Will Strategic Acquisition of Free charge revive Axis Bank from Declining Profits?

Will Strategic Acquisition of Free charge revive Axis Bank from Declining Profits?

Strategic Acquisitions have become the order of the day in the recent corporate world. Corporate Players who estimate their future survival in the market through current earnings, investor’s confidence and changing customer base are becoming prudent enough to strategize their investments in highly probable winning deals.

Axis Bank which is reputed as India’s third largest private lender is no exception to this. The bank has been choking to sustain its profit margins with increasing bad loan provisions which had resulted in a steep decline of its asset value. As a cascading impact, the bank had ended up reporting 16.06% decline in net earnings in the first quarter of the year despite a marginal increase in the top line revenue by 1.45% during the same quarter of last year. The lender’s asset quality has also worsened by a steep increase in Gross Non Performing Assets (NPA) to 5.03% during FY17 Q1 compared to 2.54% for the same quarter of previous year. The market has instantly reacted to this discouraging trend of financial performance by 3% fall in stock prices on the same day which reflects the loss of investor’s trust.

However, the Board has now come with a new strategy of venturing and broadening their presence into the digital space by acquiring Snapdeal’s ‘Free Charge’. The Bank was desperate to close this deal as they have offered an attractive price compared to ‘PayTm’ which was also competing to acquire this asset. This deal also gives a big sigh of relief to Free Charge’s parent, ‘Snapdeal’, which is already in talks for selling itself to its rival ‘Flipkart’ due to its declining fortune since the beginning of this year and struggling for independent survival. Free Charge was acquired by Snapdeal in early 2015 for $ 400 million. However, it has now been sold to Axis Bank at a massively discounted valuation of 85% at $ 59 million (384 Crores INR).

This clearly indicates a strategic acquisition with great anticipated outcomes. Axis Bank would get a popular digital payment brand backed up by a high-quality technology platform, which can be leveraged towards tapping into current market opportunities that are booming in the digital space. The benefits of this acquisition will begin to bear fruit in the next couple of years. Another big competitive advantage which the bank would gain on this acquisition is access to small value transactions and Utility Bill Payments which are the key customer service segments of Free Charge.

It is also quite rational to think that the Bank already has a significant presence in the Digital Space through ‘Axis Pay’ and there was no need for the acquisition. However, the digital market of India is in its boom days buoyanced by the ‘Demonetization’ Move of the Government last year. Telecom Giants like ‘Reliance Jio’ have further intensified this growth by their rapid penetration into the Digital markets by making Internet Connectivity as the common man’s amenity in India. A recent survey published in ‘The Economic Times’ on 27th May’17 says that the Debit Card transactions have surged to 1 billion at Point of Sales of merchant locations in January 2017 compared to 817 million during the same time last year against the ATM transactions which was almost static at 700 million. This clearly substantiates the fact that the Indian Economy is rapidly shifting towards ‘Digital Cashless Mode’ and people prefer to make more cashless payments compared to cash transactions. It has also been evidenced by the annual report (2016-17) of Axis bank that the bank had reported 66% share of digital transactions in India in FY17 Q4 compared to 51% during last year. Also, the spends on Credit/Debit Cards of Axis Bank have increased to 47% in 2016-17.

Image Source – Annual Report of 2016-17 (Axis Bank)

The above facts and figures substantiate that this acquisition is a focused strategy of Axis Bank towards an inorganic expansion into the Digital Payment Space without duplicity of efforts on the customer acquisition and emerging as a ‘Key Contributor’ to the ‘Digital India’ drive amongst the BFSI Sector. The appetite of the market is so large that the bank cannot afford to spend time and resources on building a new platform from scratch, rather it is wise to leverage the market opportunities as a forerunner amidst other competitive market players. The integration of Free charge with Axis Pay would further increase the ease of the payment by the customers as Axis Bank already has a mobile wallet ‘LIME’ which has been interfaced for UPI Payments with Axis Pay.

