(Kotak) 30nov21 - Banks1

Company Report
Banks ATTRACTIVE
Sector
November 30, 2021
THEME
BSE-30: 57,065
The rise and rise of fintech. The rise of fintech companies across financial services
has begun to challenge existing players around the world, especially full-suite banks
that have long dominated investor portfolios. Fee income pools face maximum
disruption as fee-based models increasingly pressure existing revenues. The expansive
growth runway favors the brave but notably, fintech infrastructure is a public good in
India, which constrains private operator dominance.
Open season on old ways: unbundle/re-bundle, big/small, fintech/big tech, novel/conventional
The onslaught of innovation unleashed by fintech has upended existing lines of business globally.
‘Unbundling’ and ‘re-bundling’ of financial services has emerged as a key theme. We expect
INSIDE
most revenue streams, particularly those that are fee based, to be challenged by new players.
However, we would also see these companies building adjacent revenue streams that mirror
New companies have
existing players (re-bundling) over time. Fintech will likely see a wide range of operators, generated shift in
including big tech and small players. A barbell scenario is ahoy with customized businesses market caps…pg13
dominated by smaller players and scalable businesses like payments by larger players. We are
likely to see different players driven by different objectives. Large tech or fintech players will Lending dominates
likely compete with existing players within regulated segments as well as outside of these. the revenue profile in
India…pg18
Fintech market cap. balloons on the back of capital surge
Capital is the least constraining factor today with a tidal wave of funding engulfing Indian Share of digital
fintech. Nimble, efficient and innovative new fintech companies are challenging their payments on the
traditional counterparts with (1) their relentless focus on making financial services simpler and rise…pg48
more secure for customers, (2) scalable models, and (3) strong talent pools. India has one of
the fastest fintech adoption rates in the world, which offers successful companies a long
M B Mahesh, CFA
runway of superior growth. Banks that have dominated market capitalization in financial mb.mahesh@kotak.com
services have been ceding territory to newer models of niche services like asset management Mumbai: +91-22-4336-0886
and more recently to fintech or payment companies.
Nischint Chawathe
nischint.chawathe@kotak.com
Regulators note new kid on the block, foster competition/inclusion Mumbai: +91-22-4336-0887
Fintech companies in any part of the world are partial to light regulatory frameworks. Abhijeet Sakhare
However, regulators are slowly but steadily expanding their oversight of the segment. abhijeet.sakhare@kotak.com
Importantly, regulators are supportive of new business models that foster competition as also Mumbai: +91-22-4336-0895
those that serve broader objectives such as financial inclusion. The ways in which companies Ashlesh Sonje
operate and regulators regulate differ from jurisdiction to jurisdiction. ashlesh.sonje@kotak.com
Mumbai: +91-22-4336-0889
India fintech: good growth runway; underwhelming dependence on shared infra, lending
Dipanjan Ghosh
India’s fintech landscape has much in common with its global counterparts but crucially, it has dipanjan.ghosh@kotak.com
Mumbai: +91-22-4336-0888
key differences that make it difficult to pick winners. India fintech boasts an accommodative
regulatory framework, sharp rise in mobile and broadband penetration and receptive
demographics. Growth rates in an under-penetrated country imply a long runway for growth
for existing players and notably, also that a responsive old guard does not have to face a
serious risk of losing market capitalization. Nevertheless, we would track closely the valuation
multiples for lending-based models, which are likely to get tested. Picking winners is tough
even though several payment models are impressive, as we are cautioned by (1) the lack of
Kotak Institutional Equities
ownership of infrastructure by private players (owing to the fact that India’s digital financial Research
infrastructure is a public good, available to competing innovators) and (2) the dependence of
Important disclosures appear
revenue models on lending, which is yet to be tested during cyclical downturns. at the back
For Private Circulation Only. In the US, this document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933. This document is not for public distribution
and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or
regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions.
Banks Sector
TABLE OF CONTENTS
Executive summary: Fintech drivers, models and implications ................. 3
Market capitalization: Fintech flexes muscle ......................................... 12
India fintech: The lending challenge ..................................................... 18
Tech to unpack and repackage financial services .................................. 28
Fintechs: Challenging the status quo .................................................... 41
Payments: Paving the way for non-banks ............................................. 44
New age banks or digital lenders .......................................................... 87
Healthy funding environment ............................................................. 136
The prices in this report are based on the market close of November 30, 2021.
2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Sector Banks
EXECUTIVE SUMMARY: FINTECH DRIVERS, MODELS AND IMPLICATIONS

In form and feature, face and limb, fintech is reshaping financial services globally and in India. New
companies (large and small) that challenge models in various service segments are presenting intriguing
investment ideas. As we examine such companies in India, we are wary of lending-based models as they are
not tested against slowdowns while companies using the revenue model of payment are not well established.
To understand the impact of the new fintech environment, we train our lens on some new and traditional
payment/lending companies to understand (1) their responsiveness and progress, and (2) how regulatory
oversight is evolving, promoting progressive ideas like competition, inclusive banking and open banking.
Fintech innovators enter investment portfolios

Many fintech players emerging across the financial services landscape are ready to disrupt
the market place. These players are getting listed and steadily increasing their share of the
market capitalization of financial services (see exhibit 1 and 2). It is not our contention that
these trends are new and/or that the valuation multiples of existing players must come off.
More pertinent, we believe the trends suggest that insufficient attention is being paid by
existing players to ideas that challenge conventional business models.
Exhibit 1: US: Payment companies and AMCs have created Exhibit 2: India: Private banks, select NBFCs and insurance
significant market cap. over the past few years companies have seen maximum market cap. expansion
Contribution of different segments in market cap. within financial Contribution of different segments in market cap. within financial
services, 1991-2021 (%) services, 1997-2021 (Rs bn)
Bank AMC Capital markets PSU bank Private bank SFB/ MFI
Diversified/ Other Insurance Payments NBFC Insurance Capital markets
Fintech Fintech
100
100
80
80
60
60
40
40
20 20
- -
1997
1999
2003
2005
2007
2009
2013
2015
2019
2021
2001
2011
2017
1991
1993
1997
1999
2001
2005
2007
2011
2013
2015
2019
2021
1995
2003
2009
2017
Source: Bloomberg, Kotak Institutional Equities Source: Bloomberg, Kotak Institutional Equities
Fee income pools: favorite fintech target, but not much to go after in India
Most new players are exploring two broad objectives: (1) expanding the market by reaching
the unbanked and under-banked through technology. This reduces physical and human
infrastructure; (2) focusing on specific revenue streams and simplifying or improving
customer experiences, especially the high fee income business.
It is important to note that India is a different market and, in our view, the opportunity to
grow is still large for existing as well as new players. However, several India-specific factors
are worth noting. (1) Unlike other markets, the revenue profile is dominated by lending,
which implies that the risk of disruption could be different. (2) India’s sharp skew in wealth
distribution makes focusing on the unbanked or under-banked a high risk strategy. (3)
Building a lending based institution is likely to be challenging. (4) Financial institutions have
always struggled with building trust when the source of funding is wholesale. (5) Building a
model using payment rails is another significant challenge. We have seen companies outside
India making a sound business case with the payment model but we believe this format will
need to be altered significantly to work in India, rather than be simply replicated.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Banks Sector
In several western developed economies, the revenue model has worked well for fintech
vendors (mostly through the merchant). Such companies have succeeded in building a
strong network by creating intricate two-sided business models that services both merchants
and consumers. New age companies such as Square, Stripe or Paypal have targeted this
segment which offers multiple vectors of growth by building unique and scalable assets.
Exhibit 3: Asia Pacific dominates the global revenue payments Exhibit 4: Nearly 75-80% of retail revenues are driven by
pool lending businesses
Share of payment revenue across segments and geographies, 2020 Estimation of retail revenue break-up, March fiscal year-ends, 2021 (Rs bn)
AMC fees,
Debit card 3 Insurance
fees, 2 fees, 3
Deposit
fees, 5
Card fees,
6
Lending
fees, 5
NII, 77
Source: Company, Kotak Institutional Equities

Source: 2021 McKinsey Global Payments Report
India fintech: key differentiators
 Digital payments solutions catching on slowly, steadily with consumers. In

developed markets, consumers have a longstanding relationship with digital products.
This implies that debit or credit card penetration is high and merchant ecosystems have
lagged relatively, especially for small businesses. This has improved substantially through
these new payment platforms which have reduced the cost of accepting payments (rolling
out payment solutions through mobile phone such as the Square payments). The massive
rollout of QR codes in several countries allows mobile phones to be used as a medium of
transaction. Companies that have invested in building this model have built semi-open or
closed loop ecosystems which are hard for new players to break into. India does not have
a well-developed digital market at the customer level though we have made a lot of
progress, especially post demonetization, through debit and credit and more recently, UPI.
 Fragmented market, immature merchant model dissuaded the latter. The merchant
acquisition model was a lot more challenging up until a few years ago. It was expensive
for small merchants as their transaction volumes through these mechanisms were not
sufficient to justify the set-up and maintenance costs.
 Omni-channel solutions: expensive but crucial. In recent years, merchant resistance to

offering digital products has abated with the rapid rise in customers opting for debit,
credit, internet, wallet or UPI. Further, QR-based payment models are easy to set-up and
require lower maintenance. Hence, sellers are looking at omni-channel payment solutions.
Note that the payment rail for each format of payment transaction is different. A debit
card rail is independent of the credit card rail or UPI or wallet. Offline tends to have a
different rail from online. A fragmented merchant acquisition market makes it difficult to
absorb the cost of these payment transactions. The merchant has long had to deal with
many vendors to accept these transactions. There are challenges especially regarding
chargebacks, reconciliation, clearing and settlement for merchants.

Sector Banks
 Cross-selling is an integrated part of the model, at an early stage in India.

Merchant acquisition companies tend to cross-sell more products, which increases the
break-even period for merchants who accept these solutions. For example, a typical bill
payment solution has physical and software requirements. There is an annual fee that the
merchant has to pay. The new merchant acquisition companies tend to cross-sell other
products like accounting, payroll, inventory management etc. to make their business
model stronger.
However, there are challenges at the merchant level in India. Accounting systems, inventory
management, payroll processing are yet to evolve in a formal way to make these
additional businesses attractive at the merchant level. So, the primary drivers of revenues
for payment companies tend to be far fewer than we have seen in other countries.
 Inability to own infrastructure could make models fragile. The big bet in India is that
UPI rails have witnessed significant traction and could be the most preferred option.
Exhibit 5 shows that there is a long runway for growth in the payment ecosystem. This
excludes the growth that is likely to take place when this journey of digitization unfolds
and the opportunity that is likely to come through the sales of other products. Clearing is
different from settlement and these functions are typically managed through public
infrastructure created by the respective central banks of various countries. This
infrastructure could be private as well (closed loop). We see several payment companies
offering 1-2 day settlements for transactions. India has opted for a more robust, scalable
and instantaneous payment system and at a cost which has limited competition currently.
Several challenges come with the territory:
 Scalability and stickiness are not necessarily interchangeable. Interoperability of

network infrastructure has not offered a significant advantage to infrastructure
providers. Switching platforms is incredibly inexpensive and easy in India, which
accounts for how widespread the practice is compared to developed markets. The
transaction history stays with the banks though the front end of the transaction may
move to a payment platform. Scale does not necessarily ensure stickiness of customers.
The scale of transitions of customers to UPI is a cautionary tale, suggesting that it is
going to be tough for players to create closed loop or even semi-closed loop networks.
 Transaction pricing: Infrastructure owner calls the shots, not the network. Most
payment models across the world are profitable. The merchant is willing to bear the
cost as these payment options help improve sales. However, in India, a model that is
built on UPI has inherent challenges at the level of ownership of the infrastructure.
Arguably, the merchant should be willing to pay a higher fee for an instantaneous
transfer of money such as is visible in UPI. However, we currently don’t have such a
pricing. The pricing of UPI transactions is similar to that of debit or credit cards.
Investors have to believe that there would be flexibility in pricing in the future or
companies would be able to build adjacent revenue streams (lending) or build bundled
products that can be sold for a certain fee and/or be transaction based.
 Network effect is not a sure shot formula for success in India. The path to
monetization through the network effect is still not clear or proven, even if a company
does have a dominant share.

Banks Sector
Exhibit 5: There is significant scope to change the payment behavior from cash
Share of cards, PPI and UPI in total PFCE for India, March fiscal year-ends (%)
Credit card spends Debit card spends PPI UPI P2M ATM Cash
100
80
58 58 55 53
66 65 63 61
67 66
60
40
24
27
30 29
29
20 30 30 31 31 26
9
5
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 1QFY22
Source: RBI, NPCI, Kotak Institutional Equities
Open banking: benefits for account aggregators/Indian avatars
India is setting the stage for the next round of digital initiatives through the open banking
platform. One can broadly describe this through the India Stack platform: (1) Aadhar rail,
which played a key role in opening accounts and made fund transfers faster, especially for
DBT schemes. (2) UPI rail, which followed, allowed an exponential growth in digital
payments. (3) The emerging third rail is the data sharing or account aggregator rail.
 Under-penetration of credit products warrants a fresh new look. Traditional

borrowing for a small business is challenging as (1) the high rejection rate dissuades
potential applicants or (2) the approval of limits is sorely deficient. In many instances the
inability to secure credit stems from the inability of lenders to assess a borrower’s business,
income or wealth. Hence, there is a need for new lenders who are willing to look at these
borrowers through a fresh lens. From a financial services point of view, this allows
consumers to benefit from more personalized products with lower switching costs and
improved competition. We have seen that the entrance of private banks has enabled the
quicker penetration of small ticket loans, especially in the salaried- and the middle/upper
income consumer population, resulting in a steady increase in market share (see Exhibits 6
and 7).

Sector Banks
Exhibit 6: Credit market share of private banks has doubled to Exhibit 7: PSU banks have steadily ceded deposit market share
35% since 2012 to private banks over the past decade
Credit market share by bank group, March fiscal year-ends (%) Deposit market share by bank group, March fiscal year-ends (%)
PSU banks Private banks Small Finance Banks Regional Rural Banks
Foreign Regional Rural Banks Foreign Private banks
Small Finance Banks PSU banks
100
100
19
18
18
19
17
18
16
18
20
18
18
19
22
20
21
23
25
18
18
18 80
19
19
18
21
29
29
20
18
20
20
30
30
20
19
24
20
80
27
29
33
34
35
36
60
60
40
40
20
20
72
62
75
75
74
74
71
71
74
74
75
74
74
73
71
69
67
63
61
61
74
72
72
71
70
71
71
71
71
74
75
75
74
74
73
68
66
63
60
58
56
56
0
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2014
2015
2016
2017
2018
2019
2020
2021
2013
1QFY22
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
1QFY22
 Traditional borrowing will undergo a change. India is creating a market structure

which allows citizens to readily identify themselves, make payments and share historical
data in a seamless, standardized and open architecture, all of which is enabled by
modular and individual technologies and policies. With lower friction and lower
transaction costs, the viability of a business loan improves considerably. Large banks are
likely to look at this development favorably as it will allow them to build standardized
products at ticket sizes that are much smaller than possible today. This has been a
challenge for existing large banks as the risk-reward tradeoff reverses as the size of
balance sheet becomes larger and the ticket size of loans needs to decline to generate
growth. On the other hand, smaller lenders today get access to a wider suite of
information that would have been extremely difficult given its size. This would help them
compete with the large banks and offer customized solutions which the large banks
could struggle to offer.
 Multitude of models likely to emerge. The opening of data through the account
aggregator framework is likely to generate interesting options for financial players. We
have seen that open banking has presented new bank variants targeting customer
segments on the assets, liabilities, payments, wealth, capital markets side. There is likely
to be an increased focus from financial players to make the entire experience convenient,
simple and affordable.
 No immediate threat to traditional lenders. The opening up of new avenues of

payments and access to historical information in a seamless manner does not have to
necessarily displace existing players. We have seen that the market share shift has been
gradual despite new private banks having more than 25 years of presence with superior
platforms and experience. There is a long runway for growth for all the players and
heightened competition only expands the market. Not every model is likely to be equally
successful. We have seen failures and challenges faced by new models, evinced in the
problems faced by Global Trust Bank or more recently by Yes Bank. Some models chose
to build scale while others target specific niches. These models could focus on segments
which offer high-margin products but essentially carry some form of tail risk that surfaces
during a downturn. In recent years, small finance banks are an example as they operate at
high yields, which enables them to compete in the deposit market. This however exposes
them to risk, making their business models a lot more vulnerable.

Banks Sector
In short, beyond the success in payment, enabling deeper credit penetration seems like a
more plausible outcome over the medium term through a combination of Aadhaar, UPI,
account aggregator (AA) and open credit enablement network (OCEN). It is too early to
assess the impact on existing players but such a scenario gives a strong chance to existing
and new players to build scalable business models. We have already seen frontline banks,
insurance (life and general) and mutual fund companies joining this scheme.
Digital opportunity can be tapped by many models

We can broadly categorize fintech players into (1) deposit and lending, (2) capital raising, (3)
asset management, (4) payments, clearing and settlement, (5) insurance/wealth
management and (6) cryptocurrency. Exhibit 8 shows this new set of models.
Exhibit 8: Taxonomy of the fintech environment
Source: BIS, Kotak Institutional Equities

Sector Banks
 Payment companies. This report examines the business models of several payment
companies (traditional as well as new players). We look at how businesses have evolved
for companies in the (1) merchant acquiring business, (2) customer acquiring business
and (3) transaction processing business. We look at companies like Visa, Mastercard,
Adyen, Fiserv, FIS and Global Payments along with some of the new companies like
PayPal and Square. Many of these companies have a well-established business in India.
The new companies have moved beyond a single product and offer a suite of products
that track the flow of money. They are making their presence in nearly all the payment
activities that a consumer or merchant would undertake. For example, on the merchant
side, we see payment companies offering payroll processing, order management solutions
in specific industries like food services, data analytics, loyalty management programs and
lending products etc. On the consumer side, we see them offering some form of deposits,
cross border payments, investment ideas (stocks or currency), P2P payments and lending
products like BNPL etc. We have seen several large M&A transactions where traditional
payment companies are looking to make themselves a lot more competitive by
establishing themselves across the payment chain as well. We observe that lending is not
necessarily a critical part of the revenue model.
Exhibit 9: Square is building two primary ecosystems one is through merchants and another through customers (via the cash app
ecosystem)
Source: Company presentation
 Open banking framework: evolution across the world. Open banking is a global
movement driven either by market or regulatory forces aiming to give customers
ownership and control of their data. For banks, access to customer account information
has long been a key strategic advantage, providing crucial information around consumer’s
flow and quantum of savings into the account. Open banking’s key objective is to level
the playing field for new players to enter the market.
The success of open banking in encouraging competition is not fully proven with the
ecosystem yet being built. Falling barriers to entry are a given but customer adoption and
the road to eventual profitability is foggy at this point.

Banks Sector
Exhibit 10: Open banking schematic
Source: McKinsey report on Open Banking
 Digital banks, neo banks: customer convenience, inclusion. We look at some of the
models that are emerging across the world on digital banks or neo banks. These
challengers are looking to bring financial inclusion to the under-banked or unbanked
populations or simply looking to improve convenience or customer experience. Financial
inclusion is a popular thesis with regulators and they have been forthcoming with licenses
to allow these entities to operate as full-fledged banks.
Existing banks with archaic core banking systems and rigid organization structures are
facing competition in areas where the profitability is strong. For example, banks whose
lending models are focused on a niche like SME banking. At this point, several of these
banks are in the early stages of their evolution when they are willing to spend their entire
capital and efforts to build customers and keep up a steady flow of revenue-making
products.
 Other lending models: P2P, BNPL. We look at some of the other lending models which
include P2P lending models like Lending Club (US-based) and Funding Circle (UK). We
note that the journeys for these models have not necessarily tracked the initial optimism
that greeted their listings.
Finally, for BNPL, we look at select companies like Klarna, Affirm, AfterPay and Zip. There
are several variants of the BNPL model across the world and their replicability appears to
have been simple enough. These models do pose challenges though, as the revenue
stream partly shifts from the customers to the merchants and we note that the success
has a higher rate in developed markets which are looking to challenge the credit card
market. It is difficult for vendors to provide differentiated offerings and their bargaining
power is likely to decline over time, which calls for such companies to identify new revenue
streams to build sustainable models. BNPL has taken the payment industry by surprise and
we note that existing players have offered to come with their own product variations.
The Indian scenario is different with incumbent players like Bajaj Finance, private banks
and credit card companies having built this product a few years ago. Newer players are
tapping clients who currently don’t have a card or are yet to qualify for one from existing
financiers.

Sector Banks
Innovator edge
New fintech companies have several strengths that incumbents lack:
 Able to attract talent with offers of good work and compensation. As these
companies are looking to build models from scratch, these challenges of building
solutions are not easily available in established organizations. These young companies are
able to incentivize and scale their models in an easier and more nimble way than a few
decades ago.
 Adoption rates are faster. New companies are offering products where the ability to
build scale is easier. A digital model which requires limited physical infrastructure and
rides on mobile which has a near ubiquitous presence improves the probability of success
of these models.
 Supportive regulator looking kindly on competition. The Aadhar-based platform in

India which is now getting into account aggregation does level the playing field, but this
would have been difficult without regulators drawing comfort from the model. Open
banking is another example where regulators are comfortable with competition.
 Capital not a worry, steady flow of funding. Further, these models are currently
getting backed by large capital infusions from private or public equity. The ability to
incentivize has significantly improved along with the ability to scale. The earlier models
forced companies to look at a path to profitability at a very early stage of evolution of the
company. New models allow companies, including those that are listed, to have a
reasonably long journey to earnings normalization. All this is happening while existing
players are still monitored on traditional metrics of profits or profitability.
 Decision making is quicker. Large organizations struggle to take decisions fearing

negative implications. Building consensus is time consuming and results in lost
opportunity. A lean new organization can counter size by changing the design to suit the
requirements. New companies have a much more relentless focus on customer
requirements.
 Transformation journeys for existing players are not easy. Most of the existing
financial institutions have not changed their core platforms for decades. Any attempt at
change involves a mix of existing and new technologies to ensure that existing services
are not disrupted. This transformation exercise is complex and protracted, assuming that
they are successful. New players have the advantage of starting from scratch and can take
the latest applications and suitably modify them to their needs. The recent experience of
TSB Bank in the UK is an example of the downside of undertaking large scale
transformation programs.

Banks Sector
MARKET CAPITALIZATION: FINTECH FLEXES MUSCLE

A close look at market capitalization yields valuable insights into changes in the financial sector landscape.
The direction of change is telling. Over the past four decades, new business models have presented
innovative investment ideas and fintech represents one of the big ones. A sector once dominated by lending
and insurance companies saw asset management and more recently payments become forces to reckon with
in wealth allocation. India’s vast potential could well see fintech growth take a different track.
Lenders had their moment in the sun; new players have the baton
Data of the past 30 years show that there has been constant change in market capitalization
within the financial sector. Lending, along with insurance, had been the backbone of the
overall market cap but new companies offering new services entered the fray over time to
create a meaningful difference in sector composition. On a broader note, we do recognize
that new business models are emerging that would grab several revenue pools nesting
within banks such as payments, foreign exchange, credit, savings, investments, etc. There is
probably a common approach in some of these businesses which are trying to unbundle
some parts of the bank businesses, wherein the most relevant KPI is customer growth and
GMV growth. This initial leg of the business is funded by VC/PEs towards building some level
of network effects to achieve critical mass. As these businesses get listed, their share of
market cap will expand simply on the basis of the disruption thesis and the size of the
opportunity. For India too, these forces will play out with numerous new entrants creating
market cap to begin with while a few stay the course to become long-term winners.
We have removed the survival bias by adding companies that no longer exist such as lenders
that did not survive the global financial crisis. We underscore that ours is not an exhaustive
list and it is quite likely that we may have missed many. We also acknowledge that market
capitalization does not imply returns as the latter could be a reflection of higher capital
infusion or large-scale listing of companies in the same financial services segment. The
current exercise covers banks, insurance, asset managers, REITS, diversified players, payment
companies and fintech (though some of it could be part of diversified or other segments).
This exercise covers the US, Europe, Japan and India (Exhibits 11-18).
The following discussion draws from our detailed report from a year ago (Changing
directions, August 24, 2020) that drew parallels between the savings and loans crisis in the
US and the current position of India’s banking industry. The US and European banks saw
major market cap expansion during 1995-2006. This was supported by a strong economy,
buoyant markets and a lack of regulatory constraints on capital and leverage. A reversal on
all three fronts (post GFC) led to sharp declines after 2007. In the ensuing recovery, the
aggregate market cap for US banks has reverted closer to pre-GFC levels, whereas European
banks are perhaps on a much weaker footing with market caps at close to half pre-GFC
levels. Japanese banks too saw market cap expansion during the mid-2000s which collapsed
following the GFC.

Sector Banks
Exhibit 11: US: Payment companies and AMCs have created Exhibit 12: US: Banking industry market cap remained nearly
significant market cap over the past few years unchanged over 2006-2020
Contribution of different segments in market cap within financial Contribution of different segments in market cap within financial
services, 1990-2021 (%) services, 1990-2021 (USD bn)
Bank AMC Capital markets Bank AMC Capital markets

Diversified/ Other Insurance Payments Diversified/ Other Insurance Payments
Fintech Fintech
100 6,000
80 4,800
60 3,600
40 2,400
1,200
20
-
-
1993
1995
1997
2001
2003
2005
2009
2011
2013
2017
2019
2021
1991
1999
2007
2015
1991
1993
1997
1999
2001
2005
2007
2011
2013
2015
2019
2021
1995
2003
2009
2017
Source: Bloomberg, Kotak Institutional Equities

Source: Bloomberg, Kotak Institutional Equities
Exhibit 13: Europe: Banks have lost significant market cap share Exhibit 14: Europe: Financial services is a much smaller industry
since 2007 compared to pre-GFC years
services, 1990-2021 (%) services, 1990-2021 (USD bn)
Banks Insurance AMC/REIT Banks Insurance AMC/REIT
Capital markets Payment Others Capital markets Payment Others
100 5000
80 4000
60 3000
40 2000
20 1000
- 0
1995
1999
2003
2007
2011
2015
2017
2019
2021
1997
2001
2005
2009
2013
1995
1999
2003
2007
2011
2015
2019
1997
2001
2005
2009
2013
2017
2021
However, Japanese bank stocks had a much weaker run during the 1992-2002 decade
thanks to the poor health of the banking system. This systemic fragility was a direct result of
the asset bubble collapse in the late 1980s that culminated in the 1997 crisis that toppled
several organizations.

Banks Sector
Exhibit 15: Japan: Payment companies and AMCs have created Exhibit 16: Japan: Banking industry has lost considerable market
significant market cap over the past few years cap since 2005
services, 1990-2021 (%) services, 1990-2021 (JPY tn)
Bank AMC/ eBroker Investment bank Finance co Insurance Bank AMC/ eBroker Investment bank Finance co Insurance
100 100
80 80
60 60
40 40
20 20
0 0
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
India is different: massive pie gives existing players enough potential share
We expect to see new players challenging existing systems in India. The listing of payment
companies is testament to this emerging trend. However, the only difference that we see in
India or under-developed markets is that the room to grow is large. Not only would new
players benefit, but we would expect the impact to be felt by existing players as well. At this
point, India’s banking system resembles US banks in the 1990s with a severe corporate asset
quality cycle behind and a banking system that is more capitalized. Further, with a few rounds
of consolidation, larger banks are in a much stronger position to attract deposits and fund
loan growth. Private banks and new entrants such as insurance, AMCs and capital market
players have been steadily chipping away at market share and market cap. share from PSUs.
Exhibit 17: India: Private banks, select NBFCs and insurance Exhibit 18: India: We see broad expansion of market for all
companies have seen maximum market cap. expansion segments barring PSU banks
services, 1990-2021 (%) services, 1990-2021 (Rs bn)
PSU bank Private bank SFB/ MFI PSU bank Private bank SFB/ MFI
NBFC Insurance Capital markets NBFC Insurance Capital markets
Fintech Fintech
100 55,000
80 44,000
60 33,000
40 22,000
20 11,000
- -
1997
1999
2003
2005
2007
2009
2013
2015
2019
2021
2001
2011
2017
1997
1999
2001
2007
2009
2011
2017
2019
2021
2003
2005
2013
2015

Sector Banks
Payment companies see superior valuations, performance

Exhibit 19 shows the index of payment companies with two major bank indices (a select set
of world banks and US banks). The performance of payment companies has definitely been
far superior to the bank indices. This essentially reflects the difference in growth rates and
superior profitability model as compared to the traditional banks. However, when we look at
the ratios like PBR and PER on a standalone basis, it is imperative to note that the bank
indices especially that of US-based banks are back to all-time highs (see exhibit 24 and 26).
Exhibit 19: Payment companies have outperformed banking Exhibit 20: Payment companies have shown strong earnings
indices growth leading to superior valuations
Payment companies have outperformed banking indices, 2015-21 (x) Payment companies have outperformed banking indices (x)
Payment companies index World banks index (X) 12M fwd P/E 12M fwd EPS (RHS) (USD)
US banks index 40 180
500
32 144
400
24 108
300
16 72
200
100 8 36
0 0 0
Jun-19
Jul-16
Jul-21
Mar-18
Sep-15
Apr-15
Apr-20
Sep-20
Jan-19
May-17
Feb-16
Nov-19
Feb-21
Oct-17
Aug-18
Dec-16
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Oct-21
Exhibit 21: Payment companies have delivered superior RoEs Exhibit 22: Payment companies have been operating at ~4X
leading to a higher PBR multiple of 4-5X revenues
PBR and ROE for payment companies, 2015-21 (x) Price/revenue and revenue for US-based banks, 2015-21 (x)
(X) 12M fwd P/B 12M fwd RoE (RoE) 7.0

7.0 35
5.6
5.6 28
4.2
4.2 21
2.8
2.8 14
1.4 7 1.4
- 0 -
Jul-21
Jul-16
Jun-19
Jun-19
Mar-18
Apr-15
Sep-15
Apr-20
Sep-20
Jan-19
Jul-16
Jul-21
Apr-15
Sep-15
Apr-20
Sep-20
Mar-18
Oct-17
Jan-19
Nov-19
May-17
May-17
Oct-17
Feb-16
Feb-21
Feb-16
Feb-21
Nov-19
Dec-16
Aug-18
Dec-16
Aug-18

Banks Sector
Exhibit 23: EPS growth has significantly slowed resulting in Exhibit 24: US-based banks have done relatively better on
subdued earnings multiple for banks earnings growth leading to higher valuations
PER and EPS for key banks across the world, 2015-21 (x) PER and EPS for US-based banks, 2015-21 (x)
(X) 12M fwd P/E 12M fwd EPS (RHS) (USD) (X) 12M fwd P/E 12M fwd EPS (RHS) (USD)
15 25 15 45
12 20 12 36
9 15 9 27
6 10 6 18
3 5 3 9
0 0 0 0
Jun-19
Jun-19
Jul-16
Jul-21
Jul-16
Jul-21
Mar-18
Mar-18
Apr-15
Sep-15
Apr-20
Sep-20
Apr-15
Sep-15
Apr-20
Sep-20
Jan-19
Jan-19
May-17
May-17
Feb-16
Nov-19
Feb-21
Feb-16
Nov-19
Feb-21
Oct-17
Oct-17
Aug-18
Aug-18
Dec-16
Dec-16
Exhibit 25: PBR multiples have still not reached back to their all- Exhibit 26: US-based banks’ PBR multiples have reached a much
time highs for most banks across the world higher multiple led by better business performance
PBR and EPS for key banks across the world, 2015-21 (x) PBR and EPS for US-based banks, 2015-21 (x)
(X) 12M fwd P/B 12M fwd RoE (RoE) (X) 12M fwd P/B 12M fwd RoE (RoE)
1.6 15 1.5 15
1.3 12 1.2 12
1.0 9 0.9 9
0.6 6 0.6 6
0.3 3 0.3 3
- 0 - 0
Jun-19
Jun-19
Jul-16
Jul-21
Jul-16
Jul-21
Apr-15
Sep-15
Apr-20
Sep-20
Apr-15
Sep-15
Apr-20
Sep-20
Mar-18
Mar-18
Jan-19
Jan-19
May-17
May-17
Oct-17
Oct-17
Feb-16
Feb-21
Feb-16
Feb-21
Nov-19
Nov-19
Dec-16
Dec-16
Aug-18
Aug-18

Sector Banks
Revenue pools are different across countries

We note that fintech companies favor fee income pools that are less risky in nature. They are
also likely to be highly profitable segments that would inevitably have much lower capital
consumption.
The 2021 McKinsey Global Payments Report outlines the payment revenue pool to give a
perspective of the same across different geographies. The payment revenue pools are
different across markets which implies that the level of disruption or the nature of disruption
of existing pools is likely to be different as well.
Developed markets have seen very low levels of balance sheet growth and have
progressively compensated low revenue growth with higher fee income for the services
rendered. However, these charges are making it harder for a large number of customers
who are now choosing newer financial service companies that are offering similar services at
lower rates or offering a lot of free services. We see that the revenue pools in the Asia
Pacific region is skewed towards float income probably led by higher contribution of interest
income in their revenue profile. Also, the loan mix has a higher share of corporate lending as
compared to retail lending in developed markets.
Exhibit 27: Asia Pacific dominates the global revenue payments pool
Share of payment revenue across segments and geographies, 2020
Source: McKinsey Global Payments Map

Banks Sector
INDIA FINTECH: THE LENDING CHALLENGE

India’s fintech disruption is fraught with challenges, notwithstanding the immense opportunity. The
developed markets template does not fit the landscape given that the revenue pool in India is dominated by
lending. India is still a growth market and there is room for new and existing players to grow within existing
product segments and even more in yet unexplored segments. For lending, the availability of formal credit is
good but penetration is low and skewed towards selective uses. Bold new business models are attempting to
dismantle the lending challenge with novel tools but we caution against such models, fraught as they are
with risks that cannot be easily mitigated.
High fee income not the best disruption target for India fintech, unlike RoW
Unlike other markets, revenue pools in the Indian financial system are still quite risky as they
are dominated by lending-related items. India fintech’s mission to break through this barrier
would therefore be stymied by balance sheet risks. We elaborate later in this report on how
most fintech companies are looking to avoid this piece.
Exhibit 28 gives the overall pie of revenues in the retail banking business in India. We
attempt to estimate this across banks and non-banks. This is based on back-of-the-envelope
assumptions instead of a precise estimate. We look at lending revenues in the form of net
interest income plus lending fees, along with credit/debit card fees, deposit fees and
commissions on the sale of investments and insurance.
New challengers are largely focusing on the retail part of the banking business, which is
estimated to be Rs3.1 tn or ~US$42 bn. However, nearly 80% of these revenues are
lending-linked revenues. This is different from the point we illustrate in Exhibit 27 where
consumer fees are high, especially in credit cards. We believe new players can disrupt
lending only at the fringes and are probably likely to participate as originators (in partnership
with lenders) or sourcing agents. A larger part of the opportunity could come from
payment-related fees in credit cards or through sale of third-party products. Incumbents,
especially private banks, can continue to protect their turf as India is still underpenetrated
from a credit point of view, apart from the opportunity to chip away market share from
public banks.
Exhibit 28: Nearly 75-80% of retail revenues are driven by lending businesses
Estimation of retail revenue break-up, March fiscal year-end, 2021 (Rs bn)
Debit card fees, 50 AMC fees, 90

Insurance fees, 8 0
Deposit fees, 160
Credit card fees,

190
Lending fees, 160
Lending NII, 2,400

Sector Banks
Disruption: market to expand, no opportunity loss for existing players

We believe new players will significantly expand the market, more on this when we discuss
the payment space. Since the introduction of UPI and heavy investments made by a few
players like PayTM or some of the other mobile wallet companies, we have seen the
adoption of newer payment systems that makes the system less dependent on the most
expensive medium of cash. These players are not traditional banks but new players like
PhonePe, Google Pay or the likes of PayTM who are playing a much larger role in expanding
the market. As there is more digital data, we would see newer monetization programs such
as lending, payments or other cross-sell-related fees.
Lending-based fintech models: wariness warranted

Building a business model on payments is challenging. Most of the adoption that we are
seeing at a customer level is on the NPCI-backed UPI rail. Further, there is likely to be higher
usage of Aadhar-based lending and in due course, account-aggregator-based lending,
which would be explained in subsequent sections. In all the key developed markets, we note
that the infrastructure is owned by a few players and the network effect created by
expanding this infrastructure is strong and less expensive, which elicits the loyalty of merchants
or consumers while ensuring stronger profitability metrics for infrastructure owners.
However, the same is not true for India. In nearly all the developments we are seeing,
customer adoption is on public payment rails. The rules are not defined by the dominant
player(s) but by the institution, which is a not-for-profit entity. This implies that the pricing of
services is aimed to maximize adoption rates. No single entity can own this infrastructure
and we have seen regulations emerge to constrain dominance by any single entity. This
makes the business model challenging as the revenue monetization program is less
dependent on payments.
We see fintech models more focused on lending-related programs. These target customer
segments that are essentially new-to-credit or that entail significant risks as these business
models are not tested against cycles. We are still not sure if this approach makes the model
profitable on a through-the-cycle basis. Further, it is also not certain if they can command
significant premiums given the risks associated with lending, even if a bulk of the loan book
is short term in nature.
Wider opportunity brings wider risk; historical focus played it safe
Low credit penetration has always been an area of discussion and various stakeholders have
long deliberated different strategies to counter this challenge. Priority sector lending in
banks is an example where credit is compulsorily diverted to segments where credit
penetration is low. However, making this a profitable proposition has been a challenge.
Exhibit 29 shows the Lorenz curve for India as of 2019. The basic proposition of the Lorenz
curve is breaking the ownership of assets based on various decile of population to assess the
distribution of assets. A line that is closer to the egalitarian line is considered to be the best
case scenario. For India, we see that the top 10% of population has ~50% of the overall
assets and the top 30% has 75% of the overall assets.

