The Reserve Bank of India’s deadline for accepting payments bank applications ended yesterday. Mrinal Sinha, head of strategy at digital payments company MobiKwik spoke to MediaNama about the company’s plans for a payments bank and what the banking regulator is looking for in applicants.
MediaNama: What is the Reserve Bank of India looking from applicants for a Payments Bank licence?
Mrinal Sinha: First of all, the RBI has asked us for the capital structure for each of the companies, and how the capital structure can comply with the RBI needs from payments banks. Secondly it’s asking for a business plan. And third is the banking related compliance, and what will companies do to meet RBI guidelines on those.
Payments Bank will be subject to the same kind of capital and structuring requirement that banks are subjected to. What that means is that all Payments Banks, like scheduled commercial banks, need to be owned by resident Indians. There are also caps on how much foreign parties can own collectively and also how much each individual foreign party can hold. The implication of that on a lot of other PPI (Prepaid Payment Instruments / wallet) players is that, there are a number of other PPI players, who have a lot of their equity base owned by foreign investors. They’re going to have to prove to the RBI that over time they will migrate some of the shareholding from external investors to resident Indians. Mobikwik is owned and controlled by resident Indians, so we don’t have to prove anything to the RBI. We are already compliant with their norms.
Finally, on the business plan, the RBI is looking for answers on how they will go about their business. There are two lenses to this. One is how will they address the issue of financial inclusion. How will they get unbanked and underbanked people to be part of the financially included. The other part is, how will their financial inclusion agenda fit in the overall framework be sustainable for a Payments Bank as a whole. So it shouldn’t be that an applicant’s financial inclusion agenda isn’t stretching themselves too thin in terms of their profitability or their other points.
MediaNama: What is Mobikwik’s strategy for financial inclusion?
Mrinal Sinha: Mobikwik’s plan in addressing financial inclusion is basically is through a two-fold approach. Firstly, we’re a tech company, and we have a technology platform which is very easy and cost-effective to reach out to people across the country. Not just in tier-II and tier-III cities, but also in smaller towns and villages. One of the access points for us is their mobile phones and it removes the need for infrastructure to be created for transactions. Transactions can happen right at their phones at their fingertips which takes away a whole lot of cost for us. We have a secure, stable and highly scalable platform which can reach villages. So we look at ourselves a technology company which can add a whole number of financial products etc.
However, to enable financial inclusion, having just a technology solution may not be sufficient. That’s because a lot of people are still not familiar with financial products and need some amount of education about them. They may need customer service support, they may also need grievance redressal services and might be more comfortable with dealing with a person in front of them, as opposed to technology-based email solution etc. So therefore we will need some sort of physical touch points . There we are looking to partner with people, that have a physical reach in these places. And we are already in discussion with some partners, who have the passion and willingness to innovate on customer service.
MediaNama: Do you think a joint venture with a commercial bank is a good idea? What are you looking for in a partnership?
Mrinal Sinha: A discussion with a commercial bank could mean a JV, but it could not also be a JV. It could just be some kind of partnership. Yes we are in discussion with a couple of banks, and we are also in discussion with other players.
How we look at the choice of our partners is two-fold. Firstly, these people have got to have touch points where they can put human resources and physical infrastructure. Potentially they should already have it in place in remote areas. Secondly, I think some of the software aspects are also important as well. So it’s not merely a question of having infrastructure, but also how important the initiative is for the potential partner and are they willing to learn and innovate. Which is frankly, besides the physical touch points, there will be a lot of work required and some new models will have to be created in the way you achieve product education and in the way you go about customer service. So that’s the lens in which we are looking for a partner and if it’s a bank then it’s great and if it’s somebody else, that’s fine too.
MediaNama: Who do you think is a better fit for this kind of partnership, a private or a public sector bank?
