bank faces considerable costs associated with set up in the first year.
While the analysis of the gross margin in different product categories only considers
direct costs. Other overhead costs, such as the technology platform, personnel, and
marketing and BC management, the bank will decrease as a proportion of revenue
drop over time, though the first few years bring significant costs.

Direct margins increase as outreach scales up and digital transactions increase.

Payments banks are largely a transactions-oriented business characterized by low
margins and high volume, which is why direct costs as a proportion of total revenue
remain considerably high. However, as scale of distribution and frequency of digital
transactions increase, the proportion of direct costs decreases.

The financial projections above are strongly correlated to assumptions about

scaling up distribution. It is assumed there will be a phased scale-up from an active
base of 18,000 BCs in Y1 to 135,000 in Y10. Alternatively, some MNOs may
consider a faster rollout of the distribution network, better on-ground engagement to

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keep more agents active and aggressive customer acquisition in the early years, which
could help payments banks become profitable sooner.

Higher number of active BCs can lead to the payments bank turning profitable
earlier. With an increase in active BCs from 30% to 40%, (30% assumed for the base
strategy) the payments bank can become profitable in year 6, a year earlier and an
EBIDTA difference of near INR 70 Cr (USD 10M) in year 7. This would also lead to
the payback period of 9 years instead of 10 years in the base strategy. Operationally,
this translates into a network of 24,000 active BCs in year 1 scaling up to 180,000 by
year 10.

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 12. Illustrative financials

Using a base strategy, we expect payments banks will incur losses in the early
years and will have to infuse a significant amount of capital to meet the net worth
requirement and maintain the leverage ratio. The total equity infusion is expected to
be INR 920 Cr (USD 137M) over the first six years, higher at first, then dropping and
becoming more incremental.

An assessment of the profit and loss statement for the base strategy offers
insights into the challenges and opportunities for payments banks in terms of both
revenues and expenses.

Revenue from products and services

An account and wallet-led strategy contributes both revenue from transaction
fees and treasury income from products, which grows from 62% in the first year to
83% by the tenth year. The revenue from all types of transactions for account and
wallet customers (including wire transfers, spends, interchange income from card
transactions, cash-out charges, etc.) along with the treasury income is considered
below.

A focus on driving digital transactions and spends through wallets will

increase this revenue contribution from 18% in the first year to 32% in the tenth year.
Growth in treasury income will come from the buildup of customer balances over
time. By the tenth year, treasury income will account for 25% of a bank’s overall
revenue. To achieve these gains, a payments bank must build a large transacting
ecosystem for customers, creating greater stickiness, encouraging higher balances
over time, and greater revenue from digital transactions.

The shift to digital transactions

Revenue from cash-out as a percentage of total revenue will also drop steadily,
from 28% in year one to 22% in year 10, reflecting a steady customer shift to digital
channels for spends and domestic remittances, and fewer customers withdrawing
cash.

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Over-the-counter services
Despite a strategic focus on accounts and wallets, OTC services will remain an
important source of revenue in the early years as unbanked customers will not yet be
comfortable transacting digitally. In the base case, promoting the use of digital and
self-serve transactions will gradually reduce revenue contribution from OTC services
from 38% in the first year to 17% by the tenth year.

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 13. Key revenue and cost drivers for payments bank products

Revenue Drivers Cost drivers

• Treasury income from balances • Interest payout

Savings Accounts • Revenue from cash-out at • Channel commission for
agents facilitating cash-in and cash-
out
• Cost of ATM withdrawals

• Treasury income from balances • Channel commission for

Current Accounts • Revenue from cash-out at facilitating cash-in and cash-
agents out

• Online spends through wallets • Cost of cash-in or adding

for money to the wallet (from
e-commerce, travel, urban credit card, debit card, and
logistics services net banking)
etc. • Promotional expenses and
Wallets • Commission on recharges, bill incentives for customers
payments
services
• Treasury income from wallet
balances

• Fees/charges levied to • Channel commission to be

customers for domestic paid for facilitating OTC
remittance transactions services
• Commission earned from
OTC Services service providers
(telcos, DTG operators, utility
companies) for
assisted transactions.

