Airtel Payments Bank, a subsidiary of India’s largest telecom service provider Bharti Airtel, started operations in Rajasthan last week and has already got over 20,000 savings accounts.
People can maintain an end-of-the-day balance of up to Rs 1 lakh (the cap is not too low because savings accounts with banks on an average hold Rs 25,000 to Rs 30,000), and Airtel has offered interest of 7.25 per cent — this is significantly higher than what banks offer on savings accounts.
Airtel’s initiative will surely help to get the unbanked into the mainstream. People such as migrant labourers are likely to find it of great use — it can be used to transfer money to any other account in the country.
The company claims it takes less than three minutes to open an account (all one needs to do is show one’s Aadhaar card) and less than a minute to make a deposit or to withdraw money. For Airtel subscribers, the phone number doubles as the account number. Airtel has developed the app in-house and it can even be downloaded on a feature phone.
Airtel has a network of 1.5 million retailers all across the country. Theoretically, it can get all of them into the payments bank network. But that is unlikely to happen. In areas which are fully banked, especially in cities, it would make little sense to start operations. All it takes to convert a retailer into a payments bank outlet is a biometric machine that costs around Rs 1,500 and is provided fully by Airtel.
The tricky issue is this: Under the law, a payments bank is required to invest 75 per cent of its assets in government securities and the remaining 25 per cent in fixed deposits with banks. Will Airtel Payments Bank make enough returns on its investments to make good its promise of 7.25 per cent interest?
On top of the interest, Airtel Payments Bank has offered free accident insurance to all account holders — this cost too has to be factored in. Also, Airtel Payments Bank has to give the retailers a cut out of all the deposits they take and the disbursals they make.
The interest on government securities is around 7.5 per cent, while fixed deposits can earn up to 8.25 per cent. It is reasonable to assume that Airtel Payments Bank’s net interest margin, or the difference between the average cost of funds and the average return, would be thin.
In banking, a net interest margin of three per cent is considered healthy. But it must be said that Airtel Payments Bank will have low overheads because it does not need to invest in branches, ATMs, IT hardware and staff; so, it can make do with a lesser margin. Still, as the payments bank is unlikely to have another source of earning, unlike a bank, Airtel, the parent company, would have earned much more had it put the investment it has made in Airtel Payments Bank in a fixed deposit.
Actually, Airtel is doing this to ring-fence its bread and butter telecom business. Here’s how. Airtel has about 250 million subscribers in the country, and 90 per cent of them use a pre-paid connection. It so happens, such subscribers port the most to another service provider. By building another relationship with them, through the payments bank, Airtel hopes to hold on to such subscribers: One is less likely to switch allegiances if the telecom service provider is also the bank.
This is important because the telecom industry is headed for the final showdown: Three large incumbents (Airtel, Vodafone and Idea Cellular) and one big newcomer (Reliance Jio) are ready to slug it out, while the smaller players are getting marginalised. That Airtel’s revenue market share has touched a seven-year high also shows that subscribers are consolidating behind the large operators.
In the days to come, telecom wars will be fierce. All players have made large investments to acquire spectrum and put in place the network hardware. The incumbents will need to guard their subscribers fiercely. Airtel’s investment in the payments bank needs to be seen in that light.
Also, it opens up new revenue streams for Airtel’s retailers. With the country moving towards universal telecom penetration, because of which new additions are bound to taper, this becomes an important tool to keep the engagement with the retailer going.
While one consequence of Airtel Payments Bank will be better penetration of banking services, it will help Airtel safeguard its interests in telecom. That’s the reason why other telecom service providers too want to get into the payments bank space.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
