Payments Banks Banking Sector Report 21052016

Banking Sector Report

Payments Banks (contd...) May 21, 2016 | 0

Banking Sector Report Payments Banks ‐ Changing Indian Payments Landscape

An in‐depth analysis
Sector Report May 21, 2016

Daljeet S. Kohli Banking turf is set to change…

Head of Research

Tel: +91 22 66188826
daljeet.kohli@indianivesh.in As has been evident for the past decade, the Indian consumers have been

increasingly moving online across all age segments with the increasing penetration

of mobile, internet and smartphones across markets. As a result, channel
Kaushal Patel
Research Associate preferences in banking have also shifted significantly among consumers (especially
younger one) towards non branch channels. The banks have also been responding
Tel: +91 22 66188834
to this change with the introduction of e‐banking, enhanced ATM capabilities and
kaushal.patel@indianivesh.in
mobile banking. The good news is that Reserve Bank of India (RBI) is also focused
to bring structural changes in the Indian Banking industry architecture. RBI is likely
to publish vision 2018 document for the "payment and settlement systems in the
country" which will focus on migrating to a “less‐cash” and more digital society.

In addition, RBI had set the ball rolling when they opened the stage with the
intention to hand licenses to new entrants. With the entry of small finance banks
and payments banks that are expected to build new business models based on the
advantage of being new, small, nimble, focused and innovative, the competitive
landscape is set to change. Overall, we are at a turning point for the financial
sector and more specifically banking sector. We are sure, the banking will never
be the same again in the future.

We believe that payments landscape in India is at a point of inflexion and we will
see several important trends shaping India’s payment industry. This report

highlights major trends (especially on payments technology front) that will shape

Indian banking sector over the next four to five years.

Payments Banks (Banking the Unbanked or Signs of a Tsunami?)
• Global Models and Relevance for India
• Viability of Proposed Payments Banks
• Background of Holding Company of Payments Banks
• Future of Mobile Wallet

Future of Universal Banks (Time to Rethink Banking)
• Do brick‐and‐mortar branches have a role to play in the future
of banking?
• Impact of Emergence of Payments Banks on Universal Banks
• Digital strategy of some of the Universal Banks

Banking in India (On the Cusp of Digital Transformation)
• Progress of Indian Banking Industry since independence

• Changing Mode of Banking (From Branch to Online to Digital)

National Payments Corporation of India (NPCI) –Backbone of
India’s Retail Banking

IndiaNivesh Securities Limited|Research Analyst SEBI Registration No. INH000000511
IndiaNivesh Research 601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007. Tel: (022) 66188800
IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.



Contents
1 Payments Banks: (Banking the Unbanked or Signs of a Tsunami?) 3
1.1 Global Models and Relevance for India: (Other Developing Economies as Case Studies) 4
1.1.1 Case Study 1 4
1.1.4 Relevance for India and Future of Payments Banks in India 7
1.2 Viability of Proposed Payments Banks (Survival of the fittest or the strongest) 8
1.3 SWOT Analysis of Payments Banks 9
1.4 Background of Holding Company of Payments Banks 10
1.4.1 Aditya Birla Nuvo Limited (ABNL) 10
1.4.2 Airtel M Commerce Services Limited 11
1.4.3 Cholamandalam Distribution Services Limited 12
1.4.4 Department of Posts 12
1.4.5 FINO Pay Tech Limited (FINO) 13
1.4.6 National Securities Depository Limited (NSDL) 13
1.4.7 Reliance Industries Limited (RIL) 14
1.4.8 Shri Dilip Shantilal Shanghvi, Sun Pharmaceuticals 14
1.4.9 Shri Vijay Shekhar Sharma, Paytm 15
1.4.10 Tech Mahindra Limited 16
1.4.11 Vodafone m‐pesa Limited 17
1.5 Future of Mobile Wallet 18
1.5.1 Categories of Mobile Wallet 18
1.5.2 Unified Payments Interface (UPI) ‐ Terminator or Saviour for Mobile Wallets 20
2 Future of Universal Banks (Time to Rethink Banking) 21
2.1 Do brick‐and‐mortar branches have a role to play in the future of banking? 21
2.2 Impact of Emergence of Payments Banks on Universal Banks 24
2.3 Digital strategy of some of the Universal Banks 27
2.3.1 Axis Bank 27
2.3.2 HDFC Bank 28
2.3.2 ICICI Bank 29
2.3.2 DCB Bank 30
2.3.2 State Bank of India (SBI) 31
3 Progression of Banking in India (On the Cusp of Digital Transformation) 32
3.1 Structure of the Indian Banking Industry 32
3.2 Current Status of Scheduled Commercial Banks (SCBs) 33
3.3 Changing Mode of Banking (From Branch to Online to Digital) 34
3.3.1 Branch Banking 34
3.3.2 Online Banking 35
3.3.3 Digital Banking 36
3.3.4 Mobile Banking 36
3.3.5 Social Media Banking 37
4 National Payments Corporation of India (NPCI) –Backbone of India’s Retail Banking 39
4.1 Immediate Payment Service (IMPS): (fulfilling demands of having immediate access to funds) 39
4.2 *99#: (An idea which can change rural banking in India) 41
4.3 Unified Payment Interface (UPI): (next big hurricane in the payment system) 42
4.4 National Automated Clearing House (NACH): (Super Highway for Financial Institutions) 43



Payments Banks: (Banking the Unbanked or Signs of a Tsunami?)
While credit is a critical need of all sectors, payments and savings are also central to an
efficient system. One of the big concerns over the last few years has been the fall in financial
savings. There is a need to increase it and bring more people to save in the formal banking
and financial system. For that, a robust financial system is required which fosters enough
competition and also allows variety of participants to fulfil increasing complex needs of the
Indian economy. RBI’s recent announcement of allowing payments banks was a welcome
move as it may allow access of financial services to the unbanked population with last mile
connectivity in rural areas where physical access is difficult. Importantly, increasing banking
access will increase the productivity in the economy, which will start reflecting in the GDP
growth of the country. Overall, payments banks have potential to bring about another
revolution in the banking sector and economy as a whole.

Source: RBI, IndiaNivesh Research



Global Models and Relevance for India: (Other Developing Economies as
Case Studies)
As almost all the telecom players in India have received the payments banks license, a study
of telecom companies which already provide similar (payments or mobile money) kind of
services in other developing economies will give us a better insight to understand the future
A study on other developing
of payments banks in India.
economies may give a better
insight on future of payments While most consumers in developing countries still prefer to transact in cash, increasing
banks in India ubiquity of smartphones in these regions has led more consumers to conduct financial
transactions and shopping‐related activities on their mobile devices. Surprisingly, mobile
payment penetration rates remain much higher in developing countries than in developed
countries. So, why developing countries are catching the mobile banking concept much
faster than developed nations? The widespread adoption of mobile phones has enabled
some of the poorest economies on earth to leapfrog ahead of developed nations when it
comes to tech‐driven financial solutions. As mobile phones are often the only technology
available, especially in rural places or isolated areas where it is hard to find power lines,
fixed‐line telecom infrastructure, personal computers or bank branches, mobile banking is
the only option available to them to access banking services. It is quite visible from the fact
that there were more mobile money accounts than bank accounts in Kenya, Madagascar,
Tanzania and Uganda.

Mobile money is now available in 93 countries.
51 of 93 countries have an enabling regulatory framework in 2015.
Overview of
Mobile At least 19 markets have more mobile money accounts than bank accounts.
Money
Industry 37 markets have 10x more registered agents than bank branches.
Mobile money providers are processing an average of 33 mn transactions a day.

Source: GSMA, IndiaNivesh Research

Case Study 1:
M‐Pesa in Kenya: (Mobile Banking Revolution)
The future of money is already happening in Kenya where a mobile phone‐based payment
system was born out of necessity. A majority of Kenyans didn’t have a bank account, and
bank branches were scarce, especially in rural areas. City workers used to find it difficult to
M‐Pesa in Kenya ‐ A mobile send money home to their rural families. Safaricom, the country's largest provider of
phone‐based payment system cellphone service, found a way to solve this problem. Eight out of Ten Kenyans had access to
which born out of necessity a cell phone, so Safaricom launched M‐PESA in 2007, a system of transferring money
between people on cell phones, even the most rudimentary ones. According to a Kenyan
government report published in 2012, just five years after launch, there were 19.5 mn
mobile money users in Kenya (representing 83% of Kenya’s adult population), transferring
USD ~8.0 bn per year (~24% of Kenyan GDP).

So, how exactly does it work?
It allows Kenyans to store and transfer their money using only a cell phone. Funds can be
exchanged over the network using SMS messages, meaning it works on almost any mobile
phone. M‐PESA agents spread throughout the country allow users to convert their credit to
cash and deposit or withdraw from their accounts. These agents are not employed by
Safaricom, but are simply retailers / regular businessmen and women that are ‘authorized’ to
trade e‐cash for real cash and in return they receive little commission. The actual cash is
securely held in a trust owned by Vodafone and distributed to several commercial banks.



Financials:
In FY15, revenue from M‐Pesa increased 15% y‐o‐y and hit a high of Sh (Kenyan shilling) 32.6
bn which was 20% of the company's total revenue which helped Safaricom to report a record
Sh 31.9 bn profit after tax (at consolidated level) in FY15 and became the most profitable
company in East and Central Africa.

Case Study 2:
Easypaisa in Pakistan: (Mobile Money Sprinter)
With a population of 180 mn and only 15% bank penetration in 2008, Pakistan presented an
attractive market opportunity for mobile money. Easypaisa seized this opportunity by
Easypaisa in Pakistan ‐ A great creating an innovative partnership, a new delivery approach, and an effective distribution
example of success with unique
model. Easypaisa, a mobile money service was launched in Pakistan in 2009. Within five
corporate structure
years, Easypaisa had processed more than 100 mn transactions with a total value of over
USD 1.4 bn. Six million customers can do almost all their banking on the mobile devices. In
addition, If they need assistance, they can go to one of 25,000 Easypaisa shops in 750 cities
and towns across the country.

Important innovations:
Three important mobile money innovations emerge from the Easypaisa story. (1) Easypaisa
was launched from a unique corporate structure. Telenor Pakistan, a mobile network
operator (MNO) acquired 51% ownership stake in Tameer Bank, a microfinance bank, and
then established Easypaisa as a common organization across the two companies. (2) Telenor
Pakistan and Tameer Bank introduced over‐the‐counter (OTC) mobile money services – an
entirely new model that did not require registration for an electronic wallet as many of the
users are not familiar with technology. (3) Easypaisa achieved rapid national expansion by
relying exclusively on its existing GSM distribution structure. The responsibilities were also
clearly divided between the two. Telenor Pakistan decided to take the lead on branding,
marketing, and distribution while Tameer Bank led direct operations, risk management,
compliance, and liquidity management.

Financials:
Tameeer Micro Finance Bank achieved monthly breakeven for the operations under the
brand "Easypaisa" during Q1FY13 and the bank had already identified branchless banking as
an important way to grow their services.