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Costs: Direct and overhead
Our assessment of what drives costs in a base strategy revealed that costs can
be divided into those that are tied to specific products (direct costs) and those incurred
by a bank for enabling services (overhead costs). We have categorised and analysed
the impact of both types of costs.

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 14. The impact of direct costs and overhead costs

DIRECT COSTS

Savings Accounts Account opening, KYC, channel commission for customer

acquisition, debit card issuance, ATM usage, account servicing,
channel commission for cash-in and cash-out, interest payment

Current Accounts Account opening, KYC, channel commission for customer

acquisition, debit card issuance, account servicing, channel
commission for cash-in and cash-out

Wallets Cost of customer acquisition, cost of cash-in to wallets, promotions

and incentives

OTC Services Channel commission

OVERHEADS

Technology Capital expenses (software licenses, hardware deployment, network

infrastructure), operating expenses (annual maintenance, technology
support, managed services, implementation, etc.)

Marketing Brand management, above-the-line (ATL) and below-the-line (BTL)

activities

Infrastructure Infrastructure for branch, central office, operations centre,

controlling office, other administrative expenses

Personnel Salary and other variable payments, training, employee engagement,

bonuses and other benefits

BC management BC acquisition, KYC and documentation, on-site management and

training support

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 15. Adjacent Revenue Streams

Credit Facility
In India, a majority of the population does not have access to formal credit,
driving them to use the high-cost channels of informal money lenders. Lack of
banking access, combined with lack of data, has limited access to finance and
hindered the financial growth of India’s households, and small and micro businesses.
Without access to timely credit, individuals are unable to meet shortfalls in cash flow
or weather emergencies. However, with widespread low-cost networks, payments
banks can provide simple and easy-to-use credit products through partner lending
institutions. They can also leverage customer and payment transaction data to assess
the credit worthiness of those with little formal credit history, and create alternative
credit scores that either complement credit bureau scores or serve as the primary score
where no data is available.

Small ticket credit with a partner bank, delivered through digital channels
Payments banks can leverage transaction data from mobile recharges, bill payments,
and other spending activity to generate highly unique credit profiles of their
customers. On the basis of this, they can then offer credit products specially designed
to meet customer needs, typically short-term loans of one to three months. The loans
can be deposited directly into the customer’s savings account or wallet, with
payments automatically deducted from the balance. While credit products could be
developed jointly with lending institutions, payments banks will not assume any credit
risk.

We expect payments banks to accumulate a sufficiently rich store of data for

customers who have been with the bank for at least one year, at which point the bank
can begin building and monetising credit profiles for these customers. However, for
the first year, the bank should consider selectively rolling out credit offerings for
migrated PPI customers who have already been actively transacting.

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 Credit will be targeted to mass market, low- to middle-income customers with
a regular income. In addition to salaried individuals, it will also be available to self-
employed individuals with regular income. The focus will be on bridging shortfalls in
cash flow for short periods or providing point-of-sale financing.

Customers will be able to request a loan through the payments bank’s mobile
app or at BCs. The request would then be screened based on basic criteria and
availability of KYC and data before it is processed and passed on to the lender along
with the credit score generated by the payments bank. Credit disbursement would be
close to real time for pre-approved limits and decision-based for other cases, although
it may vary depending on the lending partner’s policies. Loans that are approved
could then be instantly disbursed to the customer bank account or wallet, and the loan
amount could then be spent digitally or cashed out at BCs.

Product assumptions
1. MNO-led payments banks will be able to generate scores for active wallet
customers being migrated to the payments bank.

2. Developing directional credit scores typically requires at least 12 months of data.

Customer data will be shared only with consent wherever required.

3. Investment to set up the infrastructure to generate the credit score will be covered
in the upfront set-up cost of the bank. Depending on the nature of the partnership, the
costs can be shared with the lenders.

4. Payments banks will receive commission not just on the first loan, but also on
subsequent loans originated through its channels.

5. Fees associated with repayment behaviour, such as late fees or loan default fees,
will not be shared with the payments bank.

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Key elements of the business case
The business case for credit via the payments banks is driven by the following
elements:
1. Share of interest earnings – Payments banks will receive 10% of the interest
charged on the loan as compensation for determining the credit score and sourcing the
lead. We have assumed an annual interest rate of 18% on loans. This rate of interest is
competitive compared to both informal channels and microfinance interest rates. This
will make credit more affordable to a vast segment of the population who have not
had access to formal sources of financing in the past.

