Fino Payments Bank Ltd
NSE:FINOPB
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Fino Payments Bank Ltd
Earnings Call Analysis
Summary
Q3-2024
In its 16th consecutive profitable quarter, the company reported a 42% year-on-year increase in throughput and an 18% rise in total revenue, reaching INR 370.2 crores. EBITDA and EBITDA margins improved to INR 50.5 crores and 13.6% respectively, while PAT grew by 19.4%. Notably, digital contributions doubled, signifying a growing digital footprint with 41% of transactions being digital in Q3 FY24, compared to 20% the previous year. The company celebrated over 1 crore CASA customers, and a 30% increase in payment services throughput from its CMS business. Looking ahead, the firm is enthusiastic about its potential transition to a small finance bank, expected to occur within 12-18 months post-regulatory approval.
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Ladies and gentlemen, good day, and welcome to the Q3 FY '24 Earnings Conference Call of Fino Payments Bank Limited hosted by Go India Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rajat Gupta from Go India Advisors. Thank you, and over to you, sir.
Thank you, Aditya. Good afternoon, everyone, and welcome to Fino Payments Bank earnings call to discuss the Q3 FY '24 results. We have on the call with us today, Mr. Rishi Gupta, Managing Director and Chief Executive Officer; Mr. Ketan Merchant, Chief Financial Officer; and Mr. Anup Agarwal, Head Investor Relations.
We must remind you that the discussion on today's call may include certain forward-looking statements and must be, therefore, viewed in conjunction with the risks that the company faces. I now request the MD, Mr. Rishi Gupta, to take us through the company's business outlook and financial highlights, subsequent to which we will open the floor for Q&A. Thank you, and over to you, sir.
Thank you, Rajat. Good afternoon, ladies and gentlemen. Thank you for joining us today for the Fino Payments Bank Quarter 3 FY '24 Earnings Call. We are thrilled to announce our 16th consecutive quarter of profitability with highest ever quarterly profit. This historic high profit for the quarter is a function of our perseverance towards implementation of operational excellence and leveraging our DNA of assets, asset-light and bottom line driven philosophy.
Before delving into the business and financial update, allow me to brief you on the strategic dimension of our operations. Our TAM strategy, which is transaction, acquisition and monetization is consistently delivering desired results. Our transaction phase is continuing to maintain momentum with transaction throughput increasing 42% year-on-year during the quarter. Here again, as we have mentioned earlier, our legacy transaction business volumes are not increasing. Their footfalls continue to act as a catalyst for acquisition phase and thereby facilitate business growth steadily. We have achieved the FY '23 throughput of INR 2.55 lakh crores in 9 months of FY '24, albeit the digital transaction growth is at a much higher pace, in line with the industry trends and the growth of digital penetration in the country.
Our focus continues to remain on intensifying our geographic presence through our merchants to further enhance our last-mile reach. Over the past 6 quarters, we have been able to consistently accrete 2.5 lakh plus new customers every month. I'm delighted to share that we have now crossed a CASA milestone of 1 crore plus customers in quarter 3 FY '24. We understand this gives us a unique advantage over most of the competition. For our monetization phase, as stated in earlier meetings, we will continue to grow our CASA customers at a steady pace. Notably, we have achieved a significant 68% year-on-year growth in renewable revenue for quarter 3 FY '24, laying a robust foundation for annuity income and reinforcing the sustainability of our revenue streams.
This also demonstrates the customer acceptance of Fino services and brand. As we progress towards monetization phase, we are excited to announce that in line with our guidance from the Board in July 2023, we have now applied for transition into a small finance bank. This moves align seamlessly with our long-term vision, and we are upbeat about the opportunity it presents to our organization. With the optimism of a favorable outcome, we aim to be operational as an SFB within 12 to 18 months, subject to and from the time of approval from the regulator. Our SFB model will be a combination of asset-light model, liability backed lending, robust risk management and effective collective mechanism. We call it a payments bank plus plus model. We have shared some strategic outlook of the Fino's SFB model in the investor presentation as well. For me, this is the epitome of our model, wherein structural monetization would play a significant impact on the enhancement of shareholder's value.
