FINO PayTech: The people's bank

In 2006, when the Reserve Bank of India (RBI) issued guidelines allowing banks to employ business correspondents (BCs), it not only gave them a strong tool to work with, it also empowered the largely marginalised customer. BCs could carry out a 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 a seed 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. A recce 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 (biometric-based identity cards, to help transfer money) at the night shelters for nearly 1,000 migrant workers, on behalf of Union Bank of India.

The privately-held FINO was the first BC to carry out an operation of such scale 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 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’s chief financial officer and president (sales) 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, it is at the cusp of a transformation. After years of serving banks (since customers acquired by BCs still belong to the bank), it is 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. It 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 it is the largest BC in the country—it reaches 100 million customers and carries out 80-85 million transactions worth Rs 9,000-10,000 crore in cash each year.

It 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 bank—a process Gupta says has already commenced.

Payments 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 (see box Contours of a Payments 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 Sharma (founder of mobile wallet firm Paytm), to 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 block-chain technology or creating other digital solutions instead of becoming a payments bank?”

In the case of the Dilip Shanghvi-IDFC Bank-Telenor trio, the re-think came from the individual players: 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 as a telecom player; IDFC Bank was already a bank, competing with other universal banks. “[The payments bank] is a long-tail model and with on-tap banking a reality, the business landscape for banking has become very competitive, which could have caused IDFC Bank to have a rethink,” a senior official with a rival bank said on condition 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 period as concerns in launching a payments bank. In a note to the stock exchanges in March, the company said: “We will not proceed with the investment or capital infusion of Rs 75 crore in CDSL for this purpose.”

As Santosh Singh, head, research at Shanghai-headquartered Haitong Securities, puts it: “While the concept [of a payments bank] seems a good one to promote financial inclusion, the ability of coming up with a viable business model has been questioned.”

In April this year, SBI chairman Arundhati Bhattacharya, whose bank plans to roll out a 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 be a 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 for a payments bank, there will be “little scope” to make 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 unavailable to payments banks. Even if they were to offer higher rates on 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 a high volume, low-margin business.

But Paytm’s Sharma is not too concerned. “Margins in the payments bank business are way higher than those in the payments business. If you see it from a payments side, it is a high-margin business. If you see it from the banking side, it is a low-margin business.”

Gupta, too, says revenue per transaction could be low but he is confident that FINO can find a business model for a successful payments bank.

It will have to contend 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 impressive 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 Aadhaar.

But Gupta knows, despite the success so far, the road towards becoming a successful payments bank will get trickier.

Vodafone India’s mobile commerce arm M-Pesa, offering money transfer, finance and microfinance, 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 it can 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 the ability to give banking services on mobile.” (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 giant 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 build a full-fledged banking system that can do justice to the opportunity and will launch as soon as these systems are deployed,” adds Sharma. Infosys and Wipro are assisting 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 least for the time being.

A major challenge for FINO will be to boost literacy of financial products when it becomes a bank because of the socio-economic profile of its 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 network effect will be critical. “When one considers how a payments bank can become effective and stay profitable, it must have what we call the network effect,” says Suruchi Jain, a former equity analyst with  investment advisory firm, Morningstar Investment Adviser Private Limited. “There should be a minimum critical mass of people using the service. To get a head 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 says.

The payments bank will be largely created out of FINO’s existing retail business channels, which allow for domestic remittances, utility bill payments, micro-insurance and lending, he adds. Their BC business will also continue to function alongside the new bank, because FINO will not let go of its roots: Financial inclusion.

It is life as usual in Wavanje village (Panvel), in Raigad district, about 40 kilometres from Mumbai. A group of five women, including Zarina Sheikh (name changed on request), sit next to a FINO BC agent Karuna Mukadam (representing Oriental Bank of Commerce), to deposit some savings.

She places her smart card in the biometric-enabled PoT (point of transaction) machine, which has details of her personal identity, transaction records and balance available. Shiekh gives Mukadam a 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, it tied up with online ecommerce firm Snapdeal, wherein migrants, who have no fixed addresses and were not on the banking network, could buy products on Snapdeal through FINO. Customers place orders, FINO takes the payment and, on delivery of the parcel from Snapdeal, the person can pick it up from a 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 like-minded people, ready to carry out a large number of transactions of low kvalue. He has already fulfilled his professional dreams, twice: Of working with banks and now getting to lead a bank. But it will be the verdict of people like the ones in Chandni Chowk, Wavanje and Dharavi that will decide how FINO Payments Bank thrives in a fast-evolving space, where banking services and products—and not necessarily banks—need to reach people.