The bank also needs to focus on retaining the acquired customers by offering them loyalty programs and cross selling products by understanding their needs. As per one of the updates that was given by Free charge late last year, the number of registered users on its platform has peaked at 30 million and 20% of them for utility bill payments. Also, the market leader ‘PayTm’ claims to have 122 million active users and hosts 90 million transactions per month on its platform. The other rival ‘Mobikwik’ has reported 35 million users and 45 million monthly transactions during the same period last year. Also, a market research throws light on the fact that India’s Digital Payment Segment has handled almost 600 million transactions in the year 2015-16 whose mean economic value rising to 400-450 INR.

Another ray of hope is that the digital payments industry in India is expected to grow by 10 times to $500 billion by the year 2020 as per the recent study by Google and Boston Consulting Group. It also predicts that more than 50% of India’s Internet users are likely to use digital payments by 2020, and the top 100 million users are likely to drive 70% of digital payments by value. If the above mentioned promising predictions turn into reality, Axis Bank can significantly tap this humungous market opportunity with its unique ‘FinTech’ flavor and competencies.  This would eventually pour in into its revenue bucket and would help the bank with some breathing air to compensate for its massive bad debt provisions eating into their bottom line, while RBI figures out a sustaining solution for increasing menace of NPAs. Though this was primarily aimed at market penetration, the bank can think of stepping into other niche products in digital space apart from payment service based on the customers’ expectations and demands. This acquisition would be the first step for building a better brand equity for the bank and an opportunity to explore and serve more customers as a ‘Digital Player’.

 

Author: Yogesh Sundararajan

PGDM, Class of 2018, Great Lakes, Gurgaon

Advertisements

UPI and its Impact on the Mobile Wallet Industry

What is a UPI? How is it different from mobile wallets? Does it have the potential to eat away the market share of mobile wallets?

upi

23

UPI (Unified Payments Interface) is an advanced version of IMPS (Immediate Payments System) which do bank to bank money transfer, just by using a Virtual Id/ Virtual Payments Address.

UPI or Unified Payment Interface is a payment architecture with a set of standard app APIs by the Reserve Bank of India in order to facilitate the next generation online immediate payments leveraging trends like increased smartphone adoption, increased app downloads and universal access to data and internet.

4

5

6

Any smartphone user having a savings or current account with a UPI-partnered bank can download the app to make P2P (peer to peer) and P2M (peer-to-merchant) payments with the use of VPA (Virtual Payment Address).

Thus, in this case, the customer doesn’t need to disclose any sensitive information like bank account number or IFSC code for completing a financial transaction. It eliminates the requirement of entering one’s card details like number, CVV code, expiry date or OTP.

7

8

9

10

Virtual Payment Address is just like an Email ID, something of the form yourname@xyzbank, like sonal@sbi or rashmi@citi. No more hassle of entering the account number, IFSC and other beneficiary/payee details. On entering just this VPA and authenticating the transaction with your MPIN, one will be able to complete the transaction successfully in less than 10 seconds.

11

12

13

 

UPI’s two-factor authentication makes it safe and only shares the Virtual Payment Address. It doesn’t provide any other sensitive information.

14

How can we download the UPI app?

Steps to download the UPI App are as follows:

  • Download the UPI app from 19 participating banks on the below link

https://play.google.com/store/search?q=upi&c=apps&docType=1&sp=CAFiBQoDdXBpegUYAMABAooBAggB%3AS%3AANO1ljJBaXc

 

  • Let’s say we are using Axis Bank’s UPI app. Here’s the welcome screen. SMS will be sent for authentication

15

  • Add bank account: you’ll just need to select your Bank & your A/c will show up automatically (based on your mobile number linked with your bank a/c)

 

  • Create a Virtual Payment Address (VPA) which can be sonal@pnb or 123@ubi or pkc@icici or any other name. The suffix will be based on the app you are using. You can create different VPA with different banks pointing to the same account i.e sonal@axis, sonal@ubi or sonal@vijaya can point to one bank a/c, say from PNB

16

  • You can even collect money by requesting it from the other person’s VPA

17

UPI v/s Mobile Wallets

Currently, there are more than 25 mobile wallets available in market today.

  • Mobile wallets cannot access the UPI Technology on their own because UPI is a cross banking transfer medium and hence can only be accessed by the banks themselves. For mobile wallets to access UPI Technology, they need to partner with some or the other bank. So, in a way for banks which were suffering from the onslaught of mobile wallets, UPI has come as a boon to them that has turned the tables in favour of the banks.