Banks Sector
Exhibit 29: The top 10% of population has 50% of the overall assets
Lorenz curve for India as of 2019
Source: All India Debt and Investment Survey
Land, buildings grab 90% of savings; formal credit at 70% but low on penetration
A recent survey report from the government provides interesting insights into the country’s
savings and indebtedness profile, key takeaways highlight the skew. (1) The top 10% of
population has 50% of wealth, top 70% has 80% of wealth while the bottom 50% has
<10% of the overall wealth, suggesting a fairly unequal distribution of wealth. (There is a
good chance that the pandemic has worsened this skew as this report was based on 2018
surveys.) (2) Of the total households, 37% are cultivators, 28% are in rural India but not
involved directly in agriculture, 25% in services and the balance ~10% in self-employed
segments. (3) Wealth held by individuals is pegged at ~Rs510 bn, 55% of which is held in
rural India. Liabilities held by individuals is pegged at ~Rs210 bn; 50% in rural India. Total
value of gold held is US$170 bn and the top-5 states have 50% of this wealth. (4) Formal
credit represents 67% of rural credit, ~90% of urban credit and ~70% for India. Formal
credit is dominated by banks, RRBs and co-operative banks/societies. Professional money
lenders dominate informal sources of funding in rural and urban India. (5) 35% of rural and
22% of urban India have access to some form of credit.
In sum, large-scale lending models could be fragile
Skewed distribution of wealth and poor experiences in underwriting has served to drive
lender preferences towards asset or collateral based financing. Further, the distribution of
occupations shows a very high share of the unorganized or self-employed labor force where
uneven incomes dominate cash flows. This makes it challenging to build cash-flow-based
financing. Aided by better technology, which is enabling a more robust analytical
environment and support from other stakeholders, a fresh vision is emerging that is now
looking to overcome this challenge.
The opportunity presented by low credit penetration, especially in retail loans and SME loans,
has been a contentious idea, with the focus veering from the long runway for growth to the
risks endemic in the segment. The skewed asset mix (top 10% having a higher share of
collateral) had focused the attention of erstwhile lenders on the safe upper bracket, new
business models are attempting to dismantle these zone barriers.

Sector Banks
Tough road to new segments, no illusions there
We have seen that the risk emerging from a lack of wealth and weak income profiles implies
that building a business model primarily on these borrowers is fraught with risk, especially
considering their fragility during slowdowns. The Covid-19 pandemic illustrated this
vulnerability - MFI loans are currently witnessing significant increases in default rates. The
lack of collateral and low incomes present significant risk that can’t be diversified away easily.
There is a lot of reliance on the fresh data that is coming which enables better decision-
making but we would caution that these business models are still not tested against economic
cycles. The payment space that caters to this segment is a lot more attractive segment from
an investment perspective but it is harder as there are no direct plays easily available.
Exhibit 30: 260 mn households with 65% in rural India; 37% in agriculture, 25% in urban formal
Break-up of Indian households based on occupation (mn)
120
Rural India Urban India
100
80
60
98
40 75
65
20
23
0
Cultivator Non-cultivator Self-employed Others
Source: All India Debt and Investment Survey, Kotak Institutional Equities
Exhibit 31: Wealth held by individuals is pegged at ~Rs510 bn; Exhibit 32: Liabilities held by individuals is pegged at ~Rs210 bn;
55% in rural India 50% in rural India
Total value of assets held by individuals based on household Total value of liabilities held by individuals based on household
occupation (Rs bn) occupation (Rs bn)
250 9
Rural India Urban India Rural India Urban India
200 7
150 5
216 4 7
100 6
143
2 4
50 95 3
59
- -
Cultivator Non-cultivator Self-employed Others Cultivator Non-cultivator Self-employed Others
Source: All India Debt and Investment Survey, Kotak Institutional Source: All India Debt and Investment Survey, Kotak Institutional
Equities Equities

Banks Sector
Exhibit 33: Average value of assets/household held is higher is Exhibit 34: Average value of liabilities/household is relatively
rural India but mostly in land and buildings smaller
Average value of assets held per household (Rs) Average value of liabilities held per household (Rs)
3.0 0.3
Rural India Urban India Rural India Urban India
2.4 0.2
1.8 0.2
1.2 0.1
2
0.2
0.1
0.6 0.1
1
0.1
0 0 0.0
0.0 0.0
Cultivator Non-cultivator Self-employed Others Cultivator Non-cultivator Self-employed Others
Source: All India Debt and Investment Survey, Kotak Institutional Source: All India Debt and Investment Survey, Kotak Institutional
Equities Equities
Exhibit 35: Total value of gold held is US$170 bn and the top-5 states have 50% of this wealth
Break-up of Indian households based on occupation (mn)
Cultivator Non-Cultivator Self-employed Others

2,000
1,600
1,200
800
400
-
Kerala
Uttar Pradesh
Maharashtra
Bihar
Manipur
Lakshadweep
Mizoram
J&K
Telangana
Rajasthan
Odisha
HP
Assam
Daman & Diu

Delhi
Sikkim
Meghalaya
Jharkhand
Karnataka
Goa
A & N Islands
Puducherry
West Bengal
Haryana
Uttarakhand
D&N Haveli
Nagaland
Tripura
Andhra
Chhattisgarh
Arunachal
MP
Gujarat
Punjab
Tamil Nadu
Chandigarh

Sector Banks
Exhibit 36: Land and building dominate the entire value of assets held by households
Break-up of assets in various asset classes by Indian households based on occupation (mn)
Land Building Livestock and poultry
Agri machinery / equipment Non-farm business Transport equipment
Deposits Shares
100 4 8 7 11
80 18
37 35
40
60
40 74
51 54
20 47
0
Cultivator Non-cultivator Sel-employed Others
Exhibit 37: Formal credit represents 67% of rural credit, ~90% of urban credit and ~70% for India
Break-up of credit between rural, urban and for overall India based on sources of funding (%)
Rural Urban Total
Informal
Informal
Informal
Formal
Formal Formal
Exhibit 38: Formal credit is dominated by banks, regional rural banks and co-operative banks/societies
Break-up of credit based on formal sources of funding for rural, urban and overall India (%)
Rural Urban Total

Others Others Others
Co-op Co-op
Co-op bank bank
bank Co-op
society Co-op
RRB society
Co-op
society RRB
RRB Banks
Banks
Banks

Banks Sector
Exhibit 39: Professional money lenders dominate the informal sources of funding in rural and urban India
Break-up of credit based on informal sources of funding for rural, urban and overall India (%)
Rural Urban Total

Others Agricult Others Others Agri
ural moneyl
moneyl Relative ender
ender s/friends
Relative
s/friends Relative
s/friends
Professi Professi Professi

onal onal onal
moneyl moneyl moneyl
ender ender ender
Exhibit 40: 35% of rural India and 22% of urban India have access to some form of credit
Liabilities as a share of overall households (%)
Formal Informal Total credit

40
32
24
16
0
Rural Urban Overall
Banks show more interest in retail segment, led by tepid corporate loan demand
In recent years, banks have begun showing greater inclination towards retail and services
segments. Much of this change of heart is possibly linked to the dearth of loan demand on
the corporate side rather than a general inclination to get into the operationally intensive
small-ticket lending. Private banks have put in a lot more effort into diversifying their loan
book outside of core lending products with players like HDFC Bank, ICICI Bank and Axis
Bank investing in this segment. This includes lending to self-employed with more lending
and payment products than before, with some of this moving outside the top-tier markets.
RBI’s report (Private Corporate Investment: Growth in 2020-21 and Outlook for 2021-22 )
on project loans to the private sector by banks/FIs shows fresh sanctions at ~0.7% of loans
in FY2021 (~2.0% in FY2020) and pending disbursements at ~0.9% of loans. Muted
sanctions indicate poor corporate loan growth prospects while support from the debt
market would further drag recovery. Infrastructure (power and roads & bridges) remains a
preferred destination for bank funding, but mega projects have been out of favor.

Sector Banks
Sanctions down ~57% yoy to <Rs1 tn from peak of ~Rs4 tn in FY2010

RBI’s latest release gives us incremental data on fresh sanctions of long-term project funding
by banks/FIs in FY2020-21 to private companies. Fresh sanctions declined ~57% yoy to
~Rs0.8 tn in FY2021 – the lowest level since 2007 (Exhibit 42). This is sharply lower than
~Rs4 tn sanctions at the peak of the last corporate investment cycle in FY2010-11. As a
proportion of outstanding credit from banks to industry, sanctions stood at ~0.7% in
FY2021 – down from ~2% in the previous three years. The decline in new project
announcements and completions (Exhibit 44) in FY2021 can be partly attributed to Covid,
but sanctions in FY2020 did not show any signs of investment revival either. Capital
expenditure in FY2021 has not fallen as sharply as sanctions as companies may prefer to
finish what is currently underway and maintain a wait-and-watch approach for new projects.
Outlook on corporate loan growth muted; retail to drive growth in bank credit
We are not quite convinced of the much-discussed need for capex-led demand recovery for
loan growth for lenders. We believe that the recovery is likely to be led by retail whose share
is likely to move higher than current levels. Banks continue to focus on granularizing their
portfolios as the risk-reward is favorable as we saw through the pandemic. Loans to industry
constitute ~30% of total bank credit and growth has been muted in recent years (Exhibit
41). Even as corporate India has significantly deleveraged in recent years, either through
asset sales, improvement in profitability leading to paring down of peak debt or massive
consolidation, the need to leverage back is not yet visible. At the same time, bond markets
seem to be providing support through private placements of corporate debt. As a result,
since FY2014, bank credit mix has gradually shifted to the retail segment with its share
increasing to ~30%, as housing alone makes up ~15%. As we have highlighted in our
report The Retail Show Goes On, March 17, 2021, we believe that the retail portfolio has a
significant growth runway. Short-term consumption-linked products are likely to grow fast,
while the mortgages portfolio is likely to be a focus area for lenders given the sheer size of
the portfolio, growth opportunity and the secure nature of exposure.
Exhibit 41: Growth in bank credit to industry has been muted since FY2016, with certain sectors like power, telecom, roads and mining
showing bursts of growth in some years
Break-up of bank credit and growth across segments, March fiscal year-ends (%)
Proportion of loans Growth yoy
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Oct-21 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Oct-21
Agriculture & Allied 13.7 13.1 12.7 12.1 12.0 12.8 13.5 14.0 13.4 12.9 12.6 13.5 13.8 16 13 8 13 15 15 12 4 8 4 12 10
Industry 43.1 43.8 45.2 45.8 45.5 44.3 41.7 37.8 35.1 33.4 31.5 30.2 29.3 23 20 15 13 6 3 (2) 1 7 1 0 4
Micro, small and medium 11.2 8 .9 8 .6 8 .4 8 .6 8 .4 7.4 6.7 6.2 5.6 4.7 4.8 5.3 (3) 12 11 16 7 (4) (2) 0 1 1 7 21
Large 32.0 34.8 36.6 37.4 36.9 35.8 34.3 31.1 28 .9 27.8 26.2 24.8 23.3 32 22 16 12 5 4 (2) 1 8 1 (1) 1
Sector-wise:
Mining & Quarrying 0.6 0.7 0.8 0.7 0.6 0.6 0.6 0.5 0.5 0.5 0.5 0.5 0.5 41 28 7 3 0 9 (12) 20 1 5 5 17
Food processing 2.2 2.1 2.2 2.4 2.6 2.9 2.3 2.1 2.0 1.8 1.7 1.7 1.5 18 22 24 25 17 (12) (3) 7 1 (2) 7 6
Textiles 4.0 4.0 3.7 3.8 3.7 3.4 3.1 2.8 2.7 2.4 2.1 2.1 2.0 20 9 15 10 (0) 2 (5) 7 (3) (5) 5 7
Cement 0.8 0.8 0.9 0.9 1.0 0.9 0.8 0.8 0.7 0.6 0.6 0.5 0.5 20 25 24 18 4 (3) (0) (3) 6 5 (11) (22)
Basic metals 5.4 5.8 6.1 6.5 6.5 6.4 6.4 5.9 5.4 4.3 3.8 3.4 2.9 32 22 20 15 7 8 1 (1) (11) (6) (6) (16)
Construction 1.5 1.2 1.1 1.1 1.1 1.2 1.1 1.2 1.2 1.2 1.1 1.0 1.0 (2) 12 7 20 19 0 10 10 10 5 (8 ) (6)
Infrastructure 12.5 14.2 14.7 15.0 15.1 15.4 14.7 12.8 11.6 12.2 11.4 11.3 11.4 38 21 16 15 11 4 (6) (2) 19 (0) 4 9
Power 6.2 7.3 7.7 8 .5 8 .8 9.3 8 .9 7.4 6.8 6.6 6.1 5.9 6.0 42 24 26 17 15 4 (9) (1) 9 (2) 1 6
Telecom 2.0 2.5 2.2 1.8 1.6 1.5 1.4 1.2 1.1 1.3 1.6 1.2 1.1 58 1 (7) 1 4 (1) (7) (1) 37 24 (21) 4
Roads 2.4 2.5 2.6 2.7 2.9 2.8 2.7 2.5 2.2 2.0 1.9 2.5 2.5 24 22 18 20 7 5 1 (7) 5 2 33 24
Other Infrastructure 1.9 1.9 2.2 1.9 1.9 1.8 1.8 1.6 1.6 2.3 1.9 1.8 1.8 21 32 0 9 3 9 (0) 4 63 (12) 2 4
Services 23.9 24.2 23.7 23.7 24.2 23.5 23.5 25.4 26.7 28.0 28.2 27.2 26.7 23 14 13 16 6 9 17 14 18 7 1 3
Transport operators 1.7 1.9 1.8 1.6 1.7 1.5 1.5 1.6 1.6 1.5 1.5 1.5 1.3 33 9 4 16 (1) 9 11 10 6 7 5 3
Aviation 0.3 0.2 0.3 0.3 (17) 14 7
Professional Services 1.4 1.2 1.1 1.2 1.4 1.4 1.6 1.9 2.0 2.0 1.9 1.2 1.0 4 5 19 41 6 24 32 13 10 3 (32) (8 )
Trade 5.4 5.0 5.2 5.7 5.9 6.1 5.8 6.0 6.1 6.1 6.0 6.4 6.1 13 21 22 18 12 4 12 9 13 5 12 7
Real Estate 3.0 2.6 2.6 2.6 2.8 2.8 2.7 2.6 2.4 2.3 2.5 2.4 2.6 6 16 12 22 9 7 4 0 9 14 3 (1)
NBFCs 3.7 5.0 5.3 5.3 5.3 5.2 5.4 5.5 6.5 8 .1 9.8 9.8 9.1 62 24 14 13 6 13 11 27 41 29 4 1
HFCs 1.6 1.7 1.9 2.2 17 17 14
Other Services 7.2 7.0 6.4 6.0 5.9 5.5 5.5 6.8 7.3 6.9 5.4 4.8 5.5 17 6 7 11 2 9 35 16 5 (16) (7) 4
Personal Loans 19.3 19.0 18.4 18.4 18.3 19.4 21.3 22.8 24.8 25.7 27.7 29.1 30.3 19 13 14 12 16 19 16 18 16 15 10 12
Housing 9.9 9.7 9.4 9.4 9.7 10.5 11.4 12.1 12.7 13.4 14.5 15.1 15.2 19 12 13 18 17 19 15 13 19 15 9 8
Credit card 0.7 0.5 0.5 0.5 0.4 0.5 0.6 0.7 0.9 1.0 1.2 1.2 1.3 (10) 13 22 (0) 23 24 38 32 29 22 8 12
Education 1.2 1.2 1.2 1.1 1.1 1.1 1.0 1.0 0.9 0.8 0.7 0.7 0.7 17 16 10 9 6 8 3 (1) (2) (3) (3) (3)
Vehicle 2.1 2.0 2.1 2.3 1.9 2.1 2.3 2.4 2.5 2.3 2.4 2.5 2.8 14 22 24 (4) 17 23 12 11 7 9 10 8
Loans against gold jewellery 0.3 0.4 0.6 0.7 34 82 49
Other Personal Loans 3.4 4.0 3.7 3.6 3.6 3.9 4.5 5.3 6.6 6.8 7.5 8 .2 8 .9 42 8 11 13 18 25 27 35 15 19 14 18
Source: RBI, Kotak Institutional Equities

Banks Sector
Exhibit 42: Fresh sanctions declined substantially in FY2021 to Exhibit 43: Meaningful 57% yoy decline in sanctions in FY2021;
~0.7% of FY2021 loans (opening) to industry project cancellations increased a bit in FY2019 and FY2020
Sanctions of long-term projects by banks/FIs to private corporate Yoy growth in sanctions and decline in revised estimate w.r.t. initial
sector, March fiscal year-ends (Rs bn) estimate, March fiscal year-ends (%)
Initial Revised % of opening loans (RHS) Yoy growth Decline in revised estimate (%) - RHS
6,000 16.0 135 30
4,800 12.8 90 24
3,600 9.6 45 18
2,400 6.4 0 12
1,200 3.2 (45) 6
0 - (90) 0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Notes:
(a) We have considered credit to industry from banks only. Source: RBI, Kotak Institutional Equities
(b) Analysis includes sanctions from PSU banks, private banks, foreign
banks, PFC, REC, EXIM Bank, LIC and IFCI.
Exhibit 44: Impact of lower sanctions in FY2021 is likely to reflect in capital expenditures over subsequent years, unless there is a
significant pent-up pipeline of sanctions
Schedule of disbursements across years, March fiscal year-ends (Rs bn)
Phasing of Capital Expenditure of Projects Sanctioned Assistance by Banks/FIs
Projects Project Project Beyond
Capital Expenditure in the Year (#) Cost (a) Cost (b) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2022
Year of sanction
Up to 2011 3,136 2,237 1,233 587 119 1 9
2012 636 2,120 1,916 230 669 554 282 95 29
2013 414 1,963 1,895 1 367 567 490 273 112 64 20
2014 472 1,340 1,273 13 151 348 449 199 71 27 15
2015 326 876 873 1 148 346 259 95 12 2 10
2016 346 954 918 38 74 375 286 81 50 12 2
2017 541 1,828 1,792 14 40 254 712 411 216 86 40 21
2018 485 1,728 1,682 6 152 124 630 414 228 102 23 2
2019 409 1,766 1,592 6 69 110 600 471 212 98 27
2020 320 2,000 1,758 40 145 540 586 281 166
2021 220 756 25 37 290 262 142
Total 3,367 3,286 2,506 1,906 1,402 1,387 1,430 1,332 1,467 1,383 1,232 685 337
Incremental loans 19,076 6,298 5,849 6,566 4,815 5,477 4,848 5,956 9,446 16,960 5,807
% of incremental capex to incremental loans 17.6 52.2 42.8 29.0 29.1 25.3 29.5 22.4 15.5 8.2 21.2
Total loans 37,495 43,793 49,642 56,208 61,023 66,500 71,347 77,303 86,749 103,709 109,516
% of incremental capex to (opening) bank credit to industry 18.3 8.8 5.7 3.8 2.5 2.3 2.2 1.9 1.9 1.6 1.2
Notes:
(a) Estimated number for FY2020 loans.
(b) “Project cost (a)” and “Project cost (b)” represent initial estimate and revised estimate respectively.

Sector Banks
Exhibit 45: Number of large project sanctions has declined to Exhibit 46: Share of large projects (>Rs50 bn cost) has declined
low single digits the most
Size-wise break-up of projects sanctioned by banks/FIs, March fiscal Size-wise break-up of project cost for sanctions by banks/FIs, March
year-ends (#) fiscal year-ends (Rs tn)
Less than Rs1 bn to Rs5 bn to Rs10 bn to Rs50 bn Less than Rs1 bn to Rs5 bn to Rs10 bn to Rs50 bn
Rs1 bn Rs5 bn Rs10 bn Rs50 bn and above Rs1 bn Rs5 bn Rs10 bn Rs50 bn and above
800 4.5 4.1
708 729 697
3.8
636
640 3.6
541 3.1
472 485 2.4 1.8
480 194 189 172 145 414 409 2.7
1.4
346 1.9 1.9
115 326 180
320 1.8 1.7
1.6
1.8
320 119 149 1.8
65 76 110 220 0.6 1.3 0.3 0.3
0.9 0.9 1.1
0.9 0.3 0.5
0.9 0.7
84 52
0.5 0.4 0.9 0.7 0.8
160 0.9 0.6 0.7
0.5 0.4 0.1 0.1
0.4 0.1
0.4 0.4
420 439 412 420 245 306 223 214 287 263 220 150 128
- 0.0 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: RBI, Kotak Institutional Equities Source: RBI, Kotak Institutional Equities

Banks Sector
TECH TO UNPACK AND REPACKAGE FINANCIAL SERVICES

The unbundling and repackaging of financial services is ahoy. Leaders of the past are beginning to give way
to newer players who are nimble, obsessively focused on improving customer experience, less bureaucratic
and launching solutions at scale that would have been hard to fathom before. Capital is available for these
ideas, which implies that the gestation period to turn profitable can be longer. Lending, payments, wealth,
insurance and capital markets are seeing disruption. Risks remain as business models are not tested against
cycles, regulatory oversight is evolving and the response from incumbents is not yet predictable.
Fringe players muscle onto center stage

It is getting harder to ignore fintech. It is even harder to ignore its role in emerging markets
like India where there is a lot of activity in every sphere of financial services making the
segment ripe for disruption. Not only is there regulatory support but we also see
governments in various countries backing these changes. From ‘nice-to-have’ solutions in
the past, we are now seeing fintech players as mainstays with convenience and unbundled
services emerging as a key differentiator. These players have been working on the sidelines
and are now flexing muscle to attack the core. We see a multi-pronged approach to break
the dominance of existing players.
We see young talent joining forces with experienced bankers to create fresh new solutions
to problems that have long plagued financial services (especially in segments like mass
banking). Decision-making is quick, making them a strong force to reckon with.
Remuneration through stock options is making it very lucrative to attract talent and most
importantly, capital is flowing fast and thick to back these ideas.
Drivers of fintech adoption

A paper by the Bureau of International Settlements (BIS), The economic forces driving fintech
adoption across countries, Feb 2020, well captures the factors of fintech growth. The report
reiterates that India is ripe for disruption from fintech as we meet the criteria required to fuel
the rapid growth and proliferation of new players.
 Unmet demand for financial services. Growing interactions between various

stakeholders are complementing the strong build-up in demand for financial services. For
example, the biggest change has been with the government which has switched its
payment mechanism for subsidies and other direct benefit transfers from cash to transfers
into the bank accounts of consumers. These transfers trigger real time alerts on
connected devices. These developments pave the way for explosive growth in financial
services. A key driver is the growing adoption of digital banking, internet or mobile
banking, wallets and other payment mechanisms like UPI. It is difficult to estimate what
proportion of total consumer spends are performed through cash, digital modes or
paper-based payment modes. To arrive at an estimate, we use the total PFCE for the
economy as a proxy for total spends (see Exhibit 47). If we analyze digital peer-to-
merchant transactions as a proportion of PFCE, we observe that the share of UPI (P2M
only) has grown rapidly. The share of UPI in PFCE stood at ~9% in 1QFY22, while the
share of cards (both credit cards and debit cards together) stood at ~11-12%. We also
note that the share of PPI instruments has declined from its peak level of ~1.9% for
FY2019.

Sector Banks
Exhibit 47: Share of digital payments (cards, UPI P2M and PPI only) in total PFCE has increased from
~15% in 1QFY21 to ~23% in 1QFY22
Credit card spends Debit card spends PPI UPI P2M

20
9.4
16 5.6 6.7
5.4 4.7
1.8 3.9 1.6 1.8 2.2

12 1.9 1.7 1.8
1.4 1.7
5.7 5.7 5.8 6.1 5.6 5.3
8 0.9 5.3
4.6 4.9
0.6 3.6
4 0.1 0.3 2.0
0.1 1.5 1.7
1.3
2.2 2.4 2.6 3.0 3.6 4.6 5.4 5.9 5.4 4.3 5.4 5.8 5.9 6.1
0
2013
2014
2015
2016
2017
2018
2019
2020
2021
2QFY21
3QFY21
4QFY21
1QFY22
1QFY21
Exhibit 48: There is significant scope to change the payment behavior from cash
Credit card spends Debit card spends PPI UPI P2M ATM Cash
100
80
58 58 55 53
66 65 63 61
67 66
60
40
24
27
30 29
29
20 30 30 31 31 26
9
5
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 1QFY22
Even on the lending side, we see the credit-to-GDP gaps to be quite large in relation to
other markets (see Exhibits 49 and 50). This is true when we look at the overall credit to
GDP, including that of NBFCs and other sources of supply like bond markets. This ratio
has stagnated in the past decade given that we were undergoing a corporate NPL cycle
due to high investments in the decade prior. There is a marked shift towards retail and
despite steady growth, the scope here is broad given the extremely low levels of
penetration we have at present.

Banks Sector
Exhibit 49: Overall credit-to-GDP is quite low which implies that there is a lot of headroom for all players to grow
Total credit-to-GDP across markets, calendar year-ends, 1960-2022 (%)
1960 1970 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1QCY21
Argentina — — — 24 37 34 55 38 31 26 23 22 20 20 18 18 19 20 17 19 18 22 25 23 25 24
Australia 53 62 77 121 140 141 148 156 162 173 18 2 190 191 18 9 18 1 176 178 18 3 190 200 201 196 196 192 196 195
Brazil — — — — 47 49 52 48 45 46 50 47 55 58 59 62 66 68 71 76 78 77 78 81 91 90
Canada 79 86 117 135 144 150 155 151 154 150 154 162 167 18 3 18 0 179 18 5 191 194 209 214 214 217 220 245 241
China — — — 85 109 102 116 125 121 114 115 113 112 141 145 145 157 171 18 2 197 204 205 201 206 222 221
France — 99 108 129 138 143 143 143 145 149 153 157 164 172 173 179 18 3 18 1 18 7 193 200 201 206 211 238 237
Germany 66 90 109 114 145 146 147 148 143 141 137 133 133 137 130 124 123 124 118 117 117 117 119 121 131 132
Greece — 35 45 40 54 61 65 69 74 86 93 102 114 117 129 133 135 133 132 129 127 121 119 111 125 129
Hong Kong SAR — — 109 167 156 153 150 156 160 164 166 175 179 18 2 211 222 225 247 268 268 276 300 292 308 338 341
India 23 24 42 52 56 58 64 64 71 79 88 92 99 99 104 103 106 104 101 98 92 88 87 87 95 97
Indonesia — — 18 56 30 26 25 25 27 27 26 26 27 26 27 30 35 39 40 41 41 39 41 40 40 40
Ireland — — 82 80 133 140 138 147 165 18 3 222 236 293 314 321 327 325 308 312 335 315 279 278 249 222 228
Italy 54 78 58 68 79 83 85 89 93 99 105 113 117 125 126 125 127 125 123 119 115 112 111 110 122 123
Japan — 121 143 211 18 8 18 3 179 171 164 163 162 159 164 171 163 163 161 159 158 153 156 156 159 163 18 2 18 3
Korea — 55 78 116 138 140 146 143 135 137 148 154 168 173 169 173 175 176 18 0 18 1 18 2 18 2 18 7 196 214 216
Malaysia — 21 51 105 135 142 139 132 127 121 115 111 108 124 120 122 124 130 133 136 137 133 137 137 150 151
New Zealand 28 31 50 99 147 145 149 150 160 173 18 4 191 199 195 18 7 178 179 175 174 175 177 174 172 171 177 177
Portugal 64 87 111 77 143 154 160 168 177 18 1 18 4 194 206 215 218 223 232 220 208 197 18 4 177 167 161 172 174
Russia — — — — 24 26 30 35 39 45 48 60 66 70 63 64 70 82 98 104 100 99 98 96 110 110
Singapore — 67 96 102 121 137 133 138 122 119 111 115 128 129 121 132 144 157 166 168 167 167 164 175 196 193
South Africa — 62 54 62 60 63 56 61 61 66 75 79 80 77 74 71 74 75 75 78 75 75 74 75 75 78
Spain — 70 77 76 118 127 133 143 157 174 195 209 214 223 224 220 211 202 190 178 169 160 154 150 170 172
Switzerland 114 130 155 193 18 7 18 3 18 4 192 190 191 18 9 196 194 209 209 215 223 223 227 231 238 247 239 256 269 277
Thailand — 27 42 93 117 104 107 99 102 97 93 91 92 96 95 106 109 117 120 122 119 117 117 116 131 133
United Kingdom — 59 57 116 135 144 153 153 157 165 172 175 18 6 18 5 177 173 173 167 158 156 160 163 161 156 170 169
United States 78 91 101 124 135 139 143 147 151 155 161 168 168 167 158 153 150 149 148 148 150 152 151 151 164 165
Exhibit 50: Retail credit to GDP is quite low which offers new companies a large opportunity
Total credit-to-GDP across markets, calendar year-ends, 1960-2022 (%)
1960 1970 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1QCY21
Argentina — — — 10 22 19 13 9 9 10 12 13 12 12 13 14 15 16 14 14 14 16 15 12 12 12
Australia 18 21 27 59 83 84 90 97 101 106 111 122 126 131 127 124 125 128 132 140 144 141 140 137 141 142
Brazil — — — — 31 31 30 30 29 32 36 41 46 48 53 58 63 64 66 67 62 60 60 63 70 70
Canada 17 19 39 46 57 57 57 56 58 60 62 67 66 72 71 87 90 92 92 97 100 101 103 104 114 113
China — — — 88 111 103 117 126 119 110 109 106 102 126 127 123 129 135 141 153 157 155 158 166 18 3 18 2
France — 62 66 79 72 73 72 72 73 76 80 84 88 91 92 93 93 93 91 92 94 97 100 102 117 117
Germany 40 55 67 73 103 102 101 100 97 95 92 88 89 90 86 83 82 81 78 77 77 76 77 78 85 86
Greece — 31 39 34 43 49 53 57 63 74 81 91 102 105 112 118 117 117 116 112 108 100 91 81 81 81
Hong Kong SAR — — 88 149 146 141 140 144 146 147 141 149 158 159 18 4 192 193 209 221 216 224 242 239 255 274 279
India 12 13 23 28 31 32 35 35 39 43 48 50 52 53 56 55 56 57 56 56 53 51.9 52.9 53.1 58 .0 59.0
Indonesia — — 14 44 18 17 19 20 24 24 23 25 25 24 26 28 32 35 35 35 36 35 36 36 36 36
Ireland — — 63 47 75 78 77 85 104 124 144 158 166 169 133 116 112 105 81 53 49 44 41 37 33 32
Italy — — 46 52 59 60 61 64 66 69 74 79 82 86 91 92 91 88 86 86 83 78 74 71 80 80
Japan — 77 83 119 108 106 102 99 96 97 97 97 100 106 103 103 105 107 106 104 106 108 108 110 122 122
Korea — 45 62 89 102 97 104 103 99 102 112 116 126 127 121 122 120 118 121 121 124 125 129 138 152 154
Malaysia - 21 51 105 133 140 136 131 122 115 110 107 104 119 117 118 124 130 130 133 132 127 131 131 145 145
New Zealand 23 26 42 67 105 107 108 114 121 132 142 148 155 154 149 143 146 144 143 147 149 146 145 146 149 150
Portugal 39 53 64 43 105 111 115 116 116 121 129 138 148 155 151 152 149 140 127 117 109 101 95 92 102 104
Russia — — — — 13 16 17 20 23 24 29 35 39 42 39 40 43 47 55 56 52 51 50 52 59 59
Singapore — 55 79 90 93 101 97 101 92 85 80 81 94 93 90 100 108 117 119 116 117 114 111 114 126 127
South Africa — 47 40 50 49 51 46 51 52 57 64 67 68 65 62 59 61 60 60 61 59 58 59 59 61 62
Spain — 60 66 65 85 89 93 100 109 129 149 162 166 168 166 160 149 137 125 115 108 101 95 91 103 104
Switzerland 79 90 107 134 130 129 132 134 135 136 138 140 139 147 144 147 153 156 157 158 160 162 162 166 177 18 0
Thailand — 27 42 89 112 100 103 97 99 97 92 89 90 93 93 104 108 113 116 117 115 113 113 113 127 128
United Kingdom — 29 34 74 81 84 88 89 91 94 97 100 97 104 105 99 96 91 88 87 88 87 87 87 94 95
United States 37 47 54 53 49 49 49 50 52 53 55 57 58 54 52 50 50 49 49 50 52 52 51 51 54 53
 Increased pace of adoption hastens disruption. We are currently in an era where the
adoption of newer products is extremely quick (see Exhibit 51). This makes it ripe for any
product idea to quickly replace an existing idea. The rapid adoption of mobile phones,
especially smart phones, has resulted in a decline in landline connections. We could look
at the pace of adoption of social media websites across the world as another example.
The ability of technology and in this case, fintech to get products accepted at a much
larger scale and with low levels of acquisition cost, makes the business a viable
proposition.

