Should you subscribe to Fino Payments Bank IPO?

The IPO of Fino Payments Bank (Fino), one of the few profitable payments bank, opens on October 29, 2021. The offer worth ₹1,200 crore, comprises a fresh issue of ₹300 crore and the rest is an offer for sale. Post issue the holding company (Fino Paytech) retains 75 per cent stake.

Principal shareholders of the holding company include marquee names such as ICICI Bank, Intel Capital Corporation, International Finance Corporation, Blackstone GPV Capital Partners (Mauritius) VI-B FDI and Bharat Petroleum Corporation.

Despite the regulatory curbs on lending activities for payments banks, and heavy reliance on transaction based fees and commissions for revenue, Fino’s unique business model has helped drive profitability for the company, juxtaposed to several other payment banks that have either exited the business or are at the brink of extinction.

With an asset light and partnership based approach to scalability, the company has finally seen operating leverage kick in, starting FY21. That said, investors also need to take note that company reached profitability only in FY21 and has a limited history of profits.

However, its reach in unbanked segments of the country, and the current under-penetration leaves large head room for growth. Besides, its technology driven business model, about 15 years of experience into the payments technology related businesses (however commenced operations as payments bank from 2017 onwards), and elimination of credit risks (even while cross- selling loans and other products), are other key positives of their business model.

Also read: Fino Payments Bank IPO to open on October 29

At the price band of ₹560-577 apiece, the company is valued at 6.2 to 6.4 times its FY21 revenue, which seems reasonable given its growth prospects and operating leverage. While Fino’s business touch points, deposits mobilised, are much lower compared to the top three payments banks – PayTM Payments Bank, India Posts Payments Bank, Airtel Payments Bank, its transaction volumes and value, fare better than the rest (barring PayTM Payments). Given these factors, investors with an appetite for risk, can subscribe to the issue for the long term.

Business and opportunities

The company is essentially a fintech player that offers diverse range of financial products and services that focus on payments and are predominantly digital. Through their pan-India merchant network (spread across 90 per cent of the districts across the country), the company caters to the banking requirements of those in rural and unbanked areas.

The products and services offered include Current Accounts and Savings Accounts (CASA), debit cards, domestic remittances, open banking functionality, withdrawing and depositing cash via micro-ATM or Aadhaar Enabled Payment System (AePS).

The company also offers Cash Management Services (cash collection and payment services across physical channels, like collections of loan EMIs, to help digitise cash for clients who manage significant volumes of cash) for 97 clients that include NBFCs and other companies across logistics, e-commerce, and other industries.

Given the regulatory mandate to limit end of day balances in customer accounts of Payment banks to ₹2 lakh, Fino also provides sweep in facilities (in association with Suryoday Small Finance Bank).

Besides, the company also has 17,430 active business correspondents across the country that provide banking products and services (such as EMI collections and payment services) on behalf of other banks (such as Union Bank of India, ICICI Bank and Canara Bank), at locations other than traditional bank branches. The company also has 54 branches and 130 customer touch points in its service ecosystem.

Juxtaposed to traditional banks, payment banks cannot offer loans directly to customers. However, Fino’s merchants also cross-sell other financial products and services such as third party gold loans, insurance, making bill payments and recharges to their customers.

For all of the above products and services (including opening of a savings account), Fino derives revenue in the form of fees (fixed one time subscription charges or transaction based or annual fees) and commissions (ranging from 0.26 to 1 per cent per transaction) which are shared with the merchants and API partners (who aid in merchant on-boarding).

As of June 30, 2021, the company has onboarded 7,24,671 merchants (own and API), which are typically located in tier-2 and tier-3 towns. The company’s business model stands out among other payments banks in their merchant on-boarding process.

Instead of merely providing them with a payment processing infrastructure, Fino converts merchants into local banking partners who while enabling trustworthy banking services to its customers, earn a share in the transaction fees and commissions.

Also read: Fino Payments Bank gets SEBI nod to float IPO

Besides, with the merchants bearing the cost of acquisitions (including the cost of micro-ATM and AePS devices), Fino’s customer on-boarding becomes inexpensive, and their business model remains asset light. Scalability of revenue for the company is dependent on merchant on-boarding (and training) and technological scalability.

Currently, the company’s merchant network is skewed towards North (52 per cent of the company’s total network) and Western (28 per cent) part of the country.

The company plans to scale- up its presence in South (12 per cent) and Eastern markets (9 per cent) as well going ahead. Besides to expand its revenue streams, it also plans to launch other product offerings such as referrals for merchant loans and consumer loans (commenced from FY22) and foreign remittances (expected to launch in FY23).

Risks

However, akin to scheduled commercial banks (SCBs) the business model of Fino faces the risk of regulatory gauntlet being thrown at them. By virtue of being a payments bank, the regulatory requirements are more stringent than SCBs – limit on end of day balances in customer deposits and ceiling on transaction fees (for instance the transaction fee of 0.5 per cent on micro- ATMs is capped at ₹15 per transaction), could limit their revenue scalability despite rise in per transaction value.

Besides an SLR requirement of 75 per cent of demand deposits compared to 18.5 per cent in the case of SCB, also restricts growth in investment income.

That apart in the past, the RBI has mulled over transitioning to a zero merchant discount rate (MDR, essentially the fees earned by Fino on various transactions) scenario, which was however shelved as it could impact financial inclusion plans in the country. While far-fetched, zero MDR regime could be a long tail risk for the company, given its likely impact on the revenues for payment banks.

Another potential risk to note is the threat of losing business/revenue to costless transaction platforms such as the UPI. However the growing cash in circulation in the economy safeguards the company against this threat. This is because Fino enables digitisation of physical cash for the large unbanked customers as against UPI’s dependency on banked/digital currency.

Thus while broadly the risk-reward is favourable now, long term investors need to keep a watch on regulatory and competitive dynamics in the industry.

Financials and outlook

Fino had an average take rate of 60 basis points per transaction (in FY21). The company’s top-line grew at a compounded annual growth rate (CAGR) of 46 per cent to ₹791 crore over FY19-21.

Much of the fillip came from the pandemic led push for digital transactions – remittances (own and API led) formed 32 per cent of FY21’s revenue, followed by 22 per cent from micro-ATMs and 11 per cent from AePS transactions. In FY21 the company’s merchant tie ups also soared to 6.4 lakh from 2.8 lakh in FY20 and 1.0 lakh in FY19.

Also read: Fino Payments Bank to continue its focus on ‘emerging India’

In FY21, being the only profitable year, the company posted an EBITDA of ₹79.2 crore (10 per cent of revenue) and profit after tax (PAT) of ₹20.5 crore (3 per cent of revenue).

In the recent June quarter, the company’s revenue grew by 36.3 per cent (year on year) to ₹206.2 crore and it posted a PAT of ₹3.1 crore, compared to ₹1.9 crore in the corresponding quarter last year. The bank’s CRAR is already well above the regulatory requirement of 15 per cent – at 54.8 per cent at the end of June 2021 quarter (pre-issue).