Paytm, India’s digital wallet and e-commerce giant, officially launched a bank and is in the process of on-boarding tens of millions of customers.
“We want to go from being a wallet to becoming people’s primary deposit relationship,” said Madhur Deora, chief financial officer and senior vice president at the New Delhi-based company.
He said to DigFin, “We’re not asking people to shift all of their deposits to us. That would be too straightforward; that would not be innovation.”
The move is both to provide a novel banking experience to India’s masses that offers them more value than traditional banks can, while also boosting trust in the concept of digital wallets, he said.
Deora spoke with DigFin on the sidelines of a conference in Hong Kong organized by The Economist.
Paytm Deposit Bank has just soft-launched for company employees, and will open doors to customers some time in July, Deora says. Paytm will open an account for any of its 225 million registered users that have been active in the past six months. After that, it must evaluate each customer to meet KYC rules.
It is relying on Aadhar, India’s government-run digital identity warehouse, to expedite the KYC process, although in some cases it will also require its merchant partners to confirm customer identities. “It’s a big internal project,” Deora said, predicting the company will add tens of millions of people on a monthly basis.
Innovating for the masses
But why launch a bank at all, if Paytm is already the country’s leading digital wallet and ecommerce player?
Paytm’s argument is that banks, because of their brick-and-mortar cost structures and incentives to target the wealthiest 2% to 3% of the population, don’t provide value to the general population. They do provide interest on deposits, and give depositors a debit card that is typically only used for ATMs.
But the investment and insurance products on offer are geared only for the richest people, while there is no payments network such as Paytm’s app; the 225 million people registered for its service must use its digital wallet in isolation from their other financial experiences.
By receiving a license to open Paytm Deposit Bank, people can now have a digital wallet integrated with other financial services.
The innovation comes from creating a service that is aimed at the vast majority of Indians, rather than one maximizing profits by catering to the top of the pyramid. Banks, particularly those owned by the state, have mandates to cater to the broader population, but their financial incentives lead them to focus on the top 2%; indeed, by expanding the customer base and pricing products for the mass market, they lose the premiums from tailoring sales to the richest customers, and customer interfaces become too generic. “It’s the classic incumbency problem,” Deora says. “But with technology, you can make it profitable.”
Instead of relying on wealthy people for profits, Paytm is trying to build a business that serves hundreds of millions of people, providing the same service to all regardless of ticket size. To this end, Paytm doesn’t charge people for transactions on its digital wallet for utility payments. The company absorbs the cost in return for getting user data, from which it can generate new leads and product ideas.
New asset and wealth products
Similarly, the company rejected the idea of copying Yu’e’bao, the digital money-market fund run by an Alibaba affiliate (Alibaba is a shareholder in Paytm).
Paytm could have copied the idea for the 10 million to 20 million Indians who might want to invest in such a product, but it wanted to create wealth-management products for the masses.
Therefore in May it launched Digital Gold, a service in which Paytm customers can buy and sell gold using the Paytm wallet app, with virtually no minimum transaction size. The physical gold is stored in a vault run by a partner, MMTC, which is partly owned by the government.
By leveraging user data, Paytm intends to launch other products that depositors in its bank can access. The lack of national credit bureaus and the extent of the unbanked population means information such as Uber rides, bill and rent payments, and credit card usage – along with non-intuitive correlations derived from user behavior – all feed Paytm’s credit scoring analytics.
It is in talks with third parties to provide its bank depositors with consumer loans, fixed deposits and insurance, Deora told DigFin. The bank will also be another channel to market Paytm’s ecommerce platform.
Winning trust
Launching a bank gives Paytm a means of taking deposits and linking customers with asset-management and insurance products they can afford. But it also shores up trust in Paytm and the concept of digital wallets.
Traditional banks may not cater to the masses, but they are trusted as enjoying government backing through deposit insurance. They also provide high interest rates on deposits, because they on-lend those deposits to other borrowers, such as companies.
Acquiring a license to open a payments bank puts Paytm on similar footing, in that it now too can access the government’s deposit insurance scheme.
It also allows Paytm to begin managing salary accounts, offer savings and interest-bearing accounts, issue virtual or physical debit cards, and enable bank-to-bank transfers more cheaply than moving money through merchants via a debit card.
There are two differences between a payment bank license, and a commercial bank license. First, deposit sizes are limited to Rs100,000, or about $15,000, which is the government’s maximum deposit insurance amount. Second, depositor money cannot be lent out; Paytm will invest it in government securities instead to generate a return.
This means it offers lower interest on deposits than traditional banks, but it also gives Paytm Deposit Bank the ability to claim it is safer. “We are not lending your money to a company that might default, so we can say we are the safest bank in India,” Deora said.
With that platform, Paytm can shift money to asset and wealth products, while also giving people the ability to move money in and out for free, and without having to wait. Digital Gold, for example, can be traded instantly, as opposed to a classic mutual fund, which has a two-day settlement cycle.
