Recently the stalwarts of the Indian IT industry- Infosys, Wipro, TCS, Oracle and HP all vied for a $19 million technology outsourcing contract by Indian e-commerce major Paytm, with Wipro ultimately scooping the deal. Wipro will be the implementation partner for integrating Core Banking Services for Paytm, whose parent company One97 counts Alibaba as its largest stakeholder.
Some key pointers from the deal:
- First mover advantage - Mobile payments has grown 68% CAGR since 2011, and will continue to grow at a significant rate in the coming years. By partnering with Paytm, Wipro gains a first mover advantage in this new, emerging space of PBs. Meanwhile Paytm leveraging a core banking solutions early-on shows the growing demand and recognition for fintech in India. Wipro will implement core-banking solutions for Paytm and also manage the integration of other key systems like anti-money laundering and regulatory compliance. This is an interesting contrast to China where the Alibaba (Ant Financial)-led MyBank is using an in-house developed core banking platform.
- Business model- Recently a chorus of high level banking executives called into question the financial model of PBs, which is not an unreasonable question given that PBs can’t offer loans, and even remittances are restricted to domestic entities (high transaction volumes but much lower sizes compared to foreign remittances). However, most banks tend to operate like Goliaths- they incur heavy costs and overheads, especially in customer acquisition and payment processing. On the other hand, a PB can get by with a fraction of costs due to their digital-centric presence and momentum from their app based customer base.
- Cross-selling and upselling- Most PBs started their financial services platform with mobile wallets, which failed as channels for cross-selling financial services. However, this second coming with the added ‘bank’ should augment their market positioning. This could prove favorable for selling wealth management, mutual funds and insurance products, which Paytm is already considering.
- Deal Size- The size of the contract appears to be on the lower side, so while PB contracts might help IT companies’ flagging revenues, it might not be enough to sustain the growth numbers typically seen in the last 5-10 years. Interestingly, industry sources say Paytm alone plans to invest $180 million over three years to setup and sustain PBs. In comparison, one of the biggest deals for core banking solutions (SBI’s deal with TCS for baNCS) was valued at $430 million in 2006.
In this scenario an important question to ask is- “Why doesn’t Wipro itself become a payments bank!” After all, both Paytm and Wipro are software companies and Wipro can easily enter the market via an acquisition or by building operations grounds-up. Payments banks could signal possible areas of extension for technology companies that might leverage fintech to enter payments, wealth management, pitting the vendor against the client.
Either way, as our report ‘Fintech in India’ shows, fintech is rapidly and forcefully transforming traditional banks, forcing them to address low-value, high-volume market segments or risk serious erosion of their growth.