Why E-wallets may be the new headache for Banks after Bad Loans ?

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When Eastman Kodak, the pioneer in photography, filed for bankruptcy in 2012, it was not because rivals Fuji and Konica were gobbling up its market share.
Mobile phone fitted cameras and the digital revolution in the imaging business swallowed the iconic company. 

The Indian banking industry is probably full of Kodaks with decades of history and having been a pioneer in enabling the march of the Indian economy to where it is. No other business has had as much regulatory protection as the Indian banking industry, which now seems to be cracking. 

For long, banks were comfortable that competition from them were only from similar entities and that the Reserve Bank of India was doing a stellar role in ensuring the least number entered to compete with them. But as it happens in any business, technological innovation and the regulator's delay in waking up to developments have allowed a new set of companies to play the role of financial intermediary with a different name.


Check these numbers out. In 1981, the first credit cards were launched and later, debit cards were issued. As of now Indian banks have issued 57.4 crore debit and credit cards. That is 1.6 crore cards on an average a year. The number of mobile wallets in the country is 11.5 crore, since their launch in 2007. That comes to an average of 1.4 crore a year. 

It may well be a comparison between apples and oranges. But if consumers who don't get apples can afford oranges, this could well be the case with financial transactions. "The growth in this space is so dramatic that everybody, banks included, are going to participate in it (ewallets),'' says Jairam Sridharan, president and head, retail lending and payments at Axis Bank, adding banks can't ignore this space. "We don't know whether this is a passing phase or whether it will continue. The jury is still out on whether this is going to part of the payments infrastructure in the long run," he says. Who made high street bankers wake up to the needs of the common man, who for decades was ignored for being an 'unviable' business? The refrain was, it is not profitable to service retail customers who don't provide opportunities to milk them in the name of cross-selling financial services. 

It is CitrusPay, Oxigen, Paytm, which had nothing much to show in terms of pedigree, except that they had the commitment to innovate. And that is forcing banks to keep launching a feature a day on phones, or for tablets. 

Count these: ICICI Bank on Tuesday says it has relaunched an 'all-new mobile banking app', which provides 100 kinds of services, the highest by any bank in India. Do bank customers really need 100 services? HDFC Bank with its launch of PayZapp is almost replicating a Flipkart, or Paytm. 

State Bank of India has its own digital baby in the name of SBI Rewardz. Axis Bank is not far behind with its Pingpay, promoted through actress Deepika Padukone. Kotak Bank is experimenting with taking its social media banking towards social commerce. It offers a hefty discount to customers who buy Amish Tripathi's book through a tweet from their mobiles. 

According to a report, 'India Payments 2015' by broking firm Motilal Oswal, payment volumes through e-wallets are expected to increase by 100% year on year over the next few years. "mWallets may become a key driver for digitisation of flows that traditionally were dominated by cash such as payment to taxi drivers, domestic help, local merchants etc," it says. 

Indian banking are challenged not only in terms of loan recovery, but also with how to generate future business. With loans growth at a decade low, there is little choice for banks other than chasing the retail customer, and lay the foundation to acquire more when the economic expansion gathers pace. The boom in digital wallet transactions has been triggered by the rise in mobile commerce, emergence of cheaper internet access and increasing mobile penetration.

Mobile wallets also gained the upper hand after the RBI cracked down on ecommerce sites that violated the second-factor authentication requirement. Paytm and CitrusPay have stepped in to provide seamless payments to providers such as Uber and Meru Cabs. The big driver for ewallets is that a large number of customers are unwilling to log in to their bank accounts to pay taxi fares or shop online fearing electronic fraud. 

In fact, there are doubts whether banks are doing the right thing, or blindly aping the nimbler ones that are not even competing with them. 

"According to me, banks launching ewallets is a really bad idea because technically when a banks already holds my account it already has a wallet,'' says Amrish Rau, MD and CEO of Citrus Payment, which has applied for a payments bank licence. "They are trying to circumvent the second factor authentication by putting up a wallet. If you think of it calmly what does a wallet do? A wallet holds money, as do bank accounts. But they are enamoured by the world of wallets." 

Still, banks cannot afford to be complacent. In advanced markets, technological developments are reshaping the way banking is done. In the UK, one bank will have no premises for a customer to walk in and seek drafts, transfers, or even payments. Atom Bank is the first UK bank to provide banking services only through apps. 

"If RBI actually looks at payments banks from the digital standpoint, we think we have a chance to compete with banks because they are coming to compete in our favourite spot of innovation and consumerled payments," says Citrus' Rau. 

But Paytm, which is best positioned to topple banks from their ivory towers with its cash hoard after getting valued at nearly `23,600 crore with the latest round of investment, is downplaying its own impact on the financial landscape in India, though its top investor Alibaba shook the Chinese market. 

"Paytm is a platform for transaction and banking is platform for savings,'' says Amit Lakhotia, VP, Payments at Paytm. "In fact, PPIs are driving cash users to move to online transactions." 

The Indian banking system was ignoring the bottom of the pyramid that for want of 'profitability.' It was this neglect that led to more than half the population live without a bank account till Prime Minister Narendra Modi forced banks to do so with his Jan Dhan Yojana. 

The population may not be as wealthy as those in cities, which give a disproportionate income for services. But the sheer size of the unbanked, if costs are kept low and transactions made easy, could make banking profitable. It may be a long thin tail, but a small change could boost revenue and profits. 

"The end game is to convert him (the customer) into a full-fledged bank customer, otherwise the revenue model is not clear," says Axis' Jairam Sridharan.