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The news that three of the provisional licensees,Cholamandalam Distribution Services, Dilip Shanghvi and Tech Mahindra, have decided not to seek a full Payments Bank license, has caused much debate. The reasons for their withdrawal are varied – and not all necessarily based on the challenges posed by the underlying business model. Despite this, the media is abuzz with discussions on just how Payments Banks can achieve profitability given the restrictions imposed on their business model by the Reserve Bank of India (RBI).

It is clear that developing a successful model will depend on the nature of the licensee’s core business. MNOs will build on their existing client base and agent networks, and use the Payments Bank services both to reduce churn, as well as to make money on savings balances and transaction data to inform third party lenders’ decisions. India Post will do the same, but can easily add physical distribution and payment collection to their model. Consortia like the State Bank of India and Jio have a wider range of options and opportunities to build on the bank’s brand and core business. Paytm has already made it clear that they will be looking to derive value from leveraging their massive client base and encouraging a cashless ecosystem rather than from CASA (current account and savings account) operations.

Irrespective of the diversified business models, all will depend on Payments Bank using technology and agent networks to reduce costs, and offering diversified services to serve the mass market. MicroSave has already calculated the type of savings that a full-fledged bank (even with legacy technology) might make at the aggregated level, concluding that the annual average cost of saving a customer through the branches (around Rs.400-500 or circa $8) could be slashed to Rs. 65-125 (circa $2).

In 2012 we were able to look at this on a detailed, disaggregated basis. Conducting sophisticated activity-based costing we were able to look at the relative costs of conducting different transactions through branches and through business correspondent (BC) agents. As can be seen from the graphs, most but not all costs decreased. It is important to note in this case that the agents were conducting traditional BC (cash in/out) transactions as well as business facilitator (BF) type transactions (selling to and referring potential loanees as well as fixed depositors (FDs), collecting loans and recovery of loans that had been written-off). Indeed, this combined BC/BF role may well be essential for agents to break even given the extremely low commissions paid to agents in India for cash in/out transactions.

While some of the cost savings come from credit operations, from which Payments Banks are barred, it is clear that their agents could, and indeed probably must, play an important role in making and recovering loans made by their lending partners – and be remunerated for doing so.

There are two core challenges facing Payments Banks seeking to implement effective business models: 1. optimising their distribution networks, and 2. creating real value for their customers.

In order to optimise agent networks, Payments Banks will need to rethink the current, often unstable, models currently used in India. To date, as the 2015 Agent Network Accelerator survey of The Helix Institute of Digital Finance highlighted, too many agents are both dedicated (financial services agency is their only business) and exclusive (they offer services on behalf of only one provider). Both of these impede agent profitability. Payment Banks seem set to replicate and extend this model, and establish agents trying to survive by offering financial services for one provider alone. This risks adding to the fragmentation and duplication across India and to further reduce the ability of agents to make enough money to continue in the business.

Success will lie in recruiting agents for whom financial services is but one part of their business, who offer services on behalf of a range of providers and who are well-trained and monitored to ensure that they offer high quality, dependable services that are trusted by their clients. A study by The Helix Institute and Harvard Business School noted, “We find that the presence of a tariff sheet increases demand by over 12% and the ability to answer a difficult question about mobile money policy increases demand by over 10%. We also find that highly knowledgeable agents reaped even greater rewards for their expertise in the face of competition.”

To create real value for their customers, Payments Banks will need to move beyond traditional financial services. In addition to better understanding the needs, perceptions, aspirations and behavioural biases of their target clientele, Payments Banks will need to package and present their services in ways that align with the mental models of the mass market.

Poor people’s need for appropriate products mean that they need a range of products (just as you and I do) to reflect their life cycle. They also need disciplined systems that break down their accumulation of lump sums into small manageable amounts (saving up, through or down).

The products used to accumulate lump sums should ideally be differentiated and ear-marked for specific needs, in the same way that poor people often earmark specific income streams for specific uses to help with their mental accounting. For example: savings for a bicycle, to buy some land and for old age are very different in terms of the time horizons and instalment amounts.

But within this framework, as Ignacio Mas and Vartika Shukla highlighted in their blog Making Digital Money More Relevant, More Often -Part 1, different market segments have different needs, aspirations and biases. “At the highest level, the mass market has a few typical characteristics: a large percentage of people do not have a regular fixed income; most do not have a defined (predictable) income flow. Because of the uncertainty which comes along with a variable income, people employ various methods to manage and organise their money. We can broadly classify people into the following three segments:

People in the ‘Survive’ category have unpredictable or uneven income. They are more concerned about meeting day-to-day needs. Their money matters usually have a very short time horizon since their objective is to ensure stability of income. They are constantly searching for liquidity and have to plan for what to do with money every time they receive it.

In the ‘Live’ segment, people have moved beyond daily survival and are looking at satisfying wants. The focus of financial behaviour shifts from fulfilling necessities to meeting aspirations and planned expenses. Income, even though much less uncertain may still be variable. They need to manage their available liquidity in order to meet their aspirations and are planning for these using monthly budgets.

The ‘Comfort’ segment consists largely of people with regular income. They seek to have more convenience in their lives and are building assets, particularly for their next generation. They do occasional financial planning to ensure that resources are directed to asset acquisition in order to keep their legacy secure.” These segments require different services, think about/manage their money in very different ways, and thus offer a wide range of opportunities for Payment Banks. Indeed, the success of Sahara and Life Insurance Corporation of India provide a small glimpse of the business opportunities offered by rural India – and they are servicing very specific needs.

Ultimately, Payments Banks will want to encourage and facilitate the cashless (or at least less cash) vision articulated by the Government of India. As Paytm has already clearly articulated: cash costs! A digital, cash-lite India leveraging Payments Banks’ technological capabilities offers increased efficiency, reduced corruption and a viable business model as the marginal costs per cash-free transaction is negligible.