CASE: PAYMENT

BANK
LIVE PROJECT: CANDID COHORT
NAME: SIDDHARTH DAS
PGP/18/052
MOB: 7034235689
EMAIL: siddas1991@gmail.com.
siddharthd18@iimk.ac.in

Motivation

Objective
and
questions

Literature
review

Data
collection

Regressio
n

Factor
Analysis

PAYMENT BANK: NATURE OF BUSINESS

The key objective of setting up a Payments Bank is to further
the cause of financial inclusion to small businesses, low-income
households, migrant labour workforce, and other unorganized
entities
The entities eligible to set up a Payments Bank include existing
non-bank pre-paid instrument issuers; NBFCS, mobile telephone
companies, supermarket chains, A promoter/ promoter group can
have a JV with an existing scheduled commercial bank to set up a
Payments Bank
Can accept demand deposits, issue ATM/ debit cards/ PPIs, offer
remittance services. s. A Payments Bank can not undertake lending
activities, issue credit cards, accept NRI deposits
Minimum paid-up equity capital has been fixed at Rs 100
crores with a minimum CAR of 15% on the RWAs.
The Payments Bank would be required to invest minimum 75% of
its demand deposit balances in SLR eligible G-securities/ T-bills with
maturity up to one year and hold maximum 25% in current and
time/ fixed deposits with other scheduled commercial banks

Cluster
Analysis

Conclusio
n

COMPARISON OF VALUE
PROPOSITION
DIRHAM BANK
Focus on CASA,
loans, insurance
and investments
Follows Brick
and Mortar
Branch centric
distribution
model
Focus on all
customer
segments - retail,
MSMEs and
corporate

PAYMENT BANK
MODEL

Focus on only simple

accounts, deposit
products and
transactions
Follows internet
banking services
Focus on Financial
inclusion and
unbanked/underbanked population are
the priority target
market

Payment Bank have the potential to provide access to financial services for all Indians

CHALLENGES FROM PAYMENT BANKS

Low-cost savings accounts:
Payment banks will take cheap deposits away from the commercial
banking system, which will increase competition for deposits, but
also slim down net interest margins.

Easy transfer of money:

Payment Banks while targeting the unbanked / migrants offer easy
virtually movement of currencies with the adoption of technology

CHALLENGES FROM EXISTING COMMERCIAL

BANKS Expanding to Semi-urban areas:
Commercial banks are increasingly making tie-ups with payment
banks and expanding to semi-urban areas which is a key market for
payment banks

Leveraging existing distribution Network

Leveraging the existing distribution network and infrastructure,
ability to implement lean banking platforms and digital initiatives to
increase there customer base

CASA growth value declining in commercial banks both in rural and

urban area

OPPORTUNITIES

GAPS
Penetration level of
existing financial
services

India (2013)
(Source: Deloitte
Analysis)

Number of people with bank

accounts (per 00)

58

Number of bank branches

(per 1 lakh)

11

Number of ATMs (per 1

Lakh)

11.4

PoS Terminals (per million)

684

Total Cards (per 000)

283.6

Extend investment and insurance Key Business model

considerations:
Focus on unbanked and under-banked customers
Extensive reach in rural areas
products

MARKET SIZE
Deposits: Rs 85,00,000 crore
Annual Growth: 15-18%
Payment Banks can pay 4-5%
interest on saving account and
deploy funds in government
securities at 8-9%
Domestic Remittances size: Rs 1,20,000 crore
Sourc
Annual Growth: 10-15%
Payment Banks can earn commission of 1-2%
Distribution of Third Party Investment
Products:
a) Life Insurance annual premium size: Rs 1,19,641
crore
Annual Growth: 10-12%
b) Mutual Funds: Rs 54,000 crore
Source:
RBI
Commission:
1-5%

Lack of financially viable business model to serve the Bottom of the Pyramid customer segment
provides opportunity

Collaborative
Model

Operators
involveme
High nt

Low

Independentservice
provider

Independent Service Provider:

Mobile phone operators provide mwallets for customers to pay to
various merchants

Operatorcentric Model

Low

Bank-centric model: Bank

deploys payment applications to
customers and ensures merchants
have the required Point-of-Sales
(POS)

Mobile
Service
Provider
Technology
Service
Provider
Pre-paid
users
(PayTm)
Merchants:
supermarket
chains
Banks

Profitable tie ups for Dirhanm Bank could be Mobile service provider andS
upermarket chains which would complement Dirham Bank offerings

With high uncertainty and newness of the business model, Dirham should go for

Provide
manageme
nt services

Provide
marketing
insights

Provide
associated
services

Provide
account
manageme
nt services

Route
transaction

Acquire
payment

Aggregate

Initiate
Order
Deliver
product

Debit/ credit
accounts

Bankcentric
model

Operator-centric model:
Operators like Paytm work
independently to provide
integrated solutions to customers

Provide
Compatible
hardware

High

Manage
application
lifecycle

Bank s
involvemen
t

POTENTIAL TIE UPS FOR DIRHAM BANK

Distribute
application

Collaborative model:
Collaboration among banks and
trusted third party operators which
provides technology platform and
distribution network

CHALLENGES IN GENERATING REVENUE:

Three-quarters of the deposits they get will have to be invested in government
securities
The rest will be deposited in a scheduled commercial bank (for easy liquidity).
Payments banks cannot give loans and therefore, cannot earn any revenue from the
interest spread between loans and deposits.
Payments banks will earn interest on deposits in government securities and will
definitely pass this on to their customers to attract customer. HENCE NET
INTREST MARGIN WILL BE LOW

SOLUTION
Last mile connectivity, wide reach and large volume of transactions

SCOPE OF REVENUE GENERATION

Interest arbitrage
Payment Banks will offer interest rates at 6% and deposit the money
with other banks and government deposits at 8% making 2% gross.
Transaction costs /fees
A lot of services which are free of cost in a normal bank will be
charged in the payment banks as a charge for availing the service
Cross selling
Commercial banks providing payment banking facilities can sell
investment and insurance products so they will make money there.

POSSIBLE BENEFITS WITH TIE-UPS:

They will have to rely mostly on fees from remittances and services such as utility
payments or mobile top-ups
Ability to generate transaction volumes, having a business structure smart on
technology

HIGH VOLUME-LOW MARGIN

TELECOM PROVIDERS
Mobile phone and e-wallets integration
Reach unbanked users as well as higher economic
segments
RETAIL CHAIN (Super Markets)
Established trust with consumers
Target higher economic segments

CONCERNS FROM LOW INCOME

GROUPS
Inability to transact due to network/service downtime
Inadequate data privacy and protection
REQUIREMENT: Payments banks have to be
digital at core
Poor customer recourse for grievances and queries
User interfaces that many find complex and confusing
REQUIREMENT: Physical branches need to
complement digital banking

CONCERNS FROM COMMERCIAL BANKS

Margin is low in this business model
REQUIREMENT: The payment bank model could
be viable if technology is used to bring down costs

TECHNOLOGY CAN FACILITATE A FAST AND AGILE

ENVIRONMENT
FRONT END
(Telecom
Provider)
MIDDLEWA
RE (Data
Analytics)
BACK END
(Commerci
al Bank)

Technology
Platform

AP
I

Last mile
connectivity

Customer Management
Services

AP
I

AP
I

Customer Intelligence Vault

CORE BANKING SYSTEM

Agile technology can provide:
Real time seamless data across channels
Fast and resilient transactions
Trust among the customers

PAYMENT BANKS WILL ESSENTIALLY BE TECHNOLOGY-DRIVEN TO PROVIDE LAST-MILE CONNECTIVITY

THANK YOU