Sector Banks
Exhibit 51: Faster adoption of recent innovations

Share of US households using specific technologies, 1903-1919
Source: Ourworldindata.org
 Consumption of digital services has exploded. We have seen a significant increase in

adoption of high-speed internet (Exhibit 52) and mobile data in the past five years (Exhibit
53). The prices for smartphones have declined sharply, further aiding adoption. This has
led to a sharp increase in data consumption of ~40X FY2014. Importantly, the cost for
consumption has declined 95% since FY2014. We have seen that the cost of acquisition
of a customer has fallen significantly, which has been one of the main challenges for the
existing financial services model. Further, we see that the gaps between geographies
(rural and urban India) as well as gender (in terms of usage) has considerably reduced.

Banks Sector
Exhibit 52: Broadband internet has increased 6X and 2.5X in Exhibit 53: Data subscribers of mobile phones have doubled in
rural and urban India the past four years
Broadband internet users in rural and urban India (# mn) Mobile subscribers and total wireless data subscribers (# mn)
600 Mobile subscribers Data subscribers

1,200
480
960
360
720
240
480
120
240
0
-
2015 2020 2015 2020
2016 2017 2018 2019 2020
Source: TRAI, Kotak Institutional Equities Source: TRAI, Kotak Institutional Equities
Exhibit 54: 40X jump in data consumed per month since 2014 Exhibit 55: Price of consuming data has fallen sharply, leading
led by increase in smart phones to negligible increase in monthly rentals
Trend of wireless data usage/active data user/per month (GB) Trend of wireless data usage/active data user/per month (GB)
12.0 300
250
9.6
200
7.2
150
4.8
100
2.4 50
- -
2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020
Source: TRAI, Kotak Institutional Equities Source: TRAI, Kotak Institutional Equities
 Regulations are accommodative. Regulators are a lot more forthcoming about

allowing competition or new platforms to enter the fray in lending and non-lending
segments. The hitherto limited access to financial services has been a source of constant
discomfort for regulators. Most existing models are have been unsuitable as the cost of
building the necessary infrastructure is extremely high and returns for a private player are
highly uncertain. Better access to financial services helps reduce the skew in wealth
distribution, also serving the broader state mandate on access and inclusion. Regulators
have been highlighting that newer players have forced incumbents to respond, spurring
competition as well as innovation. The past two decades saw a healthy increase in access
to large financial services, however, this has stopped short of India’s inclusion objectives.

Sector Banks
Incumbents have argued that innovation in financial services spaces is always going to be
a struggle given the tough regulatory oversight in all parts of the business. The fines paid
after the global financial crisis is one such example where existing players simply vacated
markets that are considered risky. Also, changes are unlikely to be easily accepted by
regulators unless the use case was established or is getting established by the regulator.
Hence, it is relatively easy for technology companies to work outside the regulatory
framework by providing infrastructure access to players who are regulated. Interestingly,
we are seeing incumbents face challenges in nearly all segments of their services. As a
custodian of public deposits, a bank or life insurance company (promising to pay post an
unexpected event) is highly likely to be monitored far more stringently than an institution
in another industry. However, the regulator wants to ensure that competition is not
stifled by existing players. In that context, we have seen new frameworks like open
banking or faster payment mechanisms getting promulgated by the regulator. Open
banking, which allows consumers to move data with ease, is shifting the power equation
from lenders to customers. This has helped new players make use of historical
information rather than begin the customer-profiling process from scratch.
 India’s demographic dividend for fintech. India is well-positioned as it has a relatively

younger population where the adoption rate is proven to be faster. They are comfortable
to experiment and are known to give more importance to convenience and consumer
experience. With mobile phone or internet access, especially smartphone accessible to all
genders, this should allow adoption rates to be higher.
Exhibit 56: Share of working age population is expected to stay high in the near future
Breakup of population in India across age groups (%)
100
>=70
80 60-69
50-59
60
40-49
40 30-39
20-29
20
10-19
0 <10
2011 2020 2030
Source: MoSPI, Census, CEIC, Kotak Institutional Equities
 Funding environment for fintech has significantly improved. BIS’ recent paper
Funding for fintechs: patterns and drivers, September 2021 highlights the sharp bounce-
back in investments in fintech after a brief slowdown in 2019 (see Exhibit 57). It is
important to note that the number of deals and their sizes are getting larger and larger.
There is a steady shift in preference to blockchain/ cryptocurrency as compared to mobile
commerce or payments. One of the key challenges has been that these models are
coming into public markets with a fair amount of price discovery already completed.
There is a combination of early stage financing for younger companies and late stage
financing for the larger companies with reasonably strong business viability already
established and it is to build scalability. The above mentioned paper on fintech funding
makes three key observations: (1) fintech funding increases along with increased
regulation, (2) investment is higher in developed markets and (3) investment is strong in
countries where there is a higher level of innovation.

Banks Sector
Exhibit 57: The number of deals rebounded sharply after a brief pause during Covid-19
Investments in the number of fintech companies across the world and sectors
Source: BIS
Busting the too-big-to-take-on myth: can compete with large banks

It is not only the number of players but the sheer competition within each segment of the
value chain in fintech that is making the sector very different from patterns we have seen
earlier (see Exhibits 58 and 59). Apart from large players in the technology space that are
looking to break into financial services, we are looking at very long tail of smaller players. In
the past, the acquisition costs of customers were quite high but this has changed in recent
years, especially post mobile or internet adoption. Also, embedded finance, where the
presence of lenders is at multiple locations as compared to the traditional finance of branch
banking, is making it easier for new players to compete on an equal footing with larger
players.
The biggest barrier has been the regulatory oversight that is common across the financial
services space. Existing players have gained market share as the might of their balance
sheets has made it challenging for new players to conform to similar strictures. Also,
changes to legacy systems have been slow, cumbersome and transitions have been quite
challenging so banks have been reluctant to take these decisions.
In most developed markets, we see a sustained pattern of large banks becoming larger over
time. A more recent trend is that of competition coming not only from the inside but also
from new players that are quite unrelated to financial services. A smaller player does not
necessarily portend a bad outcome given that the reach to larger customer bases can take
place through partnerships at a never-before scale.

Sector Banks
Exhibit 58: New players are coming into every segment of the financial services space
The rising importance of fintech across financial services
Source: CBInsights
Exhibit 59: There is competition emerging from all sides of the business for banks
Unbundling of financial services is emerging as a theme for fintech companies
Source: CBInsights

Banks Sector
A recurring theme that we see in most models is that the fees charged by existing players in
developed markets are disproportionately high for the services rendered and hence, newer
players are looking to give this benefit back to consumers. These charges have largely offset
the decline in spreads or loan growth, especially post the global financial crisis.
This allows new players to gain acceptance but this theme may not play out in the same way
in India in the medium term. If anything, we believe that lenders have more room to expand
their market share over the next decade. We note that the fees charged by Indian lenders
are not that high.
These lenders do have a common challenge as their size makes decision-taking more
protracted. This would explain the much slower response from incumbent banks to new
opportunities presented by the current environment like UPI, for example. A classic case
would be the recent experience of HDFC Bank where the regulator imposed restrictions on
select digital products until the bank had significantly improved its back-end systems .
India fintech leadership may be decided differently from RoW

With new players (small or big) chipping or challenging steadily on all financial service fronts,
will large banks sustain their dominance? Over time, the dominance might shift towards
these new players while existing players that have been slower to adapt may lose their pole
positions in critical markets or products.
We have seen this scenario play out in India already. The stronghold of public banks in
Indian banking gave way to the new set of private banks over the past two decades. Given
the high share of adoption by consumers in some of the newer payment platforms like
PayTM, Google Pay or PhonePe, it would be fair to assume that some of the existing large
players could cede significant market share over the next decade. However, we believe that
the opportunity in India’s financial services space continues to be large as there is going to
be higher consumption of financial products over time given the low penetration levels. This
implies that India’s fintech thesis is not only about newcomers gaining market share but
importantly, about expansion of the financial services pie. Further, existing players, especially
private banks, would continue to gain share at the expense of public banks.
Employee mix: experienced bankers and tech talent

The new crop of companies has one eye on finance and the other on technology. Hiring
talent is becoming a lot easier than before. The younger generation is keen to experiment
with new ideas in a space where regulatory barriers have engendered a reluctance to
change. The outcome for a successful venture is quite high given that compensation, which
is mainly through ESOPs, is directly linked to positive outcomes.
The organization structure in these places is characterized by:
 Lower number of employees with a high degree of productivity, talent from diverse
backgrounds and willingness to experiment with new ideas with limited resistance. Large
banks today also tend to have employees from similar backgrounds but with greater
focus on regulatory compliance which inhibits risk-taking.
 Decision-making speed is better in smaller organization with fewer hierarchical

structures. Experimentation is higher and making frequent changes is part of the learning
curve that makes them different from large organizations.

Sector Banks
Less baggage allows for quicker development and rollout

Change is not easy when it could involve cannibalizing existing revenue streams or existing
internal structures. As organizations grow, they often become unwieldy, making it difficult
to take risks. We are witnessing a classic example in the lending and payment landscape.
Historically, a wide range of instruments have been available to make payments, each with
differentiated attributes, the most common. being the credit card - offering credit and
payment - and the debit card, which has a payment feature. A credit or debit card is a
physical product while a UPI or wallet is a mobile/internet friendly product.
However, we now know that debit cards can have similar features (pay later or 0% EMI
features) as digital payments. Further, even a net banking transaction can be made to have
similar characteristics to a credit card. Notably, at present, incumbent organizations are
structured so each of these payments are managed by different product teams. This
structure does not naturally lend itself to cross division products. New players have no such
structural boundaries and are easily designing products to meet the demand for such
innovative products.
A noteworthy challenge has been the technology infrastructure that powers these
institutions. We have seen banks continue to work on legacy infrastructure. A series of new
developments in IT implies that the programs were designed to rest on legacy infrastructure.
Financial players have been reluctant to move to new systems as this can be an extremely
time-consuming exercise and any unforeseen challenge during this transition can result in
serious damage to the reputation of the institution. Financial institutions are gatekeepers of
trust and transitions are managed with a lot consensus that slows down decision-making.
The same is not true with smaller organizations, especially fintech. Decision-making is quick.
Fintech companies are young which implies that these companies are operating with the
latest infrastructure, which puts them ahead of traditional players. They are keen to solve a
particular challenge and are not so very focused on the instrument that is available currently.
We see that these new players bring about a lot of other value products within the product
offering.
Small changes and big changes: both visible in new players

Financial disintermediation is sweeping through several segments in the financial services
sector and naturally, we are large overhauls as well as small tweaks to models and much in
between. Many of these changes simply aim for better efficiency in delivery of the same
product, leading to market share shifting away from existing lenders.
New tech and their challenges
 High dependence on capital infusion. With two different models where we have a
long tail of small fintech competing along with large fintech players against incumbents,
there is a lot of focus on building scale. The capital burn in this business is necessarily
high, which suggests that the ability to raise capital would be a big differentiator. The
fund-raising environment needs to be quite favorable as it is not easy to switch mode
from profitability to growth. This many require significant changes to the business model,
which is not necessarily an easy exercise.
 Fluidity, abundance of ideas makes it hard to build business models. We see a lot
of ideas for variants of existing models being re-designed for scale or specific niches. The
barriers to entry are different as compared to traditional financial services. In the current
situation, we think that large capital would back ideas that shorten the time to scale,
which was hitherto a key challenge. Also, a revenue model is not necessarily available and
likely to change over time. The payment space in India is a classic example of the same.
The revenue model is not in the payment transaction but the service that is offered to the
payment, such as a loan.

Banks Sector
 Not all new ideas are likely to be successful or scalable, let alone both. The fintech
space is likely to have a higher share of ideas that is unlikely to be successful (see Exhibit
60). Failure to thrive could be for a multitude of reasons: regulatory constraints,
management change, ideas being ahead of their time or rapid changes in macro
environment, competing business models or simply, the inability to scale-up.
Exhibit 60: Several fintech companies have had to slow down or exit
Source: Press releases, Kotak Institutional Equities
 Models not tested against economic cycles. Most models have not stood the test of
time and several have resorted to heavy discounting to gain acceptance.
 Regulatory oversight likely to increase over time. We have seen that fintech is
actively discussed by regulators across the world. The oversight has been light so far but
we do expect this to increase over time. As some of these businesses scale-up, we expect
the regulator to step in to streamline various practices that are in place. From a regulator
perspective, fintech has proven that financial inclusion or providing banking services to
the unserved or underserved is possible and at a much lower cost as compared to
traditional models. Also, the enthusiastic adoption by customers suggests that there is a
strong rationale to back these changes. Hence, we don’t see regulators being negative to
fintech. We note that the Bureau of International Settlements has stepped in to discuss
the role of fintech a lot more frequently than before. We have seen several regulators
looking at separate licenses for fintech players – the digital bank is an example.
Regulators have been quite comfortable with the scale and efficiency that these
companies are bringing in and hence, we don’t believe that they would impede the
developments that are taking place. However, the response from companies is not likely
to be similar across geographies (see Exhibit 61), we have seen how big tech operates
differently across regions.
However, the key challenge is that they are likely to come under regulatory scrutiny if
they gain scale. Outside the regulatory framework, fintech firms tend to be a lot more
flexible and faster to adopt or respond to changes. However, bringing these companies
into a regulatory set-up would alter this behavior. Areas such as capital adequacy
requirements, liquidity, consumer protection, anti-money laundering/combating the
financing of terrorism, data protection and pricing regulations (interest rates or fees
charged for services) require managements to build expertise and the decision-making
process could slow down considerably as the risk of non-compliance is quite high.
A look at regulatory frameworks of various countries is telling. There are broadly two
forms of licenses: digital full bank or digital wholesale bank. The number of licensees is
restricted in some regions, while other geographies impose restrictions on business
activity. For example, Malaysia limits the asset size in the initial years while Singapore
specifies the type of services that can be offered in the early years and has restricted such
banks to offering simple services. We have seen no restrictions in Hong Kong or Taiwan.

Sector Banks
Exhibit 61: Big tech companies have acted in different ways in different regions
Licenses held by big tech companies in select jurisdictions
Notes: B = banking license. C = credit license. P = payments license.
Source: BIS
Exhibit 62: Regulatory environment for large fintech companies
Source: BIS

Banks Sector
 Expect incumbents to defend their turf. Despite the challenges that we have
discussed earlier, we expect incumbents to fight back. The mindset in which the
traditional banks operate is different from new fintech players who find it a lot easier to
take short-term unsecured risks on borrowers with limited credit histories or are new to
credit. The product characteristics can be replicated but scale is likely to be difficult. We
expect to see incumbent banks working through mergers and acquisitions, partnerships
or replicating fintech products to defend their business model.
In payment companies, we have seen significant consolidation in recent years. FIS Inc
acquired Worldpay Inc for US$35 bn, Fiserv acquired First Data Corporation for US$22 bn,
Global Payments Inc acquired TSYS (Total System Services) for US$22 bn. Visa Inc looked
to acquire Plaid Inc for US$5 bn but the deal was subsequently called off.
Financial institutions have responded to the innovation of fintech companies in various

product features. For example, in the current wave that we are seeing in BNPL, we note
that nearly all banks and credit card companies have launched their own variations of the
product. Even transaction processing companies like Visa and MasterCard have started to
incorporate this as a regular feature while customers make their payments.

Sector Banks
FINTECHS: CHALLENGING THE STATUS QUO

Fintechs have now emerged as convincing competitors for entrenched institutions. Their early impact was seen
in payments, especially on the consumer side, but we are slowly seeing their presence in wealth management,
capital market, lending, compliance, payments, payroll and others. We see a combination of small and large
player coexisting depending on the nature of revenue pools that are getting targeted. We see these
companies chasing scale at a very early stage of evolution. However, the lack of through-the-cycle emphasis
in these rollouts, especially in lending, makes it challenging for us to explain the success of these models.
Small players and big players

Fintech have started to grow their scope impressively, led by their flexible business approach,
nimble and readiness to build new ideas demanded by their customers. Technology is rapidly
changing the way in which customers engage with vendors for their financial requirements.
We are moving rapidly towards easy-to-use, frictionless, paperless, low-cost, instant
settlements and products that are available at all times. The demand for physical branches has
given away to digital frameworks.
Fintechs have grown in recent years to respond to this challenge. They have attracted good
talent to improve service capabilities by placing a lot of importance on technology. The cost
of acquisition has fallen sharply as adoption requires limited push from the lender. The scale
of operations is much larger than traditional banks with a greater focus on addressing
customer segments that may not be bankable under existing infrastructure. They don’t have
the baggage of high cost structures as in the case of existing banks, nor do they have legacy
systems ill-equipped to handle this change.
Exhibit 63: Taxonomy of the fintech environment

Banks Sector
Big tech raises the stakes

Big players like Alibaba, Tencent, Apple, Google, Amazon and Facebook are making inroads
into financial services, competing with traditional financiers. Beginning with offerings in
payments, several have now begun offering adjacent products like money management,
insurance and even lending. We lean on the BIS paper ‘Big Tech in Finance: opportunities
and risks’, June 2019 and a second on ‘Big Tech and changing structure of financial
intermediation’, April 2019 to understand the framework.
A key advantage for these large fintech companies is their large customer base. They offer
multiple products with financial products being just one of them. The trust factor associated
with these companies is quite high, which makes it easier to build financial services. Given
the standardization of the product, the ability to replicate the service across geographies
makes it scalable. The ability to reach unbanked and under-banked consumers is higher
through these companies.
Small fintech finds a firm foothold in customization
The need for large-scale customization in financial services would challenge large players
whose models are predicated on standardized offerings. We are likely to see smaller players
compete quite strongly in spaces like these, the Investment space, for example - where the
degree of customization is quite high compared to payments, which requires limited
customization.
Exhibit 64: Two-pronged approach (large and small players) likely in the fintech space
Source: BIS

Sector Banks
Exhibit 65: Snapshot of India Fintech Landscape
Source: The Digital Fifth

Banks Sector
PAYMENTS: PAVING THE WAY FOR NON-BANKS

Non-banks, especially large companies, are well-positioned to capture the benefits of significant scale and
scope in the retail payments space. This opportunity finds support in several developments over the past
decade: (1) better adoption of technology leading to convenience, real time and anytime settlements,
(2) strong regulatory support across regions leading to faster adoption and (3) growing share of non-banks,
especially companies from the technology sector.
Retail payments: growth driven by constant innovation

A key function of an economy is a strong payment system. We have seen remarkable
innovation in the payment ecosystem in the past decade, largely led by better technology
adoption and changing customer preference. Banks have built a strong payment system on
the wholesale side but progress on the retail side has been slow. Note that the scope of our
discussion on payments does not extend to the contribution of government, the treasury
activities of banks or the corporate segment. Our discussion and analysis of payments for the
purpose of this report is confined to the retail part of the payment value chain.
We have seen strong growth in retail payments across the world, led by newer products and
better quality of competition. Retail payments in most countries are a lot more convenient
with better customer experience and the offers of real time settlement available 24*7.
Payments by the under-banked and non-banked have significantly improved in recent years.
Payments provide the best gateway for financial inclusion as offering a credit product or any
other financial product would be the next step in this journey. Fast (retail) payment systems
(FPSs) are being developed in many jurisdictions. An FSP is a system in which the
transmission of the payment message and the availability of the final funds to the payee
occur in real time or near real time and as close to 24/7 as possible. In India, much of this
journey took place in the 2006-10 period. Non-banks play a big role in payments
We have seen the rising contribution of non-banks in the payment space. We look at the BIS
report, Non-banks in retail payments , September 2014, to get a better perspective on the
role of non-banks in payments. Several factors pertaining to retail payment services may
attract non-banks. Payment services present non-bank entities with opportunities for
economies of scale and scope and for specialization.
Key drivers of non-bank role in payments
 Specific drivers of non-bank involvement in retail payments include (1) the trend for banks
to outsource payments and technology-related services, (2) changing payment habits and
customer preferences, including the emergence of new payment needs, and (3) technical
and other innovations in payment methods. In addition to these market-driven factors,
the regulatory environment can also influence non-bank involvement in retail payments.
 These drivers have implications for the efficiency of retail payment systems and related
risks. Non-banks can use economies of scale or scope to bring down the cost of retail
payments. Most banks do not have customer bases as large as non-banks tend to have or
may not have a significant cost advantage to compete in this space.
Regulators like democratized reach and competition
 From a regulator perspective, the role of non-banks has been commendable for two
reasons: (1) they have helped plug an important gap in financial inclusion by making
available payment options to several segments and jurisdictions that reach a much larger
customer segment, and (2) competition between players has helped improve customer
experience while offering a wider range of tools to access payments.

Sector Banks
 Non-bank providers of front-end services may compete with banks to improve end user
access to retail payments by providing a broader range of payment options including
innovations like as person-to-person proximity payments in place of cash. Competition
may also lead to improvements in traditional payment systems, such as faster or round-
the-clock retail payment services, and to lower costs for end users. In some cases, the
introduction of such services has taken place with policy support, and has involved
collaboration between banks and non-bank technology providers.
Role of non-banks in the payment chain

Non-banks are well established in various products depending on the geography. Their role at
critical stages of the payment chain is well established, particularly at the (1) pre-transaction
stage: customer acquisition, provision for hardware, software, security, data centers, e-
invoicing or communication with merchants and authorization (fund verification, fraud and
risk management, compliance), clearing and settlement; and (2) post-transaction stage:
(statements, reconciliation, retrieval, reporting and data analysis).
We examine the role of non-banks in from three perspectives: (1) the stages within the
payment chain in which the non-banks are involved, (2) the type of service (front-end or
back-end) and (3) the type of relationship with banks (co-operation or competition). The BIS
report on non-banks in retail payments looks at the role of non-banks in the payment
ecosystem.
 Front-end providers. These are non-banks which typically provide an interface between
end users of payment services (payers and/or payees) and the traditional clearing and
settlement process. They are mostly present in the pre-transaction, initiation, and post-
transaction stages of a payment, but not typically in clearing and settlement. Front-end
providers compete with banks in some areas, while cooperating with banks for the
clearing and settlement of transactions. Examples of this type of non-bank are mobile
wallets, internet payment gateway providers, credit card acquirers or, payment
institutions and emoney institutions in the EU.
 Back-end providers. These are non-banks that mostly provide specialized back-end
services to banks, often related to several payment instruments, via outsourcing
arrangements or in the framework of a cooperative arrangement. They do not have a
direct relationship with payers or payees and they generally focus on just one or two
stages of the payment chain. Examples include information technology (IT) services,
providers of data center services, trusted service managers, data security firms, or entities
that provide back office operations, anti-money laundering, audit or compliance.
 Operators of retail payment infrastructure. These specialize in back-end clearing and

settlement services, cooperating with banks and other payment service providers to which
they offer their services, usually in relation to different payment instruments. In some
cases, these non-banks are owned by the banks participating in the arrangement.
Examples of card payment business would include card networks, such as Visa,
MasterCard, or China Union Pay. They do not offer front-end or back-end services, but
provide clearing and processing services for card transactions.
 End-to-end providers. This category represents a combination of the foregoing

categories. Payers and payees have direct relationships with end-to-end providers, usually
by maintaining accounts with them. These providers are closed-loop systems in the sense
that movement of funds from a payer’s account to a payee’s account does not necessarily
require connections with banks, although banks may be used to fund or redeem end-user
accounts with the end-to-end provider. Some examples of this type of non-bank include
operators of three-party card schemes, providers of certain e-money products, such as
PayPal, and some operators of remittance services. End-to-end providers may also use
other non-banks and banks as agents for the provision of some services. Notable
examples are remittance service providers and emoney providers that use agents to offer
cash-out and cash-in services.

Banks Sector
Exhibit 67 shows non-banks as a front-end provider. Here the services are offered directly to
the end-user. They could be providing only an interface between the users and their banks,
or they might deliver payment services similar to those provided by banks. Non-banks need a
connection to the retail payment infrastructure (for clearing and settlement services), either
through a bank (indirect access) or by directly participating in the retail payment
infrastructure (direct access).
Exhibit 66: Retail payments landscape – stylized model
Source: BIS
Exhibit 67: Non-banks as front-end providers
Source: BIS
Non-banks may provide specialized services that are outsourced to them by banks or by
other non-banks. In such scenarios, it is the banks that have access to the clearing and
settlement infrastructures. Besides providing services to banks in various stages of payments,
the operator of the clearing and settlement component could also outsource some of the
back-end services to a non-bank.

Sector Banks
Exhibit 68: Non-banks as back-end providers
Source: BIS
Exhibit 69 shows how the clearing and settlement component of the retail payment
infrastructure could be operated by a non-bank. This might occur, for example, when
specialized activities in the clearing and settlement phase of the payment chain start to be
undertaken by non-banks. Here, we could look at examples like the usage of UPI which
clears through NPCI or payments that happen through the credit or debit framework as
examples of the same.
Exhibit 69: A non-bank can act as the clearing and settlement agent
Source: BIS
Exhibit 70 shows a scenario where non-banks are classified as end-to-end providers. End-to-
end providers may either offer services under a three-party model payment service (where
the non-bank provides all services for transactions between its customers – both payers and
payees) or they could be part of a platform in which other banks and non-banks participate.
Connections with end-user banks might be needed to send or retrieve funds to and from
the scheme. In such cases, the end-to-end providers could be on only one side of the
payment transaction (payer or payee) and would need to access the retail payment
infrastructure either directly or indirectly.

Banks Sector
Exhibit 70: Non-banks as end-to-end providers
Source: BIS
Digital payments in India: rapid growth

We are seeing rapid growth in digital payments with its share (cards, UPI P2M and PPI only)
of total PFCE increasing to ~23% in 1QFY22 from ~15% in 1QFY21. The share of UPI in
PFCE is also growing steadily, to ~9% in 1QFY22 from 6.7% a year prior (P2M only, we
analyze digital peer-to-merchant transactions as a proportion of PFCE). Meanwhile, the
share of cards stood at ~11-12% (credit and debit cards combined). We also note that the
share of PPI instruments has declined from a peak level of ~1.9% in FY2019. (Note: It is
difficult to estimate the proportion of total consumer spends performed through cash,
digital modes or paper-based payment modes; our estimates consider total PFCE for the
economy as a proxy for total spends.)
Exhibit 71: Share of digital payments (cards, UPI P2M and PPI only) in total PFCE has increased from
~15% in 1QFY21 to ~23% in 1QFY22
Credit card spends Debit card spends PPI UPI P2M

25
20
9.4
5.6 6.7
15 5.4 4.7
1.8 3.9 1.8 1.6 1.8 2.2
1.9 1.7
10 1.4 1.7
5.7 5.7 5.8 6.1 5.6 5.3
0.9 5.3
4.6 4.9
5 0.6 3.6
0.1 0.3 2.0
0.1
1.3 1.5 1.7
2.2 2.4 2.6 3.0 3.6 4.6 5.4 5.9 5.4 4.3 5.4 5.8 5.9 6.1
0
2013
2014
2015
2016
2017
2018
2019
2020
2021
2QFY21
3QFY21
4QFY21
1QFY22
1QFY21

Sector Banks
India has a diverse range of payment systems for different purposes like large value transfers,
peer-to-peer payments, peer-to-merchant payments, remittances, prepaid payment
instruments, cash deposit and withdrawals, utility bill payments and RFID-enabled FASTag
for highway toll payments (see exhibit 72-81).
Our exhibits below illustrate the growth in key payment modes and systems over the past
few years. We observe that card payments (both debit and credit cards) have grown
meaningfully over the years. Even as Covid-related restrictions on mobility in early FY2021
dented card-related spending (especially those at physical POS terminals), card spends have
revived substantially since. Other payment modes like UPI and IMPS have also seen a healthy
growth in transactions, whereas large value transfers like NEFT and RTGS have seen relatively
sluggish growth. Prepaid payment instruments (which typically include wallets and prepaid
cards) saw strong traction till about CY2018, but lost momentum thereafter. On the other
hand, AEPS transactions (Aadhaar-based cash withdrawals through micro-ATM machines)
have grown steadily and helped drive financial inclusion in rural hinterlands. FASTag (for
highway toll payments) and BBPS (platform for utility bill payments) are also seeing healthy
growth, with FASTag seeing increased adoption thanks to the state-led push.
Exhibit 72: Credit card usage has grown rapidly Exhibit 73: …. similar is the case with debit cards
Credit card spends, March fiscal year-ends (Rs tn) Debit card spends, March fiscal year-ends (Rs tn)
DC spends Growth (% yoy) - RHS DC spends Growth (% yoy) - RHS

7.5 120 7.5 120
7.0 7.0
6.0 6.6 90 6.0 6.6 90
5.9 5.9
4.5 60 4.5 60
4.6 4.6
3.0 3.3 3.4 30 3.0 3.3 3.4 30
1.5 0 1.5 0
1.6 1.6
1.2 1.2
0.7 1.0 0.7 1.0
0.0 (30) 0.0 (30)
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Note: Note:
(a) FY2022 data is for the first 3 months only. Growth rate is (a) FY2022 data is for the first 3 months only. Growth rate is
accordingly annualized. accordingly annualized.

Banks Sector
Exhibit 74: UPI payments amount to ~Rs6.5 tn monthly Exhibit 75: …while IMPS payments amount to half of that
UPI payments (Rs bn) IMPS payments (Rs bn)
UPI value IMPS (Rs bn)

8,000 4,000
6,400 3,200
4,800 2,400
3,200 1,600
1,600 800
0 0
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Oct-21
Apr-18
Apr-19
Apr-20
Apr-21
Oct-17
Oct-18
Oct-19
Oct-20
Oct-21
Exhibit 76: NEFT payments are not growing Exhibit 77: RTGS payments have declined over the past few
NEFT payments (Rs bn) years
RTGS payments (Rs tn)
NEFT (Rs bn)
35,000 RTGS amount (Rs tn)
150
28,000
120
21,000
90
14,000
60
7,000
30
0
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Apr-16
Oct-15
Oct-16
Oct-17
Oct-18
Oct-20
Oct-21
Oct-19
0
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Oct-21


Sector Banks
Exhibit 78: PPI payment growth has been sluggish recently Exhibit 79: AEPS payments are on an upward trajectory
Payments through PPI (Rs bn) AEPS cash withdrawals (Rs bn)
PPI (Rs bn) AEPS (Rs bn)

325 300
260 240
195 180
130 120
65 60
0 0
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Oct-21
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Oct-21
Note:
Source: RBI, Kotak Institutional Equities (a) This includes only off-us transactions.
Exhibit 80: FASTag payments have grown driven by government Exhibit 81: Use of BBPS for utility bill payments has seen good
intervention traction
Payments through FASTag (Rs bn) BBPS payments (Rs bn)
FASTag (Rs bn) BBPS (Rs bn)

35 125
28 100
21 75
14 50
7 25
0 0
Jul-19
Jul-20
Jul-21
Apr-19
Apr-20
Apr-21
Jan-20
Jan-21
Oct-19
Oct-20
Oct-21
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Oct-17
Oct-18
Oct-19
Oct-20
Oct-21
Source: NPCI, Kotak Institutional Equities Source: RBI, Kotak Institutional Equities
An RBI survey titled Retail Payment Habits in India - Evidence from a Pilot Survey, on digital
payment habits indicates that awareness about digital payments is modestly high – with card
payments being better understood (see exhibit 82 and 83). The same survey also indicates
that the propensity to use a digital mode for payment increases as the size of the transaction
increases. Our analysis of digital payment transactions (Exhibit 84) indicates that the average
ticket size (ATS) of a wallet payment (one form of PPI) is lowest at ~Rs400 followed by a UPI
P2M transaction which has an ATS of ~Rs700. Debit cards and credit cards have relatively
higher ATS of ~Rs1,600 and ~Rs3,600 respectively. IMPS (~Rs9,000) and NEFT (~Rs80,000)
have much higher ticket sizes. When it comes to cash withdrawals, AePS withdrawals from
micro-ATMs have relatively lower ATS (~Rs3,000) as compared to debit card withdrawals
from ATMS (~Rs5,000).

Banks Sector
Exhibit 82: Preference for cash declines for higher value spends Exhibit 83: Awareness about card payments is high
Preferred mode of payment for small value transactions, based on Awareness about digital payment products among survey participants
survey responses (%) (%)
Cheque Digital Cash 100 93.6

125
80 72.7 72.3
100
38 .3 30.0 60 49.5
73.8 52.1 44.2 40.8
75 8 3.9
8 7.1 40
24.2
50 20
53.6
57.3 2.2
25 57.7 0
44.3
33.6
BHIM UPI
Debit/ credit card
Others
Net banking
IMPS
Mobile banking
NEFT/ RTGS
Prepaid cards/ mobile
26.4
9.5 16.7
0
Rs100-200
Rs200-500
Rs500-2,000
<Rs100
>Rs5,000
Rs2,000-5,000
wallets
Note:
Source: RBI survey on retail payment habits (Dec 2018 - Jan 2019) (a) Data will not add up to 100 as participants could select multiple
options.
Source: RBI survey on retail payment habits (Dec 2018 - Jan 2019)
Exhibit 84: Wallets and UPI are typically used for low-value transactions
Average ticket size of digital transactions, March fiscal year-ends (Rs)
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
PPI payments 1,18 4 606 679 652 427 409 463 404 400 507
Wallets 306 270 321 341 327 359 443 428 38 0 407
UPI transfers 4,025 1,200 1,634 1,703 1,8 38 1,8 77
UPI P2M 670 753
UPI P2P 2,670 2,8 44
Card spends
Debit cards 1,58 4 1,539 1,502 1,356 1,375 1,377 1,344 1,379 1,624 1,68 9
POS 1,48 2 1,8 17 1,923
Non-POS 1,221 1,444 1,48 0
Credit cards 3,057 3,019 3,068 3,040 3,002 3,248 3,404 3,331 3,554 3,8 76
POS 3,031 3,231 3,469
Non-POS 3,58 6 3,906 4,227
ATM cash withdrawals 3,017 3,158 3,176 3,143 2,758 3,375 3,359 3,992 4,98 5 4,8 61
Micro-ATM (AePS) 2,38 9 2,966
Debit cards 3,016 3,157 3,175 3,141 2,756 3,374 3,358 3,991 4,98 5 4,8 61
Credit cards 5,738 5,701 5,947 5,042 4,455 4,644 4,639 4,759 4,976 5,079
Toll/ bill payments
FASTag recharges 26,38 9 22,648 19,38 7 17,149 16,569
BBPS utility bill payments 1,640 1,659 1,698
Others
IMPS 7,417 7,349 8 ,126 8 ,8 38 9,072 9,063 8 ,973 9,040
NEFT 64,476 66,465 74,030 8 8 ,48 8 98 ,297 8 3,607 8 1,256 71,216
RTGS ex-interbank 7,139,254 7,459,953 8 ,199,352 8 ,58 8 ,190 8 ,8 8 5,271 7,567,036 5,78 3,916 5,419,38 7
Note:
(a) FY2022 ticket size includes data till the latest available month.
Another study by PhonePe named Beat of Progress indicates that user penetration of
PhonePe is relatively low in many northern and north-eastern states (see exhibit 85). Note
that PhonePe is a major player in the UPI space with ~45% market share in total payment
volumes. These observations together imply that we can expect a further deepening of UPI
and other digital payment modes in the country over the next few years.

