Dear Reader,
It is time the Reserve Bank of India admitted that the idea of payments banks was doomed from the beginning.
Eight years ago, when the regulator proposed the idea of a bank that would only be a payments facilitator and not lend, it was received with scepticism. But the regulator pitched the concept as a panacea for financial inclusion as payments banks were supposed to make it easy for low income households to transact.
The business model was not clear though, and the revenue stream had too thin margins for profitability. Rules were too tight as well. The result was that of the 11 successful applicants who got a payments bank licence, only eight decided to use it. Of these, only six are operational right now and one of them is Paytm Payments Bank.
Ironically, Paytm Payments Bank was the first to turn profitable among the six when it reported Rs 19 crore net profit for FY19, within two years of starting operations in 2017. Fast forward to today, the bank is almost on the verge of shutting down not because of unviable business but because of regulatory non-compliance.
The RBI has revealed that the bank has been a repeated offender in non-compliance and that the regulator gave enough time to fix the lacunae in the absence of which business restrictions have been imposed.
What does it say about the nature of payments banks and the business model?
In a cut-throat world of capitalism, a business can be profitable by either boosting its revenue or reducing costs. Most times, businesses do a little bit of both, but predominantly large businesses have been built on revenue growth rather than cost cutting. The biggest revenue generator in financial intermediation is lending while payments is a supplementary source. The payments bank model flips this and makes payments the main source of revenue while relegating lending as a supplementary source and that too only through distribution of loans. This is where the payments bank model fails its test. Building scale is easier than turning profitable in payments because of the low margin nature of it.
It should come as a surprise that when promoters witness the struggle of becoming profitable through revenue, they resort to cutting costs. In extreme cases, they cut corners which partly explains Paytm Payment Bank’s non-compliance with basic know-your-customer norms. Add the compulsion of wanting to be the poster boy of fintech revolution in payments, and Paytm’s non-compliance is easy to see. After all, even venerable and established public sector banks have fallen prey to the lure of building a top line quickly. Employees of Bank of Baroda recently pumped up the user base of the public sector lender’s mobile application 'bob world' through fake mobile numbers, perhaps to meet strict business targets set for them. The RBI has stepped in, of course, putting an end to customer onboarding until the issue is fixed. When employees can cave, can we expect promoters to maintain the hygiene of KYC?
There is no denying that non-compliance should be punished in every case. In payments banks, a weak business model makes transgressions more tempting. The RBI must relook at its idea of payments banks and perhaps shutter the concept completely. For financial inclusion in payments, Unified Payment Interface (UPI) is more than capable of carrying out the same.
As for Paytm, the pioneering fintech needs its own reckoning on a viable business model. Its wallet business continues to face existential questions and a cyclical loan distribution business is not an ideal anchor for revenue. It has its hands in too many pies. But before all this comes the reputation that must be fixed and the customers it services must be migrated with as much ease as possible.
But it is time Paytm and RBI said goodbye and good riddance to the payments bank business model.
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