Why banks want to be­have vir­tual

The Pak Banker - - OPINION - Les­lie D'Monte

Global prece­dents in­di­cate that tele­com ser­vices providers will even­tu­ally end up dis­rupt­ing the tra­di­tional bank­ing sec­tor. Re­serve Bank of In­dia (RBI) gover­nor Raghu­ram Ra­jan in­sisted on Thurs­day that the cur­rent struc­ture of the new pay­ments banks will com­ple­ment In­dia's tra­di­tional bank­ing sec­tor rather than com­pete with it. That may be the case for a few years, given that cur­rent RBI pol­icy does not al­low pay­ments banks to lend and is pri­mar­ily aimed at widen­ing the reach of bank­ing ser­vices to push for fi­nan­cial in­clu­sion.

Global prece­dents, how­ever, clearly in­di­cate that tele­com ser­vices providers, or tel­cos, will even­tu­ally end up dis­rupt­ing the tra­di­tional bank­ing sec­tor. Fur­ther, the ex­pe­ri­ence of banks in coun­tries like Kenya and Nige­ria, where mo­bile phone tech­nol­ogy is driv­ing fi­nan­cial in­clu­sion sim­i­lar to that in In­dia, sug­gest that while banks will ini­tially part­ner with tel­cos, they may also be­come vir­tual tel­cos to stave off com­pe­ti­tion from the for­mer.

On Wed­nes­day, the apex bank granted in­prin­ci­ple clear­ance for 11 en­ti­ties in­clud­ing, a few tel­cos, to launch pay­ments banks. These in­clude Re­liance In­dus­tries Ltd (RIL) that owns Re­liance Jio, Aditya Birla Nuvo Ltd and a unit of Idea Cel­lu­lar Ltd. Fur­ther, In­dia's largest pri­vate telco Bharti Air­tel Ltd's unit Air­tel M Com­merce Ser­vices Ltd has got a li­cence and so has Voda­fone m-pesa Ltd, which is a unit of In­dia's sec­ond-largest pri­vate telco Voda­fone In­dia Ltd. Glob­ally, there are prece­dents of tel­cos al­ly­ing with, and even nur­tur­ing, banks. In De­cem­ber, 2010, Turkey­based Avea Iletisim Hizmet­leri AS (Avea) part­nered with Garanti Bank to launch a com­mer­cial near-field com­mu­ni­ca­tion (NFC) ser­vice in Tur­key. In Oc­to­ber 2011, Cit­i­group and Amer­ica Movil teamed up for a $50 mil­lion mo­bile bank­ing joint ven­ture called Trans­fer to ex­plore op­por­tu­ni­ties in mo­bile pay­ments and bank­ing across Latin Amer­ica.

And Rogers Bank, a wholly-owned sub­sidiary of Rogers Com­mu­ni­ca­tions that is Canada's largest mo­bile car­rier, be­came a Cana­dian Sched­ule I bank (do­mes­tic banks al­lowed to ac­cept de­posits) af­ter it got the gov­ern­ment's per­mis­sion in May 2013. It thus be­came the first Cana­dian telco to launch a credit card busi­ness in 2014. RBI, on its part, has al­lowed pay­ments banks in In­dia to is­sue ATM and debit cards but not credit cards. They can ac­cept cash de­posits, per­mit re­mit­tances and roll out "sim­ple fi­nan­cial prod­ucts."

In In­dia, tel­cos have al­ready be­gun part­ner­ing with banks. While Air­tel M Com­merce has part­nered with Ko­tak Mahin­dra Bank, RIL has joined hands with State Bank of In­dia (SBI) and Voda­fone m-pesa was launched al­most three years back in col­lab­o­ra­tion with ICICI Bank Ltd. Even way back in Jan­uary 2011, SBI and Bharti Air­tel had an­nounced the set­ting up of a joint ven­ture to serve "In­dia's un­banked mil­lions" but iron­i­cally, the deal fell through, re­port­edly due to RBI's ob­jec­tion of it be­ing a back-door en­try for a non-bank­ing en­tity into the bank­ing sec­tor.

By Ra­jan's own ad­mis­sion, when speak­ing at the sec­ond an­nual SBI bank­ing con­fer­ence in Mum­bai on Thurs­day, he doesn't fore­see pay­ment banks tran­si­tion into uni­ver­sal banks, but he does en­vi­sion small fi­nance banks, which are yet to be li­censed, hav­ing an eas­ier path to tran­si­tion into uni­ver­sal banks.

If this hap­pens, there is a strong like­li­hood that banks may even think of be­com­ing a telco. Con­sider the case of Equi­tel's launch in July 2014 in Kenya as a mo­bile vir­tual num­ber op­er­a­tor (MVNO). Equi­tel is owned by Kenya's big­gest bank, Eq­uity Bank. An MVNO does not in­vest or own any ra­dio spec­trum but leases the net­work ser­vices from an ex­ist­ing tele­com op­er­a­tor at whole­sale rate.

On 4 June, news24wire.com re­ported that First Na­tional Bank is set to be­come the first fi­nan­cial in­sti­tu­tion in South Africa to launch a mo­bile net­work by start­ing to sell SIM cards. FNB Con­nect launched an MVNO to roam on South Africa-based telco, Cell C's in­fra­struc­ture. But In­dia does not cur­rently al­low for an MVNO li­cence (though there are some work­arounds, such as when UK-based Vir­gin Mo­bile tied up with Tata Docomo, now a brand of Tata Te­le­ser­vices Ltd).

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