Payment banks: Quest for profitability

Payments Banks (PB) have the stated objective of furthering financial inclusion by providing small savings bank accounts & payments/remittances to the financially under-served. Certain regulatory restrictions are imposed by RBI, the primary ones being – no lending allowed & mandated deployment of majority of its funds in specified Government securities. This poses serious challenges to overall profitability.

"The most point really is – Can Payment Banks become profitable? If yes, how?"

The answer is YES; but with a lot of persistent, focused efforts & some radical deviations from the traditional banking approach.

Typically revenues for a Bank can be classified into two broad categories:

• Fee-based income: charges levied for providing products/services
• Fund-based income: revenue generated by deploying available funds

As can be imagined, fund-based income is considerably depressed for PBs; so one really has to be creative with fee-based income to cover up for the shortfall from fund-based income.

However, fee-based income has to be implemented carefully as customers need to see proportionate value for charges applied. Indiscriminate charging will definitely not work & will actually be counter-productive. On the other hand, giving everything free will not help either, in the long term profitability (plenty of lessons learnt from other industries!). Of course, introductory pricing/complimentary offers would be helpful to get the first bunch of customers.

So a delicate balance has to be targeted between charging policies & desire to turn profitable faster. Tiered pricing based on different segments of customers and appropriate thresholds (both on values & volumes) would greatly help.

Generally, revenue sources for PBs could be charges for (in no particular order; not exhaustive):

• Remittances (NEFT/RTGS/IMPS, DD issuance/cancellation), bill payments
• ATM/Debit/prepaid/add-on card issuance, re-issuance
• ATM usage (both for on-us & off-us)
• International usage of cards
• Forex draft issuance/cancellation; forex conversion; forex cheque collection
• Cheque book, physical statements, stop payment, signature verification
• Current account-related charges
• Account re-activation, early closure
• Commission on sale of mutual funds, insurance, other 3rd party products
• Revenue from being a Business Correspondent (BC) for other banks
• Revenue from other Bank, if customer balance above Rs.1L is swept-out to them
• Revenue from investments in allowed securities

PBs can get really innovative on these parameters, depending on their addressable customer base, lineage, experience, expertise, unique advantages, synergies from existing businesses, etc.

Having worked on the initial business plan for a PB, suggest the following key levers be used to enhance profitability:

• Digital-first approach for the complete customer lifecycle – right from customer acquisition to on-boarding; and from resolving grievances to evangelism. The same digital-first approach may be used for employees, internal systems & external service providers. Not all of these elements may lend themselves to a digital-only approach, but digital-first should be the underlying philosophy. When in doubt, try digital – should be the mantra!
• Single customer view – one customer, one view; does not matter how/when/who is looking; a truly omnichannel experience. Enough said!
• Heavy reliance on technology, self-service & minimal manual intervention – if it can be automated, it has to be. Absolutely no doubt about that!
• Intuitive customer experience – if it can be made more simple & intuitive, no questions asked – that is the way to go! Let the customer experience what/when/how they expect, definitely not what has been done for years. Customers would be only happy to tell you what they want – just ask. If you can incentivize that process, even better!
• More-than-adequate customer education – in regional languages please! Given the raison d’etre of PBs, the importance of this cannot be stressed enough. Inadequate efforts on this front might load the service organization & cause negative publicity.
• Tiered customer service model – It could be on multiple levels like L1-Artificial intelligence-based chat-bots, L2-Live chat agents, L3-Video agents, etc. However, this has to be reinforced by an assisted support structure (Service agents, branch staff) wherever required, for some customer segments.
• Customer insights – Not data, not information, but distilled insights. This would tell you what to do next, NOW!
• Shift from product/service push to facilitating life stage events – if you can be timely relevant & contextually familiar in customers’ life, there’s no bigger opportunity. And if you miss it, there’s no bigger loss!
• Collaborate, not compete – Partner with trail-blazing innovators who are creating and/or (re)defining status quo in areas of authentication & security, analytics, customer communication, loyalty, retention, due diligence, risk management, operations optimization, Forex remittances, alternate assets, just to name a few. Actively scout for who you could work with!

With existing banks swiftly moving towards digital & wallets becoming almost ubiquitous, it is imperative that PBs get it right. Because the window of opportunity is narrow and the customer is spoiled for options!

Authored by (at the time of writing):

Madhur Singhal, Leader, Financial Services Practice

Chandrashekhar Bhide, Advisor, Financial Services Practice 

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