Sector Banks
Exhibit 85: User penetration is higher than 33% in only 8 states and UTs
User penetration of PhonePe across states and UTs (%)
Source: PhonePe
India Stack: cornerstone of the country’s digital innovation

India’s progress towards open banking is a part of a wider ‘India Stack’ development. India
Stack is a set of modular, individual technologies and policies that act as enablers of
innovation (see exhibit 86). India Stack’s challenge was to create a structure that overcomes
information asymmetries and lack of trust by allowing customers to readily access and share
their personal data. From a financial services point of view, this allows consumers to benefit
from more personalized products with lower switching costs and the choices presented by
competing vendors. With lower friction and lower transaction costs, the viability of a small-
ticket sachet loan improves considerably.
As per the BIS report, The design of digital financial infrastructure: lessons from India, India
has created its digital infrastructure base predicated upon two principles: (1) building digital
platforms as a public good allows both public and private sector participants to develop
technological innovations, and (2) embedding the criticality and provision of data privacy
and security within the design. Apart from the use of such infrastructure in payments and
lending, we look at applications in other industries (healthcare, insurance, etc.). Being open-
ended and a public good, both a big tech firm and a traditional commercial bank can
operate on the same digital platform.

Banks Sector
Exhibit 86: Building blocks of India Stack
India Stack has three rails:
#1. Identity rail - Aadhaar
Aadhaar allows the authentication of identity on demand without the need for a physical
presence, as well as e-KYC (verification), eSign (digital signature) and DigiLocker (online
document depository). Aadhaar is a biometric identity that requires minimal information
and has a low marginal cost per identification.
Aadhaar’s privacy protection features do not allow financial institutions or data brokers
to put collate detailed profiles that combine transactions across databases. Further, when
the bank or other institutions send an authentication to Aadhaar, the application does
not record the location or purpose of authentication (see exhibit 87). The authentication
response to the providing institution is ‘Yes/No” only – no other information about the
individual is conveyed.
Exhibit 87: Aadhaar identity rail

Sector Banks
Aadhaar has played a key role in government schemes such PMJDY (bank account
opening) and Direct Benefit Transfer (DBT). Aadhaar has made it easy for banks and
financial institutions to complete the critical piece of customer onboarding – KYC. The
government launched electronic KYC (e-KYC), allowing banks and other companies to
handle the KYC processes in a paper-free way, thus reducing the costs of engaging new
customers while complying with bank and anti-money laundering regulations. Aadhaar-
based e-KYC is fast, cost-effective and simplifies the process for accessing a range of
financial services as it is based on biometrics; it also obviates the need for paperwork and
reduces the chances of forgery. According to one of the estimates, banks using e-KYC
could lower their cost of compliance setting up accounts from US$15 to around US$0.07.
Aadhaar has also been used for ‘ESign’. ESign allows individuals to digitally sign the
documents, with authentication done through biometrics or one-time password. ESign
has been heavily used in signing income tax returns. Going forward, it could be used to
sign invoices, which could support invoice financing of business.
DigiLocker is another application of Aadhaar used for the online repository of digital
documents. Government organizations can use DigiLocker to deposit verified documents
directly into the lockers of citizens. This can be used for accessing telecom, land, health
records, insurance policies, licenses, mark sheets, etc. and sharing them using the ESign
capability.
#2 Payment rail – UPI
Unified Payments Interface (UPI), developed by the NPCI, has been operational since
2016 and regulated by the RBI. UPI is a single interoperable interface for bank accounts
and enables anyone with a mobile phone to access the payment system, allowing
financial transactions to take place instantly (real-time) and on demand (24X7).
UPI works by virtualizing accounts with uniform addresses. It allows customers to transfer
funds using any of the following methods: a virtual payment address (VPA), a mobile
number, a bank code and account number, an Aadhaar number, or a QR code, which
has captured any of the above information (see exhibit 88).
Exhibit 88: UPI payment rail

Banks Sector
UPI’s interoperability is one of its key strengths. The open API architecture allows users
access to multiple bank accounts with a single banking or third party interface. The
ability to transfer funds through this interface makes it similar to some of the other open
banking initiatives seen elsewhere. Several payment and fintechs have proliferated to
capitalize on this opportunity. However, it’s worth noting that only the regulated banks
can transfer money on the UPI rail.
UPI’s success and strong adoption since 2016, especially post demonetization, is well-
known and well-documented.
#3 Data sharing rail – account aggregators
The identity rail has brought a large population into the formal financial system, whereas
the payment rail has allowed for continuous activation through facilitating convenient
transactions. The third rail of India Stack allows individuals to access and share their
personal data to overcome lack of trust and information asymmetries. Research studies
indicate that open access to data can lower switching costs for customers and support
competition and financial inclusion.
Countries around the world deal with the subject of data regulation in different ways.
For example, the US has a market-oriented approach with large bigtech firms having
more freedom in how they choose to utilize user data. In China too, the domestic big
tech firms have autonomy in their use of customer data. Europe on the other hand has a
relatively more conservative, activist stance on data protection and privacy through the
General Data Protection Regulation (GDPR). The burden of privacy and security is shifted
to service providers, with strict rules on their ability to collect and handle data and heavy
penalties for violations.
Open data sharing rail is possibly a bigger challenge than open payment rail. Unlike a
common regulator (RBI) that binds the payment firms, user data sits across different
regulatory organizations and in different formats. The lack of access to a coherent user
database represents a significant opportunity cost to consumers. Digital data trails can
help consumers show evidence of income, businesses revenues and earning potential,
thus potentially improving access to credit and other financial services.
It is the RBI’s remit to develop regulatory framework to enable open access (link to
guideline). The RBI established the legal framework in 2016 for a category of regulated
data entities, called account aggregators. This framework covers 18 classes of financial
information across banking, investment, insurance and pension fund sectors. According
to the framework (see exhibit 89), access to data must be granted to regulated entities,
with user consent, for a limited time and for a specific purpose. There are few key
aspects of the AA framework:
 All participating institutions that can request data must also agree to provide data in
response to requests. This prevents free-riding.
 The customer has the option to restrict consent in terms of time and data categories,
as well as revoke earlier consent.
 Data flow is fully encrypted, so AAs will not be able to see, store or sell the
underlying data.
 Users will have portability to switch across account aggregators.

Sector Banks
Exhibit 89: Data sharing rail through the AA framework
The next step – cash-flow-based lending through OCEN
Open Credit Enablement Network‘s (OCEN) objective is to democratize access to credit in

India (see exhibit 90). OCEN extends the benefit of standardization to credit – it standardizes
digital loan application and its life cycle from loan origination and its repayment. OCEN is to
credit, what UPI is to payments and AA is to data. OCEN provides a framework to allow any
consumer-facing company to embed credit or ‘plug-in’ lending capabilities into the existing
product or service offerings. Traditional lenders find it difficult to originate new-to-bank,
small-ticket loans primarily due to the cost of customer acquisition as well as cost of
collections, especially in the absence of high-frequency data signals on credit health as well
as their inability to monitor cash-flows.
To understand the use case for OCEN, consider the example of vendors in an online retail
marketplace. The marketplace entity wishes to offer loans to its vendors as a way to build
stickiness and loyalty. Underwriting of this credit will need the vendor to share with a lender
several details like revenues, order frequency, average size, seasonality, customer
concentration, etc. apart from conventional data such as revenues, profits and balance sheet.
Such integrations between the marketplace and lenders are indeed possible and in existence
today, however, these are customized solutions and require bespoke integrations between
the two systems. OCEN allows for the creation of an open standard way of plugging and
sharing of data. OCEN creates a common language for parties to communicate, which can
replace complex bilateral tech integrations with a single standard.
OCEN defines a Loan Service Provider (LSP) as an entity that helps borrowers connect with
lenders. LSPs are not DSAs (direct selling agents), i.e. agents of the lender. LSPs are
supposed to be agents of the borrower who help them find the best credit products to suit
their needs. The LSP is the marketplace or platform that helps the lender by opening up its
captive pool of users. In the above example, LSP is the online marketplace which will
connect borrowers with lenders along with the data captured on the platform. Ideally, any
entity that interacts with a large number of users and captures their transaction data can
become a useful LSP (e.g. Amazon, Swiggy, Zomato, etc.). By embedding credit into their
offerings, OCEN can spur cash-flow based lending for merchants, vendors, restaurants, etc.
based on their real, dynamic cash-flows instead of necessarily relying on static balance
sheets and collaterals.

Banks Sector
 Benefits to borrowers. (1) Potentially lower interest rates/fees due to a lower cost of
acquisition, (2) easier access to credit on the place/website itself and (3) customized credit
based on the established track record of revenue/cash-flow profile.
 Benefits to lenders. (1) Lower cost of operations by leveraging the customer pools
already aggregated by LSPs, (2) new customer pools hitherto out of reach and (3) use of
LSP to trap cash-flows and ensure timely repayments.
 Benefits to LSPs. (1) Improved loyalty and stickiness and (2) potential new revenue pools
through related parties that can underwrite credit.
Exhibit 90: Schematic representation of OCEN
Source: ISPIRT, Kotak Institutional Equities
Role of AA in OCEN
Lenders enabling loans on OCEN can get data from three sources. (1) Borrower-related
business data coming from the LSP – say for restaurants it will be their reviews, order history,
etc. (2) Along with this, lenders will be able to fetch the financial data through the AA
setup. (3) Traditional checks around bureau data. In case of OCEN, the loan application is
initiated on the LSP app, the customer selects the financing option which is transferred to
the lender through OCEN. The prospective borrower can simultaneously send the consent
for AA as well as part of the application to the lender.
The entire flow of transaction/data can be represented by a high-level architecture diagram

sourced from iSPIRT’s GitHub page (Exhibit 91). It relates to the use case for OCEN in
availing loan against invoice at a Government e-Marketplace (GeM) platform. According to
experts, given that LSPs themselves capture a lot of data, they can become data providers
and can start providing their data to account aggregators in future.

Sector Banks
Exhibit 91: Interaction between various parties in OCEN+AA framework
Source: iSPIRT, Kotak Institutional Equities
LSP: could it disintermediate traditional lenders?
LSP is the customer’s agent or point of contact that enables credit. LSP provides distribution
services, creates loan applications and shares alternate data. LSP can potentially handle the
entire loan value chain, i.e. sourcing and underwriting, including identification and
documentation as well as disbursement and collection. Entities which have rich customer
engagement and transaction flow can naturally dovetail into a strong LSP. LSP can
hypothetically replace traditional lenders if they start lending on the balance sheet of
associate/related entities with an NBFC license. However, in a more probable scenario, LSPs
can partner with a bank and integrate their tech with a bank’s loan management systems.
Along with the open rails of AA, LSPs can provide real-time credit.
Case study: Sahay-GeM Ecosystem
Sahay GeM is a digital ecosystem through which a seller on the Government eMarketplace
can avail of an unsecured, short-tenure loan from a lender (see exhibit 82). The Sahay-GeM
ecosystem is powered by an application (Sahay App) that performs the role of LSP. The app
does not charge any fees – businesses only pay the service fees/interest rates charged by the
lenders. This is similar to the BHIM app which first rolled out the UPI service.
Loans are disbursed instantly/same day and up to 80% of the purchase order value with
75-90 days duration. For availing financing through GeM Sahay, a virtual account is created
for a borrowing seller. It acts as an escrow account where the payment against a financed
Purchase Order (PO) will first be transferred to when the buyer makes the payment against
the PO. This helps lenders get repaid first from the payment buyer makes against the PO.
The balance amount, once the lender has been paid, is settled to the seller’s primary account
on GeM. It is an account created by a GeM collection account partner and the seller does
not have to submit any documentation or take steps to create the account. This is auto
created for sellers that opt for GeM Sahay financing.

Banks Sector
Exhibit 92: Key highlights of Sahay GeM
Source: Gem.gov.in, Kotak Institutional Equities
Payment processing: changing models

The revenue model for a payment processing company has undergone a shift in recent years,
especially in developed markets. The traditional product that provide a simple payment
acceptance solution is seeing its margins being squeezed, a situation that is compelling
innovation in business models. Note that the margin compression has happened despite this
business having only a few players with significant market share. In the initial leg of the
digitization of the payment journey, there was a distinct set of players offering specific
services in the payment value chain. In its most common form, the traditional card-based
value-chain involves few parties (shoppers, merchants, acquirers, card networks and issuers)
whose interactions are governed by a card network (see exhibit 93). This expanded to a few
more parties which included terminal/gateway service providers (hardware or software
support), processors (authorization, data transmission, data security and settlement
functions) and risk management.
Exhibit 93: Stakeholders involved in a credit card transaction
Acquirer Issuer
processor processor
Card network
Payment Issuer bank
facilitator/ ISO
Member/
settlement bank
Goods/ services
Merchant Cardholder
Use card for payment

Note:
(a) In some cases, the acquirer processor performs the role of payment facilitator/ ISO as well.
Source: Global Payments, Kotak Institutional Equities

Sector Banks
Over time, as consumers got comfortable with different modes of payment, merchants
added more services to meet the multiple needs of customers. However, this required
merchants to subscribe to multiple partners in order to accept various modes of digital
payment. Players in the online and offline spaces may not be the same, which meant that
merchants needed to work through multiple vendors, which was a time consuming, error-
prone exercise with significant challenges in reconciliation.
Since then, new models have begun offer more comprehensive, streamlined payment
solutions. Exhibits 94 and 95 show an illustration of the payment value chain that existed
earlier and where it is currently. Quite simply, much of the intermediation is now assumed
by a single player making life more convenient for the merchant.
From a merchant processor’s standpoint, nearly all of the services are now automated,
which implies that product acceptance is high. Merchant processors can bring these
products through acquisition or through internal development. From a merchant’s
standpoint, much of the back-end activities are now getting handled by a single player,
allowing the merchant to focus on sales. Higher dependence on a merchant processor helps
expand the pool of revenues for the processor with negligible incremental effort.
Exhibit 94: Earlier model involved working through multiple layers with different partners
Illustration of a typical electronic payments value chain
Source: Adyen prospectus
Exhibit 95: Payment companies have integrated a lot of services in the payment chain
Illustration of Adyen (a large payment processing company) in the electronic payments value chain
Source: Adyen prospectus
Most of the large payment players have started to diversify their business models and/or
have started to provide value-added services to their merchants. From a merchant’s
perspective, these value-added services offer a compelling reason to shift from existing
payment providers. These add-ons are usually paid services, and trends show growing
acceptance. Nearly all the new and large payment service providers are offering this service
either through their own products or through their partnerships.

Banks Sector
These services include: (1) billing services like invoice management, (2) payroll processing, (3)
banking as a service for operations like treasury or cash management, (4) business analytics
and reporting, (5) fraud and risk management tools, (6) providing loans, (7) spend
management tools and (8) subscription services or commerce management programs like
affiliate marketing, loyalty schemes, etc.
The exhibit below is from the 2021 McKinsey Global Payments Report. It breaks down the
revenue pool for merchant services into four major categories: (1) core transaction
processing and transaction enablement, (2) payment software, infrastructure and services, (3)
commerce enablement and (4) balance sheet offerings.
The core transaction processing forms <15% of the overall revenue pool and is expected to
grow at the slowest pace. The biggest pool of revenues is in commerce enablement which
goes much deeper into the merchant’s wallet pool and its growth is the highest as well.
Exhibit 96: Transaction fee forms a smaller share of the revenue pie in merchant processing business
Break-up of revenue streams as per McKinsey for merchant processing in US, 2020-25 (US$ bn)
Source: 2021 McKinsey Global Payments Report
Revenue generation: the playbook of big players

The payment business makes money: the theme is unarguable across players. This is the
plinth on which large global companies are building other products. We look at a few big
players in the payment space that operate from the US and one from Europe (though we do
note that all of these companies have been diversifying their revenue base across
geographies). The revenue model or margins differ across companies, products and
geographies but payments remain an important and dominant source of revenues. On the
other hand, lending is not an important part of the business model. These companies have a
much longer history with the consumer or merchant and yet, this has not yet emerged as
the primary engine for growth.
In this section, we look at select international companies that are very large players in the
payment space. We look at transaction processors and companies that provide solutions to
customer acquirers and merchant acquirers. Most of these companies began as providers of
solutions either to merchants or to customers, but the business has evolved over time to
encompass the other side and so the revenue stream is now two-sided.

Sector Banks
Visa Inc
Visa is one of the oldest payment processing company facilitating payments between
consumers and businesses with a strong market share in the credit, debit, pre-paid card
along with ATM business. It has been in operation since 1958. Over time, the company has
evolved to meet business needs with solutions both on the online and offline models. The
company issues credit and debit cards through its partnership with financial institutions, co-
brand partners, fintech companies or other affiliate partners. This allows consumers and
businesses to access a payment function to pay for goods and services. The company does
not take any credit risk. The company is also into payment processing of pre-paid and helps
in facilitating cash withdrawals through the ATM network. They also provide value-added
services which include fraud management, merchant acquirer solutions and analytics/
consultancy. Visa has grown its volumes by ~10% CAGR since 2007 (see exhibit 97) and
healthy revenue mix (see exhibit 98).
The company generates revenues from the following segments
 Service fees. Service fees primarily reflect payments by customers for their participation
in card programs carrying marks of the Visa brand. Current quarter service fees are
assessed using a calculation of pricing applied to prior quarter payments volume as
reported on customer quarterly operating certificates, exclusive of PIN-based debit
volume. These payments volumes also do not include cash disbursements obtained with
Visa-branded cards, balance transfers or convenience checks.
 Data processing services. Data processing fees are primarily driven by the number and
type of transactions and represent fees for processing transactions that facilitate the
following services:
 Authorization. Fees to route authorization requests to the issuer when a merchant,

through its acquirer, requests approval of a cardholder’s transaction.
 Clearing and settlement. Fees for determining and transferring transaction amounts
due between acquirers and issuers.
 Single Message System, or SMS, switching. Fees for the use of SMS for determining
and transferring debit transaction amounts due between acquirers and issuers.
 Member processing. Fees for the use of the debit processing service, which provides
processing and support for Visa debit products and services.
 Processing guarantee. Fees charged for network operations and maintenance

necessary for ongoing system availability.
 Other products and services. Fees for miscellaneous services that facilitate
transaction and information management among Visa USA customers.
 International transaction fees. These are generally driven by the volume of cross-
border payments, which include the settlement of currency exchange activities in
connection with the settlement of multi-currency transactions. International transaction
fees are influenced by levels of travel and the extent to which Visa-branded products are
utilized for travel purposes. These fees are recognized as revenues in the same period that
related transactions occur or services are performed.

Banks Sector
Exhibit 97: Visa has grown its volumes by ~10% CAGR since Exhibit 98: The revenues are driven by service, data processing
2007 and foreign exchange
Nominal payments volume, June fiscal year-ends, 2007-20 (US$ bn) Revenues mix across segments, June fiscal year-ends, 2007-20 (US$ bn)
Consumer credit Consumer debit Commercial Cash Service Data processing

International transaction Volume/ support incentives
12 Others
32
10
24
7
16
5
8
2 -
- (8)
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2007
2008
2009
2014
2015
2016
2017
2018
2019
2020
2010
2011
2012
2013
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Exhibit 99: Visa makes ~10 bps on the transactions processed

Profit and loss statement as a share of total payment volume, June fiscal year-ends, 2007-20
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenues
Service 0.06 0.07 0.07 0.07 0.08 0.08 0.08 0.08 0.09 0.09 0.08 0.08 0.08 0.09
Data processing 0.04 0.05 0.06 0.06 0.06 0.06 0.07 0.07 0.08 0.08 0.08 0.08 0.09 0.10
International transaction 0.01 0.04 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.06 0.06 0.06 0.07 0.06
Others 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01
Volume/ support incentives (0.01) (0.03) (0.03) (0.03) (0.03) (0.03) (0.03) (0.04) (0.04) (0.05) (0.05) (0.05) (0.05) (0.06)
Total 0.10 0.15 0.16 0.17 0.16 0.17 0.18 0.18 0.19 0.20 0.18 0.19 0.20 0.19
Operating expenses
Personnel 0.02 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03
Marketing 0.02 0.02 0.02 0.02 0.02 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01
Network and processing 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01
Professional fees 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.00 0.00 0.01 0.00 0.00 0.00 0.00
Depreciation and amortization 0.00 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01
General and administrative 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.04 0.01 0.01 0.01 0.01
Litigation provision 0.08 0.04 0.00 (0.00) 0.00 0.07 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00
Total 0.14 0.12 0.08 0.07 0.07 0.13 0.07 0.07 0.07 0.10 0.06 0.07 0.07 0.07
Operating profit (0.04) 0.03 0.08 0.10 0.10 0.03 0.11 0.11 0.12 0.11 0.12 0.12 0.13 0.12
Non-interest income 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00 (0.00) 0.00 (0.00) (0.00) (0.00) (0.00)
PBT (0.04) 0.03 0.09 0.10 0.10 0.04 0.11 0.11 0.12 0.11 0.12 0.11 0.13 0.12
Tax (0.01) 0.01 0.04 0.03 0.04 0.00 0.03 0.03 0.04 0.03 0.05 0.02 0.02 0.03
PAT (0.03) 0.02 0.06 0.06 0.06 0.03 0.07 0.08 0.09 0.08 0.07 0.09 0.11 0.10

Sector Banks
Exhibit 100: Revenues are dominated by service and data processing while costs are dominated by staff costs
Profit and loss statement as a share of revenues, June fiscal year-ends, 2007-20
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenues
Service 54 49 46 43 46 47 45 46 45 45 43 43 42 45
Data processing 39 33 35 39 38 38 39 41 40 42 42 44 45 50
International transaction 13 27 28 28 29 29 29 28 29 31 34 35 34 29
Others 8 9 9 9 7 7 6 6 6 5 5 5 6 7
Volume/ support incentives (14) (19) (18 ) (19) (20) (21) (20) (20) (21) (23) (25) (27) (27) (31)
Total 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Operating expenses
Personnel 20 19 17 15 16 17 16 15 15 15 14 15 15 17
Marketing 16 16 13 12 9 8 7 7 6 6 5 5 5 4
Network and processing 7 5 6 5 4 4 4 4 3 4 3 3 3 3
Professional fees 9 7 5 4 4 4 3 3 2 3 2 2 2 2
Depreciation and amortization 4 4 3 3 3 3 3 3 4 3 3 3 3 4
General and administrative 10 5 5 4 5 4 4 4 4 18 6 6 5 5
Litigation provision 74 23 0 (1) 0 39 0 4 0 0 0 3 2 0
Total 140 80 49 43 41 79 39 39 35 48 34 37 35 36
Operating profit (40) 20 51 57 59 21 61 61 65 52 66 63 65 64
Non-interest income 2 2 7 1 2 1 0 0 (0) 1 (2) (1) (1) (1)
PBT (39) 21 58 58 62 21 62 61 65 53 64 62 65 63
Tax (9) 8 24 21 22 1 19 18 19 13 27 12 12 13
PAT (30) 13 34 37 40 21 42 43 46 40 36 50 53 50
Mastercard Inc
Mastercard is one of the early players in the global payments industry that connects
consumers, financial institutions, merchants, governments, digital partners, businesses and
other organizations worldwide. The company operates multiple payment rails domestic and
cross-border payment needs. Similar to Visa, the company provides integrated value-added
offerings such as cyber and intelligence products, information and analytics services,
consulting, loyalty and reward programs, processing and open banking.
Mastercard has grown its volumes by ~8% CAGR since 2007 (see Exhibit 101) with credit
card volumes growing by ~3% CAGR while debit cards has grown by ~13% CAGR
alongside a doubling of growth in commercial credit and debit cards. The price structure is
dependent on the nature of volumes, types of transactions and type of products and services
offered to customers. From an issuance of cards perspective, debit and commercial cards
have grown 15% CAGR while credit cards grew 4% CAGR since FY2013 (see Exhibit 102).
Since FY2013, the average transaction per card has been flat on credit cards, declined by 4%
in debit cards and 3% in commercial cards.
The company classifies its revenues under the following categories.
 Domestic assessments. These are fees charged to issuers and acquirers based primarily
on the dollar volume of activity on cards and other devices in the local country.
 Cross-border volume. These are fees charged to issuers and acquirers based primarily on
the dollar volume of activity on cards and other devices that carry the company’s brands
where the merchant country and the country of issuance are different.
 Transaction processing revenue. This is recognized for both domestic and cross-border
transactions in the period in which the related transactions occur. Transaction processing
includes the following: (1) Switched transaction revenue – authorization, clearing and
settlement, (2) connectivity fees and (3) other fees.

Banks Sector
 Other revenues. This consists of value-added products and services which include data
analytics, consulting, cyber and intelligence fees, loyalty and reward solution, program
management services, etc.
 Rebates and incentives (contra-revenue). This is provided to customers that meet

certain volume targets and can be in the form of a rebate or other support incentives,
which are tied to performance.
Exhibit 101: Mastercard has grown its volumes by ~8% CAGR Exhibit 102: Debit and commercial cards have grown 15% CAGR
since 2007 while credit cards grew 4% CAGR since FY2013
Nominal payments volume, December calendar year-ends, 2007-20 Cards issued across various products, December calendar year-ends,
(US$ bn) 2013-20 (US$ bn)
Consumer credit Consumer debit/prepaid Consumer credit Consumer debit/prepaid

Commercial credit/debit Commercial credit/debit
7.0 2.5
5.6 2.0
4.2 1.5
2.8 1.0
1.4 0.5
0.0 0.0
2010
2011
2012
2013
2014
2015
2016
2018
2019
2020
2009
2017
2013
2014
2015
2016
2017
2018
2019
2020
Exhibit 103: Largely unchanged spending per card across various Exhibit 104: Mastercard has grown its revenues by ~10% CAGR
card types since 2008
Average transaction per card across card types, December calendar Revenues across segments, December calendar year-ends, 2007-20
year-ends, 2013-20 (US$) (US$ bn)
Consumer Credit Consumer Debit and Prepaid Domestic assessments Cross-border volume
Commercial Credit and Debit Total Transaction processing Other revenues
Rebates and incentives
10,000
30
8,000 20
6,000 10
4,000 0
2,000 (10)
0 (20)
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2014
2015
2016
2017
2018
2019
2020
2013

Sector Banks
Exhibit 105 shows the break-up of revenues based on gross dollar value processed. The
company generates ~25 bps on the overall transaction. Of this, ~15 bps comes from the
transaction processing and ~10 bps from domestic assessment. Earnings are ~8-10 bps on
the total transaction revenue. A similar earnings break-up has been shown as a share of
revenues (see Exhibit 106).
Exhibit 105: Mastercard makes ~10 bps on the transactions processed

Profit and loss statement as a share of total payment volume, December financial year-ends, 2009-20 (%)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenues
Domestic assessments 0.10 0.10 0.10 0.10 0.09 0.09 0.09 0.09 0.10 0.10 0.10 0.11
Cross-border volume 0.06 0.07 0.06 0.06 0.07 0.07 0.07 0.07 0.08 0.08 0.09 0.06
Transaction processing 0.08 0.08 0.08 0.08 0.08 0.09 0.10 0.11 0.12 0.13 0.13 0.14
Other revenues 0.03 0.03 0.03 0.03 0.03 0.04 0.04 0.05 0.05 0.06 0.06 0.07
Rebates and incentives (0.07) (0.07) (0.07) (0.07) (0.07) (0.07) (0.09) (0.10) (0.11) (0.12) (0.13) (0.13)
Net revenue 0.21 0.20 0.21 0.20 0.20 0.21 0.21 0.22 0.24 0.25 0.26 0.24
Operating expenses
General and administrative 0.08 0.07 0.07 0.07 0.06 0.07 0.07 0.08 0.09 0.09 0.09 0.09
Advertising and marketing 0.03 0.03 0.03 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.01 0.01
Depreciation/amortization ― ― 0.02 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01
Provision for litigation 0.01 0.01 0.01 0.00 0.00 ― 0.00 0.00 0.00 0.02 ― 0.00
Total operating expenses 0.12 0.10 0.12 0.09 0.09 0.10 0.10 0.10 0.11 0.13 0.11 0.11
Operating profit 0.09 0.10 0.08 0.11 0.11 0.11 0.11 0.12 0.13 0.12 0.15 0.13
Non-interest income (0.00) 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) 0.00 (0.01)
PBT 0.09 0.10 0.08 0.11 0.11 0.11 0.11 0.12 0.12 0.12 0.15 0.12
Tax 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.05 0.02 0.02 0.02
PAT 0.06 0.07 0.06 0.08 0.08 0.08 0.08 0.08 0.07 0.10 0.13 0.10
Exhibit 106: Revenues are dominated by service (domestic assessments) and transaction processing while costs are dominated by staff
costs
Profit and loss statement as a share of revenues, December calendar year-ends, 2009-20 (%)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenues
Domestic assessments 47 48 48 49 46 42 42 41 41 41 40 44
Cross-border volume 30 35 31 32 33 32 33 33 33 33 33 23
Transaction processing 40 40 39 41 40 43 45 48 50 49 50 57
Other revenues 15 14 15 16 16 18 21 23 23 22 24 31
Rebates and incentives (32) (36) (33) (37) (35) (35) (41) (44) (47) (46) (48 ) (54)
Net revenue 100 100 100 100 100 100 100 100 100 100 100 100
Operating expenses
General and administrative 38 34 33 33 32 34 35 34 36 35 34 39
Advertising and marketing 15 14 13 10 10 9 8 8 7 6 6 4
Depreciation and amortization ― ― 11 3 3 3 4 3 3 3 3 4
Provision for litigation 3 3 3 0 1 ― 1 1 0 8 ― 0
Total operating expenses 56 50 60 47 46 46 47 47 47 51 43 47
Operating profit 44 50 40 53 54 54 53 53 53 49 57 53
Non-interest income (1) 0 0 (0) (0) (0) (1) (1) (1) (1) 0 (2)
PBT 43 50 41 53 54 54 51 52 52 48 58 51
Tax 15 16 13 16 17 15 12 15 21 9 10 9
PAT 29 33 28 37 37 38 39 38 31 39 48 42

Banks Sector
Fiserv Inc.
Fiserv, Inc. is one of the leading global providers of payments and financial services technology
solutions servicing banks, credit unions, financial institutions, corporate clients and merchants.
The company operates in areas that include account processing and digital banking solutions;
card issuer processing and network services; payments; e-commerce; merchant acquiring
and processing; and the point-of-sale (POS) solution. The company has made several
acquisitions and divestments in the past. In July 2019, the company had acquired First Data
Corporation. The company operates in three segments: acceptance, fintech and payments.
 Acceptance. This segment provides a wide range of commerce-enabling solutions and

serves merchants of all sizes around the world. These services include PoS merchant
acquiring and digital commerce services, mobile payment services, security and fraud
protection products and omnichannel commerce solutions. The acceptance of solutions
enables businesses to securely accept a consumer’s electronic payment transactions online
or in-person. Payment transactions represent credit, debit, stored-value and loyalty
payments, whether at a physical PoS device, a mobile device such as a smart-phone or
tablet, or an e-commerce transaction over the internet. Services include payment
authorization, settlement, charge-back management and solutions that secure payment
data from end-to-end.
 Fintech. This segment provides financial institutions with the technology solutions they
need to run their operations, including products and services that enable financial
institutions to process customer deposit and loan accounts and manage an institution’s
general ledger and central information files. This segment provides digital banking,
financial and risk management, cash management, professional services and consulting,
item processing and other products and services that support numerous types of financial
transactions.
 Payments. This segment provides financial institutions and corporate clients with
products and services required to process digital payment transactions. This includes card
transactions such as debit, credit and prepaid card processing and services as well as a
range of network services, security and fraud protection products; card production and
print services. In addition, businesses in the payments segment offer non-card digital
payment software and services, including bill payment, account-to-account transfers,
person-to-person payments, electronic billing, and security and fraud protection products.
Clients of the global payments segment businesses reflect a wide range of industries,
including merchants, distribution partners and financial institution customers in other
segments.

Sector Banks
Exhibit 107: Revenues grew at a stable rate of 2% CAGR prior to Exhibit 108: Operating profits grew at a stable rate of 7% CAGR
acquisition of First Data prior to acquisition of First Data
Revenues across segments, December calendar year-ends, 2007-20 Operating profits across segments, December calendar year-ends,
(US$ bn) 2007-20 (US$ bn)
Acceptance Fintech Payments Acceptance Fintech Payments

Payment Financial Corporate/other Payment Financial Corporate/other
16 6
12 4
8 2
4 0
0 (2)
(4) (4)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Notes: Notes:
(a) There is a reclassification of revenues post the acquisition of First (a) There is a reclassification of operating profits post the acquisition
Data Corporation. of First Data Corporation.
Exhibit 109: Fiserv was operating at a 15% PAT margin and ~25% EBITDA margin prior to the acquisition of First Data Corporation
Profit and loss statement as a share of revenue, December calendar year-ends, 2009-20 (%)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue
Processing and services 76 82 83 82 83 84 83 84 84 85 85 84 82
Product 24 18 17 18 17 16 17 16 16 15 15 16 18
Total revenue 100 100 100 100 100 100 100 100 100 100 100 100 100
Expenses
Cost of processing and services 42 45 45 45 44 43 43 41 40 40 40 39 39
Cost of product 20 13 13 14 14 14 14 14 14 13 13 13 13
Selling, general and administrative 18 18 18 18 19 20 19 20 20 20 21 32 38
Gain on sale of businesses 0 ― ― ― ― ― ― ― ― (0) (4) (0) (3)
Total expenses 81 77 76 77 76 78 76 75 74 73 70 84 88
Operating income 19 23 24 23 24 22 24 25 26 27 30 16 12
Interest expense, net (6) (5) (5) (6) (4) (3) (3) (3) (3) (3) (3) (5) (5)
Debt financing activities ― ― (1) ― ― ― ― (2) (0) ― (0) (0) ―
Other income (expense) 0 0 0 0 0 ― ― ― ― 0 0 (0) 0
PBT 14 18 19 17 20 19 21 20 23 24 27 11 8
Income tax provision 6 7 7 6 7 7 8 7 9 3 6 2 1
Income from unconsolidated affiliates 0 0 0 0 0 2 2 1 3 1 0 0 ―
Net income 8 12 12 11 13 14 15 14 17 22 20 9 7
Less: noncontrolling interests/others (5) (0) 0 (0) (0) 0 ― ― ― (0) ― (0) (0)
Net income 12 12 12 12 14 13 15 14 17 22 20 9 7

Banks Sector
Exhibit 110: Prior to acquisition, EBITDA margin improvement Exhibit 111: Pre-acquisition, the RoEs were at a healthy 25%
was supported by operating leverage average over the past decade
EBITDA margin, December year-ends, 2008-20 (%) Return on Equity, December year-ends, 2008-20 (%)
35 50
28 40
21 30
14 20
7 10
0 0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2009
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2008
2010
Global Payments Inc.