M‐Pesa (Kenya) Easypaisa (Pakistan)
• Success Metrics • Success Metrics
•19.5 mn mobile money users • Over 5 mn monthly users and
(83% of Kenya’s adult 25,000 agents
population) in Kenya in 2012 • USD 1.4 bn cumulative
•USD 8.0 bn cumulative throughput
throughput
• Innovations • Innovations
•Store and transfer their money • Unique corporate structure
using SMS messages • OTC transactions allow non
•Simply retailers / regular Telenor customers to access
businessmen and women as M‐ service
Pesa agents

Source: GSMA, IndiaNivesh Research



Case Study 3:
South Africa: (A Failure Story So Far)
As per GSMA Mobile Economy Africa 2015 report, Mobile money penetration in South Africa
is still lagging behind most prominent African markets. Only 7.6% of adults in the country
reportedly had a registered mobile money account by the end of 2014, putting it at the
M‐Pesa and Mobile Money in bottom four among 18 top countries in Africa. There are only 76 registered accounts for
South Africa ‐ A similar product every 1,000 adults in the country. A number of attempts to launch mobile payments
and strategy across different solutions have failed which includes Vodacom’s M‐Pesa and MTN Banking's MTN Mobile
markets don't bring success Money. MTN Banking is a joint venture between mobile operator MTN and Standard Bank.
Under MTN MobileMoney, only 1.6 mn people were registered users whereas under M‐Pesa,
only 1.0 mn people were registered users as of FY15 in a country with a total population of
55 mn.

Reasons behind the flop show:
During the course of its relaunch attempts, Vodacom has marketed the platform differently:
First as a mobile money solution. Then as a mobile money wallet, which allows customers to
store their money safely and finally at last year’s relaunch, as a platform that allows user to
swipe and buy with a Visa card linked to user’s mobile phone. It is a clear example
highlighting the fact that you cannot replicate the same strategy in different market to enjoy
similar success.
In addition, South Africa has a more developed banking market as compared to other African
nations like Kenya and Tanzania. Local banks have already increased their share of low‐
income customers by opening up‐level bank branches and banking kiosks in remote areas,
bringing banking services closer to where people live. South Africa's financial system also
provides a number of options other than M‐Pesa for its unbanked population.



…Relevance for India and Future of Payments Banks in India
So, will the Indian telecom operators who received payments banks licenses are in a position
to enjoy success similar to M‐Pesa in Kenya? We believe that it will depend on two
fundamental challenges that must be resolved in order to sustain and later become
successful in mobile payments. (1) It has to make sense to the poor to use the service and (2)
It has to make sense to service providers to offer the service.
It sounds difficult when it comes to execution but the first two success stories we discussed
above have demonstrated that both challenges can be addressed simultaneously. So, rather
than competing with crowded financial services space in urban areas of India, it would be
prudent for payments banks to focus more on vast sections of unbanked population. In
Mobile or technology will be
addition, analyzing the most successful mobile payment system in the world reveals that the
only enabler
use of the mobile platform was clearly an important enabler of its rapid success. So, it is

important to remember that technology will only play a roll of enabler and putting together
Products or services and prices
will be the actual drivers the right package of features and prices will be the actual drivers of success. Overall, M‐Pesa
was an African innovation to solve an African problem. In a similar way, considering India's
Of payments banks demographic and cultural diversity, our institutions will have to create a product which
meets specific need and purpose of our underserved population. Remember, M‐Pesa has
been labelled a failure in South Africa and India so far.
To conclude, the old banking model with expensive branches and extensive infrastructure is
no longer viable within low‐income communities but for payments banks on mobile it can
still be a profitable market segment. However, the profitability will be highly sensitive to
transaction volumes and gaining critical mass of customers as they will have to live with
very thin margins (<1.0%). A number of elements need to be in place for a payments bank to
become a sprinter, including (1) designing the right products (innovation is important
element to change the Indian customer’s mentality of “Cash is King”), (2) Patient capital and
adequate levels of investment, (3) strong marketing, and (4) well‐managed distribution
networks.
Payments Banks ‐ High Volume
Low Value Business Model Payments Banks have great potential to become profitable but only in the long term as
profitability will be directly linked to economy of scale. Considering all the above factors, we
expect some consolidation in this space as many of the entities will go out of the business
and only selective players with enough financial muscle, latest technology and large
customer base will survive in the long term. Notably, one of the eleven players has already
decided to abandon its plans to set up a payments bank considering competition and long
gestation period to become profitable. Hence strong corporate commitment and faith in
payments bank’s future profitability will be essential factors required from the promoters.



Viability of Proposed Payments Banks (Survival of the fittest or the strongest):
In addition to all the above concerns, the payments banks will also have to face tough
competition from existing players like PSBs, private sector banks, RRBs and other NBFCs. If
we assume the success of payments banks concept then the next most important question
comes to our mind is that who will survive as payments banks out of these 11 players. One
of the companies, Cholamandalam has already exited from the race.

We believe that players like Airtel and Idea (telecom operators with large customer base),
FINO (the largest business correspondents company) and PayTm (with base of the largest
digital wallet users) will have an added advantage and higher probability to succeed over
the other payments banks players considering their large existing customer base strength
into their respective field.
Airtel
Idea
FINO Vodafone (the second largest telecom operator in terms of user base) has experience of m‐
PayTm pesa but it has not tasted success of it in India yet. However, it can use its previous
experience and learning to ride the journey of success under the new venture of payments
bank.

A payments bank from Reliance will be a wait and watch event as it has not yet launched its

digital services (Reliance Jio) in India. Notably, the payments bank from Reliance will leverage
Vodafone mainly on its telecom business’s (Reliance Jio) pan‐India network. Reliance has invested Rs
Reliance 1.5 tn in Reliance Jio which is the biggest‐ever for any digital startup globally. Therefore,
Reliance can be the biggest disruptor in the future in this space considering the past
experience of the group.

What about players like NSDL, Shree Dilip (Sun Pharma) and Tech Mahindra? We believe
that it will be very difficult for these players to survive in the long term until and unless they
come out with some real innovative products and different strategy.
NSDL

Dilip Shangvi
Tech Mahindra At last, the most important player of payments bank will be the Departments of Post (India
India Post Post) which has all the required ingredients to transform the payments and financial
inclusion space in India. However, considering the previous experience of PSBs, we don’t
expect it to be the game changer at least in near to medium term.

Overall, companies which already have an access to the last‐mile customer like top telecom
companies will definitely have an advantage over other players as building such a large
network will be a challenging task. However, right technology and financial strength of the
group will also be equally important considering thin margins and long gestation period. So,
it will not be the case of survival of the fittest only but also survival of the strongest.

In the following pages, we have discussed in detail about the above entities and their
existing offerings of products and services on payments side (if any).



SWOT Analysis of Payments Banks:

Strengths Weaknesses
• Innovative business models • Loss of business due to
• Nationwide and last mile poor network / internet
coverage • Lack of awarensess among
• Large existing customer people on latest
base technology and products /
• Anywhere anytime banking services
• Lower servicing and • Low margin business
customer acquisition cost • Limited products offering
• Financial inclusion • Security concerns

Source: IndiaNivesh Research
Oppertunities Challenges
• Immense potential for • Intense competition to
market expansion in rural lower profits
areas • Cash dominated economy
• Greater innovation will • Technology inexperience
help to produce and offer and literacy constraints will
unique products and lead to lower acceptance
services of technology
• Technology to help to offer • Lack of awarness
right product to right • Low customer loyalty
customer at a right time
• Regulatory restrictions




1. Aditya Birla Nuvo Limited (ABNL)
Structure: RBI has given an in‐principle approval to Aditya Birla Nuvo Ltd (ABNL) for setting
Background of Holding up a Payments Bank as promoter. The proposed Payments Bank incorporated as Aditya Birla
Company of Payments Idea Payments Bank Ltd will be 51:49 Joint Venture (JV) between ABNL and Idea Cellular.
Banks
Background: There are ~175 mn Idea Cellular subscribers in the country as of February 2016.
The Aditya Birla Group has about Rs 2.0 tn in assets across its mutual fund and insurance
businesses. In addition, Birla Sun Life Mutual Fund is India’s fourth‐biggest money manager.
The Aditya Birla Group also runs a brokerage and a private equity business.
Future Strategy: The payments bank will be launched by H2CY16. The payments bank will
promote range of services including opening of savings bank account, domestic remittances,
merchant payments etc. and tying up with third parties for offering range of credit,
investment & insurance products.

Existing Payment Product: Idea Money Wallet
Idea Money is an RBI authorized payment wallet service and offers a semi‐closed wallet.

Product Features:
 Recharge any Mobile, datacard & DTH number (all operators)
 Pay electricity, water, gas, postpaid, landline bills
 Transfer money to any idea wallet instantly
 Transfer money to any bank account number instantly
 Shop for the merchants listed online
 24*7 customer care facility on mail & phone

Source: Company, IndiaNivesh Research



2. Airtel M Commerce Services Limited
Structure: Airtel’s mobile commerce subsidiary Airtel M Commerce Service Ltd (AMSL) has
received a payments bank license from RBI. Kotak Mahindra Bank (KMB) has already bought
19.9% stake in Airtel’s mobile commerce subsidiary AMSL for Rs 984 mn.
Background: Bharti Airtel Ltd is the largest mobile network operator in India and the third
largest in the world in terms of subscribers. There are ~249 mn Airtel Cellular subscribers in
the country as of February 2016. KMB is the fourth largest private sector bank in India by
market capitalization. Airtel money posted a net profit of Rs 45 mn in FY15 as compared to a
loss of Rs 1.1 bn in FY14.
Future Strategy: Bharti Airtel plans to roll out its payments bank network in H2FY17 under
the name of Airtel Payments Bank Ltd (earlier known as Airtel M‐Commerce Services Ltd).
Airtel aims to leverage its existing subscriber network and vast distribution network for its
payments bank operations. Airtel already offers financial services including money transfers
and semi‐closed wallet service in about 800 towns in the country under its subsidiary of
Airtel M‐Commerce Services.

Existing Payment Product: Airtel Money
Airtel Money is an RBI authorized payment service and offers a semi‐closed wallet.

Product Features:
 Recharge ANY mobile, DTH or Datacard (all operators are supported)
 Pay Electricity, Water, Gas, Postpaid, Landline and Data Card bills
 Instantly transfer money to any bank account in India (using IMPS technology) or to any
Airtel Money user
 Pay at shops, restaurants or any other merchants that accept Airtel Money
 Request money from your contacts
 Find Airtel Money points near you




3. Cholamandalam Distribution Services Limited
*Cholamandalam Investment and Finance Company has decided to abandon its plans to set
up a payments bank considering competition and other factors including long gestation
period to become profitable.

4. Department of Posts
Structure: India Post has received approval from RBI for payments banks. About 40
international financial conglomerates including World Bank, Barclays and ICICI have shown
interest to partner with the Postal Department for the payments bank.
Background: The Department of Posts, trading as India Post, is a government‐operated
postal system in India. The department has 1,55,015 post offices across the country, of which
1,39,144 are in rural areas. India Post has already been active in the deposit‐taking activity
through its various savings schemes. As of FY14, the outstanding balances under the post
office savings scheme stood at Rs 6.05 tn, which is nearly equivalent to half the deposits of
SBI.
Future Strategy: The Payments Bank from India Post is expected to start operations by
March 2017. The bank will also set up white labelled ATMs. We believe that India Post may
bring the biggest revolution to the banking sector given the fact that it is present in many far‐
flung areas where even PSBs do not have branches.

