FINO PAYTECH The People’s Bank Staying with the spirit of financial inclusion, the raison d’etre of its existence, FINO PayTech intends its payments bank avatar to reach the unserved and underserved BY SALIL PANCHAL, Rishi Gupta, CEO & MD, of FINO PayTech believes his company’s track record in financial Inclusion givesit an upper nang over ather prospective payments banks 72 | FORRES INDIA AUGUST 19,20161 2006, when the Reserve Bank of India (RBD issued guidelines allowing banks to employ business correspondents (BCs), itnot only gave them a strong tool to work with, it also empowered the largely marginalised customer. BCs could carry out range of services and transactions on behalf of banks for a wider consumer base, getting a commission for this service. FINO PayTech was incubated as such a BC by ICICI Bank in July 2006—with aseed capital of Rs 15 crore—out of Navi Mumbai. The acronym FINO stands for Financial Inclusion Network & Operations, and financial inclusion is what took this freshly-minted BC to the ‘bustling Chandni Chowk market district of Old Delhi soon after. Fresh from its first project of ‘opening accounts for slum dwellers in Mumbai, on behalf of Union Bank of India, a FINO team had gone to Delhi to explore business opportunities. Arecce of the Chandni Chowk area revealed how rickshaw- and cart pullers as well as coolies—mostly migrants with no fixed homes who slept in night shelters—were unbanked; savings were a challenge for them and they had limited ways to remit money to their families. “They kept their daily earnings [Rs 300 then] with local baniyas [shopkeepers] for safekeeping, without any records,” says Rishi Gupta, CEO of FINO PayTech. In about 3-4 months, FINO introduced smart cards based identity cards, to help transfer money) at the night shelters for nearly 1,000 migrant workers, on behalf of U ‘The privately-held FINO was the first BC to carry out an operation of such seale at the time. It positioned itself as a private financial inclusion company to serve the unbanked— mainly those with an income well below Rs 3,00,000 per annum, Banks have rarely been able to THE SHAPE OF FINO’S PAYMENTS BANK (NEW IDENTITY FINO Payments Bank INITIAL SIZE 1400 bank branches BY WHEN December 2016" START FROM contra nis STAFF STRENGTH 3,000 (besides BC agents: st to ouble in 35 years CAPITAL RAISING Rs 400 erore n coming months FUND UTILISATION PLAN To bull Infrastructure, branch expansion, marketing and brancing PROFITS Estimated to beak even in 5-5 years STRENGTHS Decade ona experione in servicing the unbanked population ] CHALLENGES: Bulling trast fr the new bank, financial iteracy and increasing the ‘equity base to lower stakes of foreign investors to requisite levels MANTRA Return of capital nore important than return on capital * Subject fial approval service this segment well, leaving people underserved and unserved, due to factors such as poor reach of financial services, a reluctance to lend and borrow, remoteness of location and also lack of credit history. The Global Findex 2014 study by the World Bank states that India accounts for 21 percent of the ‘world’s unbanked population. “In the early days, whenever we would enrol a customer, people would ‘come dressed up for the photos, men in their best formals and women with bindis and jewellery... it was like identity creation for them, For the first time in their lives, someone came to their doorstep and gave them a banking/identity card,” Gupta recalls. “This [the Chandni Chowk project] ‘was a win-win situation for all of us.” A chartered accountant by profession, the 47-year-old Gupta was roped in by ICICI Bank as FINO’ chief financial officer and president (ales) in 2006. He came from a three- year stint at International Finance Corporation in New Delhi, having. worked on budgeting and project finance, Manish Khera, a senior ICICI banker, had founded FINO and was CEO till he quit in 2013. He thereafter briefly worked at FINO’s now rival Airtel Payments Bank before taking up other entrepreneurship ventures. As for FINO, ten years after it was set up, itis at the cusp of a transformation, After years of serving banks (since customers acquired by BCs still belong to the bank), itis set to become a payments ‘bank—in partnership with ICICI Bank—and get ownership of the customers and the services it offers. (The details of the partnership are still being worked out.) FINO, along with 40 other firms, had applied to RBI for a payments bank licence and, last August; the central bank gave ‘in principle’ approval to 11 companies, including FINO. Ie will now submit an application to the RBI for final approval—they have till March 2017 to set up the bank. They would need to disclose details of the payments bank's equity structure, its investors, the head of the bank and a detailed business plan including rollout of operations. FINO claims to have the credentials for its new role. With a turnover of Rs 320 crore for FY2016 and profitable for the past five years, Gupta says itis the largest BC in the country—it reaches 100 million customers and carries out 80-85 [AUGUST 19,2016 FORBES INDIA | 75million transactions worth Rs9,000- 10,000 crore in cash each year. Tt also has a strong roster of investors, including The Blackstone Group with a near 20 percent stake, ICICI Group (15 percent), Intel Capital, Headland Capital Partners, IFC, Indian Bank, Life Insurance Corporation of India (LIC), Union Bank of India and Corporation Bank, FINO has raised capital four times between 2007 and 2011. It plans to raise another Rs 400 crore for its payments banka process Gupta 'shas already commenced. ayments banks are an Indian innovation, given shape by the RBI to promote digital transactions and financial inclusion through small savings accounts and also to provide payments and remittance services to low-income households and migrant labourers (ee box Contours of a Payments 74 | FORRESINDIA. AUGUST 19,2016 FINO PAYTECH Bank). Once a payments bank, FINO will compete for business with seven others, including large corporates like Aditya Birla Nuvo (partnered by group firm Idea Cellular), Reliance Industries (with State Bank of India), Vodafone M-Pesa, Airtel Payments Bank (with Kotak Mahindra Bank), National Securities Depository Ltd, Department of Posts and Vijay Shekhar $ of mobile wallet firm Pay provide banking solutions, ‘Three of the original eleven firms granted in-principle payments bank licences—Cholamandalam Distribution Services Limited (CDSL), Sun Pharma promoter Dilip Shanghvi (partnered by IDFC Bank and Telenor Financial Services) and Tech Mahindra—have withdrawn from the race this year. At the time of quitting from the payments bank race, CP Gurnani, managing director and CEO of Tech Mahindra, had cited profitability concerns. “Unfortunately, due to competitive pressures, margins started getting squeezed so much that we realised the payback period has become very long. The question that Mahindra Finance and us sat together and asked is: Is this our priority?” he told the media at the time. “Is this something where the capital allocation is, appropriate? Or should we let this opportunity pass and hope that there will be other areas where we can collaborate and work together, like hain technology or creating tal solutions instead of becominga payments bank?" Inthe case of the Dilip Shanghvi- IDFC Bank-Telenor trio the re-think came from the individual playe Shanghvi was a pure investor in the venture with interest in entering. the financial services space; Telenor has been re-evaluating its current India footprint even asa telecom [At Wavenie in Panvel, 40 km from. ‘Mumbai, FINO's BC agent Karuna Muleidam Cextrome tft) helps ‘women depost morey Ina savings ‘account using a blomevic readerplayer; IDFC Bank was lreadya | bank, competing with other universal | banks.“{The payments bank]isa | Jong-tail model and with on-tap | banking a reality, the business landseape for banking has become very competitive, which could have ‘caused IDFC Bank to have a rethink,” with a rival bank jon of anonymity. Cholamandalam investment and Finance, the financial arm of the Chennai-based Murugappa Group and CDSL's parent, cited competition and a long gestation periodas concerns in launching a Payments bank. In anote to the stock exchanges in March, the company said: “We will not proceed with the investment or capital infusion of Rs 7Scrore in CDSL. for this purpose.” As Santosh Singh, head, research headquartered Haitong 3s, putsit: “While the concept [ofa payments bank] seems a good one to promote financial inclusion, the ability of coming up witha viable business model has been questioned.” In April this year, SBI chairman Arundhati Bhattacharya, whose bank plans to roll outa payments bank with Reliance Industries (which owns Network 18, publishers of Forbes India), too pointed out that “neither payments banks nor small finance banks seem to have devised a model ‘which can be called viable.” She said it would bea challenge for a payments bank to take away customers or income from a universal bank Credit Suisse India analysts Ashish Gupta and Sunil Tirumalai say that under the current norms fora payments bank, there will be “little scope” tomake money as pure payments enablers. “Instead, we could see payments banks lead partnerships across banks and non-banks where they act as the main customer interface and cross-sell products of partners.” Profitability, concurs Singh, is the biggest concern, since most of the revenue streams that banks have are Vv, CASHLESS IS KING Ayrethe: sane game changer, the Unified Payments Interface (UPD) is in the process of being rolled out. This system allows the customer to operate multiple bank accounts through a single mobile application (which could belongto any bank) linked to the UPI system. ‘Thus money is transferred instantaneously, cashless and. paperless, without providing personalised details. Also, unlike a mobile wallet, one does not need to set aside funds upfrontin an account Fifteen banks have joined the UPI interface, which is built on the existing IMPS (immediate payment service). AP Hota, MD & CEO, UPI says the National Payments Corporation of India (NPCD, the unmbrella body for all retail payment systems in India, will scale up slowly. “We will tryto | fuse all types of payments, like bill payments step by step.” It makes money by charging 50 paise per transaction from the sending bank. ‘The biggest challenge for UPI is that many people have not given their cell phone numbers to their banks. unavailable to payments banks. Even if they were to offer higher rateson deposits to woo customers, it would impact their net interest margins, another analyst says. Also, given that the basic reason for the RBI to grant a payments bank licence was to create efficiency in the payments system, and make it less costly with the use of technology, this will inevitably be ahigh volume, low-margin business. But Faytm’s Sharma is not too concerned. “Margins in the payments bank business are way higher than those in the payments business. If you seeit from a payments side, it isa high-margin business. If you seeit from the banking side, it isa low-margin business.” Gupta, too, says revenue per transaction could be low buthe is confident that FINO can finda business model for a successful payments bank. twill have tocontend with Paytm, the Department of Posts as well as telecom companies like Vodafone, Airtel and Idea Cellular; all of them, like FINO, have a large, existing sticky customer base. But among the eight prospective payments banks, FINO is the only ‘one with an existing and impres ‘track record in financial inclusion, Gupta says, a fact the company considers its strongest point. Of FINO’s nearly 100 