Kotak-AMSL deal: May see more such marriages, say experts

Airtel m-Commerce Services (AMSL), a wholly-owned subsidiary of Bharti Airtel , is converting its existing prepaid payment instrument licence into a payments bank licence to be issued by the Reserve Bank of India. Bharti Airtel will also sell 19.9 percent stake in AMSL to Kotak Mahindra Bank . AMSL offers mobile money services under the brand name Airtel Money.

In an interview to CNBC-TV18, Sanjay Kapoor, former CEO of Bharti Airtel and currently the chairman of Micromax and Mahesh Uppal of ComFirst India, discuss on the deal.

Below is the transcript of the interview

Q: Do you think this is an eminently sensible partnership, Kotak buying a 19 percent stake in Bharti Airtel's mobile arm?

Kapoor: Absolutely. When this policy was out little a while back that joint ventures could be made with banks, I had very openly said that this could actually bring in some new collaborations going forward. Even when the licensing was limited to having business correspondent kind relationships, that stage also there was strategic alliances without any monetary participation between telcos and banks and that time it was more for the KYC reasons and also that you have knowledge that comes to you from the other side but now as you enumerated and explained, there are lot more synergies that come together between the two.

They complement each other fairly well and one point that probably you did not cover was and every retail banker would have a lot of customers at the lower end who would be unprofitable. They could get a vent by this because they could be transferred to such like services, so for banks, its complementary and enriching because once you enrol a customer for a payment bank, then any services that the payment banks cannot offer can be passed on to the main bank. So both of them do some business development for each other as well which is a positive.

While I say all this, I still strongly believe that the fundamental around commercials and economic viability of a payments bank is yet to be seen and tested and that is going to get governed a lot by the transaction money that payments banks will charge and the number of transaction that will happen and that is yet to be tested. So I am not too sure how early, how much will it take for these relationships to yield profitability.

Q: I completely take your point, you put your finger on it for banks especially after Jan Dhan, they are all awakened to the fact that a lot of small accounts, probably no balance accounts are actually a cost and this cost will be greatly reduced if it is being done through and in collaboration with a mobile company. That will make transaction easier and make it more profitable to maintain such small accounts. They are otherwise a drain on the banking system no doubt but if you were heading a payments bank, what would you outsource to a bank?

Kapoor: All those things that you said, all treasury related matters would be outsourced. KYC is understood by banks a lot better. Many banks would already have platforms which are technology platforms ready although some of the telcos have built technology platforms as well overtime whether its M-Paisa or Little Money, these platforms have been created now from an I-T perspective as well. So there is lots but what the Telcos bring to the party is very clear. Telcos bring a capability of managing scale, a reach which no bank would have, especially by virtue of its retail outlets which are more than 1.5 million for large telecom companies and above all, their ability to bring their cost of transaction down to a fraction because they work at one paisa per second and those like denominations, they have understood cost of a transaction better than any banks would understand and they bring that to the party. But like I said, with small banks coming in, with Jan Dhan coming in, with payments coming in, obviously this is now going to stir up a lot of competition at that level as well and let's see how the transaction and the service really pans out in a fashion where there is enough for these banking systems to sustain themselves economically.

Q: I am inclined to believe that the competition at that level will be won hands down by the telcos, rather than by the banks for the reasons that you said. They have accessed a certain hinterland of India, which the banks have not been able to even dip into but it says that Kotak will buy a 19.9 percent stake. Do you think in all probability, that participation will come more by way of personnel, that a part of the cost will be borne by Kotak by just sending their personnel to man certain tasks?

Kapoor: Yes, there will be some intellectual participation as well as financial because they own 19.9 percent of the stake. But it cannot be restricted just to people. Their platforms, their know-how, everything will come into play. From a financial service perspective it's a play that banks understand better, from a distribution and reach perspective it's telcos who understand better.

Q: What is your sense, is this something which both parties get equal gains or will there be some kind of disproportionate gains for the bank?

Uppal: Both sides will stand to gain. Obviously banks are going into territory which is by and large familiar and the telcos clearly have not that much of a department in the banking business but clearly what they want to do as your colleague was also mentioning is to leverage their reach and scale. That enables them to reach parts that banks cant reach, at a scale that banks cannot match.

So, clearly it is something that the Telcos, particularly given their Average Revenue Per Units (ARPUs) currently would be very keen to ensure that they could add value if they like or actually extend the profitability of their operations. So, I believe there is something in it for both sides.

Q: You expect more such marriages, other telcos will also look for other banks?

Uppal: Yes, I do, I do expect that.

Q: You probably already in the know?

Uppal: No, I won't claim to but certainly I would imagine, especially the incumbent telcos and probably even the others would look to give up this opportunity. I do believe that they will all want to do their own deals with other banks.

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