Fino Payments Bank coming with an IPO to raise upto Rs 1209 crore

Fino Payments Bank

• Fino Payments Bank is coming out with a 100% book building; initial public offering (IPO) of 2,09,60,141 shares of Rs 10 each in a price band Rs 560-577 per equity share.
  
• Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
  
• The issue will open for subscription on October 29, 2021 and will close on November 02, 2021.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 10 and is priced 56 times of its face value on the lower side and 57.70 times on the higher side.
  
• Book running lead manager to the issue are Axis Capital, CLSA India, ICICI Securities and Nomura Financial Advisory and Securities (India).
  
• Compliance Officer for the issue is Basavraj Loni.
  

Profile of the bank

Fino Payments Bank is a growing fintech company offering a diverse range of financial products and services that are primarily digital and have a payments focus. It offers such products and services to its target market via a pan-India distribution network and proprietary technologies, and since 2017, it has grown its operational presence to cover over 90% of districts as of September 30, 2021. The bank’s products and services include various current accounts and savings accounts (CASA), issuance of debit card and related transactions, facilitating domestic remittances, open banking functionality (via its Application Programming Interface (API)), withdrawing and depositing cash (via micro-ATM or Aadhaar Enabled Payment System AePS) and cash management services (CMS). Its merchants also leverage the customer relationships within their respective communities to facilitate it cross-selling other financial products and services such as third party gold loans, insurance, bill payments and recharges. It also manages a large BC network on behalf of other banks.

The bank is also the only payments bank to offer a subscription based savings account in India. Customer satisfaction, its brand and reputation have played an important role in it becoming an industry leader in fintech products and services, as well as to further developing its business and improving its market position. Additionally, by remaining focused on its payments business it is able to continue leveraging its deep market expertise which in turn helps it develop products and services that meet the needs of its target market. Its significant geographic coverage and position as a large-scale, leading technology-enabled company with a diverse banking product offering also provides economies of scale that yield significant operating efficiencies, supports future growth and also helps to diversify some of its risks, such as regional or geographical risks or concentration risks. The bank operates an asset light business model that principally relies on fee and commission based income generated from its merchant network and strategic commercial relationships. Each merchant serves the banking and financial needs of its community, which in turn forms the backbone of its assisted-digital ecosystem, referred to as its ‘phygital’ delivery model (i.e., a combination of physical and digital).

Proceed is being used for:

• Augmenting Bank’s Tier-1 capital base to meet its future capital requirements.
  
• Meeting the expenses in relation to the offer.
  

Industry overview

The Indian banking system currently consists of 12 public sector banks, down from 26 owing to the merger of some public sector units to make them more relevant, 22 private sector banks, 46 foreign banks, 43 regional rural banks, 11 SFBs, six payment banks, 2,550 cooperative banks. All the banks fall under the purview of the RBI. Payments banks and fintechs have been increasing their presence and reach by increasing touch points through retails outlets which have a widespread presence in India. In India, the private final consumption expenditure (PFCE) was 58% of GDP in financial year 2021 at Rs 116 trillion and India’s retail spending on goods was at around 50% of its private consumption. For large swathes of the Indian population, particularly lower middle class customers and customers in the semi urban and rural areas, small mom and pop stores remain the primary outlet for retail spending. There are about 12 million mom and pop (kirana) stores spread throughout the country, which are estimated to account for almost 90% of the FMCG sales in the country. These merchants provide a huge potential for payment banks and fintechs to grow.

The Indian e-commerce sector has had a phenomenal run in the recent past. The sector has managed to attract consumers and has grown at a around 35% CAGR from Rs 0.38 trillion financial year 2015 to Rs 1.72 trillion in financial year 2020 on the back of rising internet penetration, increasing awareness of online shopping, penetration into tier 2 and tier 3 with the help of assisted model (where e-commerce firms tie up with merchants to cater customers) and lucrative deals offered by well-established players and start-ups. Over the last decade, the usage of debit and credit cards in India has increased substantially. Between financial year 2011 and 2021, the number of debit cards issued in the country has increased from 230 million to 898 million, while issued credit cards has increased from 20 million to 62 million. As more cards are getting issued, there has been a growth in the acceptance infrastructure as well. As of March 2020, the POS infrastructure in the country has more than doubled over the past 5 years to reach 4.4 million terminals, which further increased to 4.7 million terminals at the end of financial year 2021.

