Fino payments bank – bank of the future ?

In another blog , we looked at Paytm’s business and prospects (link – https://financevoyager.com/?p=842 ). We also spotted certain short comings and value drivers. After a detailed discussion on external and internal risk , we also concluded that the risks outweigh the returns and thus the business model was inefficient. However , Fino Payments Bank (FPB) might just be the right player to capitalize on opportunities lying in the banking and financial services sector. Moreover , in this blog, we will analyze FPB’s asset-light business model and discuss future prospects based on certain criteria or ratios.

SETTING THE STAGE – The industry

Payments banks are new model of banks, conceptualized by the Reserve Bank of India, which cannot issue credit. These banks can accept a restricted deposit, which is currently limited to ₹200,000 per customer and may be increased further. These banks cannot issue loans and credit cards. The aim of payments banks is to provide financial services to unbanked and underbanked areas(low income groups such as migrant workers). This is also termed as “financial inclusion”. The goal is to set up as many retail touch points as possible. Subscribers can keep the credit in their wallet and make recharges(from the wallet) when required. The influx of technology (in the form of smartphones) has played a crucial role in the growth of payment banks. This is because technology has allowed payment banks to expand their customer base and cut costs as physical branches are not required. Moreover , the revenue of payment banks is mainly dependent on the variety of services offered , transaction costs(pricing) and more importantly- volume of transactions. In other words , they deal with low value, high volume transactions. The payments banking sector is mainly dominated by the following companies –

• Airtel Payment Bank
• India Post Payment Bank
• Paytm Payment Bank
• NSDL Payment Bank 
• Jio Payment Bank
• Fino Payment Bank

STAR OF THE SHOW – Fino

Fino Payments bank is a subsidiary of Fino paytech Ltd. So what makes Fino special ? Well , here’s a table of products of major players in this industry .

Here’s Fino’s business model –

Fino’s x factor is its phydigital model. In other words, there will be offline as well as online payment mechanisms. The asset light business model essentially turns retail shops into mini bank or transaction sector. Masses can then approach such “kirana” shops to deposit,withdraw or transfer money. Fino’s services are mainly aimed at rural and semi-urban areas. Fino’s moat is the strong relationship and trust that it has built with its customers over the past few years.  It already has the largest number of physical customer touch points among all payment banks . In addition , lack of competition from large and established bank has allowed Fino to further spread its presence. Large players may face high fixed costs of opening branches .The customers are easily available for grabs and lack of ATMs in rural areas has further fueled Fino’s growth. Another important differentiating factors is that Fino , unlike may other payments banks , does not require a certain amount of money to be deployed for activation of account. Even though there’s a cap on the maximum amount that can be deposited , there’s no minimum amount that needs to be deposited. This has proved to be particularly beneficial for low-income customers . Fino also benefits from a wide national presence .Its distribution network has increased by around 7%.

Key ratios and figures –

A crucial aspect that needs to be focused on is the number of CASA Accounts. The main value drivers for large banks are CASA accounts. For instance , that is why HDFC is priced at a higher band. Similarly , Fino is expanding its CASA accounts and will thus earn significant revenue streams through subscription fees. A rise in the number of CASA accounts also points towards to the loyalty and strong relationship of Fino with its customers.

The cost income ratio reflects the extent to which non-interest expenses of a bank make a charge on the net total income (total income – interest expense). The lower the ratio, the more efficient is the bank. As can be seen from the graph above , Fino has successfully reduced interest expenses and thus the cost-income ratio. It has done so on a quarterly and annual basis , thus displaying consistency. Therefore, Fino is highly efficient in its operations.

