We then assessed the likely transactions, balances and other revenue sources from each of these by segment in order to build up a clear picture of the contribution of each and, thus, where MNOs should focus their efforts (see diagram below). Intra-state migrants, self-employed and traders, wage and salaried segment, and farmers are expected to yield the most revenue, but some of the initial work would be focused on students and inter-state migrants to drive adoption of these larger market segments. Thus, a carefully sequenced marketing campaign will be essential, and those MNOs already servicing the inter-state remittances market will have an important competitive advantage.
On the basis of our analysis, we expect around 90–95% of revenue to come from transactions, and only 5–10% from float. Of the 95%, the largest revenue source is likely to be remittances, transactions on basic savings accounts and shared interest on loans offered, backed by credit-scoring customers’ “digital footprints” (each around 20%). Other revenue sources will include G2P/direct benefit transfer payments and utility payments (around 10%). Airtime top-up is only expected to yield around 5–7% of the bank’s revenue, but would, of course, result in substantial savings for the MNO, in terms of both distribution costs and reduced customer churn.
We then examined the operational imperatives for an MNO to build a successful Payments Bank, including the IT, branding and marketing, call centre and core employee spend, as well as the costs of agent selection, on-boarding, training, monitoring and, of course, commisions. Perhaps unsurprisingly, agent commissions and distribution operational expenses were the largest costs (in the range of 40–45% and 16–20%, respectively), followed by sales and marketing and HR costs (around 10% each).
On this basis, we built a comprehensive financial modelling of the potential for a relatively modest-sized MNO to achieve financial break-even (without factoring in the value of the expected reduced customer churn). We found that, with conservative estimates, a mid-sized MNO should break even in year 5, with an ARPU of around Rs.700–800 per customer. Importantly, the Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) margin grows rapidly from year 5 and is estimated to be 30–35% by year 8. We estimate the total payback period will be around 8 years, and that the internal rate of return will be 12–15% in the first 10 years.
So can mobile network operators make it as Payments Banks? There is clearly a long-term business case for MNOs to open and run Payments Banks. But, as many commentators (and indeed the Reserve Bank of India) have said, it is a long-term play, requiring significant investment. This is no different for a more traditional mobile money offering like M-PESA, MTN Money or hundreds of other mobile money offerings across the globe. Indeed, as GSMA has pointed out, seriousness of intent and significant investments are required to ensure that mobile money systems flourish and yield profits
. Indeed, this is the key differentiator between mobile money deployments that “sprint” and those that “limp”
. But as a Payments Bank, MNOs have significantly more options to derive revenue, particularly from transactions on, and to, the savings accounts they offer – if they are able to build and maintain a robust technological infrastructure to gain the trust
of the mass market.
This blog was first published in EconomicTimes on 17th August, 2016.