Existing Products: Post Office Savings Schemes, Postal Life Insurance, Forex Services,
Distribution of Mutual Funds and Securities, Jansuraksha Scheme




5. FINO Pay Tech Limited (FINO)
Structure: Fino Pay Tech Ltd (FINO) has received “in principle” license from RBI to start a
payments bank. ICICI Bank will partner FINO to foray into the payments bank space. The ICICI
Group has about 16% stake in FINO and is the largest domestic shareholder.
Background: FINO PayTech (India’s largest business correspondent) is a business and banking
technology platform combined with extensive services delivery channel which plays a key
role in developing branchless banking infrastructure in India. It is promoted and owned by
various public and private financial institutions. FINO generated an annual turnover of Rs 3
bn in FY15 and 33% of the revenues came from remittance and micro lending businesses and
the rest by selling banking products to its customers. At present, FINO has about 45,000
transaction points (agents) spread across 26+ states in close to 500 districts across India. The
firm has a customer base of 80+ mn, which are mostly migrants, small‐business owners, daily
wagers, low and middle‐income households and in some cases, old‐age pensioners. FINO has
opened more than 50 mn new bank accounts (as a banks’ business correspondent) for other
banks. FINO has developed an in‐house, low‐cost technology solution for customer
acquisition, servicing and monitoring.
Future Strategy: The payments bank is expected to be operational before the end of CY16.
Fino has appointed KPMG as consultant to advice it on converting to a payments bank and
IFC CGAP for ‘strategic inputs in niche areas. In addition, Fino PayTech Ltd has tied up with
Reliance Commercial Finance Ltd (NBFC subsidiary of Anil Ambani‐led Reliance Capital Ltd) to
provide credit to rural poor in the states of Maharashtra and Madhya Pradesh.

Existing Payment Product: Fino Money

Product Features:
 Money transfer, Insurance
 Prepaid recharges, Utility bill payments
 Ticketing (Air / Bus / Train), Hotel booking and holiday packages
 Cash Management Services (CMS)

6. National Securities Depository Limited (NSDL)
Structure: RBI has granted in‐principle nod to National Securities Depository Ltd (NSDL) for
payments bank. IDBI Bank has approached the NSDL to buy a stake in the payments bank.
IDBI Bank is one of the promoters of NSDL and holds 30% in the largest depository.
Background: NSDL is India’s first and largest depository, which handles most of the securities
held and settled electronically in the country’s capital market. It is promoted by IDBI Bank,
the Unit Trust of India and the National Stock Exchange. At least eleven public and private
bankers own stakes in NSDL. NSDL held 15 mn demat accounts as of FY16.
Future Strategy: NSDL is planning to launch a payments bank by the end of CY16. NSDL may
tap its 26,765 DP service centres spread across 1,632 cities / towns to open Saving Bank
Accounts. NSDL provides permanent account numbers (PAN) and enrolls individuals for the
implementation of the Aadhaar project and maintains a repository of IT professionals. NSDL
plans to leverage on these database to offer banking services when its starts the bank.



7. Reliance Industries Limited (RIL)
Structure: Reliance Industries Ltd (RIL) has received an in‐principle approval of RBI to set up a
payments bank. RIL has entered into a partnership with State Bank of India (SBI) for
payments banks. While RIL is the promoter, SBI will be the joint venture partner with equity
investment of 30%. It will help to create the most extensive distribution network in India.
Future Strategy: The Payments Bank from RIL is expected to start operations by the end of
CY16. The payments bank will leverage its telecom business Reliance Jio’s pan India network
and Reliance retail’s online and offline business model. Reliance Jio has laid more than
0.25mn kilometres of fiber‐optic cables, covering 18,000 cities and over 0.10mn villages, with
the aim of covering 100% of the nation’s population by 2018. RIL is planning to launch
JioMoney which will be a prepaid payment instrument to facilitate cashless payments across
multiple‐use cases and build India’s largest digital merchant network.

8. Shri Dilip Shantilal Shanghvi, Sun Pharmaceuticals
Structure: Shri Dilip Shantilal Shanghvi of Sun Pharmaceuticals has received RBI’s approval to
set up the payments bank. Sun Telenor Payment Bank is a new partnership between Shri
Dilip Shanghvi of Sun Pharmaceuticals; Telenor and IDFC Bank. Dilip Shanghvi holds 41%
stake in the partnership with Telenor holding 39% and IDFC the rest 20%.
Background: There are ~52 mn Telenor Cellular subscribers in the country as of February
2016. (Notably, Telenor and Tameer Microfinance Bank have together set up the largest
branchless banking service in Pakistan.) IDFC Bank started its banking operations as on
October 01, 2015 with a balance sheet of Rs 734.5 bn and a networth of Rs 133.2 bn. Shri
Dilip Shanghvi is an Indian businessman and one of the richest persons in India and the
founder and managing director of Sun Pharmaceuticals.
Future Strategy: Telenor plans to start payments bank in CY16. It will start with some basic
services like bill payments.



9. Shri Vijay Shekhar Sharma, Paytm
Structure: Vijay Shekhar Sharma, founder and chief executive of One97 Communication that
runs Paytm, is one of the two individuals who got permission to start payments bank from
RBI.
Background: Paytm was founded by Vijay Shekhar Sharma in 2010 and is owned and
operated by One 97 Communications Ltd. It offers a mobile commerce platform that enables
the users to do mobile recharge, pay bills and shop at the mobile marketplace. Most
importantly, Paytm Wallet has crossed 100 mn digital wallet users in India. The company
claimed to have 50,000 merchants on the platform and processing over 75 mn orders a
month as of October 2015. The company reported revenue of Rs 3.4 bn (+60% y‐o‐y) in FY15
with a loss of Rs 3.4 bn. The company reported a profit of Rs 60 mn in FY14.
Future Strategy: PayTm is likely to launch its payments bank in Q2FY17. The payments
business will be separated from the e‐commerce wing, and will be called Paytm Payment
Bank Ltd. Considering the company’s aggressive footprint in the digital wallet with the
highest number of users in India, we believe that Paytm can emerge as a disruptor in
Payments banks space.

Existing Payment Product: Paytm Wallet
Paytm wallet is an RBI authorized payment wallet service and offers a semi‐closed wallet.

Product Features:
 Transfer money to your friend’s wallets
 Transfer money from your Paytm Wallet to a Bank Account
 Request money from anyone
 Get discounts from over 5000 deals across 100+ cities
 Every time you transfer or receive money, the transaction becomes a part of a chat
conversation
 See all your transactions at one place
 Save credit or debit cards that you use to make a purchase or payment




10. Tech Mahindra Limited
Structure: Tech Mahindra has received RBI’s nod to set up payments bank. The bank will be
an independent unit under the Mahindra Group led by Tech Mahindra (IT firm) and
Mahindra Finance (rural NBFC) as equal contributors.
Background: Mahindra Finance has over 3.7 mn customers spread over 260,000 villages and
has an AUM of over USD 5 bn. Most of the Company’s customers are outside the ambit of
the formal financial system and are served by pan India network of over 1100 branches. Tech
Mahindra has over two decades of experience in offering innovative solutions for Retail
Banking, Lending and Leasing, Cards, Asset and Wealth Management, Investment Banks,
Stock Exchanges and Life / Non‐life Insurance.
Future Strategy: The payments bank would possibly start from September 2016. It will
leverage Mahindra Finance’s large rural distribution network. The company is planning to
reach out to a million vendors and target as many as 150‐200 mn customers over the next
five years.

Existing Payment Product: mobomoney
Mobomoney is a prepaid wallet issued in the form of an App and/or a tag and offers a semi‐
closed wallet. It can be used to tap and pay on a network of NFC enabled merchant PoS
(Point of Sale).

Product Features:
 Over the counter payments
 Mobile and DTH recharges
 Utilities bill payments
 Online payment for a host of products and services




11. Vodafone m‐pesa Limited
Structure: Vodafone has received payments bank license from RBI. Vodafone has issued an
open mandate to bankers to find the best partner for its payments bank as the foreign
holding in payments bank cannot be more than 74%.
Background: There are ~197 mn Vodafone Cellular subscribers in the country as of February
2016. The company has a presence in 1.8 mn multi‐brand outlets across India apart from its
98,000 Vodafone stores and 90,000 M‐Pesa outlet. M‐pesa has 5 mn customers.
Future Strategy: Vodafone will leverage its wide telecom distribution network for the
success of its payments bank. Vodafone will use its 98,000 stores as bank branches where
consumers can deposit money into accounts, receive cash against digital money received on
their phones and get access to other products like loans and insurance.

Existing Payment Products: Vodafone m‐pesa and Vodafone Wallet
Vodafone m‐pesa is a RBI authorized payment service and offers an open wallet. Vodafone
wallet is an RBI authorized payment wallet service and offers a semi‐closed wallet.

Product Features: Vodafone m‐pesa
 Recharge any prepaid number (Vodafone and other operators)
 Recharge a DTH connection (TataSky, Airtel, Dish TV, Sun Direct, Videocon & Big TV)
 Recharge a Broadband connection
 Recharge a Post‐paid Vodafone number
 Pay your Utility Bills
 Online shopping
 Instant Transfer to any bank account/ m‐pesa wallet




Future of Mobile Wallet:
As majority of the payments bank candidates have already introduced mobile wallet or e‐
wallet, it is important to understand the present and future of mobile wallet or e‐wallet
when NPCI is all set to launch UPI in 2016 which will dramatically change the Indian payment
system. (We have already discussed UPI in detail earlier in the report). Before we go into
discussion on future of mobile wallet, it would be better to get basic idea on mobile wallet.
The mobile wallet (also known as m‐wallet, digital wallet, or e‐wallet) is a type of payment
service through which businesses and individuals can receive and send money via mobile
devices. As per RBI, mobile wallets can be divided into 3 different categories. (i) Closed
wallets, (ii) Semi‐closed wallets and (iii) Open wallets.

(i) Closed Wallets:
Closed mobile wallets can be used only for that particular company (or online merchant)
goods and services. No redemption or cash withdrawal is possible with such wallets. For
example, makemytrip wallet

(ii) Semi‐closed Wallets:
Semi‐closed wallets also do not allow redemption or cash withdrawal but they can be
used to transact for goods and services (inclusive of financial services) at several different
merchant locations that have the required tie‐up (contract) with the wallet issuing
company to accept payments. For example, paytm

(iii) Open Wallets:
Open Wallets are those that allow redemption as well as cash withdrawals (from
automated teller machines / business correspondents) in addition to the other features
offered by semi‐closed ones. For example, m‐pesa

The distribution of the mobile wallet ecosystem in India

Source: TechInAsia, IndiaNivesh Research (Above image doesn’t cover all the active wallets in India.)



Growth in m‐Wallet Transactions
200 600.0
501.5
500.0
150 160
400.0
100 255.0 300.0

82
200.0
50 107.5
32.7 100.0
29
0 10 0.0
FY13 FY14 FY15 FY16*
Volume (No Mn) ‐ RHS Value (Rs bn) ‐ LHS

Source: RBI, IndiaNivesh Research; *Till Jan ‘16

Though on a small base, both volume and value of transactions per month through wallets
have increased to almost double in February 2016.