2. Processing fee – Payments banks will charge the customer an upfront processing
fee, estimated at INR 25 per loan for the first year.

3. Target customer base – Digital credit will be targeted to the base of actively
transacting savings account and wallet customers.

4. Loan tenure and frequency – Loans will be of short duration, 45 days on average,
and customers will take loans twice a year on average.

Profitability analysis: Credit

Credit provided through digital channels scales up gradually. In the first year
of operation, only PPI customers with a transaction history of more than one year (i.e.
those migrated to the bank) are considered for credit. By the second year, this history
and customer profile data will be more detailed and lending will begin to contribute
incrementally to revenue. In the initial years, as the product is being rolled out,
customer awareness and digital maturity are likely to be low. Therefore, it is expected
that a proportion of loans will be sourced by BCs. As the digital maturity of the
customer base increases, the proportion of lending originating at BCs is expected to
decline significantly.

In the first year of operations, revenue from credit services will grow from
INR 0.6 Cr (USD 89 K) to close to INR 277 Cr (USD 41 M) by year 10. Processing
fees and share of interest income are the key revenue drivers for this model. Total

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credit revenues will contribute approximately 7% of total bank revenues by the tenth
year. By itself, credit as a revenue stream will start to contribute positively to gross
margins in year three as the bank scales and the incremental costs per credit case go
down.

Key considerations for digital lending

While payments banks will have access to rich and detailed transactional data,
what will likely determine the success of this model is the bank’s ability to process
data and provide targeted loans with accurate credit scores. Therefore, customer
analytics and product design will be key to choosing the right lending partner.

In addition to this, payments banks should consider:

1. Early investment in digital lending to collect data, learn from customer behaviour,
and build customer awareness,

2. Traditional processes and underwriting norms are unlikely to work for this
customer segment. Lending partners will need to modify their loan parameters and
processes to serve low-income customers.

3. The credit model will need to be refreshed with additional data periodically and
adapted to meet the needs of different customer segments. In the medium to long
term, this will likely lead to lower interest rates and higher approval rates, driving up
overall profitability.

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Merchant payments
India’s retail industry is extremely fragmented, with a large number of small-
and medium-sized merchants in both the formal and informal sector. There is a huge
opportunity to enable digital payments at a network of merchants that meet
customers’ daily needs, but scaling this network requires significant investment and
time.

POS penetration in India is very low and concentrated among medium- to

large-sized merchants in urban areas. India has an estimated 15 million retailers,49
but only 1.4 million 50 POS terminals. The high cost of merchant acquisition and
transaction processing has limited the growth of card outgoing digital transactions in
India. There is an opportunity for payments banks to focus on building a low-cost,
hardware-agnostic merchant payments model that leverages the merchant’s own
handset.

Operating model
Retailers operating in India’s formal economy already have POS devices and
often pay low fees because of their large volumes. There is an opportunity for
payments banks to focus on individual retailers in urban and rural areas with low-
ticket, high-frequency transactions and which are either not currently accepting card
payments or paying high merchant discount rates (MDR). In this model, the bank will
focus on small and mid-sized retailers that process low transaction volumes.

A bank’s traditional pricing system involves a merchant transaction fee, a

monthly rental and a fixed fee, should monthly transaction volumes fall below a
certain threshold. In certain cases, merchants have to pay for the device upfront,
which creates a barrier to usage and adoption. For a payments bank, pricing will be a
critical differentiator and an important consideration.

To keep the costs of merchant acquisition and activation low and to avoid
incurring large expenses for acceptance hardware for merchants, payments banks will
need to develop an asset-light merchant payment offering that utilises inexpensive

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hardware (such as basic handsets or mPOS devices instead of full-fledged POS
machines) and leverages channels such as USSD/ STK, NFC, QR codes, or UPI.

Cost considerations
The cost of rolling out a merchant payments offering tends to be spread across
three areas: issuing the offering (instrument cost, customer education cost), acquiring
merchants (merchant outreach cost, device cost), and the scheme itself (scheme cost,
settlement intermediary cost).

