Payments Banks Business Model | How Will Payments Banks Make Money:
Payments banks are a new class of institutions that aim to enhance financial inclusion to the deepest level, They are all set to redefine banking businesses in India. The Payments Banks can accept deposits of up to Rs 100,000 per customer, but can’t give out loans loans. This makes them unable to earn in a traditional banking way.
How Will Payments Banks Make Money?
Payments banks will generate their major revenues from the following sources:
- Selling others’ financial products and earning commission
- Customers’ data (spending habits) monetisation
- Forming credit access platforms and creating alternate merchant payment models
Airtel Payments Bank, Paytm and India Posts Payments Bank have already launched operations. Finotech, Vodafone and Reliance are expected to launch their payments banks soon.
“A lot is happening from the technology, regulatory and legislation perspective,” said Rishi Gupta, managing director and chief executive officer, Fino Payments Bank.
Reportedly, payments banks are likely to offer micro-savings options. Such as being allowed to maintain FD accounts with amounts as low as Rs 100. “Very few banks have taken an approach toward encouraging micro-savings, i.e. making acceptable savings amount to near zero,” said a recent by EY, an audit and consulting firm.
Out of every Rs 100 of deposits received, payment banks have to invest minimum Rs 75 (75 percent) in approved government bonds and securities, and may choose to deposit the balance Rs 25 (25 percent) in fixed and current deposits of conventional banks – Private or Public. Government bonds and bank fixed deposits offer about 7 percent annual returns, limiting the payments banks’ ability to offer attractive interest earnings to customers to save money with them.
“Payments Banks need to focus on developing products which will significantly reduce the minimum denomination that needs to be accumulated to be put into a savings product,” the EY report said.
Cross Selling Services (Commission)
These companies are also likely to offer a variety of products by cross-selling services such as insurance and mutual funds through affiliate marketing. Payments banks can’t lend on their own, but they can offer credit products on behalf of partner banks and earn through cross-selling charges. Cross-selling charges are the fees that a bank earns as a commission, by partnering with various financial institutions and providing services such as insurance and loans.
Tie-ups with other banks, non-banking financial companies (NBFCs), mutual funds and insurance companies could be the main revenue source for payments banks.
Payments banks can also develop alternate merchant payment models with low transaction costs for merchants and customers. After getting a solid user base, the payments banks can make money from the merchants’ side. If people start using their banking ecosystem for daily payments, these banks will earn their revenue from the participating merchants.
Some banks have decided to charge a tiny fee on cash withdrawals from bank branch. Others will charge Automated Teller Machine (ATM) cash withdrawals above over and above a certain amount. To prevent cash-outs, free withdrawals need to be limited.
Data monetisation will be another major revenue source for these banks. These banks will generate a good database of customer spending patterns and preferences, which will be a valuable asset to be marketed. This data would include transactions such as how and when of Mobile Recharges, E-Commerce Purchases, Food Ordering Online, etc. These insights will enable the payments banks to explore new revenue opportunities.
If this data can be properly organized and recorded, it will help in a precise targeted marketing without sacrificing with the privacy of consumers. To make this possible, these payments banks will need to have a very strong system of analytics.
The break even duration for Payments Banks is estimated to be around 4-5 years.