Fino Payments Bank IPO: Should you apply?

It’s unique. It’s big. It’s phygital! This payment bank, with a genius business model, is all set to start its journey in the Indian Stock Market with its IPO.The Indian constitution offers 7 constitutional rights to all the legitimate citizens of India. The 8th one that might find its way sooner or later would be the “Right to Banking Facilities (Credit).” 

In order to stretch the advantages of banking facilities in every corner of the country and to create a last-mile outreach, RBI on 27th November 2014, granted banking licenses to special entities that were named “Small Finance Banks,” Fino Payments bank was one of the 11 banks that was given the license. 

So, Should you apply for its IPO or not? Let's find out!

Fino Payments Bank: Overview

Fino Payments banks was incorporated on 4th April 2017 and is a fully owned subsidiary of Fino Paytech Ltd, which has been serving the country’s financial  needs for over a decade.As of August 2021, the bank has 7.77 lakhs+ banking outlets (merchant partners), 54 branches, 143 customer service points, and a fleet of doorstep bankers. Fino Payments Bank enables banking transactions at the convenience of users.

Fino incorporates a very unique asset-light business model. The merchants that it collaborates with are positioned at the front end to serve and assist the clients’ needs and leverage the technical assistance given by Fino Payments Bank. This forms the backbone of their assisted-digital ecosystem- the “Phygital” delivery model (i.e., a combination of physical and digital). 

The use of analytics on the data that Fino Payment Bank tracks enhances the merchant’s ability to offer the right products to consumers, thereby increasing their serviceable market. 

Talking about what Fino Payments Bank has to offer to the general public at large, the list goes- 

• CASA (Current & Savings Accounts)
• Facilitates remittances
• Debit card related transactions
• CMS (Cash Management Services) 
• Cash withdrawal via micro ATMs & Aadhar enabled ATMs.  

With intent for attaining 100% financial inclusion, the bank has taken its next step via its coming IPO. It aims to become the largest banking ecosystem for financial services for various urban and rural users at large, primarily catering to the needs of those who are still untapped by public and private banks. Sweet!

We will now get into the objectives of coming up with the IPO.

Objectives of the Issue

• The net proceeds are proposed to be utilised to meet their future capital requirements which are expected to arise out of growth in their assets & investments.
• The second purpose stated in the prospectus is to meet the expenses.

Well, good reasons for going public! So, let's move forward and take a look at the details of the IPO.

Details of the IPO

Financials of Fino Payments Bank

As we take a look at the financials of the company we can see that it has recovered from its losses and has delivered profits for the year 2021.

More details on the financials, Coming right up in the next section! 

We have covered almost all the technicalities, let's get to the deciding factors, moving forward  you will get to know the key factors of why you should or shouldn't invest in the IPO. Take a look!

Why Should you invest?

1. Technology: The Game-changer

When it comes to the landscape of transactions and payments mechanisms, technology is expected to play an important role and be the game changer by progressively reducing the cost of reaching out to smaller markets. India has hit a home-run in fintech adoption in the past few years and has the highest fintech adoption rate globally of 87%, which is more than the global average rate of 64%. Fino Payments Bank considers itself more of a fintech company that leverages technology as a solution to reach the masses across all longitudes and latitudes to solve their financial problems.

2. Government Initiatives: The Helping hands

A legendary move that will certainly find its mark in the history of digitisation of India, is the launch of UPI, a pivotal move towards financial inclusion. It provides a single-click digital interface across all smartphones linked to bank accounts and facilitates easy transactions using a simple authentication method. 

The volume of digital transactions has also seen a surge in the past few years, driven by the increased adoption of UPI. Many other government initiatives like the Aadhar ecosystem that supports E-KYC are a helping hand to the bank’s business model and help it cut costs.

3. Smartphones market and Data penetration: The sudden surge

Who wouldn't enjoy getting banking facilities in their own comfort and convenience? Higher mobile penetration, improved connectivity, and faster and cheaper data speed (all thanks to the Jio revolution of 2016), supported by Aadhaar and bank account penetration, have led India to shift from being a cash-dominated economy to a digital one!

Consequently, Fino Bank currently has its presence in almost 94% of the districts of our country (that's truly a vast area to be served, but the bank is stubborn to achieve the 100% mark).

4. Asset Light Volume Heavy Business Model:

The business model of Fino Payments bank is asset-light, scalable, and volume-heavy. It operates mainly via merchants in the front end and by being their technology partner, supporting them with technological interfaces and equipment to scale their businesses. 

Transacting through mobile is becoming more and more convenient for the consumers. CRISIL Research expects the share of mobile banking and prepaid payment instruments to increase dramatically over the coming years.

There are many corners of our country still unexplored and untapped. The graph below sheds light on this open-ended fact and depicts that India’s non-cash payments transactions per capita are still very low. Brands like Fino Payments Bank can look up to this as an opportunity.

5. Looking at the larger picture:

A famous proverb says, “Every legend was once a beginner.” A journey that started with it being a payments bank, may someday diverge into being a well-established private bank! But we’re only talking about probability which comes with its own set of inherent risks and rewards. 

Why should you avoid investing?

1. Financials; a worry - 

Taking forward our discussion on financials from above we can see that until March 2021, Fino Payments Bank was a loss-making entity. However, both revenues and profits have been traveling the northwind, and the brand is expecting the trend to continue, but it depends highly on volumes. 

In due course of action, the bank would also need to reduce its expenses that it plans to invest in CAPEX, and use technology as a cost-cutting mechanism. The company has had a negative ROA in the past, and the Capital Adequacy Ratio has seen a downtrend from 65.5% in 2019 to 56.3% in 2021.

Need more details? Kindly Check (Upcoming IPO) 

2. High Regulations, low Flexibility-

The banking business in our country is regulated by the RBI, which mandates a 75% SLR on the deposits generated by payments banks. This reduces the flexibility of the bank to invest the deposits into diverse asset classes and generate returns. Thus, their profits and margins suffer. As per some experts, high restrictions operating a payments bank seem like a hard nut of crack. Take, for example, the drop in the number of payment from 11 in 2016, to a mere 5 now!

The Bottom Line

The bank has great vision on board to democratize the entire payments ecosystem of India via bringing gold loans, mutual funds, and many other additional products to its interface for customers to explore. The business model also looks progressive as it adds more and more merchants to its disposal that will definitely impact its profitability in the coming years. However, given the price band, conservative investors might consider giving this IPO a miss. For investors that wish to invest in the viability of the model and Industry prospects, they must give Fino Payments Bank- a green chit.

Invest Wisely! 

*Disclaimer: The stock discussed above aren't recommendations from Finology, they are only picked to make you understand the concept.