Let me now talk about the digital progress, which we call Fino 2.0. In the ever-evolving digital landscape, our focus on innovation and customer engagement has yielded significant milestones. Our country remains a global leader in digital payments led by UPI accounting for 46% of the global real-time payments. According to National Payments Corporation of India, NPCI, there were around 35 billion UPI transactions, of which Fino accounted for 1.23% in quarter 3 FY '24. We seized the digital momentum in quarter 3 FY '24 by opening over 79,000 plus digital sales account, aggregating to a total of 2 lakh plus digitally-acquired customers till date. In terms of customer engagement, 37% of our 1 crore plus customer base is now digitally active. This indeed makes us a digital model to the point, wherein both network distribution and digital channel set to excel.
This growing participation is reflected in the figures, with digital throughput contributing to 41% in quarter 3 FY '24 compared to 20% in the same quarter of the previous fiscal year. We are witnessing trends wherein digitally active customers significantly contribute in the renewal revenue of the bank. As we navigate the digital landscape, this achievement emphasize our adaptability, customer-centric approach and strategic initiatives. Our progress in the digital space has been encouraging, and we remain committed to leveraging digital opportunities for enhancing customer experience and driving sustainable growth.
In quarter 3 FY '24, our CMS business, which is payment services business saw -- witnessed a 16% growth in our client base and a 30% increase in our throughput on a year-on-year basis. Our transaction business, which is the old business of remittance, cash withdrawal, micro ATM AePS continue to create footfall for our acquisition phase. Recent statistics from the NPCI revealed a significant shift in transaction dynamics. Actually, we are all seeing this in our life as well. In quarter 1 FY '23, the ratio of cash withdrawal to digital transactions, which is ATM, micro ATM, AePS and UPI stood at 44% to 56%, which means 46% were transactions were cash withdrawal and the balance was through UPI. That was in quarter 1, FY '23. Today, we stand at 30:70, which means only 30% are cash withdrawal and 70% have moved to UPI, which means 56% of UPI is now 70% of UPI.
The shift in behavior from cash to digital is not only irreversible, but is also gaining widespread traction cutting across social strata spanning both rural and urban areas. Fino is also aligning itself with a transformative print, witnessing a surge in digital adept customers. In fact, we started talking about digital journey, as you would recall, Fino 2.0 about 2 years back. So we're very much ahead of our times and we started to see that digital would probably play a bigger role in our customer segment. We have also witnessed that the CASA subscription renewal rate of digitally active adept customers, more than 80% as compared to our other customers. More digitally active customers translates to more annuity revenue for the bank.
Technology has always been very close to my heart. Let me also share our significant developments in the technology space. We have always been committed to innovation, building operational capabilities, seamless transaction experience for the customers and recognize the importance of cutting-edge core banking systems and technology. In this direction, we are happy to share that we have onboarded Infosys, their Finacle software as our core banking partner for our next phase of growth. We are also working in parallel to Hollow the Core by moving away the large species of transaction business applications from inside the core to outside of the core. So the core banking platform continue to give superior performance even after factoring the growth in transaction business over the years to come.
We had done similar exercise when we built our own UPI switch about a year back. The new switch is able to handle, which was developed in-house -- the new switch is able to handle multiple X volume of transactions with the best in the industry technical declines. Both the projects are going as per schedule, and we are dedicated to completing this transaction in the next 12 to 15 months, marking a transformative milestone for our organization.
I conclude by saying that our strategic focus in TAM strategy remains pivotal, consistently driving superior performance and creating value for our shareholders. And me, along with our management are super excited to further evolve differentiated bank with long-term growth at the helm of our thinking.
Now I'll hand over to Ketan Merchant, our CFO, to update on the financial performance of our bank. Over to you, Ketan.
Thank you, Rishi. Good afternoon, ladies and gentlemen, and thank you for joining us today on our earnings call. As mentioned by Rishi, our sustained strong performance during the quarter signified yet another period of resilience and profitability. TAM strategy is something which we keep on seeing it off, and it is delivering superior results for us. We are focusing on transaction footfall as a cornerstone, growing the acquisition platform and setting base for our monetization journey ahead. The strategic focus is driven by the understanding that once a customer is acquired, numerous opportunities unfold for diverse products and offering and services, and that can lead to enhanced profitability.