Not all costs apply to every merchant payment deployment. For payments
banks in India, we assume there will be no instrument cost since we are proposing an
asset-light approach. However, some costs will be incurred for customer education
and uptake, as electronic payments are less common in India and customers will need
to be encouraged to try out the service for the first time.

Acquiring merchants and building a merchant network requires significant

upfront investment and could produce high negative margins in the early years
because of merchant on-boarding and training costs. For this reason, it is important to
have a segmented and focused approach that allows the bank to learn and adapt. We
have assumed that merchant acquisition will be largely outsourced by payments banks
to third parties, which would be paid once specific objectives were met.

Creating incentives for merchants to accept and promote digital transactions

will also be critical, and banks may need to invest in local promotions to engage
merchants and create consumer awareness. Finally, payments banks will need to be
prepared to invest in the scheme and the technology associated with switching and
transaction processing systems.

Analysis: Merchant payments

We have considered a simplified merchant payments business model for
payments banks. Since banks will not be investing in traditional POS terminals, all
transactions will be processed through wallets and alternative transaction formats,

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such as QR codes, USSD, or UPI. This will produce significant cost savings over
traditional merchant acquisition.

Cash-in costs for wallets is an important determinant of transaction charges to

merchants. Given the types of merchants that payments banks serve, it is very likely
their customers will use BCs to cash-in to wallets or bank accounts, rather than high-
cost modes of payment, such as credit cards. Therefore, to arrive at unit economics,
cash-in costs for the bank are estimated at 0.75% and transactions will earn an MDR
of 1%.

Promoting electronic transactions at merchants will help customers save on

transaction charges for cashout, yet the economics for the bank remain the same.
More importantly, this leads to higher circulating value within the payments bank
ecosystem.

Merchant payments contribute very little to a bank’s gross margins, especially

compared to credit and insurance. The profitability of this business is limited given
the strategic focus on small merchants who cannot afford high MDRs. At these
merchant locations, MDR rates will need to be low to drive transaction volume. As a
result, gross margins from merchant payments stand at about 9% by the tenth year of
operations. By themselves, merchant payments start contributing to positive gross
margins from year seven onwards.

A collaborative model for building a merchant network

Given the size and scale of India’s merchant base, it may not be feasible for
payments banks to build a large-scale merchant acceptance network. Data indicates
that in order to scale a merchant payment business, a mobile money operator would
need to have 80% market share. Given the competitive and fragmented nature of the
market, it is unlikely that any one operator would be able to scale to this level of
market leadership. To scale merchant payments, payment banks have an opportunity
to collaborate with each other and developing smooth and standardised offerings for
end users.

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 On acquiring, payments banks could look at collaborating to build a joint
merchant network by agreeing on operational and settlement standards between
participants. This approach could lower cost and accelerate scale of merchant
payments rapidly and benefit the entire ecosystem. Beyond merchant payments, such
an approach would also increase the value in circulation exponentially which will
reduce the cost of cash-in and improve the profitability of the business model.
Further, a large scale collaborative approach from payments banks can help in
digitising the upstream transactions value chain (retailer supplier transactions).

Alternatively, payments banks can consider the opportunities presented by

joining other mobile enabled merchant payment standards or schemes on the horizon
(for e.g., RuPay or UPI) to benefit from the scale and network effect that they can
bring to customers of the payments bank.

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 16. Case Study on PayTM

Introduction
Paytm is a digital wallet service launched in 2010 with an idea of cashless
transactions. Paytm works both through an application and website owned by One97
Communications Ltd. Paytm strategy initially seemed lousy but it set the market on
fire with revolutionary and milestone step into e-commerce industry. According to
official statistics, by the end of January 2018, the estimated Net worth of Paytm was
10$ billion. While singing the praises of Paytm success, it’s worth to mention that
Paytm is the 1st Indian startup to receive funds from Chinese e-commerce company,
Alibaba.

Paytm set in motion and are the leader of QR based mobile payments in India.
After its successful inception in the industry, Paytm is now established as a payment
banking company along with Paytm mall and other auxiliary services. In the rest of
the content, you’re going to read about Paytm revenue structure along with the
complete guide on how Paytm gets profit.