Pros and strengths

Unique DTP framework: The bank’s unique DTP framework enables it to serve its target market efficiently and is designed to achieve improvements on three key challenges associated with serving such target market, being: (i) scale - the significant investment of time and capital required to develop and deploy the infrastructure needed to establish the necessary geographic reach; (ii) service - the high levels of upfront and continued customer service required to build and maintain trust among all of the communities in which it operate and target; and (iii) sustainability - the customized range of products required to meet the needs of its target market. This framework creates a network effect and facilitates a seamless interplay between each of distribution, technology and partnerships. This framework differentiates the bank from its competitors, is difficult to replicate, promotes effective delivery of its products, reinforces positive customer experiences, facilitates strong relationships and improves its operational and strategic decision making, enabling it to innovate products for its customers.

Technology focused business model: The company has and will continue to invest into technology throughout its business. Such investment has been made with a goal to offer an unparalleled user experience to its customers and empower its merchants to carry out more transactions. Accordingly, simplicity in its service and product design and efficient deployment are important factors for it, both of which are demonstrated in its Bpay app, the ease in which it on-board merchants through e-KYC, as well as its Cash Bazzar initiative that assists in identifying merchant locations and directing customers to the nearest merchant outlet. Its in-house technology expertise and culture of application-led innovation, provides an attractive value proposition to its stakeholders. Currently, it is equipped with reporting process automation based processes at the back-end, SAS dashboards for analytics and demand forecasting, fraud risk management system for fraud detection, and other security systems and a network of servers.

Customer centricity and innovation at the core of business: The bank places the customer at the centre of all that it does and as such, its products and services are designed and customized to meet the needs and requirements of its customers and its target market. For instance, the diagram below illustrates its products and services which are targeted at meeting its customers’ needs throughout their banking and financial life-cycle. Further, the bank’s focus on understanding the needs, behaviors and desires of its customers is reflected in its brand commitment of it is ‘hamesha’ (i.e., it is ‘always’) there for its customers’ banking and financial needs. This understanding informs every single product and service that it develop and demonstrates its culture toward improving the customer experience.

Asset light and scalable business model: The bank’s merchant-led model is a capital light business strategy in respect of network expansion and except for referrals of third party loan providers, it does not offer any lending products and it does not hold credit risk for loans. In addition, its well established technology platform and consistent investment in further improvements, allows it to service a wide pool of customers and cater to their diversified requirements. In addition, its focus on and use of technology throughout its business assists it in expanding its reach throughout India without incurring the relatively higher costs associated with traditional bricks and mortar branch presence. For instance, it incur minimal capital expenditure costs in connection with on-boarding its merchants, because the on-boarding and setup capital expenditure costs are borne by the merchant, such as any existing physical premises, laptop, mobile based phone, internet connectivity, micro-ATM and AePS devices and fingerprint and/or IRIS scanners, and its technology significantly simplifies its merchant on-boarding and training process, making it cost effective for the merchant and efficient for both parties.

Risks and concerns

Primary drivers of revenue are fees, commissions: The primary drivers of the bank’s revenue are the fees and commissions that it charge for its products and services, and the volume achieved of such fees and commissions. The fees and commissions it charge its customers can depend upon a number of factors that are, in part, within its control, which can include its overall business strategy, its expenses related to a particular transaction type, the volume of transactions for a product or service (where the greater the number of expected transactions will typically result in it setting a smaller fee or commission, and vice versa), or promotions that it may be running at any given time. Further, they are also dependent upon a number of external factors, which can include general macro-economic conditions, the market value of certain infrastructure, the supply or demand for a product and service, regulatory instructions (for instance the RBI and NPCI imposed interchange fees), changes in general banking activity and competitive factors with certain other fintech companies, including other Payments Banks or within certain product/service lines. Competitive factors in particular, have and may continue to have an adverse effect on its ability to charge higher fees and commissions to improve its margins.