Moving towards the financial performance during the quarter and 9 months for FY '24. For Q3 FY '24, our total revenue stood at INR 370.2 crores, up by 18% Y-o-Y. Robust performance of our high-yielding products, CASA and CMS, has indeed contributed to our growth and significantly bolstered our margins, which have increased to 33% from 32% a year ago. Together, CASA and CMS now contribute 30% of our revenue pie in Q3 FY '24. This number was 26% up a year ago. This consistent success of such high-yielding product assures that ongoing profitability will continue to rise. Our EBITDA margins have increased to 13.6% in the quarter 3 from 12.4% a year ago. EBITDA has grown by 30% Y-o-Y to INR 50.5 crores in quarter 3 '24. Our PAT has increased by 19.4% on a year-on-year basis to INR 22.8 crores. This is the historic high as Rishi alluded to.
During the quarter, our total throughput has surpassed INR 93,300 crores making a substantial year-on-year growth of 42%. Digital throughput, as mentioned by Rishi, has grown by 184% year-on-year, exceeding INR 38,000 crores of throughput and now constitutes 41% of overall throughput. This robust performance indicators not only demonstrate our current strength, but also lay a solid foundation for future cross-selling opportunity, enabling us to leverage our existing customer base and expand our service offerings.
Now quickly, I'll just take over a 9-month performance as well. We've achieved a total revenue of INR 1,077.1 crores during the 9 months of FY '24, reflecting a year-on-year growth of 18.8%. Our throughput has increased to INR 2.56 lakh crores, resulting in a growth of 37% Y-o-Y for the 9-month period. Our EBITDA margins have risen to 12.7% in the 9-month period from 10.3% during the same period in FY '23. EBITDA has demonstrated a sustainable growth, increasing by 47% year-on-year to INR 137.2 crores. Furthermore, our PAT experienced a significant surge climbing by 42% to INR 61 crores and PAT margins have increased by 100 basis points to 5.7% in 9-month period, vis-a-vis a 4.7% during the previous year.
Quickly going towards the product performance during Q3 '24. Revenues from CASA demonstrated a 35% year-on-year growth totaling to INR 73.7 crores. This surge is primarily fueled by substantial rise in our renewal income, which has soared by 68% year-on-year, reaching to INR 31.4 crores. This notable increase in both accounts subscription and renewal rates not only highlights the loyalty of our customers, but also reaffirms our standing as a preferred bank in our target segment. During the quarter, the highest number of CASA customers were added in the following states: Uttar Pradesh was first followed by Madhya Pradesh, Bihar, Maharashtra and Gujarat. Additionally, the significance of UPI in our digital landscape cannot be overstated. UPI not only serves as a cornerstone for our CASA customers, but also proves instrumental in amplifying our business volumes, as Rishi has elaborated earlier.
Essentially, our UPI active customer contributes to high transaction volumes, better balances and renewal rates, thereby significantly bolstering our CASA base and advancing our overall profitability philosophy. Our renewal rates continue to remain healthy. Just to give a perspective, for digital customers, our renewal rate is around 83%. And on an overall basis, it is around 61% to 62%. Maintaining this rate over increased base reflects the success of our model and resonates with how best we can monetize it in the times to come. On the balance sheet front, it is important to state that our objective of evolving into lending foray, on a structured basis, we are focusing on enhancing our liability franchise. Just to give a perspective, for the 9-month period, our average deposits have increased in excess of 50%.
Our endeavor is to grow deposit based on a strategic basis whilst maintaining our USP of cost of funds, which currently is in the range of around 2.2%. CMS is another high-margin product demonstrating robust growth. Revenue from CMS stood at INR 36.9 crores, up by 26% in quarter 3 Y-o-Y. In 9 months FY '22, (sic) [ FY '24 ] revenue saw the increase of 43%. We now have strong presence across 11 states, wherein our average monthly throughput is over INR 200 crores in quarter 3 FY '24. With an established diversified base of 200 plus clients, a strategic emphasis has been laid on partner diversification resulting in sustainable CMS growth from here on. Overall, CASA and CMS, our high-margin products, are exceeding expectation and poised for substantial growth, which will further lead to margin maintenance and increase company's profitability.
