SBI chairman Rajnish Kumar's YONO app target isn't overblown: Experts

SBI Chairman Rajnish Kumar
A few weeks back when Rajnish Kumar, chairman, State Bank of India (SBI), said the bank’s YONO app must be valued at $40 billion and subsequently proposed that it be hived off into a separate subsidiary like SBI Cards & Payment Services, critics were doubting the efficacy of the strategy. The answer lies in understanding how the banking landscape has changed globally, and how India is progressing.

ICBC, China Construction Bank, HSBC, and JPMorgan Chase ruled the charts in terms of market capitalisation in the US a decade ago. Now, they have made way for Visa, MasterCard, and PayPal, indicating the traditional lending ecosystem may not guarantee business relevance and market ranking for banks.

SBI’s YONO, ICICI Bank’s Fino Payments, HDFC Bank’s PayZapp, and Axis Banks’s Freecharge, to name a few, show how Indian banks, too, have grasped this change. A report by Blume Ventures indicates Indian banks spend $11 billion annually towards technology, mostly to digitalise internal systems.

In India, the fintech space is dominated by non-banks or payment banks, with UPI and Bharat Pe taking the lead in the B2C (business-to-customer) and B2B (business-to-business) segments, respectively, in volume and value terms. This is despite two key regulatory barriers — the quantum of deposits they can accept and loans that can be extended. Yet, experts say that the SBI chairman’s target for YONO may not be overambitious.

“Covering a fourth of banked customer base, SBI has a clear demographic and geographic advantage,” says Navin Surya, chairman, Fintech Convergence Council. The move to separate YONO from the mainstream bank will allow the app to extend products which wouldn’t have been possible otherwise. “An independent step-down will delink YONO from its parent’s licensing limitations and decision making,” he adds.

For instance, banks cannot bundle products or offer payment discounts, an advantage which non-banks enjoy. This is a critical aspect which not just helps them retain the customer but also incentivises user clicks. If carved out of SBI, YONO, too, can have these advantages.

But will this trigger others to follow? Not quite, says Abizer Diwanji, partner and national leader financial services, EY. “Only a few have built digital banking capabilities where credit-risk assessment and pricing can be done properly,” he explains. Apart from SBI, ICICI Bank, HDFC Bank, and Bajaj Finance lead the digital segment among lenders. Analysts at BofA Securities say in the small and medium enterprise (SME) lending space, Bank of Baroda is significantly invested and making notable progress.

Banks face in-house competition from their online platform, which is still reckoned as a safer option among retail customers. Also, challenges for banks is less about technology and more about their mindset and demography, say experts. “Private banks mostly target the top 10 per cent or creamy layer of the customer, which can limit their penetration. Also, not all public sector banks have the technology and mindset, even if they have the scale,” said an industry expert in the fintech space. Agreeing that only a few banks have the required orientation, Diwanji feels banks may take a while to catch up with non-banks on this front. “Banks work best when there is an element of credit and not just payments,” he adds.

A report by Centre for Finance, Technology and Entrepreneurship highlights that 12 of 50 fintech start-ups in the US are valued upwards of $1 billion each and the bankruptcy rate is contained at 4 per cent. In India, the market is highly concentrated; only a handful — Paytm, Pine Labs, Bill Desk, and MobiKwik — enjoy valuations of over $1 billion. Paytm is an outlier and valued at around $16 billion, according to media reports. Regulatory and underwriting risks remain their major deterrents.  Analysts at BofA Securities point out how the profitability of payments banks is less than traditional banks despite catering for a larger customer pool and higher interest charged.

With banks and non-banks having their limitations in the fintech space, and both at early stages of evolution, a tectonic shift similar to the one in the US may take some time. While there are some challenges in the domestic ecosystem, a lot also depends on how fast customers are willing to accept the change. The SBI stock currently commands a market capitalisation of Rs 1.7 trillion or about $23 billion, which is a little more than half the valuation that Kumar aims for YONO.

How fast India adapts to the changes will have a bearing on valuations of entities like SBI YONO, and consequently on stocks of their parent companies.



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