Rely extensively on information technology systems: The bank is highly dependent on its information technology systems and its ability to efficiently and reliably process a high volume of transactions across numerous locations and delivery channels, as well as for certain critical functions including financial controls, risk management and transaction processing. Its information technology systems enable it to manage the back-end operations that support API, its document management system and connections to its data center, as well as the front-end customer interface, eKYC onboarding and its digital mobile applications. Any disruption to its information technology systems or its ability to efficiently and reliably process its transactions, including disruptions to its digital mobile applications, may adversely affect its operations, reputation and its financial position.

Competition: The banking and financing sector in India is highly competitive and the bank face competition across all of its products and services from other payments banks, certain fintech companies, micro finance institutions (MFIs), small finance banks (SFBs), as well as from scheduled commercial banks, public sector banks, private sector banks, non-banking financial companies (NBFCs) and foreign banks with branches in the country. In particular, it competes closely with other BC operators in its domestic remittance, micro-ATM and AePS offerings; with regional rural banks, public sector banks and small finance banks on its CASA accounts; with BC operators and dedicated CMS entities on its CMS; and with insurance companies, brokers, corporate agents on third party insurance sales and online aggregators.

May face cyber threats attempting: The bank interact with and offer its products and services to its customers through a range of digital channels including its website, mobile phones and micro-ATMs. Therefore, it is exposed to various cyber threats including (i) phishing and trojans targeting its customers, wherein fraudsters send unsolicited mails to its customers seeking account sensitive information or to infect customer machines to search and attempt exfiltration of account sensitive information; (ii) hacking, wherein attackers seek to hack into its website and system with the primary intention of causing reputational damage to it by disrupting services; and (iii) data theft or ransomware, wherein cyber criminals may attempt to enter its network with the intention of stealing its data or information or by encrypting some or all of its data and information with the intent to demand a ransom for its restoration.

Outlook

Incorporated in 2017, Fino Payments is a growing fintech company offering a wide portfolio of digital financial products and services in India. The bank’s products and services include various current accounts and savings accounts (CASA), issuance of debit card and related transactions, facilitating domestic remittances, open banking functionality (via its Application Programming Interface (API)), withdrawing and depositing cash (via micro-ATM or Aadhaar Enabled Payment System AePS) and cash management services (CMS). Its merchants also leverage the customer relationships within their respective communities to facilitate it cross-selling other financial products and services such as third party gold loans, insurance, bill payments and recharges. On the concern side, the bank has and will incur significant costs to expand its range of products and services and it cannot assure you that such products and services will be successful, whether due to factors within or outside of its control, such as general economic conditions, a failure to accurately understand customer demand and distribution and market requirements or insufficient focus by management on these new products and services. Besides, it is required to obtain various statutory and regulatory permits and approvals to operate its business which requires it to comply with certain terms and conditions to continue its operations.

The issue has been offered in a price band of Rs 560-577 per equity share. The aggregate size of the offer is around Rs 1173.76 crore to Rs 1209.40 crore based on lower and upper price band respectively. On the performance front, total income increased by 14.4% from Rs 6,913.97 million for the financial year ended March 31, 2020 to Rs 7,910.27 million for the financial year ended March 31, 2021. Net profit was Rs 204.74 million for the year ended March 31, 2021 as compared to a net loss of Rs 320.36 million for the year ended March 31, 2020. The bank intends to continue to improve its operating leverage by focussing on its use of technology and in particular in connection with the on-boarding and training of its merchants and also to enhance its ‘phygital’ delivery model. The bank also intend to focus on increasing the adoption of its CASA offering by customers as this acts as a key customer sourcing gateway for certain of its other products. It also intends targeting high growth products with high margins within its existing offering, as well as exploring new and/ or improved products, in each case with a focus towards products offered through its ‘own’ channel.