Turning to our transaction business linked to our acquisition strategy, we observed a subdued growth. And as Rishi alluded earlier, despite systemic challenges in transaction, remittance and cash withdrawal, our customer funnel, the key to bolstering our high-margin products remains intact, as reflected in our transaction volumes. We are consistently striving to transform each interaction at a micro ATM via AePS into new accounts aligning with our goal into opening up new accounts. Additionally, the UPI landscape witnessed a dynamic evaluation marked by significant growth in transaction volumes and monetary value accompanied by expanding user base. Q3 '24 recorded an impressive 42.5 crore UPI transactions, portraying a continued upward trajectory in digital payments. The monetary value of the same reached to INR 28,000-plus crores, signifying the bank's ability to handle enhanced financial transactions seamlessly.
As seen in Slide 18, our digital revenue is increasing on the back of payment services, wherein margins are largely around 30%. Here, again, the emphasis lies on the fact that our digital stack is based on profitability genesis as opposed to banking on future cross-sell only. Just to give a context, our revenue on digital, which now contributes around 8% is on the back of payment services, which I earlier mentioned as well as the B2C growth, which we are looking at.
In conclusion, I want to highlight or maybe reemphasize what I started, or Rishi also started off with, TAM is our go-to mantra. Transactions leading to acquisition and continued acquisition, which will lead to monetization is the philosophy, which we are going through.
With this, I will open the floor for any questions, and we can take any questions on the financials, which are coming.
[Operator Instructions]
Our first question is from the line of Shreya Shivani from CLSA.
I have 2 questions. First is on the M-ATM and AePS line. So I understand that the shift to digital is moving quite rapidly in the rural market. Where do you expect the product mix or the revenue mix from these 2 line items to settle around, say, by the time you get your SFB license, where do you -- how much do you expect these 2 products to contribute to your revenue mix? First is on that.
And second, maybe if you can discuss a bit about what will your product strategy be once you get an SFB license? Like, for example, on CASA, will it continue to be a subscription-based or will you offer other kind of CASA products also? If you can speak a little bit on that. You've also spoken in your presentation about 200 branches. I think at the end of FY '23, you had 77 branches, I think. So there is really a plan to open more branches, how would that be? If everything is going to be done by merchant, what exactly -- what purpose will these branches serve? So some questions around the CASA product, the lending product and the brand strategy once you become an SFB. And also the time line on SFB, if you can just remind us on.
I'll answer the second question and part of your first question. So on the second question first, on the SFB, I think, the time lines, as you know, we have already submitted our application to the Regulator in December of 2023. We now await feedback on that application from the Regulator. So there is no real time line, which I can share with you in terms of when the regulator will come back to us on approval or questions as such. What we understand is that normally there is a 12 to 18 month period post the approval where you can transition both the technology, people, products, which are there. So our time lines, if I could say, will be around 2 to 2.5 years from December '23, looking at a time line for approval as well as for transition. So that's the first part. That's the first part of your second question.
The second part is in terms of the kind of products and what we focus on, as I mentioned earlier, and it's mentioned in the presentation also, we will continue to focus ourselves in the asset-light strategy, so to say, which means that we are not going to invest very heavily on building up a very fixed cost heavy model whether it is on the branches or on a very heavy manpower on the ground or on the back end, we already have a lot of systems, people on the ground, which is already covered as part of our current businesses and it's a profitability bank business right now. Our strategy largely will be around building up a good franchise around liability. Liability becomes the core for any lending business.
So if you are able to save, your cost of funds are lower and if you are able to build up a good liability, consistent profile that really helps you in building up the lending portfolio as such. So that will be taken care of. The second part is that we will continue to focus on building up a distribution network, which is already there. And part of the distribution network will act as points for lending, and also points for customer engagement as such, branches, we have around 130-odd branches, including the customer service points. We plan to take it to 200, so not very heavy investment on the branches side, but more focus on the liability product as well as asset-light model with lending gaining strength as we experience the lending portfolio over a period of time.
Coming to the product strategy point of view, we will continue to build on the CASA platform. We will continue to do our transaction business, and we'll continue to add more distribution points. So that -- in the TAM strategy, the transaction acquisition phase will continue as an SFB also. The monetization phase will take up a higher piece of income and bottom line also because the cross-sell will start to kick in once we start the lending piece as well.
Coming to your first question, let me answer a part of it, then probably Ketan can talk a little bit more in terms of the percentages. See micro-ATM and AePS, while there is a decrease in the total revenue percentage of the overall number, both in the absolute terms as well as in the percentage in this year vis-a-vis last year. But also not only from the fact that it is moving from cash to digital, but also a large part of our customers who were off-us have now become on-us. So to 1 crore plus customers will use AePS and micro-ATM as an offers platform have now started to use on-us of Fino as well. So largely, the reason also for decreasing the share. And I think the numbers, probably Ketan can tell better in terms of projections, but would largely be in the same range. Ketan, you would like to answer that?