million customers across the country, 45 million are banking customers and the balance is enrolled in large projects such as, the Rashtriya Swasthya Bima Yojna (RSBY) and the Unique Identification Authority of India's Andhaar. But Gupte knows, despite the success so far, the road towards becoming a successful payments bank will get trickier. offering money transfer, finance and mierofinance, is one of the largest BCs in India with 1.2 lakh authorised agents and 5.4 million registered customers. “Vodafone M-Pesa’s biggest strength is in its strong distribution network and ‘mobile customer base, which itcan leverage for providing payments bank services to the last mile" says Suresh Sethi, business head, Vodafone M-Pesa. “Over 50 percent of our customer base lies in rural India. We are strong in both distribution and mobile penetration and have odafone India's mobile AUGUST 19,2016 FORDES INDIA | 75FINO PAYTECH the ability to give bankingservices onmobile:” (Sethi declined to share M-Pesa's business strategy and a rollout plan for its payments bank.) Sharma, whose firm Paytm is backed by Chinese ecommerce Alibaba, is planning a pre-Diwali launch for his payments bank. Prior to this, he will seek to raise fresh funds for the bank from current investors, banks and other financial institutions. “We need an investment Of Rs 100 crore,” he says, adding that regulatory confirmations are awaited. Paytm, which has nearly 130 million customers, will have a Wacasa (wallet account, current and savings accounts) model for its payments bank. “We decided to builda full-fledged banking system that can do justice to the opportunity and will launch soon as these systems are deployed,” adds Sharma. Infosysand Wipro areassisting Paytm in technology solutions for the payments bank. FINO, meanwhile, has a simple strategy: To provide those products of ICICI Bank suitable for its low-income customers, which would include fixed and recurring deposits. But it ‘may refrain from offering ‘complex’ products like equity-linked savings schemes, at leastfor the time being. A major challenge for FINO will be o boost literacy of financial products when itbecomesa bank because of the socio-economic profile of ts customers. After all, FINO has built its reputation and reach serving those who were deprived of products, services and dignity To service them, achieving the economic moat of the neworkeffect will be critical. “When one considers how a payments bank can become effective and stay profitable, i¢ must have what we call the network effect,” says Suruchi Jain, a former equity analyst with investment advisory firm, Morningstar Investment Advi Private Limited. “There should be cal mass of people using the service. To get ahead start, each payment bank would need to tap an existing network of customers who can quickly adopt the service and make it valuable enough for others to jump on the bandwagon.” ‘The new payments bank will certainly service this lower end of the pyramid. The only way FINO will be able to differentiate itself from rivals would be through a better customer experience, Gupta say “The payments bank will be largely ‘created out of FINO’s existing retail business channels, which allow for domestic remittances, utility bill payments, micro-insu CONTOURS OF A PAYMENTS BANK ‘They are stripped-down banks which can take deposits of up to Rs Lakh from customers But they do not have the liberty to lend or issue credit cards. ‘* Unlike universal banks, they have to largely survive on fee-income and not net interest income. nents banks will require mum paid-up equity capital of Rs 100 crore. © They'll have to invest at least 75 percent of deposits in government securities with a one-year matur and maximum 25 percent in current and fixed deposits in other banks. and lending, headds. Their BC business will also continue to function alongside the new bank, because FINO will not let go of its roots: Financial inclusion. tis life as usual in Wavanje lage (Panvel), in Raigad district, about 40 kilomesre from Mumbai. A group of five women, including Zarina Sheikh (name changed on request), sit next toa FINO BC agent Karuna Mukadam (representing Oriental Bank of Commerce), to deposit some savings. She places her smartcard in the biometric-enabled PoT (point of transaction) machine, which has details of her personal identity, transaction records and balance available. Shiekh gives Mukadam small sum of Rs 30 to deposit and gets an immediate receipt for the same. A block coordinator acts as a mediator between the agent, the bank and FINO to resolve all technology and bank-related issues faced by the agents. This is the doorstep banking experience for Sheikh and her neighbours in ‘Wavanje area, where the nearest bank branch is several kilometres away. But FINO, like Paytm, wants to take this further. It is expanding its reach, offering a new shopping experience to the unbanked. In 2014, ic tied up with online ecommerce firm Snapdeal, wherein migrants, who have no fixed addresses and were not con the banking network, could bay products on Snapdeal through FINO. ‘Customers place orders, FINO takes the payment and, on delivery of the parcel from Snapdeal, the person ccan pick it up froma FINO mart. In its new phase for growth, like all financial institutions, trust, safety of capital and services will determine how FINO fares in comparison to those with a larger financial muscle. Gupta will need several i minded people, ready to carry out large number of transactions of low value. He has already fulfilled his professional dreams, twice: Of working with banks and now getting tolead a bank. But it will be the verdict of people like the ones in Chandni Chowk, Wavanje and Dharavi that will cecide how FINO Payments Bank thrives in a fast-evolving space, where banking servicesand products—and not necessarily banks—need to reach people. ©