Global Payments Inc. is a leading pure play payments technology company providing
payments and software solutions to ~3.5 mn merchant locations and more than 1,300
financial institutions across more than 100 countries. In 2019, the company completed the
acquisition of Total System Services (TSYS) for a consideration of US$25 bn. The company
currently operates in three reportable segments: merchant solutions, issuer solutions and
business and consumer solutions.
1. Merchant solutions. In this segment, the company provides payments technology

(accept card, electronic, check and digital-based payments) and software solutions. The
offerings include authorization services, settlement and funding services, chargeback
resolution, terminal rental, sales and deployment, payment security services, consolidated
billing and statements and on-line reporting. In addition, the company offers enterprise
software solutions to streamline business operations.
2. Issuer solutions. This segment provides solutions to manage card portfolios and support
B2B payment processes. Other solutions include account management and servicing,
fraud solution, analytics and business intelligence, cards, statements and correspondence,
customer contact solutions and risk management solutions. Issuer-solutions segment
revenues are derived from long-term processing contracts with financial institutions and
other financial services providers. Payment processing services revenues are generated
primarily from charges based on the number of accounts on file, transactions and
authorizations processed, statements generated and/or mailed, managed services, cards
embossed and mailed, and other processing services for cardholder accounts on file.
3. Business and consumer solutions. This segment provides general purpose reloadable
prepaid debit and payroll cards, demand deposit accounts and other financial service
solutions to the under-banked and other consumers and businesses in the US. Customers
are typically charged a fee for each purchase transaction made using their cards, unless
the customer is on a monthly or annual service plan. Customers are also charged a
monthly maintenance fee after a specified period of inactivity. Other fees include
overdraft, bill payment options, card replacement, foreign exchange and card-to-card
transfers of funds. Revenues are recognized net of fees charged by the payment networks
for services they provide in processing transactions routed through them.

Sector Banks
Exhibit 112: Prior to acquisition of TSYS revenues grew at 12% Exhibit 113: Pre-acquisition, the EBITDA growth was healthy at
CAGR 12% CAGR with high margin in international business
EBITDA margin, December year-ends, 2008-20 (%) Operating profit, December year-ends, 2008-20 (%)
Merchant Issuer Merchant Issuer
Business and Consumer North America Business and Consumer North America
Europe Asia-Pacific Europe Asia-Pacific
International merchant International merchant
8,000 2,000
6,400 1,600
4,800 1,200
3,200
800
1,600
400
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Exhibit 114: A relatively healthy margin although the decline in recent years can be attributed to the merger (goodwill amortization)
Profit and loss statement as a share of revenue, December year-ends, 2009-20 (%)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Operating expenses
Cost of service 33.2 34.5 35.6 35.8 39.4 37.8 37.0 36.8 49.7 48 .5 32.5 42.2 49.2
Selling, general and administrative 45.7 45.5 44.7 46.4 46.6 47.1 47.1 46.7 39.5 37.4 45.6 41.7 38 .8
Total operating expenses 79.0 80.0 80.3 82.2 86.1 85.0 84.1 83.5 89.2 85.9 78.1 83.9 88.0
Operating income 21.0 20.0 19.7 17.8 13.9 15.0 15.9 16.5 10.8 14.1 21.9 16.1 12.0
Other income/expense 0.8 (0.0) (0.8 ) (0.4) (0.3) (1.0) (1.1) (1.4) (2.9) (4.2) (5.2) (5.6) (4.0)
PBT 21.8 20.0 18.9 17.4 13.6 14.1 14.8 15.0 7.9 9.9 16.7 10.5 8.0
Income tax 7.6 5.8 5.3 5.1 3.8 4.0 4.2 3.9 1.6 (2.6) 2.3 1.3 1.0
PAT ex income from investments) 14.3 14.2 13.6 12.3 9.9 10.0 10.6 11.1 6.3 12.4 14.4 9.3 7.0
Equity income from investments ― ― ― ― ― ― ― ― ― ― ― 0.3 1.2
Income from discontinued operations 0.9 (9.1) (0.2) (0.1) ― ― ― ― ― ― ― ― ―
Net income 15.1 5.1 13.3 12.3 9.9 10.0 10.6 11.1 6.3 12.4 14.4 9.6 8.2

Banks Sector
Exhibit 115: Merchant solutions operate at 25% margin, issuer Exhibit 116: Pre-acquisition, the RoEs were at a healthy 20%
solutions are at 15%; total margins at ~17% average over the past decade
25 35
20 28
15 21
10 14
5 7
0 0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2008
2009
2010
2011
2012
2013
2015
2016
2017
2018
2019
2020
2014
Fidelity National Information Services (FIS)

FIS is a leading provider of technology solutions for merchants, banks, and capital markets
firms globally. The company completed the acquisition of Worldpay in 2019 for US$48 bn,
following which FIS is now a global leader in the merchant solutions industry, with
differentiated solutions throughout the payments market, including capabilities in global
eCommerce, integrated payments, and enterprise payments and data security solutions in
business-to-business (B2B) payments. The company operates in four segments, of which the
last segment is related to corporate overheads as well as certain non-strategic businesses
that they plan to wind down or sell. The main three segments are as follows:
 Merchant solutions. This segment is focused on serving merchants of all sizes globally,
enabling them to accept electronic payments, including card-based payments, contactless
card and mobile wallet, originated at a physical point of sale, as well as card-not-present
payments in ecommerce and mobile environments. Merchant services include all aspects
of payment processing, including authorization and settlement, customer service,
chargeback and retrieval processing, electronic payment transaction reporting and
network fee and interchange management. This service also includes value-added
services, such as security and fraud prevention solutions, advanced data analytics and
information management solutions, foreign currency management and numerous
funding options. Merchant services are accessed by clients in more than 140 countries
with a highly-diversified profile that includes global enterprises, national retailers, and
small- to medium-sized businesses.
 Banking solutions. This segment is focused on serving financial institutions with core
processing software, transaction processing software and complementary applications
and services. These products include software for deposit and lending products, digital
solutions (internet and mobile platforms), fraud and risk management, card management
solutions (credit, debit and ATM), electronic capture of data and wealth and retirement
products. These solutions and services are offered on a bundled- or standalone basis. The
revenues are characterized by multi-year processing contracts that generate highly
recurring revenue.
 Capital market solutions. This segment is focused on serving global financial services
clients with a broad array of buy- and sell-side solutions. This includes securities
processing for a wide range of clients and corporate liquidity solutions.

Sector Banks
Exhibit 117: Revenue has grown by 11% CAGR partly aided by Exhibit 118: Pre-acquisition, the EBITDA growth was healthy at
the recent acquisition of Worldpay 12% CAGR with high margin in international business
EBITDA margin, December year-ends, 2008-20 (%) Operating profit, December year-ends, 2008-20 (%)
Merchant Banking Capital Market Merchant Banking Capital Market

Corporate/other Integrated Financial Global Financial Corporate/other Integrated Financial Global Financial
FSG PSG ISG FSG PSG ISG
15 6
12 5
9 4
6 2
3 1
- -
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Exhibit 119: A relatively healthy margin although the decline in recent years can be attributed to the merger (goodwill amortization)
Profit and loss statement as a share of revenue for FIS, December year-ends, 2009-20 (%)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues 78 .5 74.3 69.1 69.6 68 .0 67.5 67.5 66.6 67.4 66.8 66.1 64.0 66.5
Gross profit 21.5 25.7 30.9 30.4 32.0 32.5 32.5 33.4 32.6 33.2 33.9 36.0 33.5
S,G and A expenses 11.3 14.7 12.7 11.7 13.5 15.0 12.7 16.7 18 .5 16.6 15.4 25.8 28 .0
Impairment charges 0.8 3.6 3.0 0.2 ― ― ― ― ― ― 1.1 0.8 1.1
Operating income 9.4 7.4 15.2 18.6 18.6 17.5 19.8 16.7 14.0 16.5 17.3 9.4 4.4
Total other income (expense) (4.5) (3.2) ― (5.6) ― (3.9) (3.4) (0.9) (4.2) (5.3) (4.2) (5.4) (2.3)
PBT 4.9 4.1 7.6 13.0 9.6 13.6 16.4 15.7 9.8 11.3 13.1 4.0 2.1
Tax 1.6 1.4 (0.6) (4.2) (1.4) 5.1 5.2 5.7 3.4 (3.7) 2.5 1.0 0.8
Income from equity/others (0.0) ― ― ― ― ― ― ― ― (0.0) (0.2) (0.1) (0.0)
PAT (continuing operations) 3.3 2.8 7.0 8.8 8.3 8.5 11.2 10.0 6.4 14.9 10.5 2.9 1.3
Income (discontinued ops) 3.1 0.1 0.9 (0.4) (0.3) 0.1 (0.2) (0.1) 0.0 ― (0.4) (0.0) (0.0)
Net earnings 6.4 2.9 7.9 8.4 7.9 8.5 11.0 9.9 6.4 14.9 10.0 2.9 1.3

Banks Sector
Exhibit 120: EBITDA margins were at 17% levels pre-acquisition Exhibit 121: FIS had reported consistent trend in improvement
of Worldpay of RoEs pre-acquisition
25 15
20 12
15 9
10 6
5 3
0
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
PayPal Holdings
PayPal is among the largest players in the payment ecosystem. The company enables digital
and mobile payments on behalf of merchants and consumers worldwide. They have helped
move money across geographies in a relatively simple, efficient and at a relatively low cost.
Outside of payments, the company has built a P2P payment system to help simplify or
personalize shopping experiences through its consumer application through Venmo and
Xoom. PayPal helps merchants and consumers connect, transact, and complete payments,
whether they are online, on a mobile device, in an app, or in person.
The company earns revenues primarily by charging fees for payment transactions and other
payment-related services that are based on the volume of activity processed. It generates
revenues for foreign currency conversion and instant transfers from a PayPal or Venmo
account to the consumer’s debit card or bank account; it also generates revenue from
interest and fees from credit products. Also, there are other revenue streams through value-
added services, which comprise revenue earned through partnerships, merchant and
consumer credit products, referral fees, subscription fees, gateway services, and other
services that they provide to merchants and consumers.

Sector Banks
Exhibit 122: PayPal has broadly two focus areas – consumers and merchants and a host of services within them on the payment side
PayPal ecosystem in consumer and merchant services
Source: Company
Exhibit 123: A representation of PayPal’s digital wallet
Source: Company

Banks Sector
PayPal has seen strong growth in its customer base (see Exhibit 124), transactions (see
Exhibit 125) and volumes (see Exhibit 126) since it was spun-off as a separate unit. As a
payment wallet, we see customers retaining some balance while the wallet also allows
consumers to directly operate their payments off their bank accounts through debit or credit
cards.
Exhibit 124: PayPal has grown its customer base by 15% CAGR Exhibit 125: PayPal has grown its transactions by 25% CAGR
since 2013 since FY2013
Active customers and growth, calendar year-ends, 2013-20 Number of transactions and growth, calendar year-ends, 2013-20
Active customers (LHS) Number of transactions (LHS

(#) Growth (RHS) (%) (mn) Growth (RHS) (%)
400 25
18.0 30
320 20
14.4 24
240 15 10.8 18
160 10 7.2 12
80 5 3.6 6
- 0 - 0
2013 2014 2015 2016 2017 2018 2019 2020 2013 2014 2015 2016 2017 2018 2019 2020
Exhibit 126: Payment volume has grown by 25% CAGR since Exhibit 127: Value held in each account has grown at a subdued
FY2013 pace
Payment volumes and growth, calendar year-ends, 2013-20 Average value held by active customer, calendar year-ends, 2013-20
Gross payment value (LHS) Value held in each account

(bn) Growth (RHS) (%) (#) Growth (RHS) (%)
1,000 35 120 30
800 28 96 20
600 21 72 10
400 14 48 0
200 7 24 (10)
0 0 0 (20)
2013 2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020
Gross margins or the take rate has been falling steadily over time (see Exhibit 129) reflecting
changes in payment behavior or diversification across geographies where rates are relatively
lower than in the US. This has had an impact on the net take rate as the costs for these
transactions have remained unchanged. In 2HCY21, PayPal moved towards a differentiated
pricing regime (see Exhibit 130).

Sector Banks
Exhibit 128: Average transaction size is range-bound at Exhibit 129: Gross margins have consistently declined reflecting
US$55-60 a mix change
Average transaction size, calendar year-ends, 2013-20 Gross and net take rate, calendar year-ends, 2013-20
Average transaction size (LHS) Take rate on transaction Net take rate
(bn) (%)
Growth (RHS) Transaction expense rate
65 6 3.5
62 4 2.8
59 2 2.1
56 0 1.4
53 (2) 0.7
50 (4) 0.0
2013 2014 2015 2016 2017 2018 2019 2020 2013 2014 2015 2016 2017 2018 2019 2020
Exhibit 130: PayPal has recently moved into a newer pricing regime
Pricing for merchants for customers using PayPal through their customers and outside
Source: Company
Despite being in existence for more than two decades, PayPal does appear keen to build its
lending products to generate revenues. The company offers this product to its merchants
and consumers but the contribution of lending is negligible. Exhibit 131 shows that <1% of
GPV is the outstanding loan book. Also, it is not an easy segment to diversify when we look
at the overdue book (see Exhibit 132).

Banks Sector
Exhibit 131: Lending is an insignificant part of the business Exhibit 132: The overdue book rose sharply in the merchant
model financing book
Gross receivables, GPV and share of overall GPV, calendar year-ends, Merchant financing loan book classification, calendar year-ends,
2013-20 2013-20
Gross receivables Gross payment value Current 31-89 DPD >90DPD

% of GPV
(%) 100 4 4 4
(bn) 9 8 6
1,000 0.7 9 7 5 6 13
10
14 12
80
800 0.6
60
600 0.4
87 87 91 90
40 83
77 75
400 0.3
20
200 0.1
0 - 0
2018 2019 2020 2014 2015 2016 2017 2018 2019 2020
The following two exhibits show the break-up of earnings based on TPV and as a share of
revenues. Overall, the company earns ~40 bps on TPV and has seen a 13-15% revenue
margin profile in the past decade. Its largest expense would be charges for making the
payment to other financial service providers for completing transactions.
Exhibit 133: PayPal makes a margin (take rate) of ~250 bps on revenues while earnings is 40 bps of TPV
Break-up of earnings based on TPV of PayPal, calendar year-ends, 2013-20 (%)
2013 2014 2015 2016 2017 2018 2019 2020

Net revenues
Transaction revenues 3.2 3.0 2.9 2.7 2.5 2.4 2.3 2.1
Others 0.4 0.4 0.4 0.4 0.3 0.3 0.2 0.2
Non-interest income (0.0) (0.0) 0.0 0.0 0.0 0.0 0.0 0.2
Total 3.6 3.4 3.3 3.1 2.9 2.7 2.5 2.5
Operating expenses
Transaction expense 1.0 0.9 0.9 0.9 1.0 1.0 1.0 0.8
Transaction and loan losses 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2
Transaction losses ― 0.2 0.2 0.2 0.2 0.2 0.2 0.1
Loan losses ― 0.1 0.1 0.1 0.0 0.0 0.0 0.1
Customer support and operations 0.5 0.4 0.4 0.4 0.3 0.3 0.2 0.2
Sales and marketing 0.4 0.4 0.3 0.3 0.2 0.2 0.2 0.2
Product development 0.4 0.4 0.3 0.2 0.2 0.2 0.3 0.3
General and administrative 0.2 0.2 0.2 0.3 0.3 0.3 0.2 0.2
Depreciation and amortization 0.2 0.2 0.2 0.2 0.2 0.1 ― ―
Restructuring ― ― 0.0 ― 0.0 0.1 0.0 0.0
Total 3.0 2.9 2.8 2.6 2.4 2.3 2.1 1.9
Operating income 0.6 0.5 0.5 0.5 0.5 0.4 0.4 0.5
Income tax 0.1 0.4 0.1 0.1 0.1 0.1 0.1 0.1
PAT 0.5 0.2 0.4 0.4 0.4 0.4 0.3 0.4

Sector Banks
Exhibit 134: PayPal makes a ~15% margin on revenues with the largest cost on transactions
Break-up of earnings based on revenues, calendar year-ends, 2013-20 (%)
2013 2014 2015 2016 2017 2018 2019 2020

Net revenues
Transaction revenues 8 9.2 8 8 .6 8 7.6 8 7.2 8 7.3 8 7.7 8 9.2 8 5.7
Others 10.9 11.4 12.1 12.4 12.1 11.1 9.3 6.6
Non-interest income (0.1) (0.1) 0.3 0.4 0.6 1.2 1.5 7.6
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Operating expenses
Transaction expense 27.3 27.1 28 .1 30.7 33.6 35.7 37.6 34.2
Transaction and loan losses 7.5 8 .1 8 .7 10.0 7.7 8 .1 7.6 7.5
Transaction losses ― 5.1 5.5 6.0 6.3 6.8 6.0 4.9
Loan losses ― 3.0 3.2 4.0 1.4 1.4 1.6 2.6
Customer support and operations 14.1 13.2 13.2 11.6 10.4 9.5 8 .9 7.7
Sales and marketing 11.8 12.4 10.6 8 .9 8 .6 8 .4 7.8 8 .0
Product development 10.8 11.1 10.2 7.7 7.2 6.9 11.6 11.4
General and administrative 5.6 6.0 6.0 9.4 8 .8 9.3 9.5 8 .9
Depreciation and amortization 6.7 6.4 6.6 6.7 6.1 5.0 ― ―
Restructuring ― ― 0.5 ― 1.0 2.0 0.4 0.6
Total 83.9 84.3 84.0 85.0 83.3 84.8 83.4 78.2
Operating income 16.1 15.7 16.0 15.0 16.7 15.2 16.6 21.8
Income tax 1.9 10.5 2.8 2.1 3.1 2.0 3.0 3.7
PAT 14.2 5.2 13.2 12.9 13.6 13.2 13.6 18.1
Square Inc.
Square started its operations in 2009 to enable anyone with a mobile device to accept card
payments, anywhere, anytime. The company has been attempting to provide a level playing
field for sellers of all sizes. They have a strong focus on technology and design that allows
the company to create products and services that are accessible, intuitive, and easy-to-use.
The company has developed analytical tools which enable merchants to understand the
business better.
Square has diversified its revenue source and has two primary engines: (1) merchant and (2)
customer level. Exhibit 135 illustrates the two ecosystems that the company is building and
the various engagement tools within each.
Exhibit 135: Square is building two primary ecosystems one through merchants and another through customers via the cash app
ecosystem
Source: Company

Banks Sector
Exhibit 136: A wide range of engagement tools positions Square as a superior service provider for merchants
Source: Company
Square’s growth in the past decade has been phenomenal. Since CY2013, the company has
grown its GPV (Gross Payment Value) by ~35% CAGR on the back of ~30% CAGR in the
number of transactions. This would have probably been a lot more if not for the impact of
pandemic effect in CY2020.
Exhibit 137: Square's GPV has grown ~33% since 2013; slowed Exhibit 138: Excluding 2020, growth in number of transactions
due to the pandemic has been robust
Gross Payment Value (GPV) and growth, June year-ends, 2013-20 Number of transactions, June year-ends, 2014-20
(Rs bn) GPV (LHS) Growth (RHS) (%) Number of transactions (LHS)
(mn) Growth (RHS) (%)
120 112 70
106 2,500 2,300 64
2,000
96 56
85 2,000 1,8 00 48
72 65 42 1,500 1,400 32
50 1,000
48 28 1,000 16
36 712
24 446
24 15 14 500 0
- 0 - -16
2013 2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020
Square has built a solid momentum on customer acquisitions as well. The company has
grown its customer base by ~20% CAGR (see Exhibit 139). The margins are quite healthy in
this business (see Exhibit 140). The company generates ~3% gross MDR (take rate) and ~2%
transaction costs (costs paid to various financial intermediaries for completing the
transaction).

Sector Banks
Exhibit 139: Square has built solid momentum on customer Exhibit 140: Margins in the payment business are quite solid at
acquisition 2.9% on gross basis
Number of customers, June year-ends, 2014-20 MDR (gross and net), June year-ends, 2014-20
Number of cards (LHS) MDR Cost of MDR Margin

(mn) Growth (RHS) (%) 3.5 1.5
450 40 3.0 2.9
407 405 2.9 2.9 2.9 2.9 2.9 2.9
2.8 1.4
360 342 30
28 4
2.1 1.9 1.9 1.9 1.9 1.9 1.8 1.8 1.2
270 245 20 1.7
190
1.4 1.1
180 144 10
90 0 0.7 0.9
- (10) - 0.8
2014 2015 2016 2017 2018 2019 2020 2013 2014 2015 2016 2017 2018 2019 2020
The company has two broad revenue streams: (1) merchant and (2) consumers. Excluding
the revenue from Bitcoin, the company generates >80% of revenues from merchants. The
primary revenues are from transactions, subscription and services, sale of hardware products
and others like Bitcoin (see Exhibit 141). Exhibit 142 shows the gross profit from the various
revenue streams. Transaction dominates the gross profits followed by subscription services.
Exhibit 141: Revenues, excluding Bitcoin, from merchants Exhibit 142: Transactions and subscriptions dominate the gross
dominate revenue profile profit profile
Revenues for Square, June year-ends, 2014-20 (US$ mn) Gross profit for Square, June year-ends, 2014-20 (US$ mn)
Transaction-based Starbucks Transaction-based Starbucks
Subscription and services Hardware Subscription and services Hardware
Bitcoin Bitcoin
10,000 2,800
8,000 2,100
6,000 1,400
4,000 700
2,000 -
- (700)
2013 2014 2015 2016 2017 2018 2019 2020 2013 2014 2015 2016 2017 2018 2019 2020

Banks Sector
Adyen
Adyen was founded in 2006 by a group of entrepreneurs, including Pieter van der Does and
Arnout Schuijff. They had previously worked together at Bibit, a company that was sold to
the Royal Bank of Scotland in 2004. Adyen has built a platform that enables the acceptance
and processing of cards and local payments globally across its merchants' online, mobile and
POS channels. Exhibits 143 and 144 show a solid growth in transactions processed, which
has resulted in robust revenue growth of ~50% CAGR.
Exhibit 143: Volume growth has been strong at >55% CAGR for Exhibit 144: Revenue growth has been at 50% CAGR since
Adyen FY2015
TPV and growth, calendar year-ends, 2015-20 Revenues and growth, calendar year-ends, 2015-20
(EUR bn) TPV (LHS) Growth (RHS) Revenues (LHS) Growth (RHS)
(%) (EUR mn) (%)
350 120 800 120
280 96 640 96
210 72 480 72
140 48 320 48
70 24 160 24
- 0 - 0
2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020
Adyen has a dominating presence in European markets. We note that the take rate or the
merchant discount rate or the gross take rate is significantly lower for Adyen as compared to
the other two. Exhibit 145 shows that the take rate or MDR is 0.2% adjusted for transaction
costs. The gross take rate is ~1.1% while the transaction cost (payment to intermediary) is
~0.8%. Exhibit 146 compares Adyen’s earnings statement with revenues and this shows
that its earnings margin is much lower compared to its US peers.
Exhibit 145: Net take rate is at 0.2%, relatively lower as compared to peers
Margins on transactions for Adyen, calendar year-ends, 2015-20 (%)
Gross take rate Transaction costs Net take rate (RHS)

1.4 0.4
1.1 0.3
0.8 0.2
0.6 0.2
0.3 0.1
- -
2015 2016 2017 2018 2019 2020

Sector Banks
Exhibit 146: Adyen operates at a much lower margin of ~20 bps as compared to ~100 bps for peers
Profit and loss account as a share of payment volumes, calendar year-ends, 2015-20 (%)
2015 2016 2017 2018 2019 2020

Revenue 1.0 1.0 0.9 1.0 1.1 1.2
Transaction costs 0.7 0.7 0.7 0.8 0.9 1.0
Costs of goods sold 0.0 0.0 0.0 0.0 0.0 0.0
Net revenue 0.3 0.2 0.2 0.2 0.2 0.2
Operating expenses
Wages and salaries 0.1 0.1 0.1 0.0 0.0 0.0
Social securities/pension cost 0.0 0.0 0.0 0.0 0.0 0.0
Amortization and depreciation 0.0 0.0 0.0 0.0 0.0 0.0
Other operating expenses 0.1 0.1 0.1 0.1 0.0 0.0
Total 0.2 0.1 0.1 0.1 0.1 0.1
Other income ― 0.1 ― 0.0 0.0 0.0
EBIT 0.1 0.2 0.1 0.1 0.1 0.1
Finance income 0.0 0.0 (0.0) 0.0 0.0 0.0
Finance expense 0.0 (0.0) 0.0 0.0 0.0 0.0
Other financial results ― ― ― 0.0 (0.0) 0.0
Net finance income/(expense) 0.0 0.0 (0.0) (0.0) 0.0 (0.0)
PBT 0.1 0.2 0.1 0.1 0.1 0.1
Income taxes 0.0 0.0 0.0 0.0 0.0 0.0
PAT 0.1 0.1 0.1 0.1 0.1 0.1
Exhibit 147: Adyen operates at 7-8% revenue margin with tighter cost control
Profit and loss account as a share of revenues, calendar year-ends, 2015-20 (%)
2015 2016 2017 2018 2019 2020

Revenue 100.0 100.0 100.0 100.0 100.0 100.0
Transaction costs 69.7 75.0 77.2 78 .3 79.3 8 0.6
Costs of goods sold 0.5 1.1 1.2 0.5 0.6 0.6
Net revenue 29.7 24.0 21.6 21.1 20.1 18.8
Operating expenses
Wages and salaries 9.5 5.8 5.5 4.4 3.8 4.2
Social securities/pension cost 1.1 0.8 0.9 0.9 0.8 0.8
Amortization and depreciation 0.7 0.6 0.6 0.5 0.8 0.8
Other operating expenses 6.2 7.2 5.4 4.8 3.6 2.8
Total 17.4 14.4 12.3 10.6 9.0 8 .5
Other income ― 8 .5 ― 0.0 0.0 0.0
EBIT 12.3 18.1 9.2 10.5 11.1 10.3
Finance income 0.2 0.0 (0.0) 0.0 0.0 0.0
Finance expense 0.1 (0.0) 0.0 0.1 0.2 0.3
Other financial results ― ― ― 0.4 (0.2) 1.2
Net finance income/(expense) 0.1 0.0 (0.1) (0.5) 0.0 (1.4)
PBT 12.4 18.1 9.2 10.0 11.1 8.9
Income taxes 2.2 3.4 2.1 2.0 2.3 1.7
PAT 10.1 14.7 7.1 7.9 8.8 7.2
India – the payment ecosystem

PoS or payment gateway businesses are similar as both provide payment acceptance
infrastructure to merchants, either online or physical presence. Payment gateway allows
merchants to provide a wide range of payment modes through a single point of acceptance.
The various payment options can include debit/credit cards, UPI, net banking, mobile wallets,
etc. Payment facilitators also provide additional services such as risk management and fraud
prevention to reduce risk for the merchant.

Banks Sector
Exhibit 148: PayU India is the largest payment gateway company in India post the acquisition of
Billdesk
GMV market share of select leading payment gateways in India (%)
18 PayU India
1 CC Avenue
Razorpay
3
3 Paytm
2
Atom
6 Cashfree
Instamojo
8
59 Others
Notes:
(a) PayU's market share post acquisition of Billdesk.
Source: NPCI, Kotak Institutional Equities
We use the broad term payment facilitators to mean companies in that deal in providing PoS
solutions or payment gateway services. These include companies like Pine Labs or Mswipe
that provide PoS solutions or players such as BillDesk, CCAvenue, Razorpay or PayU that
provide payment gateway services. These six companies cumulatively had revenues of Rs45
bn in FY2020 and given the small base have grown at ~50% CAGR over FY2016-20. We
don’t have the FY2021 financials for all, but assuming similar growth rate, the whole pack is
valued at around ~20X FY2021 revenues as per the last available valuations.
Exhibit 149: Strong revenue growth for larger payment companies

Sum of revenues for some of the large Indian payment companies, March fiscal year-ends, 2016-20 (Rs mn)
SBI Payments ICICI Merchant Services Billdesk PayU Infibeam Mswipe Pine Labs Razorpay
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-
2016 2017 2018 2019 2020
As a revenue pool, these entities are probably not large enough for the banking system –
Rs45 bn compared to Rs3 tn revenue pool on the retail side. Notably, the net revenue take
rate (<10 bps) is quite low for companies operating in India even though growth rates are
fairly strong. Banks also partake of a share of this revenue in the form of payment
processing charges, which is one of the largest cost items in this payment gateway business.
As a result, these businesses are building complementary revenue lines, largely on the
lending side.

Sector Banks
For example, Razorpay has a division Razorpay Capital with products like instant settlements,
cash advance or working capital loans (Exhibit 150). Razorpay also has a current account
product as a part of its neo banking service, in partnership with RBL Bank. Unlike Razorpay,
which is operating more on the B2B side, PayU has couple of products on the B2C side – a
pay later product LazyPay and a personal loan product (Exhibit 151). Pine Labs also has a
working capital solution for merchants offered along with partner lenders (Exhibit 152). At
the B2C end, Pine Labs facilitates BNPL on its network of PoS machines in partnership with
over 30 lenders.
Exhibit 150: Razorpay’s working capital loan offering
Source: Company
Exhibit 151: PayU’s pay later offerings for consumers

Banks Sector
Exhibit 152: Pine Labs also has a working capital offering and partnership with lenders
Even as low profitability in the core payment business is driving these companies into some
form of the lending business (direct or indirect), the market is nascent and strategies will
evolve and get tested over next few years. For banks, the loss in business for cards and on
consumer small-ticket lending business can be offset by potential opportunities on the
merchant lending side. Banks have generally avoided smaller-ticket unsecured loans to
businesses largely due to (1) very high information asymmetry, (2) cost of underwriting and
collections, (3) lower throughput given the effort involved. However, if fintechs are able to
gain scale and reach, banks can provide their balance sheet which would allow the latter to
participate in a segment which otherwise not available to them. It is early yet to assess the
potential net impact for banks.

Sector Banks
NEW AGE BANKS OR DIGITAL LENDERS

Revenue models for new age banks and digital lenders are highly differentiated and the path to profitability
is yet to be established for most. A whole suite of new age banks like challenger banks, neo banks or digital
banks are operating with new cost structures that are lighter on traditional infrastructure costs but heavy on
brand building and asset growth. More regulations are emerging though these are not particularly stringent
and evolving yet.
Fintech: genesis and drivers: financial inclusion and customer experience

We delve into the rationale for the emergence of these players and the key theses that
underpin fintech lending.
 Financial inclusion and scalability. India is ripe for fintech platforms for financial
inclusion. Credit penetration, as measured by a simple metric such as loans to GDP, is
weak suggesting that financial inclusion is a sound thesis. Corporate lending dominates
the loan books of public banks while private banks have a lot more exposure to retail loan
portfolios. NBFCs have played a bigger role in including the self-employed segment in
their loan books, but they have historically favored a more expensive physical model.
Not surprisingly, Fintech lenders find easy acceptance in segments where access to
banking is significantly lower. SME borrowers and retail consumers finding themselves
below the prime segment face difficulties in accessing banking. Traditional banks are
reluctant to lend to such high-risk segments, hobbled by limited borrower history and the
high cost of intermediation. The lack of credible information on small businesses makes
forecasting challenging for the lenders and underpins the prevailing insistence on
collateral-based lending. The ability to enforce collateral is challenging in markets where
the legal framework for creditors is not well developed and these experiences force
lenders to limit lending to low-risk segments.
 Models emerging at both ends: space for big and small. (1) Fintechs that are
primarily into lending but their scale of operations is quite low and restricted to unsecured
lending. (2) Large fintech players like Amazon, PhonePe, PaytM which began their fintech
journey with payments products and are now gradually shifting their focus towards
lending. Large fintechs have already built strong customer bases and their driving premise
is to remove friction in their core business. Their objective is to build scale and hence they
compete differently than traditional banks.
 Convenience or experience banking. We are seeing fresh challenges from banks that
are new and significantly smaller in size, despite global banks scaling back since the
global financial crisis, preferring to have a significant advantage in their home markets.
Historically, banking has been a business of scale which allows the high fixed cost model
to be absorbed relatively easily. However, several factors make conventional banking a
tough proposition.
We are undergoing a significant shift in the way we are consuming financial services. The
younger generation of consumers assigns greater value to convenience or customer
experience. Transactions or resolutions which get completed in real time are gaining more
acceptance. There is an aversion to paying high fees when alternatives are easily available.
There is greater emphasis on convenience, agility and flexibility over trust, the latter
historically gave incumbents a significant advantage. The ability to build partnerships for a
financial provider, for example, has been a source of significant competitive advantage.
Dependence on the branch-led-model is significantly lower as compared to the past.
Financial services are increasingly so embedded in our regular activities that they are
becoming inconspicuous.

Banks Sector
New banks: similar business propositions; hiring edge

We have entered a new phase in banking where existing players are being challenged by
new players or players who are building scale at a much rapid pace. Regulators have been
quite open to encouraging more competition. These banks come in different garb such as
challenger banks, digital banks or neo banks. Importantly, at their core we see that these
banks are lean on infrastructure costs, led by an advantage in technology over traditional
banks.
 New banks attractive to talent. In the past, hiring talent was relatively easy for large
banks but notably, even new banks are able to attract talent with equal success. A strong
options pool offsets the high salary/bonus offered by traditional banks. Career
development is faster and benefits for valuable employees in a successful bank are
disproportionately large. We have seen the rise of open banking in Europe and Australia
which allows customers to share/obtain data with other lenders easily.
 Monetization strategies elusive. We observe that most fintech companies find it

difficult to put in place monetization strategies that will put them on the path to
profitability. They have challenged existing banks and have shown that scalability can be
achieved at minimal cost. However, we observe that the lower the income group, the
lower the profits/customer numbers. Adding more products has not been easy as it
involves investing in people and the volumes may not necessarily justify the costs.
 Revenue model evolving, not too different from traditional banks. At their core,
the revenue models are no different from traditional banks despite differing customer
segments. Fintechs operate in customer segments that have significantly higher yields
than those favored by traditional banks. There is a greater preference for unsecured or
MSME loans and on customer segments which traditional banks have struggled with.
Many fintechs have adopted a subscription based model which makes it easier for
customers to understand the product.
Licensing regime for digital banks

Only nine central banks have released licensing guidelines specifically for digital/non-
traditional banks. This despite a slew of countries seeing the emergence of non-traditional
banking companies, referred to variously as ‘neo-banks’, ‘digital banks’, ‘challenger banks’
et al. We define digital banks as institutions that perform the task of risk transformation (by
taking deposits and dispensing loans) primarily through electronic channels with limited or
no physical branch presence.
We build on the BIS study Regulating fintech financing: digital banks and fintech platforms,
August 2020, that focuses on the regulation of non-traditional banks. Exhibit 153 below
summarizes the licensing guidelines specifically issued for non-traditional banks by various
central banks. The implementation of these licensing regimes is also at different stages –
with Indonesia, Malaysia and Philippines yet to grant any licenses so far. However, it is worth
noting that Asian central banks are at the forefront of formulating policies and issuing such
licenses.
In the process of adopting any policy relating to these non-traditional banks, central banks
have to balance conflicting objectives like promoting innovation and financial inclusion while
preserving financial stability. In line with these objectives, the eligibility criteria for securing
digital bank licenses typically include: (1) demonstration of robust policies and governance,
(2) demonstration of strong technological expertise with the management and board
members and (3) presence of a vetted and strong technical infrastructure to support the
business. Also note that some central banks (like Singapore and South Korea) have specified
the nature of activities and/or target customer segments for digital banks.

