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Payment Banks - Key technology imperatives

 

It was around a year back in the immediate period post the dramatic Demonetization in India that I first felt the need to get a mobile wallet.   Before that, mobile wallets were a mere fancy without the "killer use case".   Demonetization provided that push and there is no looking back for myriad number of mobile wallets since then.   When I last looked, there were at least 20 mainstream wallets with many more in the sidelines.  The next step of evolution for these wallets is the latest move from the Reserve Bank of India (RBI) - Payment Banks.   With the arrival of Payments Banks, wallets have started to lose market share in less than 1 year since they became mainstream (a testament to the rapid evolution in this space). Paytm has evolved by launching a Payments Bank of their own.   

Payments Bank is a new concept which I like to label as a 'mini bank'.   With limitations on deposit amounts and product offering, these banks will have to find revenue streams that mainstream banks may ignore/find too small.  For example, since they cannot issue loans or credit cards, Payment banks will have to monetize their data, bet on huge volume to offset the end user's expectation of 'free' service and depend on selling financial products like insurance, mutual funds and ETFs.    One player in the market has already started pushing for Gold ETFs to be purchased on its platform.

 

The three key levers available for Payments banks are shown below:

Figure 1 Financial imperatives for Payments Banks

 

All these will ride on having a massive user base which would be a given for any successful player in this space.   Given these financial goals, it immediately becomes obvious that these banks will have to deploy innovative technology solutions to survive and flourish.     Let's look at what banks will need in each area:

Monetize Data - Big Data

"Data is the new oil" will soon become the most clich├ęd line.   But innumerable examples show this to be a fundamental feature of our society going forward.   Payments Banks will have at their disposal all kinds of financial data that can be converted to actionable information that will be of great interest to other companies like traditional banks (e.g. credit worthiness/score), online retail (spending pattern), even the government (tax compliance?).   This will require the bank to build robust data platforms that will provide the insights others are interested in.     Big Data and Analytics will be the driving force behind their success in this area.   Efficient data capture that brings in the right attributes will be an obvious need, but even more importantly, ability to rapidly change their systems to adapt to new learnings, needs will be critical.   If they build large, inflexible systems like most large banks have ended up with, they will soon find that they are outflanked by nimble fintech startups.  

High Volume - High Performance

An obvious revenue stream for Payment Banks is to charge something equivalent of the much maligned Merchant Discount Rate (MDR) used by credit card companies.   In the Indian context, small retailers will balk at the 2% -3% fees that are charged as MDR so Payment Banks will need to have a lower rate and couple that with incentives for high volume.  Not having to roll out expensive POS machines and associated costs, is a big positive for Payment Banks.   But they must build robust, scalable payments platforms that function flawlessly.    Any problem will be magnified multifold in today's social media driven environment.   A CRM system that keeps the ever expanding customer base at the core and offers engaging User Experience, deep customer analytics, and enables the bank to offer customized offers to its customers will play a major role in expanding the customer base.   The expanded customer base will mean that the banks that are able to deploy Robotic Process Automation (RPA), AI and bots quickly will be able to achieve profitability faster.

Having a scalable and highly available Cloud based platform will be one way to achieve this.  Services like Performance Engineering offered by FS STAR team and Performance Testing services from IVS can play a key role in helping Payments Banks achieve the scaled up performance.   

Multi Product - Integrate everyday

With the need to cross sell multiple kinds of products like Insurance, Mutual Funds and ETFs, Payment banks need to build interfaces quickly and efficiently into existing marketplaces to provide efficient services to their customers.   While the philosophy of keeping costs low will be a mantra even here, the key would be the ability to integrate rapidly with different partners.   The easier they make it for large established players in the respective areas to integrate with their payment platform, the bigger the portfolio of products they can offer.  

Getting the right SI to build their systems is going to be key for Payment Banks.   Infosys has deep expertise of integrating partner products like GPP, Finastra along with our own Finacle to achieve seamless system build.    For a large bank in Australia, we helped build a complete end to end solution that was the first to integrate with and process under the new National Payments Program (NPP) structure.

To conclude, what are the key imperatives for Payments Banks?  It's all about leveraging technology to the maximum and tapping into nontraditional sources of income.   Sustaining large customer bases on high performing systems, mining data arising from these customers and rapid innovation to offer new products based on the insights gained from the customers.    System integrators like Infosys will play a key role in enabling these banks on these dimensions and it will be an exciting couple of years as the banks innovate and leverage cutting edge technology to achieve their ultimate goal of profitable growth.


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