Recap 2015: Telcos gain a new stream with Payments bank licenses

The opportunity is for real, given that telcos have the reach as well as the scale needed to succeed in this high-volume low-margin game.

As many as 41 players had earlier applied for securing “payments bank” licenses from Reserve Bank of India (RBI). The central bank granted approval to 11 of them while indicating it could be issuing more licenses in future. As of now, entities related to four existing or upcoming telcos have been issued the licenses. These include Airtel, Vodafone, Reliance Jio and Idea Cellular.

According to RBI, a payments bank will initially be restricted to holding a maximum balance of Rs 1 lakh per individual customer; could issue debit and ATM cards but no credit cards, and not undertake any lending activities.

Nevertheless, if operationalized well, the licenses would enable a potentially significant revenue stream for telcos outside of their core telecom businesses. While telcos already offer services like mobile wallets, those are faced with limitations. Most significantly, there has been little incentive for users to keep money in their wallets as there would be no interest earned. On the other hand, providers earn very negligible net income since they have to pay one to two percent of transaction charges to the bank from which the wallet is being recharged, even though they are able to earn a commission of around 1.5 percent on each transaction made by the customer. Add to this the fact that mobile wallet players need to incentivize users through discounts and cashbacks, which further trims down their margins.

Payments bank licenses would enable telcos and their customers to potentially do away with the need to recharge their wallets from a bank account and thus obviate the obligation to pay a commission to the bank. Moreover, the customers could now use the account for a whole lot of banking and financial transactions other than just the wallet, which in turn would incrementally contribute to telcos’ revenues and net incomes.

Also Read: Movers & Shakers of Telecom in 2015