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

The Story

Imagine you’re on holiday in the US. You visit the cafe to pick up a cup of coffee in the morning and swipe your forex card as usual. The machine beeps loudly. The card has been declined. You’re confused.

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

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

See, Niyo wasn’t really a bank. They were a 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 hasn’t revealed much in its public notice except for saying ‘supervisory concerns.’ But the collateral damage is clear — it’s folks like Niyo’s customers who are stuck on foreign shores and panicking.

And while Niyo’s customers wait for a resolution, this fiasco got us thinking — SBM Bank has actually partnered with over 40 fintech companies in India. BNPL, credit cards, foreign stock investments, you name it and SBM Bank is there in the thick of things. So how on earth did this obscure bank from a faraway island nation become a darling among 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 largely survived on the back of tourism. But it needed to find a way to attract capital. So it turned itself into a tax haven. And it became a massive offshore financial centre that serviced the banking needs of foreigners. At one point, these assets were 50 times more than its GDP. And banks like the State Bank of Mauritius benefited from this influx of money too.

But tax treaties were slowly being reworked. Countries didn’t like that Mauritius was a tax haven. India tweaked its agreement with Mauritius back in 2016 as well.

And banks in Mauritius felt the heat. Their growth was slowing down. So they had to expand and look outward. That’s when SBM Bank decided that the opportunity was quite immense in India.

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

But here’s the thing. It never harboured intentions of becoming a traditional bank. It didn’t want to set up branches that each cost ₹2 crores across the country. It didn’t want to hire thousands of relationship managers to canvas for business. It didn’t want to be a capital-intensive bank.

Instead, as Sidharth Rath, SBM Bank India’s CEO put it, “What we want is an open architecture banking where startups and fintechs etc, do the job for us. It will be a highly asset light model wherein we’ll just be owning the brand and checking misuse.”

Essentially, the bank will do everything a typical bank does — deposits, credit, and wealth management. But it’ll do this quietly in the background. It will wait for its partners to drive business. And then make

its way in quietly by picking up small deposits.

Not many folks are aware that behind their fintech cards, there could be an SBM Bank.

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

Well, for starters, as LiveMint reported, large banks were a little cautious about the partners they onboarded. They’d take their own sweet time to get the paperwork and approvals in order. They would easily take 8–9 months. After all, legacy banks aren’t dependent 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 up and running. They like to move fast and break things. And SBM Bank was only too happy to oblige. It wasn’t picky about its partners. Pay the bank the money and it would help launch the startup’s product. All within just a couple of months. Or less.

And SBM Bank needed this business. It basically let startups piggyback on its banking licence for a fee — it was ‘banking as a service (BaaS)’. And that’s how this tiny bank made money.

Secondly, as The Ken pointed out, SBM Bank was maybe willing to go where other banks weren’t.

For instance, you know Slice, the fintech BNPL, right? Well, Slice issued physical cards that looked and behaved like a credit card. You could 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 requisite licence. That’s when SBM Bank stepped in. It allowed Slice to use its Prepaid Payment Instruments licence. And while prepaid cards are like debit cards, they tweaked the card in a manner that it could dole out credit instead.

It was ingenious.

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 was still trying to make inroads. They jumped in and took the risk.

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

SBM Bank had become a fintech darling!

But here’s the thing. Fintechs might be getting a little worried about this RBI order against the bank. Remember, 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 a lot of confidence. Especially when things go wrong as they did for Niyo. These fintechs might try to hedge their bets and go hunting for other banking partners. Maybe like Federal Bank which has also been quite the favourite among fintechs.

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

Well, fintech payments giant PhonePe almost exclusively depended 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. Irrespective of where you held your actual bank account. But when the ban was enforced, all these @ybl and @yesbank UPI handles were blocked too. Merchants who used the PhonePe QR codes also couldn’t accept payments. With Yes Bank being in the middle of 39% of all UPI payments, it turned into an absolute mess for a while.

Overnight, PhonePe had to strike a deal with ICICI Bank and solve the issue. And Yes Bank lost steam.

So yeah, while State Bank of Mauritius has taken the Indian fintech scene by storm thus far, we’ll have to see if this RBI diktat will change its fortunes for the worse.

Until then…

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