Business model of Paytm

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 Paytm basically works on the marketplace e-commerce business model,
which’s the most profitable platform in web commerce world. Paytm business model
has undergone many changes since it was launched, at the outset, it deals in mobile
recharge and bills payment services and then come up with the idea of e-wallet and
banking features.

Revenue model of Paytm

The revenue model of Paytm is responsible for generating revenue through its
different activities. Paytm don’t charge their users directly, which gives the birth to a
big question of how Paytm earns. Paytm collects the major share of its profits through
mobile revenue model where it earns through e-wallet services, besides its advertising
revenue model. In the advertising revenue model of Paytm, it permits advertisers to
list their ads on Paytm websites and in turn Paytm charge them lump sum or annual
subscription. Another Paytm income source is interest on advance payment for
customers. Paytm also earns through commission figure charged from sellers.

Paytm revenue initially generated from mobile recharge services, where they
charge nil from their users but earn commission from network operators. The major
Paytm income source is its e-wallet services along with the considerable share from
the e-commerce segment.

Analysis:
● The Paytm is having wider presence in the urban area but the rural area is less
covered, So it should try more to increase its presence in the urban area.
● It have a goodwill in the market which can be taken as its strength and should
focus on more and more marketing

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 17. INDIA POST PAYMENTS BANK (IPPB)

IPPB is a public sector company under the Department of Posts and the
Ministry of Communication with a 100 percent equity of the Government of India,
and governed by the Reserve Bank of India. IPPB will focus on providing banking
and financial services to people in Semi urban and rural areas, by linking almost all
post office branches.

On August 2015 India Post got licence to run a payments bank from Reserve
Bank of India. It's a third bank to get license to open run payment bank after Airtel
and Paytm .On August 2016 it was registered as a public limited government
company for setting up a payments bank. The pilot project been carried out in a two
branch on January 2017 at Raipur and Ranchi. Final Indian Post Payment Bank got
green signal to launch .

The first phase nationwide inauguration happened on September 1, 2018.It is

called as India's newest bank and also mother of all banks because it is 2.5 times
network then normal baking network . IPPB has permission to link around 17-crore
postal savings bank (PSB) accounts with its Payment bank account.

Problem statement:
IPPB has the same functions as an ordinary bank, it can’t issue credit lines via loans
or credit cards.

SWOT Analysis for IPPB:

This section will analyze the readiness of India Post to handle the new
responsibilities of IPPB. While the inherent strengths of the post will provide it
certain advantages in terms of rolling out the new services, a set of new challenges
will emerge when it has to assume new responsibilities and at the same time compete
with the established private players.

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1. Strength
Rural network of India Post: With nearly 90% of its branches in rural areas, India
post’s rural network is larger than all the commercial banks put together. Hence IPPB
can leverage on India Post’s vast network of post offices to reach out to the rural and
semi-urban unbanked population.
Government of India support: Among all the payment bank players, IPPB will be
the only entity with complete stake of the government. This relation will be mutually
beneficial for both, with government achieving its financial inclusion agenda and
IPPB receiving strong regulatory and financial support.
Country wide presence: In addition to the last mile presence through the postmen/
women working as BCs, IPPB also has plans to set up 650 branches to manage and
control its operations. It will help IPPB to deliver its services seamlessly in all the
parts of the country.
Customer connect: Traditionally, postmen are well respected across communities.
When they work as BCs for IPPB, it will naturally alleviate the agency risk in the
financial transactions and will help IPPB acquire customers with ease.
Experience of providing financial services: India post has an experience of providing
savings products, payment and remittance services, insurance and third party products
such as mutual funds. This will provide an edge to IPPB over all its competitors.

2. Weaknesses
Human resource capabilities: Dak sevaks are the backbone of the doorstep delivery
system of postal services. Their customer connect and local knowledge will be very
crucial to IPPB for initial customer acquisition. However, there are significant
differences between the delivery of postal services and the financial services. In order
to comfortably deliver these new products and services, dak sevaks will need to have
a proper understanding of all the products and at the same time they should be able to
communicate the benefits of these services to the rural populace.
Expenditure revenue gap: High dependence on human capital and lower
technology substitution has resulted in higher costs due to pay hikes affected by the
government. Also, the irrational expansion of the infrastructure and manpower has
resulted in the gross expenditures growing faster than the growth of the revenues. The
payment bank will have to borne additional capital expenditures to build the required
infrastructure and bring in the necessary technology in the initial years.

