After India Post, Paytm Payments Bank mulls pivot to Small Finance Bank

Paytm is now looking to pivot into a small finance bank which will allow lending to consumers, a move in search of a profitable business model for its payments bank business.

The Alibaba-backed payment firm is approaching the government and the Reserve Bank of India (RBI) for a small finance bank licence to leverage the lending feature using technology-enabled low-cost operations.

"If the regulator gives the nod, we will definitely want to pursue this," the company's founder and CEO Vijay Shekhar Sharma, who holds 51 per cent share in Paytm Payments Bank (PPB), told TOI.

In September, the banking regulator had issued draft guidelines for Small Finance Banks licence for stakeholders consideration. Paytm had submitted its feedback after the release of the guidelines and expressed its desire to be a small finance bank.

The small finance bank, unlike payments bank, can offer micro-loans and issue credit cards to its customers along with the ability to accept deposits of over Rs 1 lakh.

And this is where the Noida-based payment firm sees an untapped opportunity.

After becoming a payments bank, it realised that to achieve the underlying vision there is an immediate need to allow payments banks to offer small-value credit to its customers, added Sharma.

He sees small finance as a profitable growth business model and aims to drive higher distribution outreach through the use of technology.

PPB, which formally began operations in 2017, posted its first profit of Rs 19 crore in fiscal 2019. According to RBI data, Paytm Payments Bank and Airtel Payments Bank together command over 88% of the deposits in payment banks in India till last year.

As of March 2019, PPB claims to lead mobile banking transactions with over 19% market share.

The majority of PPB earnings came from investing in government treasuries and FDs, besides commissions on facilitating payments across its saving bank accounts and its e-wallet holders.

The latest development comes after the govt-backed India Post Payments Bank (IPPB) had announced its pivot from a not profitable payments bank business model to a Small Finance Bank.

In the absence of a profitable business model and revenues, many PBs have shut shop in past months. The existing rules for payments banks do not allow direct lending and put a cap on deposits per customer at Rs 1 lakh. Also, they don’t have multiple monetisation options anyway. The limitations keep small enterprises away from the payments bank business.

In 2017-18, payments banks reported collective losses of Rs 516.5 crore. Out of eleven payments banks, only five - Paytm, Airtel, Fino, Jio and India Posts, are operational payment banks.

In July, Aditya Birla Idea Payments Bank Ltd and Vodafone m-Pesa announced the shutting down of their operations.