Valuation –

Companies in the financial sector can be valued using various ratios such as price to book value, loan to deposit , capital ratio and liquidity coverage ratio. It is important to note that such ratios may not be applicable to Fino given that the bank has not ventured into the loan or lending business yet. Hence a ratio such as price to book value may not be relevant in this case. However , other ratios such as PE (Price to earning) can be used to a certain extent. The PE  is defined as market price divided by earnings per share (EPS).P/E ratios tend to be higher for banks that exhibit high expected growth, high payouts, and low risk. Here’s a chart of Fino’s historical PE and other important financial data –

It can be reasonably deduced that the stock is fairly underpriced. This is because the PE is below its own mean PE. However, when compared to other banks , Fino has a relatively high PE ratio. Due to the high PE(of 38.5), there is little scope for PE expansion. Why does Fino have such a high PE of 38.5 when compared to other banks which have an average PE of 19 ? As said earlier ,P/E ratios tend to be higher for banks that exhibit high expected growth and low risk. A detailed discussion will bring about some clarity.

During the COVID 19 period, banks that cater to the bottom of the pyramid were negatively impacted. In other words , their NPAs (Non- Performing assets) rose. Low -income group customers were unable to repay the loans(with interest) as they were severely impacted due to the virus. Similarly , natural disasters( such as floods and typhoons) and GST implementations have caused the same problem for such banks. This lead to banks resorting to provisioning – using own funds to pay customers with fixed deposits and other accounts. This caused a strain on their books and thwarted growth. Banks were unable to lend and expand operations due to the indelible damage caused by NPAs. Fino , on the other hand , hasn’t suffered because it hasn’t ventured into the business of lending yet. Fino will not suffer from a legacy of bad loans as it will be starting on a clean slate. In addition , once it obtains a SFB license and enters the lending business , it will use its existing and developed infrastructure to flourish. Its existing loyal customer base will ensure consistent revenue and improve its market standing. This , in fact , is not reflected in Fino’s valuation. Its current valuation is of a transaction based payments bank and does not reflect its potential to efficiently operate in the loan dispersal business – all the more reason to classify Fino as a unique company.

Other payments banks such as Airtel Payments bank pose competition to Fino. With that being said , it’s also true that such banks were indeed “born with a silver spoon”. This is because Airtel simply converted and classified it’s wireless services customers as customers of its payment banks. On the contrary , Fino “acquired” customers through organic growth and delivered high quality services to its users. Fino will find it much easier to maintain its growth. Its consumer-centric approach has enabled the company to gain a significant portion of “mindshare”. Fino is dedicated to its core business of delivering high quality services and unlike other players ,is not doing it for the sake of profit making. This is where true value is generated for both customers and shareholders. Unlike other players , Fino has a concentrated and targeted customer base of low-income households that provides clarity in operations and helps achieve consumer satisfaction.

Fino is equipped with highly experienced management with over 20 years of experience in the banking and financial services sector. It can be seen from the images above that the PE and Growth are “in line”. Even though Fino may not be a multibagger , it surely has the potential to be a steady compounder. Such tailwinds and strengths are not yet built into the price. The current market cap of FPB(approximately 2000 cr) makes it a relatively small company. Once realization of identity as a SFB takes place , the company will begin to transition into a larger and more powerful empire. This lends itself to a good investment opportunity that requires some closer inspection. Let’s look at the main revenue sources of Fino Payments bank.

So how does Fino earn money ?

Fino has multiple sources of income . Let’s go through them –

Here are some useful graphs and figures(source-investor presentation) –

MATM or Micro-ATM –

Micro ATM meant to be a device that is used by a million Business Correspondents (BC) to deliver basic banking services. The platform will enable Business Correspondents (who could be a local kirana shop owner and will act as ‘micro ATM’) to conduct instant transactions. This machine comes with a fingerprint scanner attached to it. In other words, micro ATMs are handheld point of sale terminals used to disburse cash in remote locations where bank branches cannot reach. Customers use micro-ATMs to deposit cash, withdraw cash, check account balances and request mini-statements. The micro-ATM has a maximum limit of ₹10,000 (regulated limit). MATM transactions may be conducted on Fino’s own channel or an API(Application Programming Interface) platform. Fino paytech charges a transaction commission and this is then distributed with the merchants. Usually , it charges 0.5% of the transaction amount.

