4 Important Takeaways from the Payment Service Bank Webinar
Solving profitability challenges, leveraging unique resources and extending the range of permissible activities
On Monday, February 22, 2021, SIDFS hosted a webinar themed: Supporting the Payment Service Bank (PSB) Regime in Nigeria, inpartnership with Dvara Research India. The webinar aimed to deepen understanding of Payment Banks (PBs), their role so far in India’s financial inclusion journey and the lessons we can glean to enhance Nigeria’s own Payment Service Bank journey.
India is the poster child for PBs, being the first nation to create such a specialized bank license category to provide financial access for India’s largely underserved populations. The webinar featured expert presentations highlighting India’s PB journey and Nigeria’s justifications in adopting the model. Insights from a research study tracking the performance of PBs in furthering the goal of financial inclusionin India were also presented to attendees.
The key highlights from the presentations are summarized in subsequent paragraphs:
- Leveraging existing advantages
The capabilities, resources and experience of the applying entities are critical to their success as payment banks. Applicants with extensive infrastructure (digital and physical) and experience serving the bottom of the pyramid were better positioned to thrive as PBs.
India currently has four operational Payment Banks (PBs). They are Airtel Payment Bank (a telco subsidiary), India Post Payment Bank(the government post office), Paytm Payment Bank(previously a mobile money operator), and Fino Payment Bank(a fintech and super-agent subsidiary).Combined, the four PBs have built more than 1.3 million touchpoints (with over300,000 customer touch points in villages), and issued almost 60 million debit cards.
Because licensed entities were not new businesses but incumbents that pivoted, they were able to leverage their unique capabilities, experience and infrastructure to enhance business operations. For example, the Department of Posts leveraged its strategic coverage of India (with a post office in every district) establishing a PB outlet at every post office location and using postal officers as agents. Paytm PB, which used to be a mobile money operator, leveraged its strong digital infrastructure and network of branded retail outlets to extend its service across the country.
2. Profitability concerns
The profitability of the payment bank model is a concern due to high operational expenditure. PBs are permitted to facilitate more activities to increase their revenue and improve profitability.
The operational expenditure ratio (operational expenses/total income) for PBs is in the range of 125%; about 5x higher than that of DMBs (23%).Two PBs shuttered their operations while three PB licensees have surrendered their licenses without launching, citing profitability concerns (leaving only four PBs currently operational).
Given the permitted activities and corresponding operational costs, PBs have limited scope for increasing their profitability. To enhance long-term viability, PBs adopted adjacent revenue generating activities in addition to their primary activities (deposits and payments). PBs can act as agents to deposit money banks (DMB) and distribute third party financial products like investment and insurance. Acting as agents to DMBs, PBs can offer credit to their customers, with the DMB bearing the risk. These referral extra activities augment their revenue.
3. Competitive advantage
Payment banks can carve a niche in the low-income segment as the preferred mode of carrying out electronic transactions.
Majority of PB accounts are used for transactions rather than savings. The transactional value-to-deposit ratio confirms this indicating that PB accounts are being used as checking accounts rather than long-term savings vehicles.
This may be because PBs offer, on the average, lower interest rates on deposits than microfinance banks (average of 4.88% p.a.) and deposit money banks (average of 3.53% p.a.). It may also be that PB customers have less income which may be responsible for the ‘low value, high volume’ transactions characteristic among the financially excluded segments.
Payment banks can carve a niche for themselves serving the low income segments by offering
a.) higher interest rates than the rest of the industry.
b.) lower transaction fees than the rest of the industry.
4. PSB progress ~ 500,000 customers and counting
PSBs in Nigeria have on-boarded over 500,000 customers and are aggressively focused on the North-West geopolitical region of Nigeria. Using USSD and mobile apps as Classified as Confidential channels for engaging the customers, PSBs have processed over NGN2 billion ($US 5.3 million) worth of transactions (as at Feb 22, 2021).
It’s still early days in the Nigerian PSB journey. Over the coming months, it will be interesting to monitor the growth and evolution of PSBs in Nigeria, as well as the framework and guidelines regulating their operations in the Nigerian market.
Will the range of permissible activities grow? Will PSBs carve a niche for themselves in a market that is (arguably) saturated by providers? Can PSBs successfully tackle financial exclusion in the remote and rural regions, particularly the areas with limited infrastructural development and economic activity?
These are questions time will eventually reveal.
The PSB webinar was a very engaging session with great presentations and insights. Watch the full webinar here.