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3. Opportunities
Independent identity: In the proposed structure, IPPB will be set up as a subsidiary
of DoP. The products and services offered by POSB are currently administered by the
Ministry of Finance and the role of POSB is limited to operationalising these services.
However, with the autonomy IPPB can put its entire management force behind the
roll out of innovative services and can create an impact in the potential banking
landscape of the country.
Collaborations with private players: India post has successful collaborations with
private players like Western Union Financial Services for providing money transfer
services. With many players showing interest in partnering with the India Post for
payment bank, IPPB can leverage the expertise of these incoming players to bring
maximum synergies to the business.
Large unbanked population: India still has a large unbaked population of 233
million. Also, many of the account holders don’t transact even once after opening the
account due to multiple reasons such as proximity of bank, illiteracy about the
financial services. If IPPB is able to reach out to these unbanked and underbanked
population and able to address their concerns, it can untapped a huge potential
business opportunity.

4. Threats
Competition from private players: IPPB will need to establish various
competencies in order to set up a successful payment bank. Most crucial
competencies will be technological sophistication, last mile delivery and cost-
effectiveness. While IPPB can emerge winner on the last mile delivery, almost all the
other private players will have an upper hand in technology and cost effectiveness.
These private players are also trying to firm up their last mile presence by tying up
with retail /kirana stores, mobile recharge points. In addition, most of these players
have deep pockets and can easily sustain short term losses to capture long term
business opportunities. Hence overall, the competition is going to be very fierce in
this space.
High customer demands: The technology is advancing at a rapid pace. IPPB will
need to constantly innovate its offerings to fulfil the growing demands of its
customers.

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Autonomy of IPPB: Postal department was earlier fully reliant on the Finance
Ministry for its treasury operations. With the independence, IPPB will have to manage
its own treasury operations. As per the RBI regulations, 75% of the deposits needs be
invested in government securities. While this will prevent any riskier investments by
the payment banks, IPPB will have to be very efficient in its investment decisions to
maintain low risk and at the same time get higher returns. Since postal department
does not have any prior experience of such investing activities, handling such the
deposit base in an efficient manner will be a challenge in front of IPPB.

Analysis:
● The bank doesn’t rely on fines and loans to generate revenue, but on deposits
and transaction charges instead.
● Individuals can be a part of the initiative and have a bank account without
necessarily needing a continuous flow of income, making the IPPB an
affordable and accessible solution.

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 18. Limitation of the Study
● The study is restricted only to few banks and hence may not be applicable to
all banks.
● The information available on the internet, Brochures, internal magazine,
leaflets was limited.
● There was difficulty in getting exact income; as such some data was
confidential and not available for all.
● The project is completed in two month’s time so the time available is limited.

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 References

1. “Indian Consumer Market,” IBEF, (21 April 2018)

2. “India’s love for cash costs $3.5Bn a year,” Times of India, (19 January 2017)

3. “Sell Smart,” FICCI, (10 June 2016)

4. “Indian Consumer Market,” IBEF, (21 April 2017)

5. “Recommendations of the inter-ministerial committee for Accelerating

Manufacturing in Micro, Small & Medium Enterprises Sector,” MSME website,
(September 2016)

6. “Retail chains sign up mobile wallets,” LiveMint, (30 September 2017)

7. “Payments Banks Continue Their Loss Run, RBI Hopes for Break Even,” Inc42,
(02 January 2019)

8. “Smartphone Users In India 2018: 16% YoY Growth Is The Highest In The
World,” DazeInfo, (07 May 2018)

9. “How payments banks are different from regular banks”, LiveMint (05 Sep 2018)

10. “All You Need To Know About Payment Banks”, ipleaders.in (21 August 2018)

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 Bibliography
1. “Progress Report,” PMJDY website, (21 June 2018)
http://www.pmjdy.gov.in

2. “Home page,” UIDAI website, (21 June 2018)

https://uidai.gov.in/

3. “CensusInfo,” Census of India Website (2011)

https://censusindia.gov.in/

4. “Guidelines for Licensing of Payments Banks,” The Reserve Bank of India

Website (2014-2015)
https://rbi.org.in

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