THsr01@ (Cracks in payments-bank model: Adrya Bira’s ventute shows signs of stress ET Prime ETPrime Cracks in payments-bank model: Aditya Birla’s venture shows signs of stress It is facing strong headwinds in the absence of a viable business model. Vodafone M-Pesa, too, is facing turbulence. é Ai singh — 9Js2019 7 Mins Read An FONT SIZE A Just a little over a year after starting operations, Aditya Birla Idea Payments Bank is slowing down. According to multiple industry sources, Aditya Birla Group has decided to deprioritise the business. Aditya Birla Nuvo (now Grasim Industries) holds 51% while Idea Cellular has 49% in the joint venture, which in February last year became the fourth payments bank to begin operations after the Reserve Bank of India (RBI) issued licences to 11 entities in August 2015. Vodafone M-Pesa, the payments~ ‘ntpstprime economicimes indiatimes. com/news/70136086\finlech-and-bisracks-n-paymenis-bank-model-adiya-bifas-veriure-shows-signs-of Kumar Mangalam Birla, chairman, Aditya Birla Group 7tps:prime economictimes indiatimes. com/news/70136096iinloch-and-bisleracks- ‘Cracks in payments-bank model: Aditya Bira's venture shows signs of stress - ET Prime wallet unit owned by Vodafone Idea, is also facing uncertain times. According to industry sources, the parent company has been in the market for quite a few months looking for a buyer for its wallet unit. However, nothing has materialised just yet. M-Pesa had a total of 200-250 employees. Some of them have been promised jobs within the group entities, sources say. While ET Prime couldn't independently verify which way the businesses are heading, a peek into several WhatsApp groups to which this, reporter has access shows some Good Samaritans are trying to help the employees of Aditya Birla Payments Bank and Vodafone M-Pesa find jobs. E-mail questionnaires sent to both Aditya Birla Group ‘and Vodafone Idea didn't elicit any response till the time of filing this story. What's up with Vodafone M-Pesa? Vodafone M~Pesa enables services like money transfer, bill payments, and recharge from mobile phones. According to the company's FY18 financial statement, it had a pan-India distribution ‘of more than 147,000 agents covering about 17 million customers, making it the largest business correspondent in the country. So, what went wrong? The structure of the business holds an answer. See the graphic below: During the announcement of its Q% results in May, Vadafone Idea said it was looking at merging its payments wallet Vodafone M=Pesa with an associate or third=party firm, Stringent RBI guidelines, which says a single promoter group cannot have a payments-bank business under one entity and a prepaid payment instruments (PPI) business under another, triggered the move. To be sure, after Vodafone's merger with Idea, an Aditya Birla group company, the RBI rules are applicable for M~Pesa. “Based on various discussions, RBI had initially permitted these two entities to carry on the business until December 31, 2018 which was later extended to March 31, 2019," the ‘company wrote in the quarterly-results statement. It also said it had applied for an extension of its PPI licence, while exploring M&A deals for the firm. According to industry insiders, M=Pesa has reached out to many players in the market, including Paytm, to either take over the business or the entire team. A Paytm official, who wished not to be named, tells ET Prime, “The problem is that the M--Pesa acquisition doesn’t make sense for anyone because it banked on Vodafone's distribution channel (the channel that now belongs to Vodafone Idea). So, ideally Aditya Birla Idea Payments Bank should have absorbed the M-Pesa team within itself, which it is not doing. And they are saying that they are hiving off the M-Pesa unit and whosoever buys it can use the Vodafone Idea channel by paying an access fee.” This official points out that Vodafone M-Pesa was not a standalone profitable business. “if someone wants, they can hire a few people from there instead of buying the entire ‘company ~ which doesn’t make sense at all.” In May, the RBI imposed penalties on five PPIs for non- compliance of regulatory norms. Vodafone M-Pesa was fined INR3.05 crore, the highest among the five, The challenges with the payments bank Unlike its peers such as Paytm Payments Bank, Fino Payments Bank, Airtel Payments Bank, and India Post Payments Bank, Aditya Birla Idea Payments Bank had limited scale. The bank ran a pilot across five districts in Gujarat and Maharashtra. It also launched its own mobile banking, Internet banking, and UPI services. Here are the three key challenges that the business is facing. Challenge #: lack of a viable revenue model The reason the RBI came up with the payments-bank model was to offer small-savings accounts, payments, and remittance services to un-banked or under-banked Indians. It was seen as a tool to push financial inclusion Unlike a traditional bank, a payments bank can only accept deposits of up to INR lakh per customer and cannot lend. Moreover, payments banks are expected to invest as much as 75% of their demand- deposit balance in statutory liquidity ratio (SLR)-eligible government securities or treasury bills with maturity of up to one year. The remaining 25% can be parked with other commercial banks. Sringent KYC (know your customer) norms and tough competition from the big brothers of banking are teaching payments banks sobering lessons after the initial euphoria. A few months after the RBI gave in- principle approval to the 11 entities, players like Tech Mahindra, Cholamandalam Dilip Shanghvi-IDFC Bank-Telenor joint venture, surrendered