Tucked between a grocery store and a mobile phone recharge outlet in Dharavi, one of the world’s largest shantytowns, is a small branch of FINO PayTech. In that congested Mumbai locality, this branch could be mistaken for another inconspicuous retail shop—exactly the kind of low profile India’s newest bank seeks.

“In our surveys, one feedback was that several customers from the economically weaker sections found big banks intimidating. They were skeptical of how they will be treated,” said Rishi Gupta, managing director & CEO of FINO PayTech. “Therefore, we have tried to become a neighbourhood bank with the look and feel of a mom & pop store where the customer can walk in without hesitating.”

FINO, isn’t the quintessential Indian bank. It is among a new breed that has entered the country’s financial market over the last year-and-a-half. In all, the Reserve Bank of India (RBI) had issued 21 licences, 10 for small finance banks and 11 for payments banks. Of these, three quit the race.

Payments bank FINO began operations on June 30, looking to tap the 233 million unbanked Indians.

What are payments banks?

Despite several state-owned, private, foreign, cooperative, regional, and rural banks having established themselves in India, besides non-banking financial companies (NBFC), the RBI felt the need for two new categories: payments banks and small finance banks.

Payments banks are allowed to accept deposits (up to Rs1 lakh or $1,551), sell investments and insurance products, remit money, issue debit cards, and provide internet banking facilities. However, they can’t lend or issue credit cards.

This category has been introduced to promote financial inclusion in a country where 40% of the population still does not have access to formal banking services. Among the remaining 60%, several still don’t use formal lending services. “This may be because banks are too far and they (customers) will lose a day’s wage in travelling, or the products are complicated,” explained Gupta.

India has only 18 ATMs—and 13.4 bank branches—per 1,00,000 adults, compared to a global average of 43 ATMs.

FINO’s journey

FINO is no stranger to unbanked India. After all, it started off as a business correspondent (BC) in 2006. BCs are agents who work on behalf of banks to help people perform small transactions like opening accounts, accepting deposits, and making withdrawals.

Around 2006, Gupta recalled, the number of people out of the banking fold was between 500 million and 600 million. Therefore, BCs were introduced to provide last-mile connectivity in areas that banks couldn’t reach. Incubated under ICICI Bank, India’s largest private lender, FINO dived into the business headfirst.

“We put up camps in remote villages to enroll people for biometrics to open bank accounts. The villagers were extremely excited. They used to come dressed in their finest clothes, women would wear make up and bindi, as if they were going for a wedding,” recalled Gupta. This is because, for unbanked Indians, lack of identity was a persistent problem that could be solved partly by opening a bank account.

However, something was missing, Gupta recalled. ”Banks ultimately owned the customers and we were merely acting as agents. Moreover, the process of how to do business or which geographies to operate in was decided by the bank,” he said. This nagging feeling fuelled FINO’s ambition to join the fray some day.

Now, as a payments bank, FINO plans to target customers with an annual income of between $1,500 and $5,000 (Rs97,088 and Rs3,23,600). With 400 branches and an employee strength of 4,000, FINO has begun operations in four states: Maharashtra, Madhya Pradesh, Uttar Pradesh, and Bihar.

In the last few years, it had begun expanding its base by opening money remittance services and also an NBFC. So, it had a ready customer base of one million, which it now plans to tap.

Backed by investors such as Blackstone, International Finance Corporation, Intel Capital, ICICI Bank, and Bharat Petroleum Corporation, it has tied up with Western Union and is also working with National Bank for Agriculture and Rural Development, among others, to expand its network.

It won’t be an easy ride, though.

David vs Goliath?

FINO PayTech Rishi Gupta, MD & CEO, FINO PayTech

Of the 11 players granted in-principle approval in 2015 to set up payments banks, some names that stood out were Reliance Industries, Tech Mahindra, Airtel, Aditya Birla group, Vodafone and Cholamandalam Services. Other big players included the Indian government’s department of posts, Vijay Shekhar Sharma (owner of Paytm), and Dilip Shanghvi (owner of India’s largest drugmaker Sun Pharma), and National Securities Depository, India’s first and largest depository.

A few months on, Tech Mahindra, one of India’s top IT services firm, Shanghvi, and Cholamandalam Services withdrew from the race.

“Unfortunately, due to the competitive pressures, the margins began getting squeezed so much that we realised the payback period has become very, very long,” CP Gurnani, managing director and CEO of Tech Mahindra, said soon after dropping out of the race.

Competition from existing banks had always been a pressing concern. The situation intensified after the Narendra Modi government launched the Pradhan Mantri Jan-Dhan Yojana, a financial inclusion scheme, in 2014. Since then, some 290 million accounts have been opened under the scheme, covering 99.7% of Indian households, according to government estimates. So a large section of once unbanked Indians has been brought into the financial system, shrinking the market for payments banks.

Profitability is another sticky issue. A major source of a bank’s revenue is the difference between the interest rate at which it takes deposits (typically 4-7%) and lends (between 9-24%). As payments banks can’t lend, their earning is limited. Moreover, they are allowed to invest only in government securities which give returns of just 7-8%. Most payments banks, therefore, expect profitability to remain elusive for at least five years after launch.

FINO, with a turnover of just Rs324 crore in March 2017 and profit of Rs 10 crore in March 2015 (the latest available numbers), knows that it doesn’t stack up against the big boys.

“To be fair, I am happy that I am not among the big players. As long as you are making money for your investors, then it doesn’t matter whether you are David or Goliath,” said Gupta. ”They are guided by a different aspiration and this banking venture just forms a tiny part of the game. For us, this is all that there is and so we will put in our 100%.”

He recalls his visit to Chandni Chowk, one of Delhi’s largest wholesale markets, around 2009. Even there, in the heart of India’s capital city, a large number of people did not have access to a bank. “As a result, most of them used to either spend their money because they were scared someone will steal it. Or, they saved it with shopkeepers where they found it difficult to keep a tab. It was then that we realised that if you get the bank close to such individuals and keep the products simple, then the opportunity is huge.”

That’s FINO’s plan for Dharavi, and the rest of India.