There has been a lot of press recently about three payment banks in India returning their licenses to the Reserve Bank of India (RBI) and pulling out of the payments bank business.
There is a great post by Govind Ethiraj on LinkedIn titled ‘The Real Reason Why Payment Banks Are Returning Their Licenses’ (http://bit.ly/2f6Kjbg) in which he enumerates the potential reasons for the licenses’ return as:
- Business model was not making sense any more to any of the three players and the viability had reduced significantly (There are limited details about the lack of viability in Ethiraj’s post)
- A multitude of players were attacking the opportunity and a distinctive edge was lacking
- ‘Casino Capital’ was available and the three companies did not want to lose out on a ‘fintech plus billion’ consumer opportunity
There have been quite a few press reports on and television interviews of Vijay Shekar Sharma (CEO and Founder of Paytm), one of the licensees, on the value that can be captured from, and delivered to, consumers by payment banks. Sharma spoke about the launch of the Paytm bank in August 2016 and also discussed ambitious targets for August 2017 – in the range of 200 million accounts. He also outlined his priorities: First, building a legacy in payments by crafting a massive online to offline structure with a target of reaching a million merchants offline; second, building the distribution network of the bank; and third, bringing in seamlessness between three entities – the marketplace, the payment system, and the bank.
Our analysis is this – with Paytm’s strategy and approach to become a payment bank, we are looking at the creation of a first-of-its-kind ‘marketplace bank’ in India. This idea was first discussed in a phenomenal post by Phillipe Gelis, the co-founder and CEO of foreign exchange marketplace, Kantox. In his post (http://bit.ly/1XtHzC1), Gelis had envisioned that a ‘marketplace bank’ would offer:
- Bank accounts
- Debit cards
All other financial services (loans, mortgages, credit, and insurance) would be provided by third parties through the API, including old school banks, financial institutions, and fintech companies.
On the basis of the RBI’s mandate, payment banks will be able to acquire deposits, provide debit cards and eWallets. However, they will not be able to lend. Consequently, seeking to solve the viability problem of payment banks with the traditional banking business lens is bound to result in an unflattering business case. Nonetheless, the payment banks can distribute mutual funds, insurance and other non-risk products. The revenue opportunities for payment banks will mainly be through money movement fees and one time / recurring commission(s) from selling partner products. Paytm, with its marketplace and payments legacy, looks set to build the first ‘marketplace bank’ in India.
Such a bank will be built on the following four foundational building blocks:
- A new age core banking platform
- KYC processes
- An API layer to connect to third party service providers
- Customer base / CRM to support the customer base
The first point will be addressed by Paytm’s leverage of Fidelity’s core banking platform. API-fication of Aadhaar data will help address the second point to a large extent, complemented by other standard operational processes. Given the fact that Paytm finds its origins as a digital business, it is very familiar as an enterprise with the monetization levers of APIs. Leveraging these, the marketplace bank will offer other partner financial products. The fourth block will be addressed by Paytm’s captive customer base diversified across customer segments from legacy eWallet and marketplace businesses.
The Paytm wallet business, which was staring at death by Unified Payments Interface like all other non-bank wallet providers, now has a new lease of life. It will play a very important hook in the marketplace Paytm bank, and will also help the Paytm ‘marketplace bank’ understand the entire customer money management (Why do they, What they do) journey. This will be the most important building block to move towards becoming a ‘personalized marketplace’ from being a ‘mass marketplace.’
Paytm’s foray into being a ‘marketplace bank’ is the ideal problem. It needs to embrace design thinking as a philosophy to build, test and enhance the overall strategy, prototype and calibration of the business model. The success of this business hinges on consumer adoption and delivering relevant products and services. Design thinking will help Paytm successfully integrate the bank, marketplace and payment business build, as well as test and learn about customer segments (consumers, small businesses, etc) and specific value proposition(s) that are viable in the long term also.
In the future, whether the Paytm ‘marketplace bank’ cannibalizes the customer base and revenue stream of aggregators, small and / or large chit fund providers across India is anybody and everybody’s guess – including mine!
Meanwhile, the RBI deserves a pat on the back for its selection of a broad spectrum of payment bank licensees which will enable new business models to emerge, over and beyond fulfilling the charter of financial inclusion.