Sector Banks
Exhibit 153: Very few countries have a separate regulatory regime for digital banks
Regulatory framework for digital banks across the world
Transitional Licence restrictions to
Regulatory status scheme specific market segments # of licences issued Licencees
Rakuten International Commercial Bank, Line
Chinese Taipei Internet-only bank No None 3
Bank, Next Bank
Mox Bank, ZA Bank, Airstar Bank, Ant Bank, Livi

Hong Kong SAR Virtual bank No None 10
Bank, Fusion Bank, WeLab Bank, PAO Bank
Details of application process not

Indonesia Digital bank No None NA
yet available
Korea Internet-only bank No Retail and SMEs 3 Kakao Bank, K Bank, Toss Bank
29 entities in the race; maximum
Malaysia Digital bank Yes None NA
of 5 licenses will be allotted
Unobank, Union Digital Bank, Overseas Filipino

Philippines Digital bank Yes None 5
Bank, Tonik Bank, Gotyme
Saudi Arabia Digital-only bank No None 2 STC Bank, Saudi Digital Bank
Grab-Singtel JV and consumer internet company
Digital full bank Yes None 2
Sea
Singapore Ant Group and another consortium comprising
SMEs and other non-retail
Digital wholesale bank No 2 AMTD, Funding Societies, SP Group and Xiaomi
customers
Finance
UAE Digital bank No None 1 Al Maryah Community Bank
Notes:
(a) The ECB issues a Lithuanian Specialized Bank license through the Bank of Lithuania. This license is lighter on eligibility requirements and promises
quicker processing. However, it is not specific to fintech players.
(b) Brazil introduced a license for 'Direct Credit Companies' which conduct business exclusively through electronic channels. However, these licensees
are not allowed to take public deposits.
(c) ‘Digital wholesale bank’ licensees in Singapore cannot take deposits.
Irrespective of the licensing regime, many challenger banks and fintech companies have
sprung up across the world. We have tabulated a few of them along with select features of
these companies in Exhibit 154 below.

Banks Sector
Exhibit 154: Key features of select non-traditional banks across the world
Country Name Launch year Key features

Up is a mobile-only bank. It partners with Bendigo and Adelaide Bank for the banking licence. It charges no
Up 2017 fee for the Everyday account. The app tracks and displays spending insights. It offers 0.7% on the Savers
account. It has partnered with Wise for international money transfers.
It received ADI licence from APRA in 2019. It was acquired by the National Australia Bank (NAB) in May 2021.
The bank offers users instant payments facility. It also offers a Visa debit card linked to the daily transaction
8 6 400 2019
account called 'Pay account' which has no fees. It also offers Save account and Shared accounts. It also offers
home loans at competitive interest rates, with very little paper work and speedy approval.
Volt was the first Australian digital bank to be granted a Restricted Authorized Deposit-Taking Institution
Volt 2017 (RADI) license from the APRA. It offers 0.9% interest on savings account. It is still in beta and, hence, has
Australia fewer features than others.
Airwallex is 'built for the modern business'. It offers free multi-currency accounts along with cards to
employees. FX rates are very competitive. It allows businesses to open local currency transaction accounts in
Airwallex 2015 the US, UK, Europe and Australia - which is difficult without having a physical office in the country. That
enables businesses to receive payments from the local payment system, while the money goes straight to
the customer's wallet. The company also offers virtual and physical Visa cards - with the first 5 cards free.
It specializes in lending and financial services for SMEs. Deposits are insured. While it provides only online
Judo Bank 2018 services to depositors, it has relationship managers for SME clients. It offers personal term deposit, business
loans, equipment loans, credit lines and home loans.
Biggest digital bank in the world currently. It has acquired >40 mn customers, mainly in Brazil. Their first
product was a credit card without any sign-up or membership fees. Their credit card displays only the name,
Nubank 2013 while rest of the details are accessible only through the app. Their business account is a relatively new feature
open to small business owners. Similarly, loans is a relatively new feature and not all personal users are
eligible.
While Agibank is a completely digital bank, it does have 'service points' across the country. This likely gives
Agibank
them some edge over peer digital banks that are completely virtual.
Brazil It got the operating license in 2019. It offers personal and busienss accounts. It also offers investment
C6 Bank 2019
options. JPMorgan Chase took 40% stake in this bank in 2021.
It is Brazil's first digital bank. It offers personal and business accounts. It also issues credit cards and
Neon 2016 competest directly with Nubank. It has a mobile-first product - ~8 0% of Brazilians have a smartphone, while
only 70% have a bank account.
The bank does not have any physical branches of its own, but it does have a large sales network operated by
Banco Pan 1969 partners. It offers a bank account, credit card, debit card, car loans and insurance. It also offers free and
instant transfers via PIX, just like other digital banks.
Motusbank offers a full service that includes saving and chequing accounts, investments, loans and
mortgages. It is attached to and owned by Merdian Credit Union - a 75-year old institution. Hence, deposits
Motusbank 2016
are insured by CDIC. Savings account earns 1% interest, while even the chequing account earns 0.15%
interest. The bank offers other interesting features like 'Friends and Family Mortgage' and 'Price Drop'.
EQ Bank is a personal banking brand of 'Equitable Bank' which was founded in 1970. Hence, deposits with
EQ Bank are CDIC-insured. Also offers option to open a US dollar account. It offers cheap international
Canada EQ Bank 2016
money transfers through Wise. However, there is not debit card and, hence, ATM withdrawals are not
possible.
Tangerine is known for no fees. It is another bank which offers interest on checking accounts. Customers
Tangerine Bank 2010
can earn as much as 2% cashback on spends. The company also offers investment products.
It is the digital arm of CIBC - one of the leading financial institutions in Canada. It offers savings account,
Simplii Financial 2017
chequing account, credit card, mortgages, personal loans, investments and global money transfer service.

Sector Banks
Exhibit 155: Key features of select non-traditional banks across the world (continued)

It has >15 mn customers worldwide and is present in 48 countries.The company wants to create 'the world's
first truly global financial super-app'. A customer can use Revolut to transfer money anywhere in the world,
invest in stocks, crypto and commodities and purchase travel insurance. The company also offers company
Revolut 2015 accounts and freelancer accounts. They also compete with Wise in the field of money transfers. Revolut also
offers 'Savings Vaults' which are interest-yielding savings deposits placed with banks using the Revolut app.
The company has a banking license in the EU (from The Bank of Lithuania) and has applied for banking
license in the UK in 2021.
N26 is a German challenger bank that holds a full-fledged bank license in Europe from the ECB. It has >7
mn customers in 25 markets and deposits are covered by the European deposit guarantee scheme. It also
European Union N26 2013 offers business accounts for freelancers and self-employed, but not for companies. It also offers a
Mastercard debit card. Also has a feature called 'Spaces' to allow systematic saving. The company offers
loans in Germany and France only.
The Curve app allows customers to connect multiple accounts using one card and a smartphone. If a
Curve 2015 customer subscribes for their premium offering Curve Black, he can also earn 1% cashback from select
retailers.
It is a hip challenger fully-fledged bank that targets young people from all over Europe with its green
message and travel features. For every EUR100 spent by a user of Bunq's Green Card, the company plants a
Bunq 2012
tree. Bunq has partnered with Wise to offer cheap money transfers and international payments. Deposits are
insured under the Deposit Guarantee Scheme.
It is the digital banking division of Ant Group. AlipayHK customers can open an account with Ant Bank
Ant Bank 2019 seamlessly and spend through the AlipayHK wallet. There are no fees for the savings account and money can
be withdrawn any time without any penalty. The company is expected to expand into SME accounts as well.
It is a licensed virtual bank in Hong Kong and deposits are covered by the HK Deposit Protection Scheme
Fusion Bank 2018 (DPS). The bank offers savings accounts, personal loan credit line and Tesla loans (to buy the Tesla car). It
connects with WeChat Pay HK for a broader spending network.
It was the first virtual bank in Hong Kong. It offers savings account with 1% interest rate, time deposits,
loans, business banking, investments and insurance. Customers can fund their savings account with HKD,
USD or CNY. It offers instant money transfers in HKD, CNY or USD. The personal loan application is reviewed
ZA Bank 2018
within 30 minutes. Deposits are covered by the HKDPS. ZA Bank got its name from ZhongAn Online - a
Chinese online-only insurance company which was one of the partners in the JV that applied for virtual
banking license in Hong Kong.
It is a JV of Xiaomi Corp and AMTD Group. Their focus is on savings accounts for both personal and
Airstar 2019 corporate customers. They also offer time deposits and personal loans. They are also developing a loan
Hong Kong product to address challenges faced by SMEs.
It is a subsidiary of Standard Chartered Bank (HK). It offers a personal account and a Mastercard all-in-one
Mox Bank 2020 debit/ credit card. They have a feature that allows the Mox debit card to be "flipped" to a credit card
instantly. The Mox card is numberless, has no CVV or expiry date.
Livi Bank 2019 It targets young people who are keen on a PayLater feature without a credit card.
It is short for 'Ping An OneConnect' Bank. It offers personal and SME accounts. It is backed by Ping An
PAO Bank 2019
Insurance - the largest insurer of mainland China.
The bank offers a savings account, time deposits and a debit card. The bank offers a unique type of time
WeLab Bank 2019 deposit facility called 'GoSave' which is socially-driven. The interest rate is determined by the number of
joiners in each group.
Neat focuses on small business owners across the globe that are looking for a gateway to Hong Kong. It
offers a no-frills business account and corporate Visa cards for start-ups and small businesses. They have
Neat 2015
stopped taking applications for personal accounts. Neat is not a bank; it did not apply for the Virtual
Banking Licence.
It specializes in business accounts for SMEs. It offers a bank account, credit card ,invoicing and expense
software. It currently operates in Singapore, Thailand, Indonesia and Vietnam. It's main principle is making
Singapore Aspire 2018
business finance quick and simple. Aspire also offers SMEs the option to get incorporated in Singapore. It
partners with Wise for money transfers.
First digital bank in Asia to go public. It benefits from the Kakao brand - which is the most popular
Kakao Bank 2017 messaging app in South Korea. It offers housing deposit loan, secured and unsecured credit loan, overdraft
facility, deposits, debit cards and overseas remittances. It also offers group account service.
South Korea It was the first digital-only bank launched in South Korea. The bank reported its first quarterly profit in June
2021 quarter. The number of customers stood at ~6.2 mn. It offers mortgage loans as well as unsecured
K Bank 2017
personal loans. K Bank is aiming for an IPO in 2023. Worth noting that the bank faced some financial
troubles during 2019 when it had to halt loan services due to failure in raising capital.
Toss Bank 2021 Yet to be launched

Banks Sector
Exhibit 156: Key features of select non-traditional banks across the world (continued)

The bank began operations in January 2021. Most of its customers are in the age group of 30 and 50. Most
of its customers used its banking app from 3pm to 10 pm - times when traditional banks are closed. The
Rakuten Bank 2021
bank has launched a few services like revolving loans and bill payments. It is in the process of launching new
services to attract younger customers.
Taiwan
Line Bank has the strongest digital services ecosystem including a popular messaging app, e-wallet (8 .4 mn
Line Bank Apr-21 users of Line Pay), entertainment and social commerce with Taiwanese consumers. Line Bank is integrated
into the Line messaging app.
Next Bank Yet to be launched
First fintech challenger bank in the UK. Launched current account, financial services marketplace, unsecured
Starling 2014 personal loans for individuals and unsecured business loans for SMEs. Grew loan book early and more
rapidly than Monzo. Starling claimed that ~30% of its customers use Starling as primary bank account.
First product was a prepaid debit card, but got full banking licence in 2017. Early focus was on consumer
banking and developing Monzo as a marketplace for financial services. App offers OD, loans, mortgage
Monzo 2015
offers, insurance options and Monzo earns referral fees on it. Launched business banking services relatively
late. Reported significant doubt staying a going concern in 2020.
UK
UK's first ever app-only bank. Deposits covered by the FSCS. Savings accounts are the main feature, but the
Atom 2014
bank also offers loans including mortgage offers. However, it doesn't offer a current account or a card.
Launched as an online money transfer service. The company provides multi-currency accounts and supports
Wise 2011
>1,000 currency routes. Changed the name from 'Transferwise'
Pockit offers a bank account and a Mastercard debit card. Deposits are not covered by FSCS. Pockit does not
Pockit 2012 yet offer loans. Pockit also offers a Loqbox feature - which allows customers to build their credit profile
through a systematic saving plan, without requiring them to take a loan.
It is a digital bank with global good as its central value. It champions climate change, greener choices and a
Aspiration 2013
lower carbon footprint. It allows the user to decide what is a fair amount of monthly fee.
It is a P2P mobile payments service. Convenient tool to receive or transfer money instantly. However, money
Cash App 2013
is not FDIC-insured. It had >36 mn users. Also has features for stock trading and crypto trading.
Offers free limited OD facility up to US$100 and direct deposit (aka early paycheck) facility. However, the
Chime 2013 0.5% APY it offers is at the lower end among peers. Deposits are FDIC-insured because Chime has
partnered with Bancorp Bank and Stride Bank.
USA
The company offers a 'mobile check deposit' facility and free limited OD up to US$100. Also has a premium
offering charged at US$5 per month that includes a debit card and early direct deposit (aka early paycheck)
Current 2015 facility. Also has a Teen Banking account for US$36 per month. Currently, the company does not offer a
savings account, but instead has a 'Savings Pods' feature to encourage savings. It also offers a 'round-up'
feature similar to Chime to encourage savings.
It was the first challenger bank in the US to be granted a national bank charter. It offers a savings account
Varo 2015
with APY as high as 3%. Most basic services come for no fee.
In addition to granting licenses, a few central banks have also created provisions to allow
new or potential licensees a transition period so that they can scale up their compliances to
the desired threshold. During such a transition period, licensee institutions may be restricted
from performing all activities and/ or scale-up beyond a certain threshold. Exhibit 157 below
summarizes provisions of such facilitative initiatives across the world. Note that while
Australia and Great Britain do not have specific digital bank license frameworks, the
presence of a transition period has helped new bank licensees to adjust smoothly to
prudential regulatory requirements. Typically, at the end of such a transition period, the
regulator would assess the bank’s progress on parameters like capitalization, appointment of
key managerial personnel, formulation of policies and governance standards and
development of a business model.

Sector Banks
Exhibit 157: Key features of initiatives to facilitate entry into the banking market
Malaysia Singapore Australia Great Britain Philippines

Timeframe for transitional phase
Up to 12 months ✔
Up to 2 years ✔
2-5 years ✔ ✔ ✔
Restrictions on licence holders in transitional phase
Cap on assets size Applicable Applicable
Cap on deposits Applicable Applicable Applicable
Limited base of customers Applicable Applicable
Limits on location (overseas operations) Applicable Applicable
Limits on products to be offered Applicable Applicable
Restricted status to be disclosed to clients Applicable
Criteria assessed for exiting transitional phase

Bank is fully capitalised Applicable Applicable Applicable Applicable Applicable
Appointments of senior management are completed Applicable Applicable Applicable Applicable Applicable
Key policies and procedures are finalised Applicable Applicable Applicable Applicable
Financial performance, value added and development of
Applicable Applicable Applicable Applicable Applicable
business model are assessed to be sufficient
Note:
(a) In the case of Philippines, the transitional phase applies only to existing banks desirous of applying for conversion to a digital bank.
Neo-banks: pursuit of opportunity; outcome of challenges

UK/EU: pursuit of scale
Neo-banks in the UK are currently marked by a keen focus on growing their customer bases
through attractive pricing and better app experience. The pursuit of meaningful scale in a
relatively short time is seeing several of these companies racking up losses. The UK saw the
launch of Starling and Monzo in the UK in the 2014 and 2015 respectively, and
subsequently, these companies earned their banking licenses in 2016 and 2017. We note
the relatively high level of growth and impressive maturity in the concept of digital banks in
this geography. Revolut, which launched in 2015, received an EU banking license in 2018.
Among the three, Starling Bank seems to have grown its lending book at a faster pace than
the others – helped by its participation in the Covid-related government guarantee scheme
for business loans.

Banks Sector
Exhibit 158: Starling has fewer customers than Monzo, but has Exhibit 159: Monzo’s losses have been relatively higher than
better profitability peers led by higher investments
Number of reported customers of select challenger banks, (# mn) Net losses for select challenger banks in Europe (GBP mn)
15.0
15 250
206
12 200
10.2
9 150 130
114 107
6 5.0 100
3.9 3.6 52 47
3 2.1 1.6 50 31 33
1.1 1.1 25 23
0.6 15
0.4
0 0
Mar-21
Feb-19
Feb-20
Feb-21
Feb-18
Feb-18
Feb-19
Feb-20
Feb-21
Nov-18
Nov-19
Mar-21
Dec-17
Dec-18
Dec-19
Dec-20
Nov-18
Nov-19
Dec-17
Dec-18
Dec-19
Dec-20
Starling Monzo Revolut Starling Monzo Revolut

Notes: Note:
(a) Number of accounts for Starling (a) 16-month result for period ending March 2021 for Starling.
Exhibit 160: Starling has seen strong growth in net interest Exhibit 161: Starling has seen substantial improvement in
income recently operating margin
Revenues of select challenger banks in Europe (GBP mn) Cost-income ratio for select challenger banks in Europe (%)
100 Net interest income Non-interest income Cost-income ratio (%)

4,000 3,594
75
3,200
50 2,400
1,911
25 1,600
726
0 800 447 459
270 291 388
116
-25 0
Mar-21
Mar-21
Feb-18
Feb-19
Feb-20
Feb-21
Feb-18
Feb-19
Feb-20
Feb-21
Nov-18
Nov-19
Nov-18
Nov-19
Dec-17
Dec-18
Dec-19
Dec-20
Dec-17
Dec-18
Dec-19
Dec-20
Starling Monzo Revolut Starling Monzo Revolut

Notes: Note:
(a) 16-month revenues for period ending March 2021 for Starling. (a) 16-month result for period ending March 2021 for Starling.
(b) Revolut introduced credit products in 2HCH20. Loans outstanding (b) Adjusted the ratio for Revolut to net off commission expenses with
to customers and NII are negligible. revenue on card transactions.
(c) Netted off commission expenses with revenue on card transactions.
Challenges faced around the world
As digital banks mushroom around the world, it is worthwhile studying the challenges these
institutions have faced. We list a few such case studies from around the world.
 Xinja Bank in Australia. Xinja Bank commenced its operations with an aggressive
liabilities offering of ~2.25% on savings deposits (traditional banks were offering <1%).
As a result, it ended up garnering more deposits than it had planned for. This coupled
with its inability to launch a credit product meant it kept losing money and ran itself into
a situation where it found it difficult to raise any more capital and had to close the
banking operations and surrender their ADI (authorized deposit-taking institution) license.

Sector Banks
 Monzo Bank in the UK. In its latest annual report, Monzo has reiterated that it faces
uncertainty in its business model. At the same time, the bank is currently under
investigation by the Financial Conduct Authority (FCA) over a potential breach of financial
crime regulations. As compared to Starling, Monzo’s relatively less spectacular
performance could be attributed to the difference in strategic choices of the management.
In the first few years of operations, Monzo focused more on its marketplace strategy,
which yielded mixed results. Monzo was also relatively late in offering credit products –
both personal and business loans – to its customers.
 K Bank in South Korea. K Bank was the first non-traditional institution to receive a
banking license in South Korea (April 2017). However, in 2019, the bank had to suspend
most of its services amid its struggles to shore up profitability and an inability to raise
capital given some regulatory roadblocks. After a year of suspension, it was able to raise
capital and resume services in 2020. It was also able to turn in a profit during 2QCY21.
However, it faces increased competition now from Kakao Bank which has grown into a
much larger scale as well as from the latest entrant Toss Bank.
 Digital offshoots of traditional banks. Several traditional banks have launched their
own digital banking brands – for example, Bo by RBS Bank, Finn by JP Morgan Chase and
Marcus by Goldman Sachs. Marcus has seen success, while Finn and Bo have shut
operations. Even though there are arguments in favor of such initiatives by traditional
banks, other experts have argued that there are inherent shortcomings in such initiatives.
The time and investment required in scaling-up these brands requires sustained
commitment from the management of the parent bank which may not be forthcoming,
especially during periods of macroeconomic and business uncertainty. Further, there
could be conflicts between the traditional bank and the digital brand since there is a
possibility that the digital brand could cannibalize several business segments of the
traditional bank.
India: differentiated landscape
India’s central bank, the RBI, does not issue any specific digital banking license. Hence, in
India, the term ‘neo-bank’ is more colloquial, lacking an unambiguous, official definition. In
the absence of specific digital banking licenses, ‘neo-banks’ in India are compelled to partner
with RBI-licensed entities (banks, NBFCs or insurance players) to offer deposit, credit or other
products. Most of the neo-banks in India are based on the idea of having no physical branch
network. Hence, their products and services are typically available via mobile-phone or PC-
based applications. These are designed to make the banking experience seamless and
accessible (whether the product is related to deposit, credit, payments, insurance or wealth
management). In the Indian context, the boundary between a fintech platform and a neo-
bank is less defined. Hence, for this section of the report, we will limit our discussion on
neo-banks to those that offer a bank account product.
Exhibit 162 below gives a brief summary of select neo-banks in India that have garnered
meaningful scale or recognition. Broadly, neo-banks in India can be classified into two
categories: (1) those focused on personal users or (2) those focused on business users. Both
categories have seen a number of players launching products and several more about to
launch. In personal savings account offerings, we notice common features like: (1) low or no
minimum balance requirement, (2) interest rate at the higher end of the spectrum, (3)
embedded credit offering in the form of a credit card or BNPL, and (4) tools for wealth
management, goal-based investing, budgeting and spend analytics. The business offerings
also offer some common features like tools for automated accounting and expense
management. We have also seen RazorpayX offering loans to its SME customers through its
lending partners.

Banks Sector
Exhibit 162: In their current format, Indian ‘neo-banks’ are heavily dependent on their relationship with partner banks
Profiles of select key neo-banks in India
Neo-banking
Brand product features Other products offered Lending partners Popularity
Neo-banks for personal users
(1) NiyoX: >500k users in 5
(1) Niyo Global: Forex travel card with zero FX mark-
(1) NiyoX: Equitas SFB (earlier months.
up or other charges.
Digital savings a/c IDFC First). (2) Niyo Global: >100k
(2) Niyo Money: wealth management including Direct
(Zero min. balance (2) Niyo Global: DCB and SBM. users.
MF investing.
with 7% ROI) (3) Niyo Bharat: ICICI Bank, Yes (3) Niyo Bharat: >1.1 mn
(3) Niyo Bharat: Zero balance prepaid card for blue
and DCB. users and >6000
collar employees.
corporates.
(1) Bullet: Limited 15-day BNPL line of credit (like
Digital savings a/c >100k downloads from
Mobikwik Zip) Federal Bank
(Zero min. balance) Google Play Store
(2) Pots: Saving buckets for future goals
Digital savings a/c >100k downloads from
(1) Fi Jars: Flexible saving buckets for future goals. Federal Bank
(Zero min. balance) Google Play Store
Equitas SFB (for savings a/c), IDFC (1) Moneytap: >15 mn app
(1) MoneyTap: Line of credit of upto Rs500k
Digital savings a/c First, RBL, HDB Finance (for installs on Play Store and
(2) FREO Pay: Limited 30-day BNPL line of credit up to
(Zero min. balance MoneyTap), Incred, TapStart, Rs40 bn credit issued.
Rs3k (like Mobikwik Zip)
with 7% ROI) Apollo Finvest, DMI Finance, (2) FREO Pay: >150k app
(3) FREO Card: credit card
Fullerton India, Credit Saison India installs
(1) Saving program for future goals >10k downloads from

Digital savings a/c SBM Bank
(2) Spend analysis and budgeting Google Play Store
Digital savings a/c Suspended operations in
(1) Remittance
for blue-collar ICICI Bank, Federal Bank June 2021; >1k downloads
(2) Micro-credit
workers from Google Play Store
Neo-banks for business users

(1) Automated accounting and analytics
Online business SBM Bank, Apollo Finvest, Kudos
(2) Razorpay Capital: working capital loans, instant
bank a/c (current Finance & Investments, Gromor >5 mn SMEs use Razorpay
settlement of customer payments, corporate credit
a/c) Finance, RBL Bank
card.
Online business ICICI Bank, Axis Bank, Kotak
(1) Automated accounting
bank a/c (current Mahindra Bank, Yes Bank, Equitas >1 mn businesses
(2) Debit and credit card
a/c) SFB, SBM Bank
~10 mn monthly active
Online business
ICICI Bank, Axis Bank, IndusInd consumers; US$1 bn
bank a/c (current (1) Expense reporting
Bank, Yes Bank transaction value processed
a/c)
quarterly
Notes:
(a) Some licenced traditional banks in India have also launched their respective digital banks: SBI has "SBI YONO" and DBS India has "Digibank".
(b) FREO is yet to officially launch its savings a/c and credit card product.
Source: Public sources, Kotak Institutional Equities

Sector Banks
Open Banking: upending the old model

Power to the consumer
The underlying tenet of open banking is that consumers own their data that lies with banks
and they should be able to choose how that data is used and with whom it is shared. The
Bank for International Settlements (BIS) defines open banking as:
…the sharing and leveraging of customer-permissioned data by banks with third party
developers and firms to build applications and services, including for example those that
provide real-time payments, greater financial transparency options for account holders,
marketing and cross-selling opportunities.
In other words, open banking creates a new front-end that exploits bank data at the back to
create a new service. Fundamentally, this enables two things: (1) it allows consumers to view
their account balances across different banks through a single dashboard, generally a mobile
app and (2) it enables third party applications to control user engagement through superior
UI/UX, bypassing the need to deal with incumbent banks on a day-to-day basis.
As consumers get control over their data, it opens up for use by other entities apart from the
bank holding the account. The access of banks to customer account information has long
been a key strategic advantage, providing crucial information about the consumer’s flow
and quantum of savings into the account. A positive outcome of open banking is that it
levels the playing field for new players entering the market.
It is true that banks have been sharing data with third parties (through screen scraping of
bank statements for instance). However, there has been no regulatory push towards
creating a system for seamless information sharing.
Exhibit 163: Open banking schematic explanation
Source: McKinsey report on open financial data, Kotak Institutional Equities

Banks Sector
Open Banking: value to consumers
 Easier sign-up on new products. Open access to data enables customers to access
suitable and competitive products in the market based on customers transaction history,
salary, spend patterns, etc.
 Saves time switching between banks. Open banking can allow fast and smooth
switching across banks in order to benefit from lower costs or better rates or services. This
will counter the inertia among customers to change banks. With more access to data, the
process of changing automatic debit arrangements may also become more streamlined.
 Exploring and comparing new suitable products. Open banking can be used to
access better price comparisons and product options that are tailored to customer
requirements.
 Monitoring finances. Open banking will help provide customers with better insights and
services to help them set goals and budgets.
The banking sector arguably operates with a much lower switching rate than other services,
at least in parts of the business. An interesting study in the UK by the competition authority
titled, Personal Current Account Investigation, explores competition in the UK market for
personal bank accounts. One of the highlights of the study for us was the much lower level
of switching in bank deposits compared to other services. For example, around half car
insurance buyers had changed suppliers in the past three years while nearly a third had
switched energy providers. However, the practice of switching banks offering current and
savings accounts was significantly more infrequent. Open banking can enable consumers to
maintain a relationship with a single third party which (among other services) allows them to
hunt and switch banking products based on friendlier interest rates, charges, rewards, etc.
Exhibit 164: Banking services have seen much lower switching compared to other user services
Proportion of customers who have switched suppliers in different sectors in the past three years (as of
February-March 2015)
Car insurance 45
Energy 31
Internet provider 26
Mobile phone network provider 23
Saving account 13
Mortgage 9
Current account 8
Source: Study for UK Competition and Markets Authority, Kotak Institutional Equities

Sector Banks
Exhibit 165: Hassle involved in shifting is considered a major deterrent in switching bank accounts
Survey response to the questions on barriers for switching bank accounts
Too much hassle/can't be bothered 25
Good products/best ideas/interest rates 16
No difference between banks 14
Happy with current provider 14
Problems with other banks 12
Good customer service/satisfied with service 9
Been with them a long time/loyal customer 8
Still thinking about it 8
More convenient to stay with current supplier 6
Good branch location 5
Source: Study for UK Competition and Markets Authority, Kotak Institutional Equities
Exhibit 166: Respondents preferred to bank with the same bank Exhibit 167: Better product deal is a key reason to switch banks
Key reasons for having additional products with the same bank Key reasons for having additional products with different banks
Like to have everything

with same bank 49 Offer a better product deal 55
Better products/deals
13 Prefer not to have products with
than other banks
the same bank 9
Good customer service 12
Recommended by others 9
Convenience 8 Differet providers for different
purposes 7
Easier to
manage/transfer 6
Always had an a/c or had an a/c
before 6
Always had an account 6
Minimise risk 4
Other 6
Want to use same Other 4
account for everything 4
Recommended by
friends/family 4 Convenience 4
Source: Study for UK Competition and Markets Authority, Kotak Source: Study for UK Competition and Markets Authority, Kotak
Institutional Equities Institutional Equities
Considerations for industry, competition and profitability

Most of the developed markets have probably approached open banking initiatives through
the lens of competition i.e. empowering consumers to use their banking data to their
advantage and in the process introducing more competition into the system. India’s account
aggregator framework’s primary motivation is extending the reach of credit into the
unbanked/under-banked segments through use of data as collateral (in India, UPI already
provides the benefit of open payments). However, the movement of payment flows outside
the banking system has obvious implications on competition in the payments business, as
also a long-term impact on the lending business.
Traditional banks enjoy significant advantage due to a vast amount of customer data
(transactions, bank balances, etc.). Fintechs, on the other hand, have limited financial data
(beyond credit bureaus), but probably more advanced data analysis algorithms. Bigtech has
more access to alternate data and superior algorithms but are still at a disadvantage compared
to banks. Traditional banks clearly have an advantage in a world without open banking.
However, open banking can enhance competition by allowing borrowers to share their data.

Banks Sector
Likely outcomes
Open banking initiatives are still in their infancy with first order responses by consumers,
banks and third-party players still evolving. Hence, it’s a challenge to imagine what the
steady scenario could look like for the industry.
A thriving open banking ecosystem will likely lead to massive data diffusion across a gamut
of players which can use more accurate data on payments and account balances along with
other proprietary data to create targeted services. For example, internet companies like
Google can track location and search history to assess users home/office locations in the
physical world or user shopping/travel intentions in the online world. However, Google
would not know the amount of money in a user’s bank accounts, their spends on categories
like health, recreation, etc. or the amount of investments they hold. Historically, it is banks
that held this data and that is set to change.
The direction of regulation is hard to predict and could evolve in parallel based on industry
feedback. In some parts of the world, regulators are also grappling with the idea of
oversight for big tech. The discussion includes reciprocity i.e. users of bank data must in
return open up their data to be used by banks – Australia’s open banking reforms
incorporate this.
Open banking and industry: multiple scenarios
 Better banking service = lower profitability? Incumbents may be forced to respond

with more competitive pricing (revenue impact), higher product customization (higher
operating costs), better-informed selection of new-to-bank customers (lower
acquisition/credit cost on NTB). More agile banks can themselves exploit open banking
benefits and acquire customers hitherto difficult to reach and offer them customized
products.
 Banks lose the front-end interface. One can envision scenarios where companies with
much stronger consumer connect and engagement (like Amazon, Apple, Google, etc.)
create a financial/banking interface and control or influence a user’s financial decisions.
These new functionalities/services can integrate into the existing interface as a part of the
wider platform or marketplace. With the help of a consent mechanism, the user could
continue to bank with a regulated entity at the backend and yet benefit from a
potentially broader and better engagement with a third-party interface.
 Banks are simply capital providers. One of the more adverse scenarios for a bank could
be if they end up becoming merely capital providers with third parties parking customer
money with them and using banks as wholesale transaction accounts. This would entail
banks being fully disintermediated from the value chain. These models are already in play
in the US for example where banks are merely white label platform providers, such as
Affirm-Cross River Bank, Marqueta-Sutton Bank, SoFi-The Bankcorp and few more.
 Calling for a viable operating model to scale-up. Operating models need to evolve
for the system as a whole to function smoothly and seamlessly. All the parties involved
need to identify the value proposition as players in the ecosystem and accordingly align
incentives across the value chain. Banks seem to have the most to lose. A new entity that
controls consumer interface benefits from the flywheel of more consumer data, leading
to better products and greater engagement, in turn generating more data.

