When payments banks framework was issued in 2015, the Reserve Bank of India had given in-principle approval to 11 players.
However, three players were quick to drop out because there were apprehensions that the road to profitability would be too long, said industry players.
After eight years, three of six operational payments banks–Fino Payments Bank, Airtel Payments Bank and India Post Payments Bank–have turned profitable.
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Profitability drivers
Fino Payments Bank, which reported a 52% year-on-year rise in its FY23 net profit at Rs 65.1 crore, says it is slowly transitioning from a transaction business to a customer ownership business, which is enhancing its margins and profitability.
“Riding on the strong network of over 1.37 millioin points, our customer acquisition strategy is based on a transaction, acquisition and monetisation (TAM) approach. It led to an exceptional 45% y-o-y growth in new accounts opened in FY23,” said Rishi Gupta, MD & CEO at Fino Payments Bank.
He added that their customer ownership business now constituted 18% of total revenue and raising low-cost deposits to the tune of Rs 1,200 crore till March-end has helped.
Gupta stressed that customers’ adoption and transaction volumes are critical for revenue generation. The core source of revenue at Fino, he said is largely divided into two segments: current account and savings account (CASA) business and transaction business, which includes remittance, micro ATM, Aadhar-enabled payments system and other payment services.
Anubrata Biswas, MD and CEO at Airtel Payments Bank, said the payments bank model is a high technology and low fixed cost model, which requires scale to be successful. As the purpose of such banks is to serve the untapped financial needs of large segments requiring digital and financial inclusion, the revenues originate from users transacting across a variety of use cases.
Over the years, Basu said Airtel Payments Bank has diversified its revenue levers, building a business model at scale. ” We closed FY23 with revenues growing to Rs 1,291 crore, a 37% jump over FY22, and our profits increased by 141% to Rs 21.7 crores,” Basu said.
Almost 77% of the payments bank’s revenue today comes from payments, followed by 16% from fee income and 7% from consumer deposits. “This mix has and is rapidly changing as the bank grows its users and usage,” the MD said.
Regulatory changes needed
Aniket Dani, director of research at CRISIL market intelligence and analysis, says payments banks face various challenges, including a limit in accepting deposits of only up to Rs 2 lakh, mandatory investment of 75% of deposits in government securities, high operational costs in expanding the physical branch network and competition from peers and small finance banks.
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“If the deposit limit of Rs 2 lakh can be increased, the gamut of our customer base can be higher. The regulator could also explore the possibility of allowing payments banks to offer small-ticket loans and term deposits,” Gupta said.
He also added that payments banks can also get preferred participation in government schemes that help consumers access direct benefit transfer money more easily and it is also incumbent on payments banks to function like B2C businesses rather than B2B.
Biswas shared similar views, saying if allowed to offer small-ticket loans, payments banks can drive financial inclusion in the country “to the next level”. CRISIL’s Dani says the margin play between interest from investment and the cost of the deposit remains thin for payments banks, hence, developing more revenue streams in the form of cross-sell, brokerage and account maintenance fee becomes crucial in improving profitability.
