Airtel’s Payments Bank Pitch Shows It Will Be A Potent Threat To Regular Banks

Last week, Airtel launched its payments bank nationally, thus rubbishing naysayers who thought the idea would never take off after three payments banks aspirants returned their licences to the Reserve Bank of India (RBI).

Payments banks are here to stay, but they may not remain for too long in their current limited avatar. Regulation will change once the initial experience is positive, which is likely to be the case. They will pose a potent threat to existing mainstream banks.

While the threat to the universal banking business model is currently small given regulatory restrictions – payments banks face a deposit ceiling of Rs 1 lakh per customer, and have to invest 75 per cent of the money in government paper of up to one year’s maturity – it would be foolish for present incumbents, especially stodgy state-run banks, to take this threat lightly.

Consider what Airtel is attempting:

It is offering savings banks interest rates of 7.25 per cent, which is already higher than State Bank of India’s highest rate of 7 per cent – payable on deposits under one year. Even though the high rate may only be an initial offer from Airtel, the point is high returns are not needed for engineering a reasonable shift in deposits to payments banks. Any interest payment (even 5-6 per cent) on idle deposits is good, and the ones who will lose business are e-wallets, who pay no interest on balances. For banks, the threat is not existential yet, but there will surely be some shift in low-cost savings and current account funds to payments banks.

Secondly, Airtel has an ambitious plan to get nearly 100 million of its existing 270 million mobile service customers to open an account with it. The State Bank of India had 301 million active customers as at the end of March 2016, according to its annual report. So what Airtel is attempting is big relative to every other bank barring State Bank of India.

Third, Airtel is planning big bucks investment. Sunil Bharti Mittal, chairman of Airtel, talked of investing Rs 3,000 crore in its bank. Though this amount is small by banking standards, it is actually huge for a payments bank, which will use Airtel’s over 2.5 lakh customer touch-points as effective bank branches, with technology providing the reach that costly bank branches and ATMs do for state-run banks. What this level of investment implies is that with scale, payments banks will have far lower overheads than most banks. This will give them a competitive advantage.

Fourth, there isn’t going to be only one Airtel. All mobile companies, and major wallet companies, will get into the game. Idea Cellular, Reliance Jio and Vodafone are also getting into payments banks. Then we will have PayTM, whose major investor includes Alibaba, with very deep pockets. PayTM will probably be the second payments bank off the block, having received the RBI’s nod for it. If we have at least seven to eight major payments banks with a high capacity to invest in technology, Indian banking will be shaken up like never before.

Fifth, at some point, payments banks will be able to channel small-value investments from rural and non-urban centres into investments, including mutual funds. They will thus be able to start generating fee incomes.

The larger point is this. It is easy to rubbish payments banking as some kind of unlikely creature that will not be viable due to regulatory constraints. But the history of regulation is replete with instances where rules are liberalised after an initial period of caution. One easing could come early, where the Rs 1 lakh ceiling on deposits goes after the RBI develop comfort with the idea. The restriction on lending can also go, with the initial liberalisation focusing on allowing payments banks to lend to existing customers, provided they increase their capital base.

It is anyway the RBI’s intention to make payments banking licences available on tap, and it would not have done this if it believed that such banks will be an aberration in the long run.

The long-run future of payments banks and regular banks is convergent, with technology being a unique equaliser. Regulation will have to change – and it will.

Payments banks are here to stay, but it is unlikely that they will stay in the restrictive form in which they have been currently allowed to function. Logic dictates against killing an idea whose time has come.

The businesses they will kill are probably those of e-wallets and business correspondents, but not in the immediate future. India has too many far-flung places with limited connectivity to dispense with these adjuncts to banks.

Also, once peer-to-peer lending starts taking off, one can see millions of payment bank customers participating in small-ticket loans. Payments banks will hasten the spread of disintermediation, with bank intermediaries having to operate on lower margins from plain vanilla lending in future.

It is entirely possible, though, that payments banks may partner with commercial banks in the initial phases, just as Kotak Bank has done with Airtel Payments Bank and Reliance Jio with SBI. But no one can dismiss the idea as nonsense any more.