Sector Banks
Open Banking: genesis and development

We refer to the BIS report on open banking, Report on open banking and application
programming interfaces, November 2019 which examines the open banking framework
and how it covers multiple aspects of rule-making. These include third party access to
customer-permissioned data, implementing data privacy and disclosure and consent
requirements. Frameworks may also contain provisions related to whether third parties can
share and/or resell data onward to ‘fourth parties’, use the data for purposes beyond the
customer’s original consent and whether banks or third parties could be remunerated for
sharing data. Open banking frameworks may also contain expectations or requirements on
data storage and security.
The idea of open banking has evolved differently across the world. The UK and Europe have
been at the forefront of this change and have had regulatory support to achieve this
objective. In the US on the other hand, market forces are driving this change. A number of
other countries such as Japan, Singapore, South Korea, Australia have introduced or are in
the process of introducing open banking frameworks.
In 2016, UK’s Competition and Markets Authority (CMA) published a report on the retail
banking market, observing that older, larger banks don’t have to compete hard enough to
gain customer business, whereas newer banks find it difficult to access the market and
grow. One of the CMA’s recommendations to address this problem was open banking. The
Open Banking Standard insists on secure data sharing through open APIs that would allow
third party apps, such as fintech companies, access user data through their bank accounts.
The European Union has adopted the Revised Payment Service Directive (PSD2), which
requires banks to grant licensed third-party payment service providers access to bank
infrastructure and account data. PSD2 introduced two new regulated entities:
1. Account Information Service Providers (AISPs) AISP is authorized to access and

retrieve account data provided by financial institutions.
2. Payment Initiation Service Providers (PISPs): PISP is authorized to initiate payments

into or out of a user’s account.
Exhibit 168: Overview of Europe’s PSD2 regulations
Source: Deloitte, Kotak Institutional Equities

Banks Sector
Varied approaches
Beyond the UK and Europe that have led the initiative, the approaches of other countries
towards open banking have been varied (Exhibit 169). For example, similar to EU, in India as
well as Hong Kong and Singapore, the central bank or the banking supervisor is framing the
rules for faster and easier payments that can drive innovations. In Australia, competition
authorities are responsible for open banking implementation.
United States. Here, there are no specific regulations around open banking. In 2019, FICO,
Experian and Finicity launched a pilot product allowing borrowers to choose to share their
bank account information with lenders apart from their traditional FICO scores.
Brazil. Similar to Europe, the Brazilian Central Bank has chosen to enable open banking in
multiple phases. Phase 1 (February 2021) saw the sharing of data from financial institutions
to the public with the aim of making it easier for customers to compare different financial
products and services available in the marketplace. In Phase 2 (August 2021), customers can
share registration and transactional data related to credit operations, deposit account and
credit card with their prior consent. In Phase 3, consumers will be able to pay bills and make
money transfers outside their bank's environment.
Singapore. Monetary Authority of Singapore (MAS) is undertaking the development of
open banking in Singapore. MAS introduced API Exchange in 2018, an API guidance and
collaboration platform to enable banks to open up their data and services. MAS is expected
to announce detailed open banking measures (Financial Planning Digital Services) facilitating
data mobility through a secure API framework which will give customers access and control
over their data. According to press reports, a portal will be set up with a consent mechanism
facilitated by SingPass, the single sign-on service already used by all residents to access the
government’s e-services. Consumers will be able to grant access to the financial institutions
to share information about their bank accounts and credit cards along with information about
their pension contributions, social security savings and government housing scheme payments.
Hong Kong. Hong Kong Monetary Authority has a four-phase approach to implement open
API framework. Phase 1 involves opening up product information. Access to frequently-used
product information by customers from their bank on a ‘read only’ basis and helping
financial product comparison sites. Phase 2 deals with customer acquisition. Customer
acquisition through online applications for credit cards, loans and some insurance products,
including via Third Party Providers (TPPs). Phase 3 deals with customer account information.
Retrieval of both stand-alone and aggregated account information, helping TPP services that
aggregate information for customers across multiple accounts and banks or perform
analytics to gain customer insights. Phase 4 deals with transactions. Enabling TPPs to
communicate customers' payment instructions to banks.
Australia. The first phase of open banking was launched with Consumer Data Right in July
2020. The rollout is spread across three phases with different types of data being made
accessible. Phase 1 has savings accounts, term deposits, current accounts, debit card
accounts, GST and tax accounts, credit cards, etc. Phase 2 has home loans and personal
loans while Phase 3 has business loans, lines of credit, cash management accounts, pension
accounts, retirement accounts, consumer leases, etc. Most banks are automatically included
under open banking to receive and hold data. Non-ADI organizations, such as fintech
companies who wish to receive data through open banking will need to become accredited
data recipients.
Japan. Japan revised the Banking Act in 2018, requiring banks to develop systems for the
introduction of open APIs within two years. The law defines electronic payment intermediate
service providers as intermediaries between financial institutions and customers. Similar to
Europe, Japan introduces two new types of service providers (payment initiation service
providers and account information service providers). The amended banking act required 80
Japanese banks to open their APIs by 2020.

Sector Banks
Canada. Canada’s open banking initiative has been lagging the UK, Australia and the
European Union. A recent report by the Advisory Committee on Open Banking
recommended that open banking should be operational by January 2023. The committee
noted that around 4 mn Canadians already share their data with third-parties through
unsecure means like screen scraping. The report recommends that implementation should
be neither government-led nor industry-led and built on principles such as common rules for
all parties along with an accreditation framework and process to allow third party service
providers to enter an open banking system along with technical standards.
Exhibit 169: Comparison of open banking frameworks

Banks Sector
Exhibit 170: Comparison of open banking initiatives across the globe
Source: Innopay, Kotak Institutional Equities
Exhibit 171: Comparison of open banking initiatives across the globe
Source: Innopay, Kotak Institutional Equities

Sector Banks
Open Banking: a progress review
Europe, being the earliest to launch open banking initiatives (PSD2), has shown signs of an
ecosystem buildup. Third-party service providers are cropping up across Europe. These
entities developing apps are coming up with value propositions around new use cases or
customer segments. These service providers have a wide range of business models from
personal finance management to investment platforms to invoicing and accounting for small
businesses to payment platforms or creditworthiness assessments of consumers and
businesses.
Willingness to share personal data: highest with own bank
The willingness of consumers to share data is yet to be fully established. Payments and
banking habits have a strong cultural element. Open banking initiatives will therefore have
varied modalities and degrees of adoption and success across countries. DNB, the Dutch
central bank, found interesting insights from its survey on consumer willingness to grant
account access and enable payment flows to third parties in a report (The impact of PSD2 on
the functioning of the retail payment market) . The survey also assessed the change in
willingness if financial incentives are offered.
In the case of payment initiation services, the research finds the highest propensity to allow
access to one’s payment account when the service provider is one’s own bank. This is true
across P2P transfer, offline or online payment. Most respondents choose not to give their
consent to payments data usage in order to receive a financial overview and personal offers,
although financial incentives do improve consent levels in a small but significant share of the
respondents (Exhibits 172-174).
Exhibit 172: Reluctance towards parties other than own bank to initiate faster payments
Consumers consent to payment initiation to use a new quick and easy payment method (% share)
Payment initiation (offline) Payment initiation for P2P transfers Payment initiation (online)
Definitely not Probably not Neutral Probably Definitely Definitely not Probably not Neutral Probably Definitely Definitely not Probably not Neutral Probably Definitely
100 100 100 5
6 4 7 7 6 4 7 6
8 11 9 14 12
15 9 13 11 10 12
80 24 80
80
25 26 27 19 25
19 26 25 25 26
27
60 60 18 60
23
26
40 40 23 40
60 59 57 57 59 59 56 55
53
20 20 20 41
35 30
Payment initiation (offline) Payment initiation for P2P transfers Payment initiation (online)
0 0 0
Own bank Another bank Tech Supermarket Own bank Another bank Tech Social media Own bank Another bank Tech Webshop
Definitely not Probably not Neutral Probably Definitely
company Definitely not Probably not Neutral Probably company
company Definitely Definitely not Probably not Neutral Probably Definitely
company
100 100 100 5
6 4 7 7 6 4 7 6
8 11 9 14 12
15 9 13 11 10 12
24
Source:
80 DNB (Dutch Central Bank), Kotak Institutional 80 Equities 80
19
19 25 26 27 25
26 25 25 26
27
60 60 18 60
23
26
40 40 23 40
60 59 57 57 59 59 56 55
53
20 20 20 41
35 30
0 0 0
Own bank Another bank Tech Supermarket Own bank Another bank Tech Social media Own bank Another bank Tech Webshop
company company company company

Banks Sector
Exhibit 173: Banks are preferred despite fintechs offering attractive incentives
Consumers consent to payment data usage and financial incentives for financial overview (% share)
No financial overview Technology company Own bank

100
80 45
51 47 51 52 50
55 56 54
60
2 2
2 5
1 2 6 8 14
40
47 53 51
20 44 42 44 40 40 36
0
Eur 0 Eur 5 Eur 10 Eur 15 Eur 20 Eur 5 Eur 10 Eur 15 Eur 20
No Incentive by both bank & tech co. Incentive by tech co
incentive
Source: DNB (Dutch Central Bank), Kotak Institutional Equities
Exhibit 174: Banks are preferred despite fintechs offering attractive incentives
Consumers consent to payment data usage and financial incentives for mortgage loans (% share)
Own bank Another bank Technology company

100 2 1 2 2 1
5 12
20 22
6 27
80 38 5 6
53 54 56 5
60
93
40 82
75 72 68
61
20 45 44 43
0
Eur 1232 Eur 1200 Eur 1168 Eur 1136 Eur 1104 Eur 1200 Eur 1168 Eur 1136 Eur 1104
Monthly Another bank: lower monthly payment Technology company: lower monthly
payment payment
Source: DNB (Dutch Central Bank), Kotak Institutional Equities
Other highlights of this research were: (1) males, young people and those living in urbanized
areas show the highest willingness to adopt PSD2-related services, irrespective of financial
incentives, (2) greater awareness of PSD2 leads to more hesitation in using new services
compared to people with less knowledge of PSD2 and (3) even as financial incentives matter
in swinging the preferences, sensitivity to financial incentives also depends on background
characteristics – e.g. men are more responsive to financial incentives than women.
The willingness to share data varies considerably across countries and demographics. Hence,
it may be unfair to draw direct parallels based on research in a specific country. A BIS report,
The fintech gender gap, March 2021, has surveyed the share of consumers using fintech
services for payments/investments/ borrowing/insurance across countries (see Exhibit 175 for
findings). Further, the study also assesses willingness to share data for better terms across
fintechs, traditional banks or non-financial entities (Exhibit 176). A few interesting
observations: (1) respondents in some of the developing markets such as India, China, Brazil
and Mexico have a relatively more favorable view of fintechs than developed markets,
especially European respondents, (2) willingness to use fintechs is highest for payments and
lowest for borrowings and (3) with the incentive of better terms and conditions, there is
improved willingness to share data with new entities; however, there is a preference for
traditional financial institutions over fintechs.

Sector Banks
Exhibit 175: Consumers in emerging market countries like India, China & Brazil show greater willingness to use fintech services
Survey-based cross-country assessment of willingness to use fintech services
Source: BIS research
Exhibit 176: Greater willingness to share data in exchange for better terms; India ranks as one of the most willing to share data
Preference levels to share data in exchange for better terms from service providers (%)
Source: BIS research

Banks Sector
Obligation to share access not enough; disparate APIs a constraint
Under Europe’s PSD2 regulations, banks have an obligation to grant third parties access to
payment accounts. However, it has not been a smooth journey and one of the issues cited
by practitioners is the lack of uniform standard for APIs. APIs hold the keys to customer
databases and are an essential part of business toolkits for these third parties, any lack of
uniform standards increases development costs for new entrants.
The UK is also one of the leading markets for open banking implementation and has a
central implementation entity, the Open Banking Implementation Entity (OBIE), funded by
the country’s nine biggest banks. OBIE releases updates on the implementation progress in
open banking. We present some of the relevant datapoints below but it is worth noting that
open banking evolution is still in early stages and these findings give more of a directional
view.
 There were 109 firms with live-to-market, open-banking-enabled products and services as
of December 2020. These firms use the open banking APIs provided by banks.
 As of February 2021, over 3 mn UK citizens and small businesses were active users of
open banking-enabled products. The entire ecosystem has 301 active firms, with another
450 in the pipeline.
 According to estimates dated December 2020, open banking has penetrated 5-6% of the
active customer base of the nine large UK banks that are mandated to follow the open
banking framework. This figure was around 2-3% as of January 2020.
Exhibit 177: There are 109 firms with live open banking-enabled Exhibit 178: Third parties are increasingly accessing open
products and services in the UK banking APIs of banks
Companies offering open banking-enabled products and services, Number of successful open banking API calls made by third party
December 2018-20 (#) providers, July 2018-July2021 (# mn)
120 900
109
96 720
540
72
62
360
48
180
24 16
-
Jul-18
Jul-19
Jul-20
Jul-21
Jan-19
Jan-20
Jan-21
Apr-19
Apr-20
Apr-21
Oct-18
Oct-19
Oct-20
-
2018 2019 2020
Source: Open Banking Implementation Entity, Kotak Institutional Source: Open Banking Implementation Entity, Kotak Institutional
Equities Equities

Sector Banks
Exhibit 179: Financial decision making, payments and borrowing are the top categories of new firms
Number of firms offering open banking-enabled products & services across categories, December 2018-
December 2020 (#)
2018 2019 2020

40 37
32
25
24 21 21 20
16
16
12
10
6 7
8
3 4
2 1 2
-
-
Financial Payments Borrowing Others/mixed Savings & Access to advice
decision making investments
Source: Open Banking Implementation Entity, Kotak Institutional Equities
Peer to Peer Lending (P2P)

A simplified P2P lending model is a digital platform providing low-cost, standardized loan
application process and facilitating the matching and transacting between borrowers and
lenders (investors). Typically, matched borrowers and lenders enter into a loan contract.
Credit risk is taken by the lender rather than the platform operator. Most platforms typically
encourage investors to spread their investments across loans. Increasingly, lending platforms
are structuring investments as units in a diversified loan pool.
Some platforms also offer protection against loan defaults. For example, several platforms
maintain a contingency fund that is designed to top up payments to investors in case of
defaults. Most of these platforms earn agency fees instead of net interest margins and
operate as two-sided networks in attracting and retaining borrowers and investors.
Key characteristics of P2P lending
 The P2P lending construct intrinsically builds in more information asymmetry as borrowers
have all the information about their true repayment capacity whereas lenders have
relatively minimal information about the credit quality.
 The traditional lending setup is more cognizant of credit quality: (1) a lender has sufficient
resources to underwrite credit, (2) the lender also has significant skin in the game
considering the leverage and (3) the lender makes trailing revenues off interest income,
hence growth incentives are aligned with asset quality considerations. We see these
characteristics missing in a P2P lending system.
 P2P lending operates in a unique way wherein the lenders which take the credit risk only
have a ‘Yes/No’ option, without the freedom to price risk. On the other hand, platform
operators pricing the risk are purely incentivized to grow volumes with little first-order
consideration to credit quality.
 Business models are yet to establish their stability especially in times of Covid-like crises.
For example, the UK’s P2P lender Octopus Choice faced substantial outflows in the first
few weeks of the crisis, validating long-held fears that relying on retail investors could
cause liquidity problems on the platform. Octopus Choice suspended trading in late
March, as withdrawals had outpaced inflows. For another UK company, RateSetter,
around 15% of customers attempted to withdraw funds from its platform in just a few
days in mid-March, causing a long backlog in payouts.

Banks Sector
Case study #1: Lending Club (US)
Lending Club (LC) started operations in 2005 as a P2P lender. In terms of origination
volumes, the business has scaled-up to US$12.3 bn in FY2019 from US$4.4 bn in FY2014.
The Covid-19 pandemic led to volumes declining sharply to US$4.3 bn in FY2020. Even after
a decade of operations, the business has not begun making a profit. LC’s primary sources of
revenue consist of transaction fees that are paid by issuing banks to facilitate loan
originations, net interest income and fair value adjustments on loans in which the company
has invested, investor fees that compensate for the costs incurred in servicing loans and a
gain or loss on the sale of loans.
LC listed in 2014 with a valuation touching US$10 bn. In February 2020, it acquired Radius
Bank and towards the end of the year, it announced that it will close its marketplace lending
platform to retail investors, rather focusing only on institutional funds and family offices. The
share of retail investors had declined to 5% in FY2019 from 18% in FY2014. Acquisition of
a bank will give LC access to stable, low-cost funding for loans through deposits. It will also
hold a portion of loans on the balance sheet, providing net interest income independent of
amount of originations in a year. LC plans to retain about a fifth of the loans it originates
and sell subprime loans to investors like asset managers, hedge funds, etc. LC was also
paying fees to third-party banks that issued loans for the company. The firm will save on
those costs once it’s a bank.

Sector Banks
Exhibit 180: Lending Club financial summary

December fiscal year-ends, 2014-20 (US$)
2014 2015 2016 2017 2018 2019 2020

Loan originations 4,378 8 ,362 8 ,665 8 ,98 7 10,8 8 2 12,290 4,343
Income statement
Transaction fees 197 374 423 449 527 599 208
Interest income 354 553 697 611 48 7 345 210
Interest expense 357 550 68 8 571 38 6 247 142
Net fair value adjustments (0) 0 (3) (31) (101) (145) (117)
Net interest income and fair value adjustments (2) 3 5 9 1 (46) (49)
Investor fees 80 87 115 125 112
Gain on sales of loans (17) 23 46 68 31
Net investor revenue 18 44 68 119 162 146 94
Other revenue (1) 9 9 6 6 14 13
Total net revenue 211 430 501 575 695 759 315
Sales and marketing 86 172 217 230 269 279 79
Origination and servicing 37 61 75 87 99 103 71
Engineering and product development 39 77 115 142 155 168 139
Other general and administrative 81 122 207 192 229 238 213
Goodwill impairment ― ― 37 ― 36 ― ―
Class action and regulatory litigation expense ― ― ― 77 36 ― ―
Total operating expenses 243 432 651 728 8 23 78 9 502
Loss before income tax expense (benefit) (32) (2) (150) (153) (128 ) (31) (18 8 )
Income tax expense (benefit) (1) (3) 4 1 0 (0) (0)
Consolidated net loss (33) (5) (146) (153) (128 ) (31) (18 8 )
Less: Income attributable to noncontrolling interests ― ― ― (0) 0 0 ―
Lending Club net loss (33) (5) (146) (153) (128 ) (31) (18 8 )
Balance sheet
Cash & cash equivalent 8 70 624 516 402 373 244 525
Loans 2,799 4,556 4,321 3,529 2,726 1,8 45 8 09
Fixed assets 27 56 89 102 114 114 97
Other assets 195 558 637 608 607 779 433
Total assets 3,8 90 5,794 5,563 4,641 3,8 20 2,98 2 1,8 63
Borrowings 2,8 14 4,572 4,321 2,98 7 2,365 1,669 742

Other liabilities 103 18 0 266 726 58 4 413 397
Equity 973 1,042 976 928 8 71 900 724
Total liabilities and equity 3,8 90 5,794 5,563 4,641 3,8 20 2,98 2 1,8 63
Key ratios
Transaction fees (% of origination volume) 4.5 4.5 4.9 5.0 4.8 4.9 4.8
Delinquent loans 2.2 3.2 3.7 3.5 3.1 1.9
Cost-income 115 101 130 127 118 104 160
RoA (1.1) (0.1) (2.6) (3.0) (3.0) (0.9) (7.7)
RoE (6.3) (0.5) (14.5) (16.1) (14.2) (3.5) (23.1)

Banks Sector
Exhibit 181: Lending Club share price has declined significantly since listing
150
120
90
60
30
0
Jun-15
Jun-16
Jun-17
Jun-19
Jun-20
Jun-18
Jun-21
Sep-17
Sep-18
Sep-21
Sep-15
Sep-16
Sep-19
Sep-20
Mar-17
Mar-18
Mar-21
Mar-15
Mar-16
Mar-19
Mar-20
Dec-14
Dec-17
Dec-18
Dec-15
Dec-16
Dec-19
Dec-20
Source: CNBC, Kotak Institutional Equities
Exhibit 182: Share of retail investors on the platform has been Exhibit 183: LC has increased share of better rated loans in
declining recent years
Mix of loan originations by investor category, December year-ends, Mix of loan originations by loan grade, December year-ends, 2016-21
2016-21 (%) (%)
Retail investors Family offices & funds A B C D E F G

Banks Other institutions 100 - -
Lending Club inventory 3 9
100 7 5 14
8 5 7 14
18 16 18 13
20 14 6 80 15 19
80 23
32 17 26
21
25 27 60 34
46 30 30
60 41
31
41 40 29
40 41
41
40 40 28 28
28 30 42
20 20
19 27 32
16
18 15 15 16 17
12 7 11
0 5 -
2014 2015 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020

Sector Banks
Exhibit 184: Charge-off rates spiked to 8.5% in 2017 and around 6% in recent quarters
Annualized charge-off rates, December 2015-December 2020 (%)
9.0
8.5 8.3
7.2 8.0 8.1
7.6 7.8
7.2 7.0 7.0 7.0
5.4 6.2 6.4 6.4 6.4 6.5 6.2
6.1
5.0 4.9
4.7
3.6
3.9
1.8
-
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Dec-15
Sep-16
Dec-16
Sep-17
Dec-17
Sep-18
Dec-18
Sep-19
Dec-19
Sep-20
Dec-20
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Exhibit 185: 3-year personal loans have ~7-8% charge-off rate Exhibit 186: 5-year personal loans have ~15% charge-off rate
Net cumulative charge-off rates on 36-month personal loans Net cumulative charge-off rates on 60-month personal loans
Case study #2: Funding Circle (UK)
Founded in 2010, Funding Circle is a UK-based marketplace-lending platform for SMEs. The
company has also expanded operations to the US, Germany and Netherlands. It facilitates
credit to SMEs through data analytics and algorithms and claims to have reduced the
average application time to six minutes and average waiting time for decision to nine
seconds. The company is one of the large SME loan originators in the UK. Notably, it
received accreditation to the Coronavirus Business Interruption Loan Scheme, which provides
an 80% government guarantee to investors.
Funding Circle assumes limited or no credit risk for loans originated through the platform. It
uses a data-driven approach using proprietary scoring models and data analytics techniques
for predicting credit risk and performance. Funding Circle’s major revenue streams are: (1)
transaction fees earned from borrowers and charged as a percentage of origination; this has
ranged from 4-6% over the past few years and (2) servicing fees earned from investors on
outstanding loans; this has been around 0.8-1%. Funding Circle has seen a strong growth in
origination volumes since 2016. However, business has continued to make losses due to
high operating expenses.
Banks Sector
Exhibit 187: Funding Circle – financial summary

December year-ends, 2016-20 (GBP mn)
2016 2017 2018 2019 2020
Originations 1,065 1,738 2,292 2,350 2,742
AUM 1,362 2,107 2,148 3,731 4,214
Income statement
Transaction revenue 40 77 113 121 123
Servicing revenue 11 17 25 30 30
Finance income (net) 1 1 1 1 (2)
Other revenue/FV changes 0 1 4 16 (49)
Revenues 52 95 143 168 102
Staff costs 36 52 79 90 85
Marketing costs 25 39 58 67 47
Other costs 38 40 57 95 78
Total costs 99 131 194 252 210
PBT (47) (36) (50.7) (84.2) (108.1)
Tax (1) (1) (1) 1 0
PAT (47) (35) (49) (85) (108)
Balance sheet
Cash and cash equivalents 43 89 333 165 103
Assets 116 168 430 996 782
Shareholder's equity 104 153 402 319 218
Key ratios (%)
Transaction revenue (% of originations) 3.7 5.4 6.0 6.5 5.6
Servicing revenue (% of AUM) 0.8 0.8 1.2 0.8 0.7
Cost-income ratio 71 55 55 54 84
RoA (24.9) (16.5) (11.9) (12.2)
RoE (27.4) (17.7) (23.5) (40.4)
Exhibit 188: Originations increased ~2.5X over FY2016-20 Exhibit 189: Retail investors form a small share of funders
Originations and AUM, December year-ends, 2016-20 (GBP mn) Investor mix, December year-ends, 2021 (%)
Originations AUM National

4,500 entities, 7 Funds, 2
Retail
funds, 7
3,600
Bond
programme
2,700 s, 6 Asset
managers,
46
1,800
900
Banks, 32
-
2016 2017 2018 2019 2020

Sector Banks
Exhibit 190: Funding Circle shares have underperformed since IPO
500
400
300
200
100
Jun-19
Jun-20
Jun-21
Sep-18
Sep-21
Sep-19
Sep-20
Mar-20
Mar-21
Mar-19
Dec-19
Dec-20
Dec-18
Source: CNBC, Kotak Institutional Equities
The P2P lending industry is undergoing a shift in business models across the world. In the UK,
for example, quite a few have closed in recent years and a few have also seen a shift in
business models away from retail lending to institutional lending platforms.
Exhibit 191: Closures of P2P lenders in the UK in recent years
Company Year of close Description

Octopus Choice 2021 Only available to institutional lenders. Closed P2P lending in 2021 and is winding down.
PropertyCrowd 2020 Stopped doing P2P lending in 2020, during the Covid-19 outbreak.
RateSetter 2020 Operations sold to Metro Bank.
Growth Street 2020 Closed as it couldn't meet its own liquidity targets. All lenders are fully paid off.
CrowdLords 2020 Decided to close after greater regulations relating to the particular way it structured its lending.
Wellesley 2020 Switched away from P2P lending years ago, but went bust in 2020.
Landbay 2019 Closed P2P business. Shifted focus to facilitating loans for financial institutions.
ThinCats 2019 Shifted from doing peer-to-peer lending in December 2019. It now only allows financial institutions to fund loans through it.
UK Bond Network 2019 UK Bond Network closed its doors to arranging new P2P loans in 2019.
BondMason 2019 Closed in 2019, stating it could no longer offer lenders the risk-reward balance it believed necessary. Most loans are already repaid.
FundingSecure 2019 Went into administration in October 2019 with a lot of bad debt outstanding.
The FSCS found in 2020 that company was mis-selling and individual lenders can now put in a claim for compensation. It went bust
Basset & Gold 2019
prior to this, in April 2019. Lenders haven't yet received any repayments or interest, and they will not be repaid in full.
Closed in 2019 with a lot of question marks hanging on it, such as whether it was properly ensuring that P2P lending was ring-
Lendy 2019
fenced from the businesses that Lendy itself owes.
Source: Investorschronicle.co.uk, Kotak Institutional Equities
China’s P2P lending industry: rise and fall
China’s first online lending platform PPDAI Group was launched in 2007 with new players
growing dramatically in run up to 2017. Retail investors flocked to these, attracted by
prospects of earning 8-12% interest rates, much higher than 2.75% rate offered by larger
banks. The trend was helped by China’s high savings rate. Capital started flooding the
industry from a variety of investors including state-owned enterprises, venture capital firms
and privately-listed companies. This pushed up valuations leading to more investors and
more P2P lenders. The size of the industry exceeded that in the US with the outstanding
loan balance growing to RMB1.3 tn from RMB100 bn 2014.

Banks Sector
The first cracks appeared in 2015 when one of the largest lenders went bust as it turned out
to be a Ponzi scheme, which US$9 bn in assets at its peak. Consequent scrutiny cast a
spotlight on imprudent and fraudulent practices in the industry. These included creating
fictional borrowers to form asset pools and channeling funds for own use, extending credit
without adequate risk assessment or operating as ‘shadow banks’, where companies offered
high interest rates from individual investors and lent to businesses at even higher interest
rates. Some of these products were packaged as wealth management products and sold online.
By 2016, Chinese regulators stepped in, mandating the appointment of a custodian bank,
full disclosure on the use of investments, and caps on the maximum lending amounts that
could be extended to individuals (RMB1 mn) and companies (RMB5 mn).
Exhibit 192: P2P lending in China has declined significantly from peak
Source: Wangdaizhijia, Kotak Institutional Equities
Exhibit 193: China’s P2P industry saw maximum troubles in 2016

Sector Banks
Advance Pay or Buy Now Pay Later (BNPL) – the next product that is getting
attacked currently
A payday loan is a very short term unsecured personal loan that comes at very high costs
(interest and fees). The amount disbursed is usually a function of the previous month’s
salary. There are several companies in the digital space that provide these loans but they
tend to be quite small from a balance sheet perspective. Also, the regulatory risk in this
model appears to be quite high considering that the break-even rates to make this business
profitable tend to be quite high (see Exhibit 194).
Exhibit 194: Map of US Payday Interest Rates
Source: Centre for Responsible Lending
Buy Now Pay Later

The BNPL lending model at the point-of-sale is undergoing a significant shift and there is a
strong argument from new players to move it away from traditional payment options like
credit cards. The key messaging to customers and merchants is indeed compelling, but it
remains to be seen if this can be scalable and whether the profit pool lies elsewhere.
BNPL has several variants but essentially, it is a loan against a specific purchase. A few BNPL
players offer limits, mirroring the characteristics of a personal loan while a few have
developed products that mirror a credit card by offering a ‘pay now’ feature as well.
Newer versions of BNPL are looking at building an integrated shopping experience that can
engage the customer through the entire value chain. These can be in the ‘super app’ format
or in other ways. Exhibit 195 shows a framework from McKinsey, which looks at the BNPL
segment through customer segmentation, size of opportunity and growth rates.

Banks Sector
Exhibit 195: McKinsey has developed a framework to analyze BNPL players
Source: McKinsey
BNPL players have been arguing that legacy payment instruments such as credit cards have
not evolved and struggle to provide a convenient experience while shopping. The limits
offered do not adequately address all customer segments and hidden charges on payments,
especially when delayed, are confusing for the card holder.
BNPL has seen greater acceptance with the younger generation who have found it easy to
use; the early success of this product was visible in the e-commerce sites. Several features
proposed by BNPL auger well for merchants and customers. Most of these features are
common to regular lending products, however, conventional lenders attach these offers to
larger ticket items like housing and auto loans while the BNPL model offers the same for
small ticket size items.
 Merchants stand to gain as there is better demand generation (better conversion rates
and lower number of abandoned carts) led by a higher number of customers. Not only is
the success rate higher, there is a higher repeat rate for these merchants. The merchant
solves the affordability problem by scheduling the payments over a much longer period.
This obviates the need to discount a product in order to boost sales, which helps build
credibility for high-end brands. Also, the average order value is higher as compared to a
customer who does not take a BNPL.
 Customers stand to gain as the ability to understand the repayment terms are easier. The
overall experience while taking credit is simple, seamless and quick. Initial plans offered
(14 day product or 2 months product) may have very low or no interest rate products.
Given the convenience of repayment terms offered, it becomes much easier to leverage
or buy a product that was otherwise not easily affordable. Customers don’t have to give a
lot of personal information and they are not locked into the kind of fees we see in credit
cards. In many markets, these transactions are not reported to the bureau, which implies
that the credit history of the borrower is not affected. This is not quite healthy given that
the lenders have an incomplete picture of indebtedness of the borrower.

Sector Banks
Exhibit 196: BNPL players attempt to offer a convenient experience while shopping
Affirm’s product offering
Source: Company
BNPL players offer a combination of 0%-interest-rate products as well as interest-rate-

bearing products. The duration of these loans differs across lenders. We see it ranging from
a month to more than a year depending on the nature of the product sold. The customer
segment has so far been dominated by younger buyers (Generation Z and millennials). A
behavior change in this cohort towards payments, especially switching from traditional
products like a debit or credit card, can result in a long period of elevated growth rates.
Most BNPL players argue that this trend is visible in places like Australia where the
outstandings of credit card have started to decline and there is a strong growth in customers
opting for BNPL.
Exhibit 197: Affirm today also offers a savings instrument as compared to its start as a BNPL player
Evolution in Affirm’s product offerings
Source: Company

Banks Sector
Affirm, AfterPay and Klarna are the biggest players, although this space has seen a lot of
players emerging over the past few years. We note that the technology cost for building this
product is not too high. The marketing cost to build the customer base is much more
expensive. Competition is highest in Europe, US and Australia markets where retail credit
penetration is already quite high.
Exhibit 198: France, Germany and UK have the most BNPL players
BNPL players in Europe
Austria Belgium France Germany Italy Netherlands Poland Portugal Romania Russia Spain Switzerland The Nordics UK
Source: Company websites, Paypers, Kotak Institutional Equities

Sector Banks
Exhibit 199: US leads in the number of players in BNPL in the American geography
BNPL players in the US
Brazil Canada Colombia Mexico United States
Exhibit 200: Africa still has only a few players

BNPL players in Africa and the Middle East
Bahrain Ghana Israel Nigeria Oman Saudi Arabia South Africa Turkey UAE

Banks Sector
Exhibit 201: Australia is the most competitive market for BNPL players
BNPL players in Asia and Australia
CIS Countries
(Uzbekistan and
Australia China Kazakhstan) Hong Kong India Indonesia Japan Malaysia New Zealand Philippines Singapore Taiwan Thailand Vietnam
PFCE is the market for BNPL products
Our report initiating coverage on SBI Cards and Payments, Swipe to earn, December 28,
2020, underscored the overlap between the target market for credit cards and for BNPL.
PFCE is a good proxy to understand the payment landscape. Exhibit 202 reflects the major
spend categories where the card can be used. As of FY2021, total PFCE (Private Final
Consumption Expenditure) was US$1.7 tn, which reflects a sizeable potential opportunity for
any payment product. Note that nearly all segments barring housing (notwithstanding the
rare players that offer rental payment options) can be potential areas for BNPL provided
there is adequate infrastructure. In India, it is difficult to determine which payment option
consumers will pick, different countries have shown different preferences despite similar
infrastructure.
Exhibit 202: BNPL use cases can be seen in nearly all segments below
Components of PFCE across the years, December year-ends, 2016-20 (%)
2016 2017 2018 2019 2020

Food and non-alcoholic beverages 29.2 30.4 29.5 28 .3 29.1
Alcoholic beverages, tobacco and others 2.4 2.3 2.2 2.3 2.1
Clothing and footwear 7.1 6.7 6.5 6.4 5.7
Housing 10.6 10.1 10.0 9.8 9.4
Water, electricity, gas and other fuels 4.3 4.1 4.1 4.0 3.9
Furnishing, household equipment and maintenance 3.0 3.0 3.0 3.0 2.8
Health 4.3 4.5 4.4 4.6 4.9
Transport 14.9 15.0 16.3 16.7 16.9
Communication 2.3 2.1 2.4 2.5 2.4
Recreation and culture 0.9 0.8 0.9 0.9 0.8
Education 3.9 4.0 4.3 4.5 4.7
Restaurants and hotels 2.0 2.0 2.0 2.1 2.1
Miscellaneous 15.0 14.9 14.5 14.9 15.3
Total 100.0 100.0 100.0 100.0 100.0
Source: CEIC, Kotak Institutional Equities

Sector Banks
BNPL and the flip side of opportunity
 Merchant acquisition model is cumbersome and slow. Most of the models that we
have seen involve the BNPL provider tying up with each merchant. In a typical merchant
payment set-up, the merchant usually has to tie up with one payment provider (usually
the POS or gateway provider) and the rest is set up with less effort. Customers may have
different banks but the back-end payment is usually processed through a Visa,
Mastercard, American Express, Diners, etc.
 Entry barriers are not too high. The cost to build a BNPL payment product is not too
high and the time taken to integrate the system with the merchant is low. The sign-up
process for a customer to a BNPL player is not too cumbersome. We have seen that
technology is not the major challenge here, the goal is convenience for the customer and
a better sale for the merchant. Lenders use very simple verification process to build this
product. Banks or traditional lenders are likely to enter the fray with their own offerings
as well that compete on similar terms with BNPL players.
 Switching cost for merchants and customers is easy. We believe the switching cost
between BNPL providers is low for merchants and we believe customers prize
convenience over product loyalty and sign-up with multiple BNPL players. Hence,
investment costs would continue to be high to reinforce customer engagement.
Merchant revenues as a share of GMV therefore has negligible scope for expansion and
profitability would arise over time from the lending side. However, if merchant revenues
as a share of GMC does begin to decline, BNPL would start mirroring a traditional credit
card product.
 Acquisition models lean heavily on product segment or merchant. Merchant

concentration is quite high in this business. BNPL products are better able to retain
customers compared to traditional products. The growth strategy is always driven by
expanding the merchant base which can be quite expensive, especially when we see more
players entering this segment, which gives merchants more options to work with. In
places where the dominance of the platform is higher than BNPL provider, the ability to
negotiate favorable terms declines sharply.
 Business in infancy, so too regulatory framework. As we see with many lending

products, a regulatory framework to emerge as this product gains scale. We note that
regulators in a few countries have already started to discuss this product in public forums,
particularly in areas like over-indebtedness and operating in spaces where the regulatory
oversight is low.
 Acquisition costs are higher. We see most BNPL players operating at a loss. These
companies are quite small currently and aggressively chasing growth primarily through
the equity dilution process. The acquisition strategy favored by BNPL players has been
branding, which has yielded success at lower costs than traditional methods.
 Customer segment not tested against cycles. These products are still untested against
cycles, which poses a substantial risk. The product has emerged from the Covid shock in
reasonable form, but we are far from concluding that the underlying underwriting
standard is robust. We note that the comfort of credit card underwriters has been built
on more than 50 years of history. Covid-19 may have dented economic growth
significantly but the consumer segment was largely unaffected despite high displacement
thanks in large part to extensive support by way of paycheck protection in several
geographies. BNPL sees tough competition in developed markets, but unemployment
benefits have helped sustain BNPL players through the Covid crisis.

