How an obscure Mauritian bank became the darling of Indian fintech

In today’s Finshots, we talk about the rise and rise of the State Bank of Mauritius

The story

Imagine you are on vacation in the United States. You visit the cafe for a cup of coffee in the morning and swipe your currency card as usual. The machine beeps loudly. The card has been declined. You are confused.

And then you see an email from Niyo, the fintech company whose currency card you use. They have had to suspend your card! Your money is stuck.

Scrolling through the email, you find that the problem is actually not with Niyo. It is with an entity called SBM Bank. And that’s when you look at the card and finally notice SBM Bank printed at the bottom. You realize, “Oh, this is not the State Bank of Mysore! This is the State Bank of Mauritius.”

See, Niyo wasn’t really a bank. They were fintech. They gave you the card, yes. But they had to use a banking partner – SBM Bank – to actually enable these bank-like transactions.

But then SBM Bank was pulled up by the RBI last week. It was suspended from enabling international transactions. Oops.

Now we don’t know why RBI has taken such a decision out of the blue. The central bank did not reveal much in its public announcement except to say “supervisory concerns.” But the civilian toll is clear – it’s people like Niyo’s clients who are stuck on foreign shores and panicking.

And while Niyo’s customers wait for a solution, this fiasco got us thinking – SBM Bank has actually partnered with over 40 fintech companies in India. BNPL, credit cards, foreign equity investments, you name it and SBM Bank are in the thick of it. So how on earth did this obscure bank from a distant island nation become a darling of Indian fintech?!

Naturally, the story begins on the island of Mauritius off the coast of southern Africa. The country has never been an economic powerhouse and has largely survived on the basis of tourism. But it had to find a way to attract capital. So it made itself a tax haven. And it became a massive offshore financial center serving the banking needs of foreigners. At one point, these assets were 50 times more than GDP. And banks like the State Bank of Mauritius also benefited from this influx of money.

But tax treaties were slowly reworked. Countries did not like Mauritius being a tax haven. India fine-tuned the agreement with Mauritius in 2016 as well.

And banks in Mauritius felt the heat. Their growth slowed. So they had to expand and look beyond. It was then that SBM Bank decided that the opportunity was quite huge in India.

While it had a presence through a regular branch in the country since the 90s, it wanted a full license. Get the complete banking experience. So it applied for a license and got the approval in December 2018. SBM Bank India had arrived.

But here’s the thing. It never had intentions of becoming a traditional bank. It did not want to set up branches each costing 2 crores across the country. It did not want to hire thousands of relationship managers to work for the business. It would not be a capital-intensive bank.

Instead, as Sidharth Rath, SBM Bank India’s managing director put it, “What we want is an open architecture bank where startups and fintechs etc. do the work for us. It will be a light model where we just have to own the brand and check for abuse.”

In essence, the bank will do everything a typical bank does – deposits, credit and asset management. But it will do this quietly in the background. It will wait for the partners to run the business. And then make

their way in quietly by picking up small deposits.

Not many are aware that behind their fintech cards there may be an SBM bank.

But why did fintechs partner with SBM Bank in the first place, you ask? Couldn’t they just go with more established banks?

Well, for one thing, as LiveMint reported, big banks were a little wary of the partners they brought on board. They would take their time to get the paperwork and approvals in order. They would easily take 8–9 months. After all, legacy banks don’t depend on fintech startups for business. They acquired customers through their own branches.

Now, startups don’t have the patience to wait so long to get their business off the ground. They like to move fast and destroy things. And SBM Bank was only too happy to oblige. It was not picky about its partners. Pay the bank the money and it will help launch the startup’s product. All within a couple of months. Or less.

And SBM Bank needed this business. It basically let startups piggyback on their banking license for a fee – it was “banking as a service (BaaS)”. And that’s how this little bank made money.

Second, as The Ken pointed out, SBM Bank was perhaps willing to go where other banks were not.

For example, you know Slice, the fintech BNPL, right? Well, Slice issued physical cards that looked and behaved like a credit card. You can swipe the card and simply pay the money later. But Slice couldn’t do it on its own. It needed a banking partner that had the necessary license. That’s when SBM Bank stepped in. It allowed Slice to use the license for prepaid payment instruments. And while prepaid cards are like debit cards, they customized the card in a way that could provide credit instead.

It was brilliant.

Now, established banks probably didn’t want to push their luck with the banking regulator by doing that. They had too much at stake to lose. But SBM Bank still tried to make inroads. They jumped in and took the risk.

And it was a winner! Slice saw his business boom. Other fintechs saw this and wanted SBM Bank on their side as well.

SBM Bank had become a fintech darling!

But here’s the thing. Fintechs may get a bit worried about this RBI order against the bank. Remember that their business is basically dependent on this one obscure foreign bank. And if the business is dependent, so are their valuations! And that doesn’t inspire much confidence. Especially when things go wrong like they did for Niyo. These fintechs may try to hedge their bets and look for other banking partners. Perhaps like Federal Bank, which has also been quite a favorite among fintechs.

And we’ve seen it play out before. Remember when the RBI blocked withdrawals from Yes Bank a couple of years ago?

Well, fintech payments giant PhonePe was almost entirely dependent on Yes Bank. If you were a PhonePe user who created a UPI handle on the app, you would have been assigned a Virtual Payment Address (VPA) linked to Yes Bank. Regardless of where you had your actual bank account. But when the ban was enforced, all those @ybl and @yesbank UPI handles were also blocked. Merchants using the PhonePe QR codes were also unable to accept payments. When Yes Bank was in the middle of 39% of all UPI payments, it became an absolute mess for a while.

Overnight, PhonePe had to enter into an agreement with ICICI Bank and resolve the issue. And Yes Bank lost steam.

So yes, while State Bank of Mauritius has taken the Indian fintech scene by storm so far, we have to see if this RBI poem will change its fortunes for the worse.

Until then…

Don’t forget to share this article on WhatsApp, LinkedIn and Twitter

Ditto Insights: Why Millennials Should Buy a Term Plan

According to a survey, only 17% of Indian millennials (ages 25-35) have purchased term insurance. The actual numbers are probably even lower.

And the more worrying fact is that 55% had not even heard of term insurance!

So why does this happen?

A common misconception is the dependent conundrum. Most millennials we spoke to want to buy a term policy because they want to cover their spouse and children. And this makes perfect sense. After all, in your absence, you want the term policy to pay out a large sum of money to cover your family’s needs for the future. But these same people don’t think of their parents as dependents even though they support them a lot. I remember the moment it hit me. I routinely send money home, but I had never considered my parents as my next of kin. And when a colleague told me about his experience, I immediately put two and two together. They depended on my income and my absence would certainly affect them financially. So a term plan was a no-brainer for me.

There’s another reason millennials should probably consider looking into a term plan – Debt. Most of the people we have spoken to have mortgages, education loans and other personal loans with a significant interest burden. In their absence, this burden would shift to their next of kin. It’s not something most people think about, but it happens all the time.

In the end, you actually get a pretty good deal on term insurance rates when you’re younger. The idea is to pay a nominal amount every year (something that won’t burn your pocket) to protect your dependents in case of your untimely demise. And this fee is lowest when you are young.

So if you’re a millennial and you’re reading this, you might want to reconsider buying a term plan. And don’t forget to talk to us at Ditto while you’re at it.

1. Just go to our website by clicking on link here

2. Click on “Book a FREE call”

3. Select Term insurance

4. Select the date and time according to your convenience and RELAX!