their licences. And, after the Vodafone- Idea merger, Vodafone, which also received a payments-bank nod, may have to surrender its licence. Ashvin Parekh, who runs an advisory-services firm and had also helped India Post Payments Bank ‘among others with their initial plans, says three things are essential to building a robust payments~ bank business in India. One, a very large customer base. India Post has this. Telecom operators, too, could fit in. The only difference is, India Post already had savings products. However, telcos possessed ince, and the payments-bank-model-adiya-bitas-ventureshows-signs-of-t... 2/4‘Cracks in payments-bank model: Aditya Bira's venture shows signs of stress - ET Prime the second important advantage: the infrastructure through which the payments data would move. This pipeline infra is the most critical part of running a payments bank. The third key thing. is ha platform, like Paytm's. A company can get customers by owning such a platform, but it isn't very critical because you can buy a platform and the cost won't be high, Parekh says. He adds that when he was offering consultancy services to three payments banks, he realised the telcos would have the last laugh. “And, for a simple reason. Today they might offer data transfer at a certain price, and once they realise that there is a substantial dependence on [their] pipeline, they can gradually increase the price of the pipeline, which they can [otherwise] make available to [their own] payments-bank businesses. So, there was a hope that Airtel or Idea will prove to be better payments banks.” However, it was quite clear from the outset that it would take four-five years to break even in this business. With their books under pressure, the large banks will make sure that the payments banks don't capture a large share of the payments pie in the country. Earlier, National Payments Corporation of India (NPC!) wasn't really playing a significant role in the payments ecosystem. But it is now upping the game with platforms like UPI, BharatQR, etc. This allows the banks to put up a bigger front compared to what was envisaged in the payments space some years ago. There was nothing wrong in the payments- bank model, Parekh believes. it's ust that the variables have changed a lot. All payments banks are finding it difficult to operate, he adds. Challenge #2: strict rules for cross~selling Payments banks are not allowed to lend, but they can cross~sell financial products such as loans, mutual funds, and insurance through third-party tie-ups. But it’s not as simple as it sounds. For example, Aditya Birla Financial Services, which offers mutual funds, insurance, and other financial services, can’t directly sell through its own payments bank. A stringent regulatorily regime requires Aditya Birla Idea Payments Bank to enter into a separate agreement with its own group company to cross-sell. “So, the consumer flow will be no different from that of Aditya Birla Idea Payments Bank partnering with HDFC Bank for ‘ross-selling. That way there is no efficiency and scale (even if you have a company within the group selling financial products]. If you are doing partnerships at an arm’s-length basis, then it doesn't make sense as a business model,” a senior official with another payments bank tells ET Prime. Challenge #3: telecom play getting the mindshare Aditya Birla Payments Bank has the huge telecom-consumer base of Vodafone Idea which it can target for cross~selling. But Vodafone Idea has a bigger battle looming in the core telecom business as it prepares an INR25,000 crore war chest to take on Mukesh Ambani's Reliance Jio. This may shift the company’s focus away from a smaller business like payments bank. Not everyone's worried In a separate conversation about a month ago, Fino Payments Bank CEO Rishi Gupta had expressed his belief that over a period of time, when the existing banks become more stable and show growth, the regulator will take a more pragmatic view and make its policies more business~friendly. According to a source, “if things get better, they (Aditya Birla Group) might just revive this (payments bank) business again.” The WhatsApp groups will get less crowded then. (Graphics by Sadhana Saxena) ea POPULAR WITH READERS WV = { W U7 ‘TECHNOLOGY AND STARTUPS MONEY AND MARKETS tps:prime economictimes indiatimes. com/news/70136096iinloch-and-bisleracks- payments-bank-model-adiya-bitas-veriureshows-signs-of-t... 3/4THsr01@ (Cracks in payments-bank model: Adrya Bira’s ventute shows signs of stress ET Prime Electronics legend Terry Gou says he'll retire, but will he really? ‘Taiwan high-tech gadget giant Foxconn has announced a formal succession plan for its celebrity founder and longtime chief. Smart money takes a flight out of small- and mid-caps as investors seek safe havens Building a winning small- and mid- cap portfolio today involves an in- depth investigation of balance sheets, a task best left to professionals. Inst By Pravin Palande 03 Jul 2019 RELATED STORIES TECHNOLOGY AND STARTUPS Electronics legend Terry Gou says he'll retire, but will he really? Taiwan high-tech gadget giant Foxconn has announced a formal succession plan for its celebrity founder and longtime chief. aS A VES is MONEY AND MARKETS Smart money takes a flight out of small- and mid-caps as investors seek safe havens Building a winning small- and mid- cap portfolio today involves an in- depth investigation of balance sheets, a task best left to professionals. Inst By Pravin Palande 03 Jul 2019 Htps:prime economictimes indiatimes. com/news/70136096iinloch-ané-bisicracks-in-payments-bank-modeladiya-bilas-ventureshows-signs-of-t.. 4/4