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Telecom companies that have applied for payments bank licences are eyeing a sizable chunk of the additional revenue of Rs 14,000 crore from transaction fees, primarily from the remittances and cash-outs and cash-ins un-banked customers undertake on their payments bank accounts. They plan to draw customers in the remittances segment by charging lower fees compared to the current competition, including India Post, as well as informal channels.
Telcos say the additional revenue will be attractive, considering this is seven-eight per cent of the sector's annual revenue of about Rs 1,80,000 crore.
Telcos, including Bharti Airtel, Vodafone India, Idea Cellular and Reliance Industries (which controls Reliance Jio), had applied for payments banking licences on Monday, some along with partners.
These companies say unlike banks, which make money on float (by arbitrage, as these lend money at higher interest than what they pay depositors) and don't charge on transaction services, telcos will charge for services, primarily cash-outs and cash-ins. But some telcos say to attract investors, they will pay high interest on deposits, 7.5-8 per cent, by passing on the entire interest they make on keeping the cash in government securities.
Payments banks, unlike scheduled banks, cannot use the cash to give loans.
Telcos say initially, they are looking at levying a transaction fee of two per cent (for one-way transfers such as remittances) to about three per cent (for two-way transfers) of the value. This, they add, will come down with a rise in transactions. However, the net fee, as percentage of the value of a transaction, will be lower, as such companies have to pay for the cost of cash management (the cost of making cash available at the last mile, for deposits and withdrawals in these accounts).
"Initially, the cost of cash management will be about two per cent if you do both ways (cash-in and cash-out) and one per cent one-way. So, for a telco, the net margin will be one per cent on transactions. As the bank has to fund all its variable costs and fixed costs with this one per cent, the scale becomes important to defray costs," said a senior executive of a telco that has applied for a licence. There are about 180 million un-banked households in India. Telcos estimate each household will put in about Rs 24,000 annually into their payments banks, which means a corpus of Rs 4,32,000 crore.
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But while working on their business models, telcos have assumed each of these households will spend about Rs 18,000 annually, an overall amount of Rs 324,000 a year. It is only on this money that telcos can charge transaction fees. Based on their plan to charge three per cent, their revenue will be stand at about Rs 10,000 crore.
Another area telcos will focus on is fee from remittances. They estimate this to be a Rs 200,000-crore market, half of which is in the informal sector and not being reflected in official numbers (on remittances through India Post, mobile wallets, etc) because of lack of clarity on the definition of migrants. Currently, the average ticket size of a remittance handled by a telco is about Rs 8,000 a year, usually in two transactions. With a two per cent fee on transactions, mobile companies are looking at annual revenue of about Rs 4,000 crore.
Some companies, however, might charge a flat fee of three per cent for both remittance and transactions on deposits, which will boost their revenues. Companies estimate this business will virtually double in the next three to five years.
Telcos say they cannot charge a transaction fee of more than three per cent, as Indian Post, for instance, charges five per cent on two-way transfers, while one of the nationalised banks charges two per cent on one-way transactions (0.5 per cent for in-house customers). "With India Post at five per cent and informal channels charging six per cent, we don't see anyone charging more than three per cent if it wants to build scale," said a senior bank executive.
But what gives telcos an edge in this segment is the sheer reach of mobile services. Telecom companies say as much as 60 per cent of the country's household is banked, and in rural areas, this percentage is only 54 per cent, adding the real number is lower, as 50 per cent of those who have bank accounts do not use those at all. But most of them have mobile phones.
For instance, Bharti Airtel, is present in 50 million villages across the country and cover 87 per cent of the total population.
Importantly, telcos have the cheapest cost of executing transactions, which a bank cannot match. That is because they have the technology and the infrastructure to handle billions of phone calls a year. For instance, a leading telco handles 52 billions transactions (calls) annually, but spends only Rs 1,000 crore on capital expenditure on information technology. This gives them an edge in a business in which transaction costs is key.
It helps telcos if their customers are loyal, especially amid the growing competition. "A consumer who uses voice alone is less sticky than one who also uses data. One who also uses our mobile payment bank services, apart from the other two, will be more loyal to the brand," says a senior executive of a telecom company.
