Mobile banking, arriving with a bang

RBI will continue to raise competitive intensity in banking, increasing risks for incumbent banks

Ambit Capital

Incumbent banks have cautiously reacted to new payments bank licences. Payments banks will compete on savings and payments; we believe access to better customer data could also help them milk some income from lenders’ assets business. The key opportunity for new banks is to identify and offer highly relevant products/services to unmet needs in underserved customer segments.

A recent analysis by BCG highlights that a combination of existing financial suppression, expansion of mobile connectivity, financial autonomy and supportive regulatory framework has led to a rapid expansion of digital finance in China. This has forced Chinese banks to react by specialising vertically and/or entering into the turf of e-commerce companies.

In India, the RBI will continue to raise competitive intensity in the banking industry, thereby raising risks for the incumbent banks’ profitability. It is too early to call winners, but a differentiated niche will provide some safety.

Since the RBI, for the first time, laid out its vision in May 2014 on the coming competitive landscape in the banking sector, it has consistently attacked two grand bargains in the banking system by pushing for: (i) PSU bank reforms and (ii) making deposit financing more competitive. Issuance of payments bank licences has hastened the process, with small finance bank licences to be announced soon.

Whilst the extent, timelines and sources (cost of deposits, yields, cost of operations) of pressure on profitability are yet uncertain, we believe these new players would raise competitive intensity in the segment.

In the last two years, the number of transactions through mobile wallets has expanded at a CAGR of 179% to 255m in FY15. The growth in mobile wallet transactions indicates the potential of growth that digital channels can facilitate if the unmet needs of customers are met through targeted products/ services. Payments banks, in our view, would also focus on specific customer needs that are currently underserved by banks.

In the context of issuance of 11 new payments bank licences, we met a few FinTech companies and visited the recently-held Ficci/ IBA conference. Whilst trends in technological innovations are quickly evolving, some widely expected trends are forcing incumbent banks to take note.

Cautious response to new payments bank licences: At the Ficci/IBA event. SBI was the most vocal on the challenges that new payments banks will pose to existing banks; these challenges are: (i) Uncertainty around the unknown disruptive practices of new banks; (ii) Strategy to acquire customers at any cost, facilitated by the large investors willing to ‘burn’ significant amount of capital initially; (iii) Lack of legacy issues at new banks, unlike, for example, existing banks’ asset quality challenges; and (iv) New banks’ agility to use a range of systems and delivery modes.

Origin of m-wallet industry: The origin of the mobile wallet industry in India lies in the prepaid mobile re-charging industry, where B2B and B2C mobile apps replaced the old paper-based prepaid mobile scratch cards. This drastically lowered the cost of distribution. Mobile wallets further evolved into DTH recharging, utilities payment and e-commerce payments. Yet, mobile recharging (estimated to be a $25 bn industry) likely accounts for 50% of mobile wallet transaction in India.

China—According to BCG, in the last 18 months, 18 digital-only banks have been launched in China. Existing banks also face fierce competition from a host of internet companies in all aspects of banking . The drivers of the digital channel for financial services are: (i) pervasive presence of digital channels in all aspects of life (e.g. shopping, eating, communication, entertainment and education); (ii) extent of current financial suppression; (iii) expansion of mobile connectivity to “anywhere and anytime”; (iv) spread of cloud computing and ‘big data’ as facilitators; (v) financial autonomy; and (vi) supportive regulatory framework. The banks have begun to respond by identifying and strengthening their niche in the banking value chain. The Big-4 banks have also entered into online marketplaces.

M-wallets not popular in the West: The Western world’s experience with mobile wallets has not been as successful as has been the case in India. In the West, plastic money was pervasive as a mode of payment due to the penetration of credit cards and point-of-sales (POS) terminals. In India, lack of velocity of transactions has not allowed a wide POS roll-out. Thus, in India, a section of cash economy (used for mobile recharging) moved to mobile wallets, but there was no such opportunity in the West. In that sense, mobile wallets seem to be leap-frogging plastic money and POS network, as mobile telephony earlier did for fixed-line in India.

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