Banks Sector
 Collection models are still developing. Most banks hesitate to enter into a customer
segment where the cost of servicing the customer is quite high. The cost of building
dedicated collection teams for small value accounts is prohibitive. A mobile or internet-
based model has a geographically dispersed customer base. Having a widespread
collection team, even if outsourced to third party agencies, is quite an expensive
proposition. Further, it is quite likely that collection costs are much higher than a typical
credit card product given that these customers may or may not have qualified for an
existing payment product like credit card.
 Single-product focus could make funding a challenge in times of stress. We note

that most of these companies are less leveraged than a typical NBFC, we would expect
this to be far higher. However, the models have to be tested when there is a liquidity
challenge, which usually coincides with asset quality stress as well.
BNPL’s simple business model
Exhibit 203 shows a schematic representation of the BNPL product. The BNPL has a tie-up
with a merchant by providing the requisite service of software to offer this product to their
customers. The BNPL provider integrates directly into the merchant’s website or point of sale
terminals. Merchants then provide this service to their customers. At the time of checkout,
the customer chooses the BNPL provider (see Exhibit 204) and the customer chooses the one
that is most convenient. There are three broad variants to this product (see Exhibit 205). A
short-term product that attracts no interest to loans with more than three years of
repayment period. After the approval process, the BNPL provider gives a go-ahead for the
merchant to ship the product to the customer. The BNPL raises a line of credit for the
borrower and settles the payment transaction (usually by the next day), after deducting the
merchant fee. At due dates, the BNPL gets the repayment from the borrower. Suitable
advance notice is given each time informing the borrower of the due date for the payment.
Exhibit 203: Schematic representation of the product chain
Source: Pymts.com

Sector Banks
Exhibit 204: The checkout process is simple and the customer is informed of the total cost of the purchase beforehand
Source: Company website, Kotak Institutional Equities
Exhibit 205: 0% APR product that is payable in 1.5 months to 3 years is the most popular product for BNPL players
Common products of most BNPL players
Source: Company website
 Pay in 3 or 4 installments over 2 months at no extra cost. The borrower essentially

makes the payment in three or four installments, which is usually spaced across two
months or within some defined interest free period (for example 30 days). The first
installment is usually taken at the time of the purchase.
The credit limit identification process is usually simple though there are differences in the
approach of different players. The leverage or limit for the customer is usually verified
through a soft check on the customer’s credit score in the bureau, though not all players
are equally diligent. BNPL does not affect a customer’s credit score given that there is no
hard check on the borrower till the time of default. The borrower is given the credit line
immediately. The borrower sets up the account through a payment charged in
subsequent weeks on their debit, credit card or net banking. If the borrower’s limit does
not allow for equal installments, then the borrower is given an option to make a higher
upfront payment.

Banks Sector
A late fee is charged when there is a default by the borrower. The charges are capped by
a dollar value or as a share of the overall cost of the purchase (25% of the order value).
The borrower’s default is then shared with the credit bureau for a credit rating
downgrade. The lender usually refers to a debt collector.
 Long-duration financing. BNPL companies like Affirm or Klarna offer long-duration

financing as well, which could range from 6 to 36 months. A hard credit enquiry is done.
These are all interest earning loans, the interest rate being similar to a credit card from
what we have seen. There is a late fee in this product.
BNPL in India: the promise and challenge of low credit penetration

Indian BNPL providers have a broadly similar approach to their global counterparts but they
differ in a few key aspects. Penetration of credit cards is low while credit history is paltry
given that most BNPL players prefer to set up a credit limit using a few verification
documents like PAN Card and/or Aadhar Card to set up the account. We do believe that a
few lenders perform more stringent checks with bureaus when they set up the limits for the
borrower. The early stage product (pay in 3 or 4 installments) is generally not the preferred
product and companies have comfort to offer a marginally higher duration product as well.
Repayment is done through multiple options including NACH. The credit cost is significantly
higher than we have seen in other countries. A comparison with global counterparts may
not be entirely fair as in India, the product has seen acceptance only in the recent past, a big
chunk of which has coincided with Covid. The revenue model is not too different but we
note that a few lenders charge a fee while setting up the account or when the customer
utilizes the loan product. Late fees are a norm, reflecting the cost of collection rather than
an additional revenue stream. One of the challenges that we see is that the cost of collection
is significantly higher for the ticket size offered for the loan.
Revenue model mostly driven by merchant fees

Most BNPL models have a few revenue streams:
 Fee income from merchants. All BNPL companies generate revenues from transaction
fees which are paid by the retail merchant. Merchant revenues are based on a percentage
of the order value and may also include a fixed transaction fee. The merchant discount
rate varies depending on the interest charged by the BNPL provider. A 0% APR would
have a higher MDR. Also, a product which requires a much longer duration would have a
higher MDR as well. A look at models across the world reveals 4-5% of the gross
merchandise value as the fees generated from the merchant.
 Late fees. Most BNPLs attempt to have a lower share from late fees and use this only to
cover the cost of collection of bad debts. Some countries have regulatory restrictions on
the quantum of late fees that can be charged for a product.
 Others. We have seen BNPL looking at product extensions. This would include providing
a credit line to merchants as well. A few have diversified into deposit or wealth
management products.
Klarna Holdings
Founded in 2005, Klarna’s key objective was to make it easier for customers to shop online
by reducing the cash flow burden for the customer and improving the sales volume for the
merchant. The company provides smarter and more flexible shopping and purchase
experiences to 90 mn active consumers across more than 250,000 merchants in 17
countries. Klarna offers direct payments, pay after delivery options and installment plans in a
smooth one-click purchase experience that lets consumers pay when and how they prefer.

Sector Banks
Exhibit 206: GMV has grown at 35% CAGR Exhibit 207: Robust growth in revenues at >30% CAGR
GMV and growth for Klarna, December year-ends, 2018-21 Revenues and growth for Klarna, December year-ends, 2018-21
GMV (LHS) Growth (RHS) Revenues (LHS) Growth (RHS)

(SEK bn) (%) (%)
(SEK bn)
500 60 11.0 60
400 48 8.8 48
300 36 6.6 36
200 24 4.4 24
100 12 2.2 12
252 332 48 4 328 5.5 7.2 10.0 6.3

- - - -
2018 2019 2020 1HFY21 2018 2019 2020 1HFY21
Exhibit 208: Commission income from customers is declining, Exhibit 209: Average duration of the loan book is low at 40-45
while that from merchants is increasing days as compared to other large BNPL players
Gross commission income from two sources, December year-ends (% Duration of loan book, December year-ends (days)
of GMV)
Retailer Consumer 50
45
1.25
40
1.21 40
1.00 1.09
1.04
30
0.75
0.55
0.49 20
0.50
0.38
10
0.25
0
0.00 2019 2020
2018 2019 2020

Banks Sector
Exhibit 210: Merchant revenue is ~1.5% of GMV and is ~75% of the revenue stream
Break-up of revenues based on GMV, June year-ends, 2018-21 (%)
2018 2019 2020 1HFY21

Net interest income 0.7 0.7 0.6 0.5
Interest income 0.8 0.8 0.7 0.6
Interest expense 0.1 0.1 0.1 0.1
Non-interest income 1.5 1.4 1.5 1.5
Net commission income 1.5 1.4 1.5 1.5
Total revenues 2.2 2.2 2.1 1.9
Operating expenses 1.8 1.9 1.9 1.9
General admin. Expenses 1.7 1.8 1.8 1.8
Operating result before net credit losses 0.4 0.2 0.2 0.0
Net credit losses 0.3 0.6 0.5 0.6
Loans to credit institutions 0.0 0.0 0.0 (0.0)
Loans to the public 0.3 0.6 0.5 0.6
Financial guarantees and commitments 0.0 (0.0) 0.0 (0.0)
Operating result 0.1 (0.3) (0.3) (0.5)
Income tax 0.0 (0.1) (0.1) (0.1)
PAT 0.0 (0.3) (0.3) (0.4)
Afterpay Holdings
This company began its operations in CY2015 and is one of the leading BNPL players in the
world. Its principal started in Australia, but the company has since diversified into New
Zealand, UK, US and Canada. It has delivered rapid growth in the past six years. As a BNPL
player, its revenue model is based primarily on its merchant business, where the company
earns a fee based on the percentage of total merchant sales. Since 2015, the company has
seen an increase of 100% CAGR in GMV, ~80% CAGR in active customers and 75% CAGR
in the total number of merchants.
In August 2021, the business was acquired by Square Inc for a hefty premium of US$29 bn.
Afterpay had revenues of US$665 mn in FY2021 and an operating loss of US$120 mn. The
company had a GMV of US$16 bn, an active customer base of 16 mn and 0.1 mn
merchants.
Exhibit 211: GMV has grown at 100% CAGR Exhibit 212: A solid 80% CAGR in growth of active clients
GMV and growth for AfterPay, June year-ends, 2017-21 Active clients and growth for AfterPay, June year-ends, 2017-21
(AUD bn) GMV (LHS) Growth (RHS) (%) (mn) Active clients (LHS) Growth (RHS) (%)
25 350 18.0 210
170
20 280 14.4
130
15 210 10.8
90
10 140 7.2
50
5 70 3.6
10
- 0 - -30
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021

Sector Banks
Exhibit 213: 75% CAGR in merchants on-boarded since FY2017 Exhibit 214: Revenues have grown at 100% CAGR since FY2017
Merchants and growth, June year-ends, 2017-21 Revenues and growth for AfterPay, June year-ends, 2017-21
Merchants (LHS) Growth (RHS) Afterpay (LHS) Pay Now (LHS)

(`000) (%)
120 210 Other (LHS) Growth (RHS)
(AUD$ mn) (%)
1,000 450
96
800 360
140
72
600 270
48
70 400 180
24 200 90
- 0 0 0
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021
We are not looking at period ending receivables given the extremely short duration of these
loans and so GMV is probably a better indicator. Exhibit 205 shows the break-up of the
income statement based on GMV. AfterPay generates ~4% of GMV as revenues and this is
~90% of the overall fees. The company has an operating loss currently as the business is still
in a strong growth phase. The company has consistently raised capital to fund this
expansion. Loss rates or the provision for bad loans represent~25% of the revenues. Exhibit
216 shows the income statement based on per active customer basis. Afterpay is currently
losing AU$10/customer and generates revenues of ~AU$55-60.
Exhibit 215: Merchant revenue is ~4% of GMV and is ~90% of the revenue stream
Break-up of revenues based on GMV, June year-ends, 2017-21 (%)
2017 2018 2019 2020 2021

Afterpay income 4.1 4.0 3.9 3.9 3.7
Pay Now revenue ― 1.2 0.3 0.1 0.1
Other income 1.1 1.3 0.9 0.6 0.4
Total income 5.2 6.5 5.1 4.7 4.1
Cost of sales 0.9 1.3 1.1 1.2 1.1
Gross profit 4.2 5.2 3.9 3.5 3.0
Depreciation and amortisation expenses 0.5 0.8 0.4 0.3 0.2
Employment expenses 1.2 1.0 1.0 0.8 0.7
Share-based payment expenses ― 0.7 0.6 0.3 0.3
Receivables impairment expenses 1.5 1.5 1.1 0.9 0.9
Net loss on financial liabilities at fair value ― ― ― 0.0 0.4
Operating expenses 3.6 1.2 1.4 1.3 1.3
Operating loss (2.5) (0.1) (0.6) (0.0) (0.7)
Share of loss in associate ― ― ― 0.0 0.0
Gain on dilution of shareholding in associate ― ― ― ― 0.0
Finance income 0.1 0.0 0.0 0.0 0.0
Finance costs 0.1 0.3 0.2 0.2 0.2
Preofit before tax (2.6) (0.3) (0.8) (0.2) (0.9)
Income tax benefit (0.9) 0.1 0.0 (0.0) (0.2)
Profit after tax (1.7) (0.4) (0.8) (0.2) (0.7)

Banks Sector
Exhibit 216: AfterPay is currently losing AU$12/customer and generates revenues of ~AU$70
Break-up of revenues based on per active customer, June year-ends, 2017-21 (AU$)
2017 2018 2019 2020 2021

Afterpay income 29 57 58 60 63
Pay Now revenue ― 16 5 2 1
Other income 8 18 13 9 7
Total income 36 92 77 72 71
Cost of sales 7 18 17 19 19
Gross profit 30 74 59 53 52
Depreciation and amortisation expenses 3 11 6 4 3
Employment expenses 8 14 15 12 12
Share-based payment expenses ― 11 9 4 5
Receivables impairment expenses 10 21 17 13 15
Net loss on financial liabilities at fair value ― ― ― 0 7
Operating expenses 25 17 21 20 23
Operating loss (17) (1) (9) (1) (13)
Share of loss in associate ― ― ― 0 0
Gain on dilution of shareholding in associate ― ― ― ― 0
Finance income 0 0 0 0 0
Finance costs 1 4 3 3 3
Preofit before tax (18) (5) (12) (4) (15)
Income tax benefit (6) 1 0 (1) (3)
Profit after tax (12) (6) (13) (3) (12)
Affirm Holdings Inc
Affirm Holdings is one of the largest BNPL players based primarily in the US. Their business
operations are quite similar to AfterPay in terms of product offerings. However, the key
difference is that the revenue stream does have a higher concentration from a single client.
The company started as a pay later product and has since widened its product offerings.
They also provide a virtual card, split pay, market place (e-commerce) that is tailored to each
consumer’s preferences and savings account. Growth has been quite strong in recent years
on GMV and active customers. The average transaction on Affirm is higher as compared to
our observation of AfterPay.

Sector Banks
Exhibit 217: GMV has grown 80% CAGR Exhibit 218: Stellar 85% CAGR in growth of active clients
GMV and growth for Affirm, June year-ends, 2019-21 Active clients and growth for Affirm, June year-ends, 2019-21
9.0 Active customers (LHS) Transactions/customer (RHS)

(mn)
7.5 3.0
7.2
6.0 2.4
5.4
4.5 1.8
3.6
3.0 1.2
1.8 1.5 0.6
- - -
2019 2020 2021 2019 2020 2021
Exhibit 219: 75% CAGR in merchants on-boarded since FY2019 Exhibit 220: Merchant revenue to GMV is stable at 5%
Revenue break-up, June year-ends, 2019-21 Merchant revenue to GMV, September year-ends, 2019-21
Servicing income Gain on sales of loans 6.0

Interest income Virtual card network revenue
Merchant network revenue
100 4.8
80
45 37 3.6
37
60
2.4
40
50 50 1.2
20 44
0 -
2019 2020 2021 2019 2020 2021
The numbers of AfterPay and Affirm are not directly comparable as they appear to be
presented differently. Affirm purchases all loans it has sourced for the bank with which the
transaction is initially structured. However, as a share of GMV, the merchant revenue is ~5%
which is higher than AfterPay. We believe this is on account of the nature of the product
that is sold which has a higher average order value, longer repayment period and a possibly
higher share of 0% APR products. Loss rates are higher although the performance in
FY2021 has been quite strong.

Banks Sector
Exhibit 221: Affirm generates ~5% on merchant revenue with a similar loss rate in FY2021
Break-up of revenues based on share of GMV, June year-ends, 2017-21 (%)
2019 2020 2021

Revenue
Merchant network revenue 5.1 5.5 4.6
Virtual card network revenue 0.3 0.4 0.6
Total network revenue 5.4 6.0 5.2
Interest income 4.6 4.0 3.9
Gain on sales of loans (0.0) 0.7 1.1
Servicing income 0.2 0.3 0.3
Total revenue 10.1 11.0 10.5
Operating Expenses
Loss on loan purchase commitment 2.8 3.5 3.0
Provision for credit losses 3.0 2.3 0.8
Funding costs 1.0 0.7 0.6
Processing and servicing 1.2 1.1 0.9
Total transaction costs 8.0 7.5 5.3
Technology and data analytics 2.9 2.6 3.0
Sales and marketing 0.6 0.5 2.2
General and administrative 3.4 2.6 4.3
Total Operating Expenses 15.0 13.3 14.7
Operating Income / (Loss) (4.9) (2.3) (4.3)
Other income, net 0.3 (0.1) (0.7)
Income / (Loss) Before Income Taxes (4.6) (2.4) (4.9)
Income tax expense (benefit) (0.0) 0.0 (0.0)
Net Income / (Loss) (4.6) (2.4) (4.9)
Exhibit 222: Affirm generates US$50 from each active customer while losses are still high
Break-up of earnings based on per active customer (average), June year-ends, 2017-21 (US$)
2019 2020 2021

Revenue
Merchant network revenue 64.7 90.7 70.7
Virtual card network revenue 3.9 6.8 9.3
Total network revenue 68 .6 97.5 8 0.0
Interest income 58 .4 65.9 60.8
Gain on sales of loans (0.2) 11.3 16.7
Servicing income 2.5 5.2 4.6
Total revenue 129.3 179.9 162.1
Operating Expenses
Loss on loan purchase commitment 35.9 57.0 45.9
Provision for credit losses 38 .2 37.1 12.3
Funding costs 12.7 11.4 9.8
Processing and servicing 16.0 17.6 13.7
Total transaction costs 102.7 123.1 81.7
Technology and data analytics 37.2 43.2 45.7
Sales and marketing 8 .2 8 .8 34.0
General and administrative 43.5 42.8 66.6
Total Operating Expenses 191.6 218 .0 228 .1
Operating Income / (Loss) (62.3) (38 .1) (66.0)
Other income, net 3.4 (1.6) (10.1)
Income / (Loss) Before Income Taxes (58 .9) (39.6) (76.0)
Income tax expense (benefit) (0.0) 0.1 (0.4)
Net Income / (Loss) (58.9) (39.8) (75.6)

Sector Banks
Zip Inc.
Zip is another leading player in this space. Established in 2013, it has a presence in multiple
geographies with Australia being its primary source of business. The company offers
point‑of‑sale credit and payments to customers and finance to merchants in the retail,
education, health and travel industries.
Zip provides a line of credit through the Zip digital wallet. It has two products: Zip Pay (with
limits up to AU$1,500) and Zip Money (with limits up to AU$50,000). Revenue is generated
from merchants (merchant service fees) and consumers (predominantly monthly fees,
establishment fees and interest). Zip also offers a Buy Now Pay Later (BNPL) service. Zip has
~50,000 SMEs. Zip provides two primary products here: (1) an interest-free digital wallet of
up to AU$25,000 and (2) unsecured business loans (AU$20K-500K).
Exhibit 223: Zip Pay and Zip Money are the company’s two flagship products
Source: Company website

Banks Sector
Exhibit 224: GMV has grown at 125% CAGR since 2017 Exhibit 225: Customers have grown at 120% CAGR since FY2017
GMV and growth for Zip, June year-ends, 2017-21 Active clients and growth for Zip, June year-ends, 2017-21
(AUS $bn) GMV Growth (%) (mn) Active customers Growth (%) (%)
(%)
7.0 200 8.0 300
5.6 160 6.4 240
4.2 120 4.8 180
2.8 80 3.2 120
1.4 40 1.6 60
- 0 0.0 0
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021
Exhibit 226: ~80% CAGR in merchants signed in past five years Exhibit 227: Revenue to GMV is high at 7%
Merchants and growth for Zip, June year-ends, 2017-21 Revenues to GMV for Zip, June year-ends, 2017-21 (%)
Active merchants Growth (%) 8.0

(`000) (%)
60 120
6.4
48 96
4.8
36 72
3.2
24 48
12 24 1.6
0 0 0.0
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021

Sector Banks
Exhibit 228: Zip generates ~7% on merchant revenue with a similar loss rate in FY2021
Break-up of revenues based on share of GMV, June year-ends, 2017-21 (%)
2017 2018 2019 2020 2021

Revenues
Portfolio Income 7.1 7.2 7.5 7.5 6.9
Other income 0.2 0.2 0.1 0.1 0.0
Net Portfolio Income 7.4 7.4 7.6 7.6 7.0
Cost of Sales
Interest expense 4.5 2.4 2.1 1.9 1.0
Bad and doubtful debts 2.3 2.4 2.0 2.6 2.1
Bank fees and data costs 1.1 0.7 0.5 0.5 1.2
Amortisation of funding ― ― 0.1 0.1 0.1
Total Cost of Sales 7.8 5.6 4.7 5.0 4.5
Fair value gain on investment ― ― ― (2.3) 6.6
Total expenditure 8 .6 6.0 3.9 3.5 14.9
Profit before tax (9.0) (4.2) (1.0) (1.0) (12.4)
Income tax (0.2) ― ― (0.0) (1.1)
Profit after tax (8.8) (4.2) (1.0) (0.9) (11.3)
Exhibit 229: Zip generates US$85 from each active customer while losses are still high
Break-up of earnings based on per active customer (average), June year-ends, 2017-21 (US$)
2017 2018 2019 2020 2021

Revenues
Portfolio Income 54.6 75.6 8 0.6 92.3 8 5.7
Other income 1.9 2.2 1.3 1.0 0.1
Net Portfolio Income 56.4 77.8 82.0 93.3 85.8
Cost of Sales
Interest expense 34.1 25.1 22.5 22.9 12.5
Bad and doubtful debts 17.6 25.4 21.5 31.6 26.4
Bank fees and data costs 8 .1 7.6 5.4 6.4 15.2
Amortisation of funding ― ― 1.1 1.1 1.1
Total Cost of Sales 59.7 58.0 50.5 62.0 55.1
Fair value gain on investment ― ― ― (27.9) 8 1.7
Total expenditure 65.6 63.1 42.4 43.5 18 3.5
Profit before tax (68.9) (43.4) (10.9) (12.1) (152.8)
Income tax (1.8 ) ― ― (0.4) (13.9)
Profit after tax (67.0) (43.4) (10.9) (11.7) (139.0)

Banks Sector
HEALTHY FUNDING ENVIRONMENT

After a tepid 2020, 1HCY21 started off exceedingly well from a fintech investment perspective. Deal
momentum was quite healthy in 2018-19 but slowed post Covid-19 but has since recovered. Covid has
accelerated the transformation as demand from customers for these new products has increased. The shape
of deals is shifting towards large sizes and even listing. Outside of payments, blockchain or crypto is evincing
greater interest. These trends are true for India, but payments still have a higher preference.
Deal momentum suggests that capital is not a worry

There is no dearth of capital coming into the sector as investments into fintech companies
have been rising quite rapidly. BIS has estimated that the total capital that has come into
these companies has probably crossed US$1 tn since CY2010. BIS research, Funding for
fintechs: patterns and drivers, September 2021 suggests that activity levels are rising in
emerging markets, notwithstanding the fact that developed markets like US, Europe and
countries like China and Australia have long been the favored destinations. Also, primary
factors that account for countries attracting large pools of capital include better regulatory
frameworks, higher financial development and the ability to spur innovation. We would add
that the per capita income in these economies is high enough to allow companies to focus
on building solutions for these large markets.
In terms of investments by stages (VC, M&A and PE) we note that M&A is much larger as it
tends to be when a business model or idea is well established. In recent years, we have seen
a marked increase in listing through SPAC (Special Purpose Acquisition Company) or there is
greater interest from existing commercial banks or these companies have reached a point
where they can be listed. VC/PE funding tends to focus younger companies.
Exhibit 230: Fintech activity has bounced back well after a sharp Exhibit 231: Demand has bounced back in CY2021 in fintech in
decline in 2020 India
Total investment activity (VC, PE and M&A) in global fintech, 2014- Total investment activity (VC, PE and M&A) in fintech - India, 2014-
1CFY21 (US$ bn) 1CFY21 (US$ mn)
Venture capital M&A PE 4,000

3,58 8
250
3,200 2,8 98
200
2,450 2,493
2,400 2,210
150 2,055
100 1,600
994
50 800
196
0 -
2014
2015
2016
2017
2018
2019
2020
1HCY21
2014
2015
2016
2017
2018
2019
2020
1HFY21
Source: KPMG - Pulse of fintech, Kotak Institutional Equities Source: KPMG - Pulse of fintech, Kotak Institutional Equities
Two FT Partners reports – 2020 Annual Fintech Almanac and 2019 Annual Fintech Almanac,
show a marked increase in deal sizes in the past few years for fintech financing. There is very
high demand from venture capital and private equity in these companies. We also see
incumbent players playing a critical role in investing in these companies, either directly or
through their investment vehicles. Listings have also accelerated in recent years. The median
age for listing is ~11 years as per the FT Partners reports. We have seen a sharp rise in
listings through SPAC and the normal IPO process. With the current availability of capital, it
is quite possible to delay a listing, especially if the business is able to grow at a much faster
pace while consuming less capital on its journey.

Sector Banks
Exhibit 232: We have witnessed a spate of companies that have listed through SPACs from various segments of financial services
Listing through SPACs, 2019-20
Source: FT Partners
Exhibit 233: Listings have started to accelerate as business models have reached a point of acceptance by investors in the listed space
A non-exhaustive illustration of listing through IPOs, 2019-1HCY21
Source: FT Partners
Fintech funding in India is also showing great promise. 1HCY21 has already seen a massive
rebound in funding. In the past, we have noted that the first preference of fintech players is
the payment space, followed by insurance. A few companies like Paytm, Mobikwik and Fino
Payments are now testing the secondary market through IPOs. The private equity/venture
capital market is quite active with a lot of deals as these companies (payment companies like
PhonePe, Pine Labs, RazorPay, Cred) are getting ready for a strong phase of growth. There is
a similar interest in the lending business as well, with operators such as OfBusiness, BNPL
companies like Zest Money, KreditBee, BharatPe and a slew of digital/neo banks. The other
area of interest leads us to insurance tech (Digit, Acko, Turtlemint) and wealth tech (Upstox,
Groww, Indmoney).

Banks Sector
"Each of the analysts named below hereby certifies that, with respect to each subject
company and its securities for which the analyst is responsible in this report, (1) all of the
views expressed in this report accurately reflect his or her personal views about the subject
companies and securities, and (2) no part of his or her compensation was, is, or will be,
directly or indirectly, related to the specific recommendations or views expressed in this
report: M B Mahesh, Nischint Chawathe, Abhijeet Sakhare, Ashlesh Sonje, Dipanjan
Ghosh."

Sector Banks
Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.
60%
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided
50%
investment banking services within the previous 12 months.
40% * The above categories are defined as follows: Buy = We expect

32.3% this stock to deliver more than 15% returns over the next 12
30.0%
30% months; Add = We expect this stock to deliver 5-15% returns
21.8% over the next 12 months; Reduce = We expect this stock to
deliver -5-+5% returns over the next 12 months; Sell = We
20% 15.9% expect this stock to deliver less than -5% returns over the next
12 months. Our target prices are also on a 12-month horizon
10% basis. These ratings are used illustratively to comply with
2.7% 2.3% 2.3% applicable regulations. As of 30/09/2021 Kotak Institutional
0.0% Equities Investment Research had investment ratings on 220
0%
equity securities.
BUY ADD REDUCE SELL
Source: Kotak Institutional Equities As of September 30, 2021
Analyst coverage
Companies that the analyst mentioned in this document follow
Covering Analyst: MB Mahesh
Company name Ticker
AU Small Finance Bank AUBANK IN
Axis Bank AXSB IN
Bandhan Bank BANDHAN IN
Bank of Baroda BOB IN
Canara Bank CBK IN
City Union Bank CUBK IN
DCB Bank DCBB IN
Equitas Small Finance Bank EQUITAS IN
Federal Bank FB IN
HDFC Bank HDFCB IN
ICICI Bank ICICIBC IN
IndusInd Bank IIB IN
Karur Vysya Bank KVB IN
Punjab National Bank PNB IN
RBL Bank RBK IN
SBI Cards and Payment Services SBICARD IN
State Bank of India SBIN IN
Ujjivan Small Finance Bank UJJIVANS IN
Union Bank UNBK IN
YES Bank YES IN
Source: Kotak Institutional Equities research

Banks Sector
Ratings and other definitions/identifiers

Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our Fair Value estimates are also on a 12-month horizon basis.
Our Ratings System does not take into account short-term volatility in stock prices related to movements in the market. Hence, a particular Rating may not strictly be in
accordance with the Rating System at all times.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations:
Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and fair value, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak
Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in
certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and fair value, if any, for this stock, because there is not a sufficient fundamental
basis for determining an investment rating or fair value. The previous investment rating and fair value, if any, are no longer in effect for this stock and should not be relied
upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

Corporate Office Overseas Affiliates
Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc
27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 369 Lexington Avenue
Bandra Kurla Complex, Bandra (E) 155-157 Minories 28th Floor, New York
Mumbai 400 051, India London EC3N 1LS NY 10017, USA
Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1 212 600 8856
Copyright 2021 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and
2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject
company, public appearances and trading securities held by a research analyst account.
3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in
the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at vinay.goenka@kotak.com.
This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the
Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore
048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of
Singapore.
Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are
leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a
significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other
business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or
companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our
research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited
generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that
the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of
any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect
opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the
recommendations expressed herein.
In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important
information regarding our relationships with the company or companies that are the subject of this material is provided herein.
This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not
soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the
particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is
suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go
down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original
capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment.
Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all
investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions
expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory,
compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this
material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Kotak
Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to
or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or
income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition
options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any
derivative transactions.
Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock
Exchange of India Limited (MSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange(MCX). Our businesses include stock broking, services rendered
in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.
Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited
is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor
registered with Association of Mutual Funds in India (AMFI). Kotak Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.
We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI,
Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on KSL for certain operational
deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point
of time.
We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us
Details of Associates are available on website i.e. www.kotak.com
Research Analyst has served as an officer, director or employee of subject company(ies): No
We or our associates may have received compensation from the subject company(ies) in the past 12 months.
We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES. Visit our website for more details
We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our
associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the
past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report.
Our associates may have financial interest in the subject company(ies).
Research Analyst or his/her relative's financial interest in the subject company(ies): No
Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: YES
Nature of Financial interest: Holding equity shares or derivatives of the subject company.
Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of
Research Report.
Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of
publication of Research Report: No
Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of
Research Report: No
Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report.
A graph of daily closing prices of securities is available at https://www.moneycontrol.com/india/stockpricequote/ and http://economictimes.indiatimes.com/markets/stocks/stock-quotes.
(Choose a company from the list on the browser and select the"three years" icon in the price chart).
Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22
43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg,
Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No. INZ000200137(Member of NSE, BSE, MSE, MCX & NCDEX). Member Id: NSE-08081; BSE-673; MSE-1024;
MCX-56285; NCDEX-1262. AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal.
Call: 022 - 4285 8484, or Email: ks.compliance@kotak.com. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
In case you require any clarification or have any concern, kindly write to us at below email ids:
Level 1: For Trading related queries, contact our customer service at ‘service.securities@kotak.com’ and for demat account related queries contact us at ks.demat@kotak.com or call us on:
Toll free numbers 18002099191 / 1860 266 9191
Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on 022-42858445 and if you feel you are
still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208.
Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: Mr. Manoj Agarwal) at
ks.compliance@kotak.com or call on 91- (022) 4285 8484.
Level 4 : If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach Managing Director / CEO (Mr. Jaideep Hansraj) at ceo.ks@kotak.com or
call on 91-(022) 4285 8301.
First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been
verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject.
There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability
for the contents of the First Cut Notes.

(Kotak) 30nov21 - Banks1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

(Kotak) 30nov21 - Banks1

Uploaded by

Copyright:

Available Formats

Company Report

Open season on old ways: unbundle/re-bundle, big/small, fintech/big tech, novel/conventional

Executive summary: Fintech drivers, models and implications ................. 3

Market capitalization: Fintech flexes muscle ......................................... 12

India fintech: The lending challenge ..................................................... 18

Tech to unpack and repackage financial services .................................. 28

Fintechs: Challenging the status quo .................................................... 41

Payments: Paving the way for non-banks ............................................. 44

New age banks or digital lenders .......................................................... 87

Healthy funding environment ............................................................. 136

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

EXECUTIVE SUMMARY: FINTECH DRIVERS, MODELS AND IMPLICATIONS

Fintech innovators enter investment portfolios

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Source: Company, Kotak Institutional Equities

India fintech: key differentiators

 Digital payments solutions catching on slowly, steadily with consumers. In

 Omni-channel solutions: expensive but crucial. In recent years, merchant resistance to

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

 Cross-selling is an integrated part of the model, at an early stage in India.

 Scalability and stickiness are not necessarily interchangeable. Interoperability of

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

Source: RBI, NPCI, Kotak Institutional Equities

Open banking: benefits for account aggregators/Indian avatars

 Under-penetration of credit products warrants a fresh new look. Traditional

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

 Traditional borrowing will undergo a change. India is creating a market structure

 No immediate threat to traditional lenders. The opening up of new avenues of

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

Digital opportunity can be tapped by many models

Exhibit 8: Taxonomy of the fintech environment

Source: BIS, Kotak Institutional Equities

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Company presentation

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

Exhibit 10: Open banking schematic

Source: McKinsey report on Open Banking

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

 Supportive regulator looking kindly on competition. The Aadhar-based platform in

 Decision making is quicker. Large organizations struggle to take decisions fearing

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

MARKET CAPITALIZATION: FINTECH FLEXES MUSCLE

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Bank AMC Capital markets Bank AMC Capital markets

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Payment companies see superior valuations, performance

(X) 12M fwd P/B 12M fwd RoE (RoE) 7.0

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Revenue pools are different across countries

Source: McKinsey Global Payments Map

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17

INDIA FINTECH: THE LENDING CHALLENGE

Debit card fees, 50 AMC fees, 90

Credit card fees,

Lending fees, 160

Lending NII, 2,400

Source: Company, Kotak Institutional Equities

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Disruption: market to expand, no opportunity loss for existing players

Lending-based fintech models: wariness warranted