WHITE PAPER. Payments Bank: The Big Bet for Financial Inclusion

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1 WHITE PAPER Payments Bank: The Big Bet for Financial Inclusion Financial Inclusion (FI) has been a popular buzzword in India s development lexicon for some time now. In any banking and finance event, FI is given pride of place. But for any social movement in the banking industry to gather momentum, intervention by the Reserve Bank of India (RBI) is necessary. The Payments Bank directive from the regulator is that fillip that will make FI into a social movement in today s device driven digital world.

2 India has grown significantly in the last decade. Real GDP grew at above 9% in 2005, 2006 and 2007 and touched a peak of 10.26% in The projected growth for 2014 is 5.5%; if one were to go by the current trend, it could end up higher. However, the growth, it is said, has not been uniformly distributed across the country. There are regions of spectacular growth and regions predominantly rural that have remained untouched. To many at the bottom of the pyramid (about 300 million people) the growth story still remains a myth. One of the important economic parameters to assess growth is the availability of financial services to the population. Published statistics say 400 million of India s 1.2 billion people have bank accounts. This could be deemed as failure on the part of the banking industry and the government to adequately act upon the 1955 recommendation of the All India Rural Credit Survey Committee to improve institutional finance. However, a more positive approach would be to see the tremendous potential of the market, and initiate definitive action towards realizing the same. At the same time, replicating the sophistication of urban banking services is not cost effective; nor is it necessary in all markets. Rather, financial inclusion is the answer. For a formal definition let us step back in time to 2008 when the RBI set up a Committee on Financial Inclusion headed by Dr. C Rangarajan. The Committee defined Financial Inclusion as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. The recent directive by the RBI on Payments Banks based on the recommendation of Dr. Nachiket Mor, is a further step in this direction. The Lineup of Players Eyeing the Payments Bank Arena The RBI draft guidelines list out the eligibility criteria for Payments Banks. Existing Non-Bank PPI Issuers, Non-Banking Finance Companies (NBFCs), Corporate BCs, mobile telephone companies, supermarket chains, companies, Real Sector Co-operatives and Public Sector Entities may apply to set up a Payments Bank. Even banks can take equity stake in a Payments Bank to the extent permitted by regulations. (More information here: scripts/bs_viewcontent.aspx?id=2857) The Potential Winners in the Lineup While the lineup looks very impressive, I would bet on mobile telephone companies (MTC) and banks emerging as the winners. Although banks can only pick up a stake in a Payments Bank, they must see that as a strategic opportunity to participate, albeit indirectly. Let us now turn to mobile telephone companies and how they relate to the model and expectations from a Payments Bank. Payments Bank Model Quoting from the RBI s directive, The primary objective of setting up of Payments Banks will be to further financial inclusion by providing (i) Small savings accounts and (ii) Payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology-driven environment. This envisages a very simple model where an entity must have the capability to offer one product, namely small savings accounts, and one service, that is, payments & remittances. The technology environment will determine the success of outreach, accessibility, availability, security etc. whereas the RBI regulations will act as the governance and control mechanism. Advantage Mobile Telephone Companies (MTC) One can dissect this model into its constituent parts of infrastructure, banking backend and service delivery. Of the players permitted to run a Payments Bank, it is the MTCs, which have the infrastructure and the service delivery components in place. Some of the MTCs are already offering a partial banking service through their PPI services which can give them an early bird advantage. The missing piece is the banking backend. While MTCs are reasonably equipped from a people, process and technology triangle perspective, they need to close certain gaps. The point I am driving at is that the MTCs are already ahead in the race. (See the solution architecture diagram later in this blog). A mapping of a few key Payments Bank success factors (KSF) to the inherent strengths of a mobile telephone company will make this point clear: KSF 1: Customer base KSF 2: Wide national network KSF 3: Strong sales force on the ground KSF 4: Solid technology infrastructure KSF 5: High growth industry (subscribers to grow to 1160,000,000 by 2017-Source TRAI) 2 Infosys External Document 2014 Infosys Limited