Shreya, I think, Rishi, partly answered it. Our digital as well as our CASA works in inverse proportion with our micro-ATM and AePS business. Honestly, why do we do and you've been hearing about our TAM for a while that transaction is a footfall, and it's for generating that footfall for these high products. So typically, currently, for 9-month period, it stands at around 13%, 14% for this quarter, both taken together is around 11%. We expect to maintain it in the 9% to 11% kind of a scenario as long as we can convert it off. And as I earlier mentioned it off, our digital is also both D2C as well as the payment services, which I just mentioned about is at a margin of 30%. So we are fine in terms of a replacement coming. CASA, I think we've spoken enough about between some off-us to on-us and the kind of renewal rate, which is there. So that's where we intend to continue our transaction business to fuel the acquisition strategy.
Okay. So -- but one of the concerns is if the digitalization in the rural market is as rapid as it is showing up in the recent numbers. Then your mix from these 2 products will probably by the time say FY '26, will decline at a much faster pace, right? I totally get the part that you get -- those customers are becoming on -- like they use your app, they're using your UPI, so you are generating some revenue -- digital revenue on the other side. But these products will effectively start becoming lesser and lesser portion of your mix, right? It cannot stay at 9% to 11% of the mix.
Actually, you're right. If you go to our kind of Page 39 of our slide where we have Page 39 of our deck, where we said that we have had a particular journey on our customer offerings. Where we said that maybe by March '28, we come to around 2.8 crores kind of customers. So as and when we go into that, yes, it will come into a single-digit customers coming on. By the time the SFB comes in 18, 24 months, it is 9%, it is 7%, it is 10%. It is a bit difficult to predict.
As long as our customer acquisition is going in the right manner, we do not mind this coming -- as a percentage coming down. The concern only will come is when our customer acquisition engine reduces of, then there will be a loss of business. Currently, this is a good cannibalization, which we're essentially looking at. I'm -- actually very difficult to put a number that will it be a 7% in '28 or 5% or 9%. But if our customer acquisition goals in the proportion which we are looking at, then it seems to be fine, Shreya.
Sure, sure. And on my first question, just a bit of clarification or maybe a little more detail, if you can give us on, what will be the first set of lending products you launch or if there's any plan? Liability products, are there going to be non-subscription-based products as well? Some color on that could be helpful.
Yes, we can share that separately, but largely on the liability side, apart from the current CASA, the FD and RD products also will come in as part of the SFB strategy. Lending, as I think part of it would always be covered in the presentation, we'll start from small ticket lending and then it will go as the experience builds up on -- from unsecured to secured, so to say. Yes, you want to Ketan?
Yes. Just one thing, Shreya, if I understand your point is, are we going to change the mix from our current low-cost deposits to a high-cost deposit for the lending? The answer is essentially, no. Again, Page 41 of our deck, we have put across and I also mentioned the top in our earlier statement as well, our USPs are cost of funds. Currently, it is around 2.2%. As we grow, we will definitely go for what Rishi just mentioned, RD, FD, we are still looking at anywhere in the range of 250, 300 basis point arbitrage over any other bank as well. So that's the kind of philosophy, which we are doing at. And in the earlier presentation, I've anyway explained that if our customer acquisition continues off and our average balances goes towards 2,200, we anyway have a big cost of fund arbitrage coming in our liability franchise.
[Operator Instructions]
Our next question is from the line of Mayur from Profitmart Securities.
And congratulation on a good set of number. I have 2 questions. First, in reference to slide...
Mayur, sorry, you'll have to be a bit more louder, sir.
Okay. Okay, sir. Now voice is clear?
Yes, it is relatively better.
Okay. In reference to Slide 12 of the presentation, illustrating the geographical footprint, we have slightly lower presence in the Southern region. Just wanted to understand what are the primary geographies we are focusing on the future expansion given that we have projected to another 10 lakh merchants over the next 4 years and a rationale behind this strategic positioning? Also wanted to understand our plan for the UPI stack in terms of product pipeline or strategies formulated during the quarter and your expectation for the future?