CASA – Current and savings accounts

The main purpose of the CASA services is to provide a bank account at the doorstep of the customer. This will offer services of a traditional bank at affordable prices and suits the needs of many low -income customers. Main sub-revenue sources for CASA accounts –

• annual subscription fee on Shubh Savings Account, Jan Savings Account and Bhavishya Savings Account
• fees for fund transfers made from CASA accounts (i.e., account to account transfers and IMPS)
• fees where the customer is unable to maintain the MAB on our Pratham Savings Account & Pragati Current Account
• fees for cash transactions such as cash deposits and cash withdrawals
• other miscellaneous fees in connection with certain SMS alerts and physical account statements

CMS – Cash Management Services

Companies which collect cash from their customers need to deposit the same at a bank branch for money in the account. They do the same at a nearest Fino merchant point. This saves the agent of time & travel to a branch and risk of carrying the cash. Companies require a massive network for collection activities on the ground. With overall growth in business of such companies, their collection requirements will also keep growing. They prefer pan-India players which cover a large geography. CMS is also a cash digitizing product wherein merchants receive cash which they can use to disburse through MATM & AEPS.

AEPS – Aadhaar Enabled Payment System

Aadhaar Enabled Payment System (AEPS) is a payment service that allows a bank customer to use Aadhaar as his/her identity to access his/her Aadhaar enabled bank account and perform basic banking transactions like balance enquiry, cash withdrawal, remittances through a Business Correspondent. Interchange commission is generated for every AEPS transaction that is conducted through bank’s system, regardless of whether the user has a bank account with Fino or is a customer of another bank. This commission is 0.5% of the transaction amount or ₹15.00.

Remittances –

This Refers to migrant workers sending money from places where they work to their homes in their states or their regions for meeting the day to day expenses. Remittance is essentially a cash digitizing product wherein customers on the transferring side need not have a bank account. There has to be a player to digitize the cash till the last mile for commencement of a customer’s digital journey – with a growing cash in circulation, the opportunity for this business is expected to multiply.

BC Banking and other activities –

These activities constitute a small percentage of the revenue profile of Fino. BC Banking allows Fino to provide banking products and services on behalf of other banks (such as Union Bank of India and Canara Bank) and are authorized to perform a variety of activities. Fino has also formed strategic relationships with other NBFCs to cross-sell gold loans and act as a “distributer” . Revenue is earned in the form of commission. Similarly , Fino offers customers the opportunity to purchase third party insurance products through Banks’s distribution network. To provide such insurance products, Fino has obtained registration to act as a corporate agent from IRDAI and has formed a strategic relationship with ICICI Lombard.   Fino also of payment of bills and Direct-to-home (‘DTH”) recharges (of television connections, prepaid mobile phone connections and FASTag) via branch network or at merchant locations. To facilitate bill payments, Fino operates as a Bharat Bill Payment Operating Unit under the National Payments Corporation of India Bharat Bill payment system which is a RBI-led system for payments of bills. Revenue is earned as a percentage of the recharge.

FINAL WORD-

Fino Payments bank is an interesting and unique company. It mainly focuses on financial inclusion and seeks to boost economic activity in rural and semi-urban areas. However, there are some risks associated with Fino such as –

• Susceptibility to embezzlement due to large sums of cash that need to be managed
• Technological advances may introduce a more efficient way of banking and will force Fino change business structure
• Government regulations and actions such as demonetization negatively affected Fino’s cash balance . This also covers legislations regarding taxation.
• Intense competition from other fin-tech companies

Fino is about to make its foray into lending as it obtains a license as a Small Finance Bank(SFB) from RBI. This will further boost Fino’s business. However , Fino may meet the same fate as Paytm if it over expands and fails to cut costs in doing so. The payments banking industry is likely to expand due to economic traction in semi-urban and rural areas. A rise in the use of smartphones will also fuel growth. The relationship with customers will further strengthen and lead to high barriers of entry. Moreover , Fino may prosper if it efficiently capitalizes on the services it provides and places utmost importance on providing new and unique services.

The information provided by Finance Voyager is for information purposes only and is not intended for advice. Finance Voyager also does not make any recommendation or endorsement as to any investment, advisor or other service or product. The information is only for educational purposes and not buy or sell recommendations.