Total Volume of m‐Wallet transactions per month Total Value of m‐Wallet transactions per month

February, 2016 181.2
February, 2016 26.2
January, 2016 174.0
January, 2016 24.5
December, 2015 159.1
December, 2015 24.2
November, 2015 145.3
November, 2015 20.4
October, 2015 143.9
October, 2015 20.9
September, 2015 126.6
September, 2015 19.0
August, 2015 124.8
August, 2015 17.8
July, 2015 116.4
July, 2015 16.6
June, 2015 107.9
June, 2015 14.8
May, 2015 110.2
May, 2015 14.6
April, 2015 105.5
April, 2015 13.5
March, 2015 97.9
March, 2015 13.1
0.0 50.0 100.0 150.0 200.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0
Volume (No Mn) Value (Rs bn)

Source: RBI, IndiaNivesh Research Source: RBI, IndiaNivesh Research



Unified Payments Interface (UPI) ‐ Terminator or Saviour for Mobile Wallets:
Although, there are over 150 mn users who have their mobile wallets, there are hardly any
Majority wallets in India are avenues of usage mainly due to integration issue of mobile wallets as a mode of payment.
semi‐closed where redemption There are limited numbers of merchants who allow the use of mobile wallets today. Most of
or cash withdrawal is not the usage has come only from a few large merchants. In addition, majority wallets in India
allowed are semi‐closed where redemption or cash withdrawal is not allowed. Therefore, cash is still
used extensively by retailers and merchants to accept payments and cash on delivery is still
very popular in ecommerce.
Till now, the major advantage of using mobile wallet was a more convenient option for
making online payments as compared to mobile banking services of leading banks. For
mobile wallet users, they are not required to enter their personal details like account details,
security pins etc when they make payment through wallet. In a mobile banking, customers
Future of mobile wallets is
have to manage multiple log‐ins, various on‐boarding procedures and allied infrastructure if
questioned under the shadow
of UPI they are to use online payment option available to them on mobile banking. However, once
UPI is fully implemented then it will allow customers to make payments across banks by
using a single identifier and without having to enter other multiple details. Multiple bank
accounts can also be linked via UPI as well. So, the future of mobile wallets is questioned
nowadays under the shadow of UPI. (UPI is a payment mechanism under which all the banks
will be linked and this will enable seamless money transfer between these linked banks with
single identifier to do any transaction.)

Our View:
We believe that UPI will be beneficial to mobile wallet companies also. In an initial stage, UPI
will be enabled only for banks and in a next move, rest of the payments services providers
will be covered under UPI. As a result, the integration issue of mobile wallets as a mode of
payment will vanish and the user will be able to use multiple e‐wallets seamlessly as they will
become inter‐operable with the introduction of UPI. UPI can also reduce cash loading cost of
mobile wallet companies by more than 50% as it will reduce dependence on the payment
gateway platform. In addition, the mobile wallets are active not only because of convenience
With UPI, user will be able to but also because of discounting, valued‐added services and other features they offer. Mobile
use multiple e‐wallets
wallet companies are not watching all the developments silently but they are also going to
seamlessly
respond aggressively with their offerings. Some of the mobile wallet companies are planning
to launch micro‐credit program where an eligible user will get the small loan instantly
credited to his/her wallet. As per current regulations, mobile wallet companies are not
allowed to lend. Therefore, they are in discussion with commercial banks and NBFCs to roll
out this service. We believe that, mobile wallets won’t just be about mobile payments in the
future but they would become a complete bouquet of financial services which will fulfil all
financial needs of the customer.
Overall, we believe that UPI will act as a saviour for mobile wallets and not as a terminator.
But UPI to act as a saviour for
So, mobile wallets are here to stay and grow. Of course, with increasing and intensifying
mobile wallets
competition, many of the mobile wallet players will not be able to sail through and survive in
future and we may see some consolidation in the crowded e‐Wallet market.



Future of Universal Banks (Time to Rethink Banking)
The banking landscape has changed and is changing still. Existing Universal Banks have been
facing disruption from multiple directions. The advent of digital technology and, more

Advent of technology has been importantly, its adoption by customers is changing the fundamentals of the banking
changing the fundamentals of business. In addition, entry of differentiated banks, regulatory requirements, demographics
the banking business and economics are also creating an imperative to change. Considering the rapid scale of
disruptions, many of the universal banks can lose their market share significantly over next
three to five years.

Despite of all the above mentioned facts, we believe that universal banks have a future but
Future of universal banks
for only those who are ready to innovate and transform themselves to prepare for the
depend on their ability to
future. Universal Banks will have to invest huge sum of money for technology upgradation,
innovate and transform
themselves with time product innovation, portfolio diversification and fine pricing policy to maintain their market
share and profitability. Existing universal banks ought to embrace innovation and learn to
compete in new ways and also have to shift their operating philosophy from a product‐
oriented organization to a customer‐driven organization.
Changing philosophy to a Overall, the forecast for the future is always complex but one thing is sure that banks will
customer‐focus from a
definitely look very different in the future. Here, we have tried to analyse the possible impact
product‐focus
of technological innovation and entry of payments banks on functioning and business of

universal banks in the future.

Do brick‐and‐mortar branches have a role to play in the future of banking?
With the introduction of internet, mobile devices, smartphones, tablets and social media,
branch banking has been facing competition like never before. Digital Technologies are
taking consumer banking to a new level. Non‐traditional players are challenging the
established order, leading with customer‐centric innovation. At the same time, customers
Digital Technologies are taking
are demanding higher levels of service and value. Clearly, the trend is moving towards digital
consumer banking to a new
banking. At a similar time when the RBI has granted in‐principle approval to 11 players to
level
start payments banks, it brings us to the most important question. Do brick‐and‐mortar
branches have a role to play in the future of banking? Here, we have tried to answer this
question in a brief. It is very important to understand this as all our existing SCBs have relied
heavily on branch banking till recently.

Branch Visits on the Decline…

Basic banking services shifting When it comes to basic banking services like depositing, transferring or withdrawing money,
to digital platforms from bank branches are no longer the go‐to option. For that, customers are increasingly using
branches digital channels to meet their basic banking needs which reduce branch visits of the
customers.

…Physical Branch still Matters:
In India, consumers still value a physical presence. Digital mode of banking is more
convenient to customer for basic banking services but for any other complex financial need
Even today, physical branches the customer still likes to visit branch personally. In addition, in a country like India where
are considered as a symbol of cash is still dominating among all modes of payments, physical reality provides a sense of
trust in India safety. Physical branches are also a symbol of trust. So, the physical contact is necessary and
we believe that it is also one of the reasons behind slow digital adoption by bank customers
in India.

However, the branch banking model is definitely on the cusp of change and physical
branches will be of a different kind in the future than what we see today. These branch
formats will vary not only in the breadth of services provided, but also in the level of



customer intimacy achieved and the complexity of advice provided. So, less transactional
work will be performed by personal bankers in favour of high‐value sales and financial
advice. As a result, the branch banking model will shift to more of customer centric rather
than product centric.

Our View:
One thing is also clear that bank branches are here to stay at least in the foreseeable future.
So, traditional branch banking will not die but they will probably undergo a through
transformation. We believe that digital branches with human touch are the future of branch
Branch banking model is on the banking considering the fast adoption of technology even in smaller towns and cities. In
cusp of change addition, the digital branches will not only be convenient for the consumers but are also
helpful for the banks as they provide tremendous advantages in terms of costs, productivity
and efficiency. We believe that technology, innovation and channel integration will play a key
role in re‐engineering and re‐energizing the branch as one of the preferred mode of banking.
So, digital branches will be an important element of the banks’ future branch strategy.

Overall, the only thing that is constant is change and the fact is that bank customers have
changed. So, it's the industry's turn now. The harsh reality is that branches of the most of the
banks (especially PSBs) in India have not kept up with the times. So, it’s high time for the
But physical can co‐exist with banks to re‐work on their traditional bank branching strategies and come up with innovative
digital and technologies ways to improve services. We believe that bank branches are required to transform into
digital branches to survive and flourish. Digital Banking is not just hype about the next big
thing in the market but it is a necessary part of the bank’s future agenda as a way to
overcome outdated approaches and mismanaged client relationships.

To summarize, we believe that physical can co‐exist with digital and technologies will
A future is of smaller and fewer accelerate branch transformation (from brick and mortar to self‐service branch) but not
but smart branches make them extinct. So, we don’t envision a branchless future but a future with smaller and
fewer but smart branches.

Redesigning the Branch Strategy: (Some Examples)
Some of the banks in India have already started reworking on their branch strategy in the last
couple of years. Sensing the change in the air, many of the banks are coming with their
revised branch banking strategy. A few examples are listed below:

State Bank of India (SBI):
 In Touch Branches: SBI In Touch is fully digitalized branch (24*7) with user friendly
facilities to open accounts, deposit cash, passbook printing machine, ATM, sourcing of
loan applications and internet banking hut. SBI has 101 SBI In Touch branches as of FY16.



Bank of Baroda (BOB):
E‐Lobby branches: BOB introduced new generation branches called E‐LOBBY branches
equipped to provide 24*7 access to banking facilities such as Cash Withdrawal, Cash Deposit,
Cheque Deposit, Pass Book Printing, Internet Banking. These facilities are available through
automatic machines with minimum human intervention. BOB has 151 E‐Lobby branches as of
FY16.

ICICI Bank:
 Touch Banking branches: ICICI Bank was the first bank in the country with 100 digital
‘Touch Banking’ branches across 33 cities, available 24x7, on all days.
 InstaBanking self‐service kiosks and Self‐service kiosks for accepting cash: These allow
quick access to transactions like view & print of bank statements, balance enquiry,
updation of contact details, and opening of fixed deposits among others.



Impact of Emergence of Payments Banks on Universal Banks:
The banking sector in India has seen so far only one category of SCBs which is the universal
Payments landscape in India is bank which carries out the complete range of banking activities, including borrowing,
set to change lending, investments, and to all categories of clients. However, as a revolutionary step in the
Indian banking space, RBI announced the first set of differentiated bank licences to 11
applicants to set up payments banks. The payments banks will carry out limited banking
activities like deposits and payments services with certain regulatory restrictions.
We believe that the payments landscape in India is set to change dramatically with the
introduction of payments banks and their possible impacts on business of existing universal
banks (albeit in a longer term). Though the main objective behind the concept of payments
banks is to further financial inclusion, we believe that the payments banks will also eat into
some of the businesses (liabilities side) of universal banks. Here, we have analysed the
possible impacts on existing universal banks once the payments banks start functioning in
the market.

Threat on CASA Deposits:
Payments Banks will definitely eat into some of the low‐cost savings deposits base of SCBs.
Most of the Payments Banks have a huge customer base and infrastructure to leverage
which they can utilize to attract customers to use their deposit products. Many individual
Payments Banks to eat into
some of the low‐cost savings customers are likely to shift a part of their liquid cash for day‐to‐day transactions from their
deposits base of universal savings accounts to those at payments banks. Notably, the payments banks will be able to
banks offer interest on deposits which was not possible for them till now. (However, the maximum
deposit in a payments bank account cannot exceed Rs 0.1 mn per customer.) Importantly, it
will hardly affect traditional customers who have current accounts or those who are looking
for loans as payments banks will not be allowed to offer loans to its customers. So, we
believe there could be more impact on small and medium PSBs (Corporation Bank, Vijaya
Bank and Punjab & Sind Bank) as well as old small private sector banks (Lakshmi Vilas Bank,
City Union Bank and South Indian Bank) considering their ongoing struggle with CASA
mobilization and major presence in the semi‐urban and rural areas.