So let me take the first question. First, on the distribution, you are absolutely right. South penetration is lower than the rest of the India, largely because of the fact that we started from West and we went to East. So that's why you would see a higher penetration on the eastern side and the central part of the country. South, we started to concentrate more in the last couple of years, which has now gone to 13% of the overall number. In terms of the region, obviously, the South will continue to be one of our focus areas. Apart from that, we'll continue to grow in Uttar Pradesh, West Bengal, Assam, some of those central parts as well. So that will be the focus piece as such.
Coming to your UPI question in terms of -- so UPI, as I mentioned, the switch we started last year. And post that, we have been growing our transaction, so on the UPI switch side, we already have services around send money, UPI Collect, UPI Intent. Merchant QR, we started in this quarter. UPI stack for open banking is already there. UPI Lite and credit card on UPI, these are services, which have gone live until quarter 3 of FY '24. Specifically in quarter 3, we have started credit card on UPI, UPI Lite and QR UPI. So 3 new services have gone live in this quarter. Total services, which can be offered under UPI as of now is about 9 services, and we are live on 7 of them.
Our next question is from the line of Shailendra from [ Agreya ] Capital Advisors LLP.
Hello?
Yes, we can hear you.
Sure. So I have a couple of questions. So the digital revenue component scaled up very well. Can you give me a bit more breakup of what these revenue components are? The second question I had is that you have had -- you received RBI approval for doing international remittances for a couple of years now, but I still don't see that as a product suite that you have yet. So any hurdles on that? Or what's the status on that?
Let me just take your first question of right observation. Digital now contributes around 8% of the quarter 3 revenue and around 5% of the 9-month period. Let's me just attempt to give a breakup. We have some interchange fee coming, which contributes around 1% of the 8% in quarter 3. An earlier question also was there in terms of the UPI stack utilization and it just goes back to my earlier statement as well. Digital for us is a profitable genesis, which we are looking at a D2C as well as B2B. Now here, we have done a B2B wherein we provide payment services, a UPI pay-in and UPI payout, that together constitutes around 6% of the total revenue.
Obviously, there is some MeitY incentive also, which comes on mobilization of the digital, but that contributes 1%. So that's the breakup which I've given for the quarter, which is the 8% of the revenue mix, which is happening. I think digital is an important proposition. We said that we not only want to do a B2B, but also a D2C, we opened 79,000 accounts. And some of these are funded accounts as well, which is like a subscription model, which we are essentially running off. Future also, we will use this for cross-selling the kind of accounts 2 lakh plus accounts, which we opened until now and we are growing as well. So that's the genesis of our digital profitability, which we run through. That's the first one. Sorry, if you can just remind me the second question again?
International remittances as a product for you.
That's a good one. We had, I think, a year back attempted to have IR and we attempted a pilot coming across in some southern states as well. But the kind of response, which we were essentially getting it out was not very encouraging. So whilst the product exist off, we have not attempted to ramp up because the products which are with a relatively higher margin is something, which is going on. Have we closed the product? The answer is, no. But have we gone big into the IR product or as we had anticipated 18 months back, the answer to that is also no.
Okay. And if I could just add one additional query. You are forecasting like if I see in the last 3, 4 quarters, your CASA buildup on a month on or a daily basis is at the 8,000 to 8,500 mark. And you are giving a forecast of where you anticipate that total CASA accounts to reach by 2028. My question is, can you be a bit more aggressive? Or is there something that's holding you back from being more aggressive in getting CASA accounts?
That's a very good observation and a thought process. And I'll just give our thoughts out here. We are not going after volumes, and I have said this earlier as well. For us, CASA is -- it's not only about future cross-selling, it is about creating annuity income. So the kind of accounts which we are opening, we are attempting to do 2 things. And the important aspect out here also goes back that it is the acquisition -- whilst the acquisition pace is important, liability enhancement is equally important. So which accounts are we going with is also important. Between a subscription and non-subscription, broadly, we are looking at an 80-20 kind of a scenario, and we are largely there.
To answer your question, and in our projections as well when we are going to that 2.6 crores or 2.8 crores kind of a number in '28, we are expecting a steady kind of a growth. We are not going to go over aggressive in just opening the account at the cost of compromising our annuity income. I think people will recollect at some stage a year back, we had said our annuity income or the renewal income will exceed the new accounts income. As we stand now, that has already happened, 60% of our CASA, the ratio between the subscription -- the first year subscription and renewal now is 40:60. So we are creating that annuity base. And we will continue the current pace rather than going over aggressive in terms of acquisition, but the quality will become a very key when we go into SFB as well.
