In a country with about 2.15 lakh ATMs and just over 1.3 lakh bank branches, the payments bank have a far higher reach. Take Airtel, for instance. It's planning to tap its 2.5 lakh retail stores (who sell prepaid recharges) across the country to deliver its banking services. These retail outlets would work like a bank branch where people can deposit and withdrawal cash.
The retailer, in return, would get commission (0.15 per cent) on every cash transaction. Sunil Mittal, chairman of Bharti Airtel says that about 25,000 payments bank accounts are being created every day, and the number will go up to 1-2 lakh accounts.
"We are planning to convert around 100 million of our existing customers (270 million) into payment bank customers," says Mittal.
In order to lure customers, Airtel is offering a slew of services. To begin with, the amount deposited in Airtel payments bank will earn interest of 7.25 per cent for customers. Typically, the savings account interest rates for most banks are 4 per cent.
Mittal says that rates are kept high for the time being to attract customers. They will fluctuate in accordance with the interest rate regime. Also, there are no charges for paying to merchants through the payments bank account. In the case of cash withdrawal, the customers have to pay 0.65 per cent fee.
While Airtel has taken a lead in launching the first payments bank, it is still clueless on how it plans to make money from the venture.
Mittal says that he is not thinking about break-even period as of now. The Reserve Bank of India (RBI) guidelines mandate that payments bank have to invest at least 75 per cent of their corpus in government securities with maturity of up to one year. The interest rates for those securities are much lower than 7.25 per cent, the interest rate offered by Airtel.
It will have to rely on merchant commissions, customer fees and other income sources to turn profitable. Uday Kotak, managing director of Kotak Mahindra Bank, which is 19.9 per cent shareholder in Airtel payments bank, says that there are plans to look into areas like insurance and mutual funds. He did not divulge more details though.
Airtel has committed an initial investment of Rs 3,000 crore for the business. Given that there are 10 more companies who have got in-principle approval to start payments bank, it's expected that competition will intensify once more companies roll out payments bank services. Last week, Paytm was granted license by the RBI.
Eventually, companies with higher cash resources will drive out others. Players with deep pockets will continue to burn money, and even after doing so, the returns are not assured. The e-commerce and e-wallets sectors have seen similar trends.
In absence of mutual agreement, companies try to outspend each other to gain extra market share. Airtel has got off the ground with unsustainable offers which puts it in a similar perilous spot as online biggies such as Flipkart, Snapdeal and Paytm.