Mrinal Sinha: I think there are both on the private sector and the public sector, who seem passionate and potentially interested in doing that. Having said that, there are also a lot of non-banking players that are keen to be associated with us. The RBI guidelines do mention banks, but I also think there are people who have a retail network in these places.
Both sets of players have their reasons on why they do it and do it to the extent they can. PSU Banks, by virtue that they work closer with the government, may have done more in terms of opening financial networks. But a lot of the private sector banks may be equally interested but not necessarily have the nimbleness and the technology touch points to be able to do that. There’s a good case to be made for both sides but that’s what we’re also looking to gauge with our partner.
MediaNama: The RBI has also said that Payments Bank can offer other financial products. How would you go about that business?
Mrinal Sinha: The most basic financial product anybody would need anybody would need is a basic savings account. There are lots of other kinds of products related to that. There are products related to bill payments, insurance, investment products etc . Our existing platform already has a number of products. Even if we are not business correspondent, we already have a lot of access to a number of products. Specifically, we’ve got a user base of 12 million users, which is growing every month, and these people are transacting on a number of financial products. They’re doing mobile recharges, they’re shopping at merchant outlets, they’re sending money to friends and family etc. What is also underlying is the fact we are a mobile wallet technology company, where users have stored certain value in the wallet and their money is already with us, safe. Going back to what I originally said that you need a basic savings account. And the Payments Bank licence will enable us to offer interest on the money they’ve stored with us. So we don’t really need to be a BC to offer these services.
So we would like to increase adoption through savings bank account or a wallet. Which would be basically offer interest. But this isn’t enough, people will need insurance, and investment products. Now I think, we would obviously look at other products in the market and basically look at ourselves as a platform through which these products could be serviced and purchased. Purely, as a Payments Bank, we are governed by the RBI guidelines , whereas for insurance and mutual funds there would be different set of regulators involved.
Our view in the longer term will be a platform through which people can access these products.
MediaNama: What is your ATM strategy? How will you manage cash when people want to take it out of their wallets?
Mrinal Sinha: The reason people use ATMs is to take money out. So if we step back, the function which needs to be enabled is that people should be able to put cash into the account and people should be able to take cash out of our wallet. Whether that is achieved through ATMs or through other innovative means is immaterial, so long as the function is performed. So let’s say, I have a MobiKwik wallet, I should be able to go to some place and figure out a way for the balance in my wallet to turn it into cash. So that’s where I think partnerships become important. ATMs could be part of it, ATMs may not be a part of it. We may look to ride on top of the existing ATM network. There are a few different approaches we are taking. But our differentiator as a Payments Bank will be that customers can take out Rs 1000 in their wallet as cash.
MediaNama: How would you deploy your deposits? The RBI has said that 75% of the deposits have to be invested in government securities and 25% in timed deposits in scheduled commercial banks. Is this viable for a Payments Bank?
Mrinal Sinha: If you have a view of the players that are applying for Payments Bank licence, that would kind of give you a directional sense to your answer. The Payments Bank will not result in a windfall gains for anybody in the short term. However, if there are players that are willing to be in this business for the longer term, who will scale up their businesses adequately, they will be able to earn money on the float under the RBI regulations. That’s where the RBI’s question on the business plan comes into play. So if a Payments Bank thinks that it can manage only on the float of deposits, they would have to scale this to a level where this makes sense. It makes less sense on say a deposit base of Rs 1 lakh crore. Even if a Payments Bank is earning a very thin margin, something like a few basis points, if the deposit base is larger, then the whole thing makes sense. So the question you need to ask then is how credible is the business plan to get to a deposit base of Rs 1 lakh crore. How many people are we talking about who will have these bank accounts. That could be one strategy. The other could be that the Payments Bank does not have to reach a deposit base of Rs 1 lakh crore in 3-4 years. They would prefer it to be lower than that. Maybe they could distribute other products which could add as revenue as we make a channel margin etc. So Payments Bank need to first determine what size they have to be, and then decide what products.