Interest Rates Offering on CASA to Increase:
The players entering in the payments banks space are already large corporates with great
financial muscles. So, they will not be entering just to further financial inclusion in the
economy but also to increase their clientele base aggressively in the initial phase. As a result,
we believe that they will start offering competitive deposit rates of as high as 5%‐7% to lure
customers as compared to an average of 4% savings deposits rate offered by most of the
existing SCBs. This may force the other banks to increase their interest rate offerings on
Competition to intensify and savings deposits.
interest rate to increase on
small savings deposits In past, some of the private sector banks started offering higher interest rate on savings bank
deposits but that move was limited to number of banks only as other large banks were
reluctant to offer higher interest rate to their customers. The major rational behind that was
limited presence and customer base of the banks who were offering higher interest rate.
However, considering the large scale of payments banks and also their nature of business
(high volume and low value), we believe that they can intensify the competition on small
savings deposits. Again, it will have more negative impact on small and medium PSBs
(Corporation Bank, Indian Overseas Bank, Vijaya Bank, United Bank of India and Punjab &
Sind Bank) as their cost of fund is already high as compared to their peers and any further
increase will erode their margin further.



Minimum Balance Requirements on CASA to Come Down:
Every bank has different limits for minimum balance maintenance. Almost all the private
banks have set the minimum balance limit at Rs 10,000/‐ for metro and urban area while in
rural and semi rural area it is Rs 5,000/‐. However, minimum balance for PSBs is far less.
Almost all the PSBs have set the minimum balance limit of Rs 1,000/‐ for metro and urban
area while Rs 500/‐ for rural and semi rural area. We believe that minimum balance
requirement from payments banks will be far lesser than existing limit of other universal
Payments banks to introduce banks. The payments banks may also introduce deposits account without any minimum
deposits account without any balance criteria but having features which may incentivize the customers to maintain more
minimum balance criteria balance in the deposits accounts. (However, the payments banks cannot hold a balance of
more than Rs 0.1 mn per individual customer on any day). As a result, we may see lots of
innovation in this (CASA) products segment. Looking at payments banks large scale of
operation and customer reach, we believe that minimum balance requirements to come
down drastically especially in rural and semi rural area. It will have an adverse impact mainly
on small private sector banks considering their major presence in the semi urban areas.

DBS Bank has already set the While writing this report, DBS bank (foreign bank), sensing the need of the hour, has
example launched a mobile‐only bank to expand its retail customer base. The bank will be offering
7% p.a. interest rate with no minimum balance required on a savings account and also free
cash withdrawal across all ATMs. So, the battle has already begun.

Increase in Competition for Fee Income:
Fee income will be an important source of income for the payments banks. So, payments
banks will focus more on fee income from payments services like making demand drafts,
cash transfers, remittances, cash withdrawal through cheques, ATM transaction fees etc. and
Payments banks can deprive from transaction services like payment of utility bills, mobile recharge, remittances, ticketing
universal bank on the fee etc. The existing universal banks already offer similar services but they charge heavily for
income these basic services. The payments banks are likely to charge lower fees as compared to
SCBs. In addition, universal banks focus always remain more on fee income from corporate
and retail advances. Overall, we believe that payments banks can deprive regular banks of
the fee income they earn from customers.

Reducing Share of Government Banking Business:
Payment banks can also transform the direct benefit transfer schemes (DBT) of the
Payment banks can transform government. The subsidy payments to the poor can now be routed through theses payment
the direct benefit transfer banks as payments banks can reach the last mile beyond SCBs reach. As a result, there will be
schemes (DBT) of the tough competition for the government banking business and PSBs will be the biggest looser
government in this space considering the fact that currently they have higher share of government
businesses.

Our View:
While payments banks would be a boon to banks with limited reach, it may impact some
public sector banks’ market share (especially small and mid‐size PSBs) significantly in the long
run. With the entry of payments banks, existing universal banks will have to face stiff
competition in respect of technology, products and pricing. In addition, we may possibly see
Payment banks to impact the emergence of highly varied financial products which will be tailored to meet specific needs of
most to small and mid‐size the customers in the retail as well as corporate segments.
PSBs and least to large size
private sector banks The impact on the private sector banks will be minimal as many of them have already made
strong investments in technology and they are better equipped to face the next set of
challenges. (In following pages, we have discussed the digital strategy of some of the top
SCBs in detail). Also some of the private sector banks like Kotak Mahindra Bank Ltd (Airtel)
and ICICI Bank Ltd (FINO) have already tied up with some of the companies that have
received approval for setting up payments banks and hence will not be affected that much.



Large PSB like SBI (Reliance) also has already tied up and others are likely to tie up with
entities that have received payments bank licence.
However, as far as PSBs are concerned, we believe that PSBs will have tough time as
payments banks can increase their headache further in the future. The major threat will be
to small and med size PSBs as they have been already facing tough challenges on multiple
fronts like poor capital adequacy, excessive burdened of costs, old technology, ill HR policies
etc. In addition, these banks have been facing challenges of NPAs and further stress on their
asset qualities. However, payments banks will not have to deal with this issue as they are not
allowed to enter into lending activities. (This limitation can prove to be advantageous also).
As a result, they can divert their energy more onto mobilization of deposits. Therefore, at a
time when PSBs have been facing tough time on their asset side, the introduction of
payments banks will add difficulty on their liability side as well. In any case, many of them are
already like in ICU on a ventilator and have survived mainly due to capital infusion from the
government. So, future of small and medium size PSBs remains skeptical. (We have not
pointed out specific names of small and mid‐size PSBs which can have the highest negative
impact as all the banks in this space are largely facing the similar kind of problems. So, we
believe that they all are going to face almost equal amount of threat from the payments
banks).
Overall, it seems that payments banks will definitely disrupt the entire banking space in the
long term. However, we believe that private sector banks may see minimal impact of it and
smaller and mid‐size PSBs may see the highest impact with the dawn of payments banks.



Axis Bank (Focusing on Hyper Personalization)
Digital strategy of Top Private Axis Bank is making steady strides in the direction of digital banking. The bank is retooling its
Sector Banks* core to cope up with the demands of the new age customer. It's building a culture of
experimentation for digital initiatives. Axis Bank has been on the forefront of leveraging
*Digital banking is an exceptionally dynamic and technology to bring about a large scale transformation as the bank has not only focused on
fast‐moving market. Therefore, it is possible,
indeed likely, that many of the banks may have providing a seamless customer experience through mobile and Internet but also redesigned
launched new features or, indeed, new apps while
the present report was being written. Presented
most of its core processes at the back‐end leading to reduction in errors, turnaround‐time
below is a snapshot and should not be interpreted and cost.
as a long‐term assessment of the efficacy of an
individual bank’s digital banking strategies or Overall, Axis bank has end‐to‐end digital agenda for the future as it is going digital in the
execution.
areas of customer engagement, sales, operations, customer acquisition, and employee
engagement.
Axis Bank’s Digital Offerings:
Retail Offerings Corporate Offerings
> Axis Mobile > Tab Banking
> Ping Pay > Pay Connect
> Lime > Trade Connect
> Services for feature > Fx Connect
phone base
> Corporate Internet
> Internet Banking 2.0 Banking
Self Service Channel Driving Productivity
> Cash Deposit Machines > RM Tab App
> Sales Force Tracker > Branch Analytics
> Express Branches > Collections App
> Speed Banking Kisoks > TxB CRM App
> Insta Auto Loan > BDE Mobile App

Growth in Retail Transactions Channel Mix of Retail Transactions
40 37 Branch
13%
30
20 16
10
1 Digital
ATM
0 51%
36%
Digital ATM Branch Total
‐10 ‐5
Y‐o‐Y (%)

Source: Company, IndiaNivesh Research Source: Company, IndiaNivesh Research
Trends in Mobile Banking Spends (Rs bn)
Rs bn
2,500
2,086
2,000 1,760
1,500
1,057
1,000 630
492
348
500
‐
Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16




HDFC Bank (Marching Towards Complete Digital Brand)
HDFC bank is now a full service digital bank and offer all its products and services via digital.
As a part of the bank's larger digital strategy the bank have introduced products and
offerings such as Instant Accounts, One‐Click payments, One‐Click shopping, 10‐second
loans, Quick investments ‐ all of which are digitally accessible. HDFC Bank's digital strategy is
based around comprehensiveness, convenience and quick turn‐around times. Interestingly,
the bank has also recently released a musical logo (MOGO) that is being used across multiple
touch points such as ATM's, phone banking and app. The bank has in‐house analytical teams
that plan campaign in a relevant and timely manner also reach out its customers via
behavioural targeting.

HDFC Bank’s Digital Offerings:
Mobile Banking App: HDFC Bank has a mobile banking app which allows customers to fund
transfers, bill payments, ordering cheque books, statements and loans and much more.
PayZapp: HDFC Bank launched Payzapp which is a complete payment solution available to
customers of all banks, giving customer the power to pay in just One Click. It allows
customers to shop on their mobile at partner apps, buy movie tickets, music and groceries,
compare and book flight tickets and hotels, shop online and get great discounts at SmartBuy,
send money to anyone in your contact list, pay bills and recharge your mobile, DTH and data
card. The customers are just required to ink their Debit and Credit Card to PayZapp.
Chillr: HDFC Bank also launched Chillr App for money transfer to friends, family and
merchants, recharge, utility payments and banking along with tracking all expenses. It is
available exclusively for customers of HDFC Bank.
10‐second loans: The bank provides loans in 10 seconds (the fastest in the world) to select
pre approved customers of HDFC Bank. It is available 24*7 through net banking. In addition,
the bank also introduced products like QuickMoney (paperless top‐up car loan), ZipDrive
(instant car loan), QuickPaisa (top‐up two wheeler loan) and ZipRide (instant two‐wheeler
loan) under its digital banking strategy.

Digital Strategy of HDFC Bank:
Comprehensive set of
Allowing
transactions,
customers to End‐to‐end service
recommendations
deal on channel platforms
through analytics, digital
of choice
forms / applications
Acquisition to on‐ Higher engagement
boarding to activation Life cycle based / retention,
to servicing to cross‐ approach better relationship
sell management
Seamless, straight Greater Faster turn‐around‐

through customer time,
convenience /
interactions delight lower costs
Innovative solutions Enriched,
for banking / enhanced Higher stickiness,
customer advocacy
payment needs experience




ICICI Bank (Ahead of the Curve)
ICICI Bank has always been a pioneer in bringing technology‐enabled products & services to
customers. The bank has been an early adopter in areas like internet banking, mobile
banking, tab banking, fully automated 24X7 touch banking, banking on Twitter, and Pockets
(digital wallet) among others. ICICI Bank’s digital strategy is based on three key pillars—
digital, mobile and social. With more customers getting access to digital options over 60% of
total transactions by savings account customers through new age digital channels. ICICI Bank
monitors and generates online feedback and reviews, responds to customer complaints,
resolves queries, takes corrective action on incorrect information and uses online feedback
to guide improvements in product development for enhancing customer experience. The
bank is also focusing on analytics across areas to improve productivity & efficiency.

ICICI Bank’s Digital Offerings:
ICICI Mobile Banking – iMobile: iMobile provides various services such as transfer funds,
open FDs, RDs or iWish deposits, pay bills, check balances and transactions and much more.
iMobile allows customers to link and view all their ICICI Bank relationships (accounts /
mortgages / cards / PPF) from within the app. It has close to 150 banking and informational
services and claims to be the most comprehensive and secure mobile banking application.
Pockets: It’s a VISA‐powered wallet that customer of any bank can use to recharge mobile,
send money, shop anywhere, pay bills and much more. Pockets wallet also comes with a
physical shopping card which can be used to shop on any website or retail stores. With
Pockets, the customer can transfer money not only to bank accounts, mobile number, email
id, Whatsapp contacts, Google+ or Facebook ID but even tap and pay your friends.
Interestingly, ~60% of total downloads were from non‐ICICI bank users (as of Q2FY16).
ICICI iBizz Corporate MBanking: iBizz is ICICI Bank's official mobile banking application for
corporate customers. iBizz lets the customer to inquire online balances, last 10 transactions
on linked operative accounts, details of Deposits & Loan accounts and approve financial
transactions like fund transfers while on the go.
ICICI Bank Money2India: ICICI Bank Ltd has the Money2India app for users in the US to remit
to India using Facebook contacts. The customers can use the App to track exchange rates in
real time through the Exchange Rate Calculator and to lock the rate at the initiation stage
with Fixed Rupee Transfer facility. Registered users can initiate new transfer requests and
track their status on the go. New users from USA can simply download the app, register and
initiate money transfer requests.

