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Payments Banks and Partnerships

Posted on April 23, 2015 by Sumita Kale


The RBI’s new scheme for niche banks has received a resounding response, with more than a hundred applicants throwing their hat in the ring for a licenseApplications have come in from players of all sizes and domain expertise; Small Finance Banks have relatively more applicants, the operations being a natural extension for existing MFIs/NBFCs, while there have been fewer applications for Payments BanksHere the business case is not fully clear to prospective applicants – payments banks are not allowed to issue credit, and must park all funds in risk-free securitiesYet, there would be many who haven’t applied, watching this space closely to enter later when the RBI comes through with the promised on-tap licensing.


There are a lot of questions on this new model- how will the Payments Banks fit into the banking ecosystem, how will partnerships between banks and non-banks pan out, will the Payments Banks support, rather than compete with, existing credit-issuing banks and finally, how will the objective of inclusion be best served?


Banks in India have tried the route of JVs with non-banks earlier and have not always found the going easyThe Payments Banks space offers another opportunity now as non-banks enter the sector, and can be used by banks to raise their own businessObviously, the success of a partnership depends crucially on how responsibilities and revenues are shared, as each partner has specific core businesses and competitive advantagesSuch partnerships are already working well abroadFor instance, Telenor and Tameer Microfinance Bank have partnered to make EasyPaisa the largest branchless banking service in PakistanEach partner drives that part of the business suited to its own expertise - Telenor brings to the table a large customer base, wide and experienced agent distribution network, telecom network, marketing and relatively higher financial strength, while Tameer’s expertise lies in financial products, risk management and complianceThe partnership clearly aligns responsibilities with relative strengths, so Tameer is legally in-charge of the business and Telenor drives the front end for the most partRevenues are shared according to expenses and the revenue split is re-negotiated over time


In any digital financial service, in the early phase of a partnership, often the easy pickings come through the payments business and accessing the non-bank’s customer database, with revenue from banking services, savings, credit etcpicking up only over timeObviously, partners in a successful relationship look at the long-term picture, and do not treat each other as competitorsIn fact, as technology and markets evolve, players must be agile in their responses and be prepared to move with the changeThe two year tussle over revenue sharing on the USSD channel has already cost India’s inclusion mission; by the time all players were brought on board, smart phones became more affordable to low income customers - the USSD channel is less attractive and banks have moved on, innovating with their own digital banking apps.


Innovative partnerships can also help banks grow dramatically as they can leverage the non-bank networks and customer databasesFor instance, a mid-tier bank in Kenya, Commercial Bank of Africa (CBA), became the second largest in the country within two years, by launching MShwari, a savings and borrowings account, in partnership with the largest telco, SafaricomNot only did its deposit base jump from 30,000 to 7.5 million, more pertinently for inclusion, the average amount held in a deposit account came down to Sh 16,000 from Sh1.9 million showing that CBA had cleverly tapped into the use of mobile platform by low income customersCBA went further than providing easy access to the poor for saving, it used the customer’s airtime payments history to generate a credit scoreThe transactions history gave clean data for offering small loans, the customers soon caught onto the simple rules of repayment and CBA became the largest creditor in Kenya, serving the poor, without a major hit to its NPAs.


Yes, India is not Kenya or Pakistan, but surely we can take tips from successful partnerships and work together to chart a new way of bringing the financially excluded within the foldOne point needs to be reiterated – there is no sure shot solution that will crack the challenge of financial inclusion, especially in a country like IndiaAs the possibilities of access and delivery of financial services evolve with technology, many different models and modes of delivery must be allowedSome will succeed, some will failWhat matters in the end is ensuring competition, innovation and customer protection and here the RBI has a key role to play in allowing a free and fair playing field for banks and non-banks, allowing partnerships to flourish and also putting in adequate customer protection to allow for failed venturesThe RBI has been moving on the right track and we wait to see how the landscape unfolds ahead.

   

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