Now, let’s discuss whether UPI has the potential to make mobile wallets redundant in India. Below are some of the characteristics on which UPI and mobile wallets can be compared.

Characteristics UPI Mobile Wallets Conclusion
Transfer Limit Rs 1,00,000/Transaction Rs 10,000 for non-KYC

 

Note: It can be increased upto Rs 1,00,000 post doing a KYC, which very few customers do

UPI will be more advantageous in this case
Transfer to individual and companies Definitely yes In case of wallets, not all wallets can do transfer but yes the major ones like Paytm, Mobikwik, Oxigen etc. allow the transfer to individuals and companies Majorly, both score well in it
Payment at physical stores Any physical store can make arrangements for accepting UPI Transactions In case of the wallet industry, they have to do a personal tie-up with those physical stores like Paytm has done tie-ups with Pizza

Hut, KFC and payments via Paytm wallet is accepted at

their outlets. Similarly, Mobikwik has exclusive tie- ups with Big-Bazaar and CCD

UPI can easily capture this market
Online Payments UPI Can do very well in this Mobile wallets showed their excellence in online payments No Clear Winner here
Cash Back/ Discounts UPI cannot provide any cash back or discounts In case of Mobile wallets, since they have merchant specific tie-ups, they do provide a lot of cash backs and merchant specific discounts Mobile wallets definitely have a great advantage here
Request for payment In UPI, one can ask for money from any person who is registered on UPI network In mobile wallets, few companies are asking allowing request for payment or asking for payment but in their own network UPI has bit of an advantage here
Transaction Cost There is charge of 0.45 paisa on each transaction through UPI No charge is there on transaction in case of mobile wallets Mobile Wallets are the clear winners here
Outreach Possible outreach is larger due to GoI’s Digital India support. Awareness programs and implementation, if executed well, will encourage cashless transactions even in rural and remote places depending on the government initiatives Restricited to marketing and branding strategy of the mobile wallet company and customer segments made aware. However if Mobile wallets work with UPI network they can use it to their advantage. Usually reaching rural places is more difficult for private businesses as it does not make commercial sense UPI has more advantage here

 

There are some Pros and Cons of UPI and Mobile Wallets which have been discussed below:

  UPI Mobile Wallets
Pros ·         Easier to set up and lesser time to execute the transaction.

 

·         No waiting for OTP

 

·         Device independent and form independent. One can use any bank’s app to transfer money in any other bank

 

·         Money gets transferred directly from bank account. We do not required to recharge any wallet or card in UPI

 

·         Marketing might of cash rich banks

 

·         Wallet companies are technology companies

 

 

·         Wallet companies are experts in user interface

·         Strategic tie-ups are increasing day by day and many of them are part of big- ecommerce companies, such as Freecharge is a part of Snapdeal. These help them in extra benefits which they pass on to customers in a way of cash backs, loyalty points etc.

 

·         Other benefits- mobile recharge, Bill Split, micro credit facilities etc which may not be possible for UPI to provide.

Cons ·         Lack of technology prowess

·         No Strategic tie-ups

·         Company dependent

·         Extra KYC for higher transactions

·         Fraud Concerns

·         Too much competition

UPI certainly has more advantages over Mobile wallets but as per the current scenario in India, it doesn’t mean that mobile wallets will become redundant.

In India, which is majorly a cash run economy both can co-exist as of for now. Mobile wallets have to do some tweaking in their business model and they are in a process of doing it. Some examples are listed below:

  • Paytm will soon get their own Payment Bank license through which they can enter in the main stream of UPI and can launch a UPI based Paytm app
  • Free Charge has tied –up with Axis Bank and will provide UPI based transaction on their platform
  • Phone Pe, which is owned by Flipkart, has launched a new app in collaboration with Yes Bank where both the UPI transactions and wallet benefits are there
  • ICICI pockets, which was a wallet by ICICI Bank but wasn’t doing well, has now been integrated with UPI. So, one can have the benefits of both in their Pockets app

We can have these apps integrated with the benefits of both UPI and Mobile Wallets.

 

Author : Sonal Gupta

PGDM Class of 2018, Great Lakes