Digital Strategy of ICICI Bank:
Leadership in Technology
Digitizing channels Digitizing experience Digitizing core
Internet Automation Front Office
Apps Payments Mid Office
Social Inclusion Back Office




DCB Bank (Small but Adaptive)
DCB Bank Ltd has launched multiple digital products for retail customers either
Digital strategy of Small Private independently or with financial technology start‐ups to keep pace with the evolving banking
Sector Bank* and payments space.

*Digital banking is an exceptionally dynamic and
fast‐moving market. Therefore, it is possible, indeed
likely, that many of the banks may have launched
new features or, indeed, new apps while the present
DCB Bank’s Digital Offerings:
report was being written. Presented below is a Zippi: Zippi allows you to open a fixed deposit (FD) online without having a savings account.
snapshot and should not be interpreted as a long‐
term assessment of the efficacy of an individual You can transfer money to the FD through Net banking or by cheque.
bank’s digital banking strategies or execution.
On the go: On the go app allows you to do basic banking such as transfer funds, create FDs,
manage accounts, stop cheques and track loans.
Mobile Passbook: The Mobile Passbook app can track transactions in savings accounts,
current accounts and FDs.
Mobile wallet service YAP: DCB Bank and M2P, a digital payment solutions company, have
jointly launched a new platform YAP for wallet services. The Bank's digital wallet can be
embedded into any website or mobile application.
Mobile based collections system: The bank has operationlised mobile based collections
system, which enables the field collection team to bring in efficiency. Besides, the system
cuts down the risks associated with float money and fraudulent transactions.
Digital Lead Management System: “e‐DSR allows the bank’s salesforce to log in and handle
leads on a day to day basis with a built‐in reminder and escalation mechanism. The app
allows the field sales staff to keep tab of their daily activities, generate reports and upload
them real time.
Digital Loan Process: DCB Bank implemented Nucleus Software’s FinnOne Neo to digitize its
loan application process for auto and commercial vehicle business lines.

DCB Bank’s Four Pillars of Digital Agenda:
Core Applications
Mobile / Tab
continuously
create customer
upgrade business
convenience by
applications to
optimum use of
support digital
mobile devices
transformation
Infrastructure
Payments
innovative modernize to
solutions which is support business
dynamic, secure growth in a cost
and fast effective and
secure manner




State Bank of India (Digital by 2020)
Digital strategy of Top Public
State Bank of India (SBI) wants to bring its 447 mn customer‐base on mobile banking and
Sector Bank* digital wallet platforms as part of the 2020 digital transformation strategy. The strategy
involves digitizing processes, implementing green banking and upgrading to offer speedy
*Digital banking is an exceptionally dynamic and
fast‐moving market. Therefore, it is possible, indeed services to customers. Under the new initiative, the bank would focus on more digital
likely, that many of the banks may have launched branches like InTouch and InTouch Light branches and e‐corners at existing branches. These
new features or, indeed, new apps while the present
report was being written. Presented below is a digital outlets offer multiple services like instant account opening, instant issuance of debit
snapshot and should not be interpreted as a long‐
term assessment of the efficacy of an individual
card, live interaction with experts, opportunity to buy financial products and home loans
bank’s digital banking strategies or execution. under a single roof.

SBI’s Digital Offerings:
State Bank Anywhere: It is SBI’s retail internet banking based applications for retail
customers. It allows users to access all the basic banking activities like funds transfer, credit
card transfer, IMPS transfer, cheque book request, transaction inquiry, bill payments, fixed
deposit, recurring deposit, recharges etc.
State Bank Buddy: It is the first Indian Mobile Wallet Application available in 13 Languages. It
comes with several features like Send money to registered and new users, Ask money and
Send reminders to settle dues, transfer additional cash into an account of your choice free of
cost, Recharge and Pay Bills instantly, Book for movie tickets, flights and hotel and shop for
your favourite merchandise. The bank has 2.7 mn Buddy customers. The bank is also
planning to link Buddy with the business correspondents (BCs) so that people in rural areas
can also load and withdraw cash from customer service points.
State Bank Anywhere Saral and State Bank Anywhere Corporate: It is SBI’s corporate
internet banking based applications for Business entities. It allows users to access all the
basic banking activities like fund transfer, EPF payment, bill payment, fixed deposit, etc.
SBI Exclusif: The bank launched this app for its State Bank Exclusif Customers (Wealth
Management Customers). The app allows users to compare its current and model portfolio
allocation, view its holdings across asset classes, get reports on holdings, transactions,
realized gain / loss and view the latest news feeds that impact investments and the
economy.
Instant Vehicle Financing: The bank has partnered Uber (world's largest on‐demand
transport aggregation company) to provide vehicle finance for driver‐partners on its
platform. The loans will be sanctioned instantly using an inbuilt digital offering.

Trends in Mobile Banking Transactions Volume (mn) Trends in Internet Banking Transactions Volume (mn)
mn mn
120 1,000 890

96
100 800
630
80
54 600 450
60
38 400
40
20 200
‐ ‐
Q3FY14 Q3FY15 Q3FY16 Q3FY14 Q3FY15 Q3FY16

Source: Company, IndiaNivesh Research Source: Company, IndiaNivesh Research



Progression of Banking in India (On the Cusp of Digital Transformation)
We are at a turning point for the financial sector and more specifically banking sector.
Considering the key role of banking sector in the economy, it is important to understand how
the banking scenario will be shaped in India over the next 5 to 7 years. However, before we
peep into the future, let’s have a look on a brief history of banking in India. The story of
banking starts from Bank of Hindustan which was established in 1770 and it was the first
bank at Calcutta under European management. From Bank of Hindustan in 1770, the entire
evolution of banking in India can be classified into four distinct phases.

 Phase I ‐ Pre‐Nationalisation Phase (prior to 1955)
 Phase II ‐ Era of Nationalisation and Consolidation (1955‐1990)
 Phase III ‐ Introduction of Indian Financial & Banking Sector Reforms and Partial
Liberalisation (1990‐2004)
 Phase IV ‐ Period of Increased Liberalisation (2004 onwards)
 Phase V ‐ Era of Public Sector Banks Consolidation (probably next phase)

In a nutshell, the Indian banking industry has evolved and transformed itself from a socialist
licensed raj business to a liberalized, modernized & technology oriented business.

Structure of the Indian Banking Industry
Currently, the Indian banking industry has a diverse structure. The key feature that
distinguished the Indian banking sector from the banking sectors in many other countries
was the fostering of different types of institutions that catered to the divergent banking
needs of various sectors of the economy. However, it is changing as a variety of participants
(small finance banks and payments banks) have been permitted to enter to meet increasing
complex needs of the growing economy.

Current Structure of the Indian Banking Industry
RBI
Scheduled Unscheduled
Banks Banks
Commercial Cooperative
Banks Banks
Public Sector Private Sector Foreign Banks Regional Rural Urban Co‐ Rural Co‐

Others
Banks (27) Banks (21) (46) Banks (56) operative operative
Payments Small Finance
Banks (11) Banks (10)




Scheduled Commercial Banks (SCBs):
Within Scheduled Commercial Banks (SCBs), Public sector banks (PSBs) accounted for bulk of
the branches in India (68.8% as of FY15) and business accounted for 72.3% of the total
business of all SCBs. So, it is still the government led banks which are dominating the banking
business in India.

Business Share of SCBs
Branches Deposits Advances Business
FY15 Number % of total Rs Bn % of total Rs Bn % of total Rs Bn % of total
SBI & Associates (A) 23,947 18.4 19,552 21.9 14,809 21.5 34,361 21.7
Nationalized Banks (B) 65,764 50.4 45,473 51.0 34,474 50.1 79,947 50.6
Public Sector Banks (A+B) 89,711 68.8 65,025 72.9 49,283 71.6 1,14,308 72.3
Private Sector Banks 20,434 15.7 17,573 19.7 14,334 20.8 31,907 20.2
Foreign Banks 332 0.3 3,944 4.4 3,355 4.9 7,299 4.6
Regional Rural Banks 20,005 15.3 2,679 3.0 1,812 2.6 4,491 2.8
All SCBs 1,30,482 100.0 89,221 100.0 68,785 100.0 1,58,006 100.0

Banking in India is moderately consolidated, with the top 10 players accounting for
approximately 63% of the total industry. Overall, India has a large bank‐dominated financial
system.

Business Share of Different Categories of SCBs Business Share of Leading SCBs
Foreign Banks Regional Rural
5% Banks
3%
Private Sector Others SBI & Associates

Banks 37% 22%
20% BOB
Public Sector
Banks 7%
72%
BOI
UBI 6%
4%
PNB
Axis Bank 5%
4% ICICI Bank Can Bank HDFC Bank
5% 5% 5%
Source: RBI, IndiaNivesh Research; As of FY15 Source: RBI, IndiaNivesh Research; As of FY15



Changing Mode of Banking (From Branch to Online to Digital):
The Indian banking industry has gone through a series of transformations which started with
branch banking (paper banking) to core banking technologies to internet banking, mobile
banking etc. Now, the digital revolution is upon us in its full form. Technology, digitisation,
social media and mobility are changing our personal lives in a big way and also the banking
the way we used to do. The banks have also been responding to this change with the
introduction of e‐banking, enhanced ATM capabilities, mobile banking and social banking. It
has a strong impact on the physical branches in removing a large share of transactional
processes from the branches and also discouraging customers from visiting branch. We
expect the Indian banking industry to invest significant amount in technology innovation to
drive next generation of banking. Engaging the customer through the most relevant channels
will be a key to maximizing customer value and creating revenue streams for banks.

Branch Banking:
Despite the latest developments, branch banking has still a lot of importance in India as it
makes banking possible for people living in rural and remote areas. In addition, RBI is keen to
improve the banking situation in rural areas and has mandated banks to allocate at least 25%
of new branches in unbanked rural centers. As a result, the number of bank branches in rural
and semi‐urban areas has been growing at a faster pace. 66% of ~52,000 branches opened in
last seven years were in rural and semi‐urban regions. The following table shows the growth
of the branches in the country in last seven years.
Area‐Wise No. of Branches of SCBs:
FY Rural Semi‐urban Urban Metropolitan Total
FY09 31,489 18,764 15,325 13,478 79,056
FY10 32,289 20,358 16,653 14,697 83,997
FY11 33,325 22,419 17,706 15,660 89,110
FY12 35,364 25,076 18,541 17,078 96,059
FY13 38,451 27,822 20,127 18,247 1,04,647
FY14 43,641 30,926 21,783 19,472 1,15,822
FY15 48,033 33,523 23,522 20,785 1,25,863
Q1FY16* 49,181 35,259 24,608 21,650 1,30,698

No. of Branches of Different Categories of SCBs:
FY PSBs Pvt Sec Foreign RRBs Total
FY09 57,970 9,327 299 15,477 83,073
FY10 62,092 10,562 314 15,782 88,750
FY11 65,972 12,143 322 16,307 94,744
FY12 71,315 14,066 327 17,192 1,02,900
FY13 76,416 16,158 339 18,117 1,11,030
FY14 84,297 18,650 325 19,209 1,22,481
FY15 89,902 20,565 332 20,143 1,30,942
Q1FY16* 90,294 20,716 333 20,246 1,31,589

However, with consumers increasingly using mobile phones and the internet for banking
services, major banks are reducing the size of new branches. So, we believe that smaller and
low cost but technologically equipped branches will be the next mantra of branch banking.



