Why banks want to behave virtual
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).