3 The following figure shows operator-wise rural subscribers. (Source: COAI Report) Total Operators Wise Rural subs - August 14 (in million) Airtel Vodafone Idea Aircel Telewings favorable to MTCs and others planning to set up a Payments Bank. Some of them are listed below: a. Integrated KYC between non-banking entities (NBFC, MTCs, Retail Chains etc.) and banks using means such as unique identification (example: Aadhaar card) b. Market driven pricing for healthy competition c. Harmonization of transaction limits between customers of non-banking entities and banks d. Expansion of the Business Correspondent s jurisdiction State Bank of India, a behemoth in the Indian banking industry, has over 170 million customers. The rural subscribers (from the figure above) for Airtel and Vodafone add up to 188 million. The combined rural subscribers sum up to more than 300 million. Assuming about 25% open accounts with Payments Banks, the opportunity number is 75 million, a staggering figure. One can compute business and value per account through extrapolation. However, this is not in the scope of this blog. This bar diagram would not have been possible without KSF 1 to 4. KSF 5 is the teaser to get into the banking business. The business case for the MTCs is strengthened by growth in mobile wallet adoption, improving customer loyalty and independence from banking intermediaries. This also presents a significant alternative revenue source for the industry which is currently struggling with per capita profitability. Credit Suisse suggested that restrictive mobile payments could yield 1-1.2% additional revenue for telecom operators, while for liberal mobile payments this number could be 7-8%. The Payments Bank Business Model for Mobile Telephone Companies A Mobile Telephone Company looking to transform into a Payments Bank requires a few foundational additions, the most important of which are a. A strong back end core banking system b. An Internet banking solution c. A payments system d. A digital commerce solution and e. Access to switch (ATM etc.) This is in fact the gap I was referring to earlier. There are several solution providers who can bundle and offer the functionality in an opex model. Finacle from Infosys offers a state of the art, quick to deploy solution bundle in a cloud environment. The Future Perspective It is possible that there will be some changes in regulation in future that will be e. No requirement of pre-approval for wallet to wallet interoperability Conclusion The directive from the RBI on Payments Banks is an opportunity for MTCs to move into an innovative business model by simply adding banking functionality to their existing infrastructure. Entering the banking business will also increase their credibility and what better way to do this than riding on a new business model? The world is fast getting digitized. The concentration of power is moving towards end points, in this case customers. For an end user it is the service experience that matters; and not whether it is offered by a legacy bank or any other entity. The line that separates Gen X (legacy banks) and Gen Y (non legacy, new era banks, for example a mobile telephone company) banks is blurring rapidly. This is the time for MTCs to mount the offensive and classic banks to beware. 3 Infosys External Document 2014 Infosys Limited

4 Annexure 1: A generic solution architecture for a Payments Bank: AGENT CUSTOMER BANK USER MERCHANT (ATM POS Terminal) PAYMENT NETWORK* Agency Portal SMS, USSD, IVR, J2ME, STK, RICH CLIENT MOBILE Banking Ebanking Bank Administrators SWITCH MONEY TRANSFER AGENCIES* Web Interface Wallet & Agency Banking Product & Schemes Customer On Boarding Agent & Merchant Mgt. Hierarchy & Comm. Mgt. Transaction Rules, Engine F I FINACLE INTEGRATOR (FI) Web Interface ISO8583 LISTENER Finacle UBS Actor CIF Product Maintenance Wallets / Accounts Transaction Engine Deposit/Loan Products GL/Batches/Reports FINACLE INTEGRATOR (F1) INTEGRATION LAYER FOR LEGACY SYSTEMS INTERACTION WITH EXTERNAL SYSTEMS NATIONAL Payment NETWORKS MERCHANT MANAGEMENT OTC MERCHANT E-COMMERCE UTILITY PAYMENTS Core Banking System VARIOUS MIDDLEWARES (FINDOOT) DATA FEED/EXTRACT WATER ELECTRICITY MOBILE Other Banking functions (GL, Document Management, etc.) Operator Service Delivery Platform (SDP) CONVENIENT MONEY TRANSFERS EXTERNAL SYSTEMS Billing CRM DMS Insurance System Bill Aggregator Pricing Engine BI / DW Fault Management INSTANTANEOUS PEER-TO-PEER INTRA AND INTER-BANK Contributed by: Vishnudatta Harihar Finacle Presales Group 4 Infosys External Document 2014 Infosys Limited

5 Annexure 2: Comparison of Commercial Bank, Telco e-wallet and Payments Bank on a few key parameters Parameter Commercial Bank Major Telco e-wallet Payments Bank Lending Yes No No Accept deposits Yes Yes Yes Cash out Yes Yes and No Yes (Depends on the product) Cash in Yes Yes Yes Make payments Yes Yes Yes Remittances Yes Yes Yes Monetary control CRR Yes No Yes Monetary control SLR Yes No Yes Business model Use delta between lending Use escrow account/ Use delta between deposits and deposit rate for revenue corporate account for revenue and investments in SLR backed securities as investment revenue Business entity Scheduled Bank Telco NBFC/Telco/PPI/etc Regulated by RBI / BRA etc. Payments and Settlement Act RBI/BRA/etc. Initial capital INR 5,000,000,000 Not required INR1,000,000,000 Default risk Yes Yes Minimal Contributed by Shekar Kapoor Finacle Product Strategy References 1. (Draft Guidelines for Licensing of Payments Banks ) 2. Afi-global.org (A quick guide to Maya Declaration on Financial Inclusion) International Journal of research in commerce and management- Study of financial inclusion in banking industries in India Pavan Kapoor 5. RBI Annual report gross-domestic-product-gdp-growthrate-in-india/ 7. COAI report on mobile subscribers Note: Shekar Kapoor has helped in collating information and statistics for this blog. Vishwanath Thanalapatti Lead Product Manager, Product Strategy, Infosys Finacle 5 Infosys External Document 2014 Infosys Limited

6 About Infosys Finacle Infosys Finacle partners with banks to simplify banking and arms them with accelerated innovation to build tomorrow s bank, today. For more information, contact finacleweb@infosys.com Infosys Limited, Bangalore, India. All Rights Reserved. Infosys believes the information in this document is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of other companies to the trademarks, product names and such other intellectual property rights mentioned in this document. Except as expressly permitted, neither this documentation nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, printing, photocopying, recording or otherwise, without the prior permission of Infosys Limited and/ or any named intellectual property rights holders under this document.