Online Banking:
Though cheque used to be the dominant mode of payment, the value of cheque‐based
transactions has been on a gradual decline since FY08. Thanks to RBI’s proactive approach to
create and push electronic payment systems. After the introduction of the Payments and
Settlement Systems Act in 2007, the focus on digital proposition led to market and regulatory
developments that have actively sought to change consumer behavior with respect to
payments. As a result, paper‐based payments accounted for only 6.0% of total retail
transactions in terms of volume in FY15 as compared to 78.9% in FY07 whereas it accounted
for only 10.5% of total retail transactions in terms of value in FY15 as compared to 28.9% in
FY07. RTGS transactions continued to grow, with a CAGR of 20.1% in volume and 16.9% in
value over FY12‐15. The retail electronic segment registered a robust CAGR growth of 48.8%
in volume and 47.0% in value over FY12‐15. Cards volume and value transactions grew at a
CAGR of 13.7% and 17.9%, respectively over FY12‐15.

Trends in Retail Transactions Value (Rs bn)
Value (Rs bn) CAGR (%)
Payment System
FY12 FY13 FY14 FY15 FY16* FY12‐15
RTGS 3,95,245 5,12,998 5,73,614 6,31,051 5,56,742 16.9
Paper Clearing 1,64,105 1,57,686 1,24,259 87,410 67,757 ‐18.9
Retail Electronic Clearing 20,575 31,881 47,856 65,366 71,529 47.0
Cards 31,020 37,275 44,319 50,831 48,751 17.9
Prepaid Payment Instruments (PPIs) 0 79 81 213 380 NA
Source: RBI, IndiaNivesh Research; *Till Jan '16

Trends in Retail Transactions Volume (mn)
volume (mn) CAGR (%)
Payment System
FY12 FY13 FY14 FY15 FY16* FY12‐15
Cards 11,463 12,797 14,438 16,848 16,530 13.7
Retail Electronic Clearing 512 694 1,108 1,687 2,505 48.8
Paper Clearing 2,277 2,137 1,697 1,220 911 ‐18.8
Prepaid Payment Instruments (PPIs) 0 67 134 314 611 NA
RTGS 51 64 76 88 77 20.1

Trends in Average Value of Retail Transactions (Rs)
Average Value Per Transaction (Rs)
Payment System (Rs)
FY12 FY13 FY14 FY15 FY16*
RTGS 77,46,854 80,16,844 75,12,954 71,39,391 72,67,221
Paper Clearing 72,078 73,789 73,206 71,675 74,415
Retail Electronic Clearing 40,154 45,934 43,179 38,736 28,549
Cards 2,706 2,913 3,070 3,017 2,949
Prepaid Payment Instruments (PPIs) 0 1,184 606 679 623



Trends in Retail Transactions Volume (%) Trends in Retail Transactions Value (Rs bn)
0.4 0.1
100% 3.0 100% 5.1 5.0 5.6 6.1 6.5
9.7 6.0 4.4 3.4 4.3
15.9 13.6 6.1
90% 8.4 90% 7.8 9.6
4.4 6.3 12.1
80% 3.6 80% 21.3 15.7 10.5 9.1
26.9
70% 70%
60% 60%
50% 50%
40% 80.1 81.2 82.7 83.6 80.1 40% 72.6 75.6 74.7
64.7 69.3
30% 30%
20% 20%
10% 10%
0% 0%
FY12 FY13 FY14 FY15 FY16* FY12 FY13 FY14 FY15 FY16*
% of total retail transactions volume % of total retail transactions value
Cards Retail Electronic Clearing Paper Clearing Prepaid Payment Instruments (PPIs) RTGS RTGS Paper Clearing Retail Electronic Clearing Cards Prepaid Payment Instruments (PPIs)
Source: RBI, IndiaNivesh Research; *Till Jan '16 Source: RBI, IndiaNivesh Research; *Till Jan '16

Digital Banking:
“Digital” is the new buzz word in the banking sector. So, what is digital banking? We define it
as banking that relies only on technology and mobile (or any other electronic) devices. Both
individual and corporate customers have been rapidly adopting digital and mobile banking.
According to E&Y’s survey, customers from India are the world’s heaviest users of these
digital channels. We believe that digitization will change the traditional retail‐banking
business model radically. So, Banks will have to embrace technology innovation, realign their
business models and develop new sources of competitive advantage by harnessing digital
technologies to remain in the business over the next five years.

Mobile Banking:
Most banks are investing heavily in mobile technology and mobile is already the largest
banking channel for some of the new private sector banks by (retail) volume of transactions
and it’s growing rapidly. According to market research firm, (eMarketer) India will have the
largest mobile phone user base at 145.9 mn by CY17. With such a large base of mobile phone
users, the use of a mobile as a platform for electronic payments can create a meaningful
dent in a tremendously cash‐intensive economy. However, lack of awareness as well as
standardization of procedures has led to a situation of slow pick‐up of mobile banking
services despite the high mobile density in the country.

Growth in Mobile Transactions
3,500 350.0
295.3
3,000 300.0
2,500 2,928 250.0
2,000 171.9 200.0
1,500 150.0
94.7
1,000 1,035 100.0
53.3
500 25.6 50.0
18 60 224
0 0.0




Total Volume of Mobile Transactions per Month Total Value of Mobile Transactions per Month
January, 2016 42.8 January, 2016 464.7
December, 2015 39.5 December, 2015 490.3
November, 2015 40.5 November, 2015 334.7
October, 2015 40.5 October, 2015 334.7
September, 2015 32.5 September, 2015 305.7
August, 2015 27.1 August, 2015 269.6
July, 2015 25.0 July, 2015 235.7
June, 2015 21.8 June, 2015 221.2
May, 2015 21.4 May, 2015 199.2
April, 2015 19.8 April, 2015 188.6
March, 2015 19.7 March, 2015 168.9
February, 2015 18.5 February, 2015 148.9
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 0.0 100.0 200.0 300.0 400.0 500.0 600.0
Source: RBI, IndiaNivesh Research; *Till Jan '16 Source: RBI, IndiaNivesh Research; *Till Jan '16

Social Media Banking:

Social media is another buzzword in the banking sector. With the increasing popularity of
social media platforms such as facebook, youtube and twitter, India is witnessing significant
uptick in the number of people using these platforms as part of their daily routine. As more
and more people utilize social media, customers increasingly expect banks to offer services
via these platforms. Social media is now an important channel for banks to acquire, engage,
cross‐sell and retain customers as it enhances user experience in retail banking. Banks are
using the platform, not just to promote their products, and improve their branding, but also
to resolve customer queries, make important announcements and offer money transfer
facilities. Every major Indian bank already has a Facebook page and a Twitter handle to use
social media as a platform to connect with customers. Indian banks are coming aggressively
on social media with technology innovation which is quite visible from their presence in top
global rankings of banks using social media.

Top 15 Banks across the Globe Using Social Media
Facebook Twitter YouTube
Rank* Bank Area Likes Followers Views
1 Bank of America USA 21,25,297 3,90,000 2,40,13,839
2 Wells Fargo USA 7,59,570 1,48,000 3,81,55,820
3 Capital One USA 33,46,969 1,11,000 1,53,88,939
4 ICICI India 34,66,261 26,900 40,48,417
5 Citi USA 10,28,692 4,09,000 1,75,72,835
6 TD Bank USA 5,49,662 72,500 2,82,03,223
7 Axis India 30,42,213 22,200 43,97,542
8 Chase USA 26,84,593 32,500 58,02,600
9 GT Bank Nigeria 24,11,033 2,41,000 3,23,193
10 State Bank of India India 17,20,405 1,13,000 3,17,089
11 Yes India 14,98,604 3,27,000 67,219
12 HDFC India 22,41,329 33,100 11,63,802
13 Maybank Malaysia 11,96,249 1,00,000 77,48,436
14 IDBI India 11,76,934 50,700 24,60,308
15 Natwest UK 2,92,910 47,000 1,01,88,025
Source: The Financial Brand, IndiaNIvesh Research; *as of FY15



Overall, Social media will be considered as one of the important banking channel in the
coming period as it offers considerable opportunities to enhance the overall customer
experience. However, given the open and unmoderated nature of social media, the banks
must develop and implement compliance policies and monitoring mechanisms for social
media banking to mitigate the possible risks.

Outlook:
There is a clear shift from traditional channel to electronic channels in the last five years and
usage of mobile banking services will continue to grow at an accelerated pace over next four
to five years. However, older customers still care more about branch location and quality of
branch staff, while younger customers are the most active user group for mobile banking and
place greater value on mobile device interactions. Considering the fact that India has the
youngest population of mobile banking users across the globe at a median age of 30, mobile
phones are likely to lead digital growth in India.

Average Age of Population
UK 38
Germeny 37
Japan 37
China 37
Brazil 34
US 32
India 30
0 10 20 30 40
Age in Years

Source: KPMG, IndiaNivesh Research

Overall, growth in mobile payments will create numerous opportunities for all the banks
especially payments banks as there is a huge service availability gap. Most existing banks are
lagging behind on technology front. However, many banks have already begun to fill this gap
with heavy investment in mobile and other technologies.



National Payments Corporation of India (NPCI) –Backbone of India’s Retail
Banking:
In today’s era, where there is immense business and consumer pressure on banks and
payment processors to expedite payments, payment and settlement systems of the country
plays a pivotal role in supporting such transitions. Recognizing such requirements, National
Payments Corporation of India (NPCI) was set up in December 2008 with the guidance and
support of RBI and Indian Banks’ Association (IBA). The core objective was to consolidate and
integrate all retail payment systems in India. The other objective was to build a world class
reliable, customer friendly, simple electronic retail payment system available round the clock
for the benefit of the common man across the country.

Payments Landscape in India


How NPCI has been helping in transforming India’s retail banking?
As we know, payments play a key role in banks’ transformations into everyday Banks. It’s
also increasingly clear that offering immediate payments capabilities to customers will be
critical for banks to remain relevant in the business. Here is the role of NPCI. It provides
payments infrastructure through various platforms (NFS, IMPS, AEPS, BBPS etc.) to banks
which facilitate all domestic electronic banking transactions. It also provides solutions to the
economic and monetary problems through Direct Cash Transfer, Financial Inclusion, Subsidy
Allocation, One Access Point Mechanism etc. Here, we have discussed some of the important
products and services provided by NPCI.

(1) Immediate Payment Service (IMPS): (fulfilling demands of having immediate access
to funds)
One of the least known, but effective, mobile payment systems in India is IMPS. It was
launched in November 2010 by NPCI. IMPS allows round the clock instant fund transfer
anywhere in India to any bank account‐holder if he/she uses a cell phone or a smartphone. It
is also being extended through other channels such as ATM, Internet Banking, etc. Besides
P2P money transfer, IMPS can be used for the host of payments like utility bills, travel tickets,
mobile recharge, e‐commerce etc. For using IMPS, the user only needs to know the mobile
number of the payee (registered with his/her bank) and his/her seven‐digit MMID. MMID
(mobile money identifier) is issued to any bank customer when he/she registers for IMPS.



