Payment Banking - Disrupting Banking

I have always been bullish on the Indian financial sector. My logic is simple. Any industry where there is a very large disconnect between demand and supply is bound to do well. India is a cash / credit starved nation and any business which provides credit to people and businesses will do well over a very very long time.

The history of Indian banking is very interesting. Refer to Banking in India on wikipedia for a good overview. By now, most people are used to the ubiquitous ATM machines and do not consider private banks as fly-by-night operators who will take their money and run away. We are at the cusp of the third major wave in Indian banking (nationalisation in the 70s and privatisation in the 90s being the first two). With the 11 new licenses given out by RBI for new payment banks, the playing field has been (once again) forever changed. Ten years down the line, banking will not be the same as today. Brace yourself for a huge disruption in the coming years.

So what are payment banks? For simplicity’s sake, it is a “technology driven bank”, mainly mobile based which will cover most of the services provided by a regular bank except giving loans. They can take deposits of upto Rs 1 Lakh and pay interest on it, provide debit cards, transfer money from one account to another.

The 11 players who have got the licenses include some very very prominent names - Airtel, Vodafone, Aditya Birla Nuvo, Reliance, Mahindra, India Post, Dilip Sanghvi (promoter of Sun Pharma), Paytm, Cholamandalam and NSDL. All of them are big players in their own fields. Three of them stand out distinctly - India Post, Airtel and Vodafone. Their reach and penetration is really unmatched. Just as an example, Vodafone m-pesa accounts for more than 50% of the GDP of Kenya on its platform.

Already, we are seeing a beginning of "Uber"isation of services. Players like Vodafone & Airtel who are already there with you. It is so much more convenient if you can just use the mobile to pay for your kirana purchases or on public transport or at petrol pumps.

Where does that leave the existing banks? The existing large players will push strongly on their apps (HDFC, ICICI, SBI etc). The brunt of the disruption in my opinion will be borne by the mid sized PSU banks and the smaller private banks. We already saw a DCB Bank being routed on the bourses because they accepted the increased competition from these new players. There will be more to come. The age of easy-CASA money may be behind us. The mid sized banks would now have to tie-up with some of these payment banks or invest heavily in their own app infrastructure.

Let us keep an eye out for the trio - Airtel, Vodafone and India Post for the next leg of banking disruption.


Any way to play this theme (payment banks) in the listed space?

  1. Airtel
  2. AB nuvo

Airtel is messed up with high foreign debt and African fiasco. Does AB nuvo + idea network offer a opportunity? Its not clear if idea is involved or benifit from this license.

Thanks Abhishek for summarizing the disrupting changes in Banking industry. There will many PSU banks which will go MTNL way. However, the larger banks like SBI will survive although they will keep losing the market share.

The real benefit of IT revolution seems to be coming now. Banking, Energy, Automobile are on the cusp of a major change and this time changes will be much faster. I even hope that the drug discovery cycle will be shortened and we will see new medicines finding cures for diseases who do not have any cure right now.

Interesting talk by Nandan Nilekani on this disruption topic.

In my opinion both of them are too big to have an impact on their P&L in short run.

In the gold rush, people selling shovels made more money than the gold diggers.

similarly, people providing IT solutions and backup mintainance will make more money than the banks itself.

Consider Aurionpro.

Open the link for more details on their expertise and client list.


Thanks for the excellent write up and providing the insight of the future business.

I think the IT company which provides the software solution to the app and back office operations will have more added advantage and more switching cost for the company and proxy play for the next mega trend in payment banking.

Do you think Intellect design arena will be benefited from it ?

I am not very sure who the winners will be. And I do like the pick-and-shovel approach myself. But the market of suppliers is also very fragmented.

On the other hand it is relatively easier to identify who are likely to find the going tough - the mid sized PSU & private banks. It will be perform or perish for a lot of them.

I completely agree with above post. I think this sector has limited competition from few good players (read HDFC, ICICI, Axis, Yes Bank etc) so they made money on the back of bad service provided by PSU banks. But current structural changes ushered in by RBI by giving license of payment banks, new licence to Bandhan and IDFC with a promise of future “license on tap” will make competition severe in this sector.

As with any sector, competitive intensity gives great benefit to the end customer but dents profitability of the companies in the sector, till consolidation takes place. Telecom sector is very good example of that for last 5-10 years. Due to above reasons, it may be better to avoid this sector for next 2-3 years, till the dust settles and clarity emerges in terms of survivors.

Even now i think it will be the mid tier psu banks who will perish the most. Payments bank will hit the retail franchisee of banks. Yes, it will affect the private banks but they atleast seem to be gearing for the competition and it would be easier for payment banks to relinquish share of old and stagnant psu banks who as it is don’t provide any service on the retail side

Nandan Nilekani - Indian Banking - in a time of change :

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IMHO, the PSU banks will perish or de-facto privatisation is inevitable.
The data / related software companies may flourish. But which one is a question mark?
However the credit will be issued by the NBFC or Banks or SFB who is more tech savvy and has good retention of customers.
Whatever be the disruption, the company which focuses on efficacy rather than efficiency and the company which treats its customers will flourish. Obviously cash for credit is only with financial institutions.
IMO, we have to identify a company which is customer friendly and has efficacy.

Capital first fulfills this criteria. Its algolending model can get only better with time as more data inputs get factored in. Along with it JAN Trinity . Sweet spot.

Dear Seniors, I happen to hear that HCL info systems is a company dealing with AAdhar data. with Future being linked to Aadhar, the payment banking and all cashless transactions will be focusing on authentication. All DBT (direct benefit transfer) will also come under this scheme. Will HCL infosystem charge any company for data verification?
Is HCL info the company identified for Aadhar? More questions than answers. HCL info balance sheet looks very stressed.
Not invested in any of e-governance companies. IMO, e-governance companies will have a say in credit disbursement.