Currently majority of interbank mobile fund transfer transactions are channelized through
NEFT / RTGS mechanism. However, Under NEFT, the transactions are processed and settled
in batches, hence are not real time. In addition, under NEFT and RTGS, the transactions can
be done only during the working hours of the system, hence limited flexibility in terms of
timing.

Benefits of IMPS:
 Instant Transfer (Real Time Money Transfer) anywhere (in India) at any time (24*7)
 No need of Internet Connection
 No need to disclose bank account number
 Easy, Simple and Secure

After keeping low for almost four years since its launch, IMPS volumes in terms of
transactions and value have been increasing exponentially since FY14. The phenomenal
growth of this service has illustrated the increasing popularity among retail customers.

Growth in IMPS Transactions
1,400.0 1,245.1 200.0

1,200.0
1,000.0 150.0
800.0 581.9 100.0
600.0 171.0
400.0 50.0
95.8 78.4
200.0 0.3 4.3
0.0 0.1 1.2 15.4 0.0

Source: RBI, IndiaNivesh Research; *Till Jan ‘16

The analysis over the year also provides another interesting insight. (1) 85% y‐o‐y growth in
total volume of transactions per month shows a huge increase in IMPS usage over the last 12
months. (2) 100% y‐o‐y growth in total value of transactions per month signals a sharp rise in
mobile fund transfers in the country.

Total Volume of IMPS transactions per month Total Value of IMPS transactions per month
February, 2016 181.2 February, 2016 26.2

January, 2016 174.0 January, 2016 24.5
December, 2015 159.1 December, 2015 24.2
November, 2015 145.3 November, 2015 20.4
October, 2015 143.9 October, 2015 20.9
September, 2015 126.6 September, 2015 19.0
August, 2015 124.8 August, 2015 17.8
July, 2015 116.4 July, 2015 16.6
June, 2015 107.9 June, 2015 14.8
May, 2015 110.2 May, 2015 14.6
April, 2015 105.5 April, 2015 13.5
March, 2015 97.9 March, 2015 13.1
0.0 50.0 100.0 150.0 200.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0

Source: NPCI, IndiaNivesh Research Source: NPCI, IndiaNivesh Research



Looking at increasing popularity of payment through the IMPS channel, the number of
member banks has also increased from 59 as of September 2013 to 132 banks as of February
2016 covering all the public sector banks and almost all the private sector banks.

Member Banks for IMPS
140 132
120
100 81
80 60
59
60
40
20
0
Sep‐13 Mar‐14 Mar‐15 Feb‐16
No of Member Banks

Source: NPCI, IndiaNivesh Research

Outlook:
However, even after such a phenomenal growth in the last two years, IMPS is still at its
nascent stage only as it contributes only 0.8% in terms of total retail payment volumes and
0.2% in terms of value. But with the deep penetration of mobiles, coupled with increased
bank accounts, IMPS is bound to grow at exponential volumes, provided it is well promoted
by the banks. At present, the awareness about IMPS is low amongst bank customers as well
as bank officials. Overall, IMPS has shown rapid growth in the last five years but its potential,
especially as a more secure payment mode, is yet to be fully appreciated.

(2) *99#: (An idea which can change rural banking in India)
How can the Banks reach out to the rural population through an affordable, 24×7 electronic
banking channel that is easy to understand and use? To answer the same, one of the
innovative payment services launched by NPCI was *99# service in August 2014. The bank
customers can just dial *99# from their mobile phones (basic as well as smartphone) and
avail mobile banking facility on their phones. Key services offered under *99# service include,
interbank account to account fund transfer, balance enquiry, mini statement besides host of
other services. Currently, the service is available on 11 telecom service providers (TSPs) and
across 43 banks (includes all 27 PSBs) in 12 languages.

Benefits of *99#:
 Works without Internet – Uses voice connectivity
 Real time transaction and round the clock availability (24*7*365)
 Accessible through a common code *99# across all TSPs
 Works across all GSM service providers and mobile handsets

Outlook:
While we don’t expect mass adoption to take place overnight but this has all the potential to
promote inclusive banking in rural India where majority of the population is underbanked
but voice connectivity is available. Notably, there are more than 1.0 bn mobile users in India,
with 431.2 mn mobile subscribers in rural India as of December 2015. In addition, the recent
initiative by the government where the banks opened 215 mn accounts under PMJDY



(Pradhan Mantri Jan Dhan Yojana) is also likely to help people to remain banked in the
future. However, what it requires right now is only wide promotion from the banks which is
likely to happen soon. In the case of IMPS also, the banks were reluctant to push it in the
initial years of its launch. Probably, concerns over security are creating a barrier and make
the banks to go slow in the promotion of new technology based product/service.

(3) Unified Payment Interface (UPI): (next big hurricane in the payment system)
NPCI is all set to launch Unified Payment Interface (UPI) this year to simplify and provide a
single interface across all the payment systems. The UPI can be thought of as a digital
framework which will allow different banks to interconnect and transfer funds quickly and
easily. The new interface is designed to enable all account holders to send and receive
money from their smartphones with a single identifier like Aadhaar number, mobile number
or virtual payments address etc. without entering any bank account information.

So, how exactly it works?
Paying and receiving payments will be as easy as swiping a phone book entry and making a
call on mobile phone. With UPI system everyone who has a bank account can send and
receive money from their mobile phone with just an identifier without having any other bank
/ account details.
For example, a person buying groceries will have to give his Aadhaar number, cellphone
number, or even just an e‐mail id to the shopkeeper. The shopkeeper will key in the bill
amount and a text will come to the customer. The customer will have to key in his mobile
phone ID or bank ATM pin to complete the transaction.
In a next phase, once smartphones will have biometric authentication facility then the
customer can also execute the transaction using his fingerprints. The fingerprints will be
cross checked with the biometric database with Unique Identification Authority of India
(UIDAI) database. Once verified, the transaction will be executed in an instant.

Architecture of UPI

Source: NPCI, IndiaNivesh Research
Security:
The security will be fool‐proof as the transaction will happen in a highly encrypted format. In
addition, system provides end to end strong security and data protection.



Benefits of UPI:
 Instant Transfer (Real Time Money Transfer) anywhere (in India) at any time (24*7)
 Fully interoperable system across all payment system players, making a customer to
transact from any bank
 Seamless payments across various banks, businesses, merchants, traders, person‐person
without sharing any confidential financial data

Outlook:
According to RBI’s estimates, the cash floating in the system is about 18% of the country’s
gross domestic product (GDP), making India as one of the most printed currency‐dependent
country in the world. UPI can help RBI significantly to achieve its agenda of cashless
transactions. It will also revolutionise the e‐commerce space as what this could do is to make
online payments much easier without requiring a digital wallet or credit or debit card.
Currently, you either have to enter your credit / debit card number, name, expiry date and
verification code or sign in with your net‐banking account and go through a similarly tedious
process or use a digital wallet such as MobiKwik or Paytm to make a quick payment.
However, with the UPI, you might simply need to enter your details, and get a billing request
on your phone which you can accept or reject right away. In a way, UPI can also be potential
threat to mobile wallets and card payments. (We have discussed the impact of UPI on mobile
wallets in detail under the future of Payments Banks in India). Besides, remittances and
government schemes like direct benefit transfer will get a big boost with this kind of hassle
free payments system.
Overall, we expect that UPI will be a game changer as it would also lead to higher
competition among banks and give financial inclusion activities a fillip. However, it will also
provide an equal opportunity to all the financial service providers to tap the unbanked or
underserved population of the country.

(4) National Automated Clearing House (NACH): (Super Highway for Financial
Institutions)
National Automated Clearing House (ACH) is a network that processes low value, high
volume transactions based on electronic instructions. Ideally implementing this mandate will
allow transactions to be cleared in real‐time mode rather than batch mode.
National Automated Clearing House (NACH) is a centralised clearing system launched by the
National Payments Corporation of India (NPCI) with an aim to replace and consolidate
multiple existing Electronic Clearing Service (ECS) systems across India and create a faster
and more efficient clearing platform. It empowers banks, financial, corporate and
government institutions for making bulk transactions towards distribution of subsidies,
dividends, interest, salary, pension etc. Transactions towards collection of payments
pertaining to telephone, electricity, water, loans, investments in mutual funds insurance
premium etc. are also processed seamlessly through NACH.
It has already crossed a major milestone of bringing 1000 banks under its network. According
to NPCI reports, Apr‐Feb’ 16 volume of NACH has already reached about 1.2 bn transactions
amounting to about Rs 3.3 tn in actual credit value. We expects these volume to increase
significantly as all the existing ECS mandates will be replaced with NACH.



Total Volume of Final Credit per month (NACH) Total Value of Final Credit per month (NACH)
February, 2016 167 February, 2016 502

January, 2016 129 January, 2016 417
December, 2015 123 December, 2015 279
November, 2015 114 November, 2015 337
October, 2015 109 October, 2015 395
September, 2015 104 September, 2015 213
August, 2015 110 August, 2015 245
July, 2015 101 July, 2015 257
June, 2015 98 June, 2015 231
May, 2015 92
May, 2015 248
April, 2015 90
April, 2015 158
March, 2015 92
March, 2015 141
0 20 40 60 80 100 120 140 160 180
0 100 200 300 400 500 600
Volume (No Mn)
Value (Rs bn)

Source: NPCI, IndiaNivesh Research Source: NPCI, IndiaNivesh Research

Benefits of NACH:
 Same day clearing
 Supports financial inclusion through its Aadhar Payment Bridge (APB) variant
 Cost effective for all the participants
 Lower rejection ratio as compared to ECS

Outlook:
There are four categories of electronic clearing services in India namely Local ECS, Regional
ECS, National ECS and NACH. The former three categories of services are based on
geographical location of branches whereas NACH runs on all India platforms. From FY17, all
the existing ECS mandates will be moved to the NACH platform. NACH will replace and
consolidate over 82,000 core‐banking enabled branches of 1,000 plus banks under multiple
ECS systems with the single set of rules for all participants, service providers and users.
However, no intervention from investors will be necessary in this regard. Overall, we believe
that NACH is all set to boost electronic transfers (both value and volume) significantly for
both payments and collections. It will also save time and costs of all the participants as well
as help to gain more reliability across the payment and collection chain.



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recommendations or views expressed in this report: Daljeet S Kohli, Amar Maurya, Abhishek Jain, Yogesh Hotwani, Kaushal Patel, Kamal Sahoo & Harshraj Aggarwal.
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Payments Banks Banking Sector Report 21052016

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Banking Sector Report

M‐Pesa (Kenya) Easypaisa (Pakistan)

100 255.0 300.0

Volume (No Mn) ‐ RHS Value (Rs bn) ‐ LHS

Seamless, straight Greater Faster turn‐around‐

Digitizing channels Digitizing experience Digitizing core

Internet Automation Front Office

Apps Payments Mid Office

Social Inclusion Back Office

120 1,000 890

Public Sector Private Sector Foreign Banks Regional Rural Urban Co‐ Rural Co‐

Private Sector Others SBI & Associates

1,400.0 1,245.1 200.0

February, 2016 181.2 February, 2016 26.2

February, 2016 167 February, 2016 502

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