Our next question is from the line of Muskan from Concept Investwell.
I have 2 questions. So first is, how many of your existing CASA customers come from renewals in the second year and subsequently again in the third year? And what are the renewal fees? And my second question is, is there any strategic changes we are implementing to increase the number -- same number?
Thank you for the question. Answer the first question, our renewal rate is around 83% for the customers who are using our digital platform, so that's the kind of renewal rate. If 100 people come, subsequent year around 83% renew, if they are using digital. On a total basis, it is anywhere in the range of 61. So if 100 people come in year 2, 61 renew. In year 3, again, those 61 renew. So that's the kind of a renewal rate, which we are looking at. And that's the reason for the annuity increase which you see.
From the second year also roughly 90% odd who actually renew in the first year, they come in the second year also for renewal. And the fees for renewal is the same as the first year.
I missed that question.
Okay. And the second question about any strategic changes to implement the increase in that number?
So more in terms of -- see that number is already -- we are focusing a lot on analytics, customer experiences, merchant education, merchant level engagement. So a lot of those pieces are actually already there. So from a strategic point of view, if you ask me, there is no strategic new thing, which we are doing. Whatever we are doing, we are doing it more and focusing more in terms of building up the customer experience so their renewal can become better.
Our next question is from the line of Divyansh Gupta from Latent Advisors.
I have a couple of questions. So first one is that as the digital adoption keeps on increasing, then the, let's say, the share of revenue that the merchants were earlier getting that stream of revenue will keep on reducing for the merchants, right? So earlier when we had launched, we were -- we had value prop of saying that merchants will get additional line of income, but now that will go away. So how do we see the merchant ecosystem still being aligned with Fino to keep providing services? Or it will become more and more, let's say, our own infra getting created to service the customers?
So we will continue to focus on building up the merchant ecosystem. Obviously, the ecosystem is moving from cash to UPI, but we are engaging with the merchant in terms of CASA onboarding, CASA renewal income. We are trying to push more digital products through the same platform. We already have shared a plan to convert into an SFB, a large part of the lending portfolio also will be extended to and from the merchant ecosystem. So from a cash, is -- from a pure transaction platform is also becoming more ownership. We have started to see some of the merchants who actually are able to make a few thousand rupees per month because of the balances, which gets built up in their accounts. So let me take this a little further in terms of conversation and it's very important for people to understand.
So see if a merchant opens 1,000 accounts and that 1,000 accounts has some balances. On that balance, there is a plan in which the customer -- in which the merchant earns a few basis points of income, so that itself has -- for some merchants, it crossed INR 1,000. And in some cases, it has crossed even INR 10,000 per month. So it is like -- it's building up like an annuity revenue model for the merchant also very akin to similarly like LIC model where you take an insurance and second year, third year, if you continue to pay the premiums, the LIC agent continues to get commission from LIC.
The same way in case of merchants, and that's what we are driving our merchant ecosystem that you start opening CASA accounts and build balances that is where the liability fees comes in. So as you build more liability, not only that the Fino makes money, but the merchant also makes more money. So that is driving the merchants also to add, come to Fino on the CASA platform and build balances. And over a period of time, we'll be able to start lending also in the SFB [ avatar, ] that will also help the merchant build up some more revenue streams.
Got it. And you had mentioned that digital is also there, so do they get rev share of digital transaction?
That's important because that's a good add-on, which you have done, is that when a new account is opened, we actually incentivize the merchant to download the FinoPay app for the customer or help the customer download the FinoPay app. On that download also, the merchant makes some money. And the model also, the way we have built up is that any transactions which you do through the FinoPay model and if there is a revenue, which gets accumulated or we get some revenue that also will be shared with the merchant. So merchant also is incentivized to move the customer from a cash to a digital platform.
So one thing we have to realize is, this is a -- digital journey is good for the nation. It's good for the customer, good for the company. So as the digital journey becomes more, our ability to do more business with the customer also substantially improves because then we have a direct connect with the merchant over and above the -- direct connect with the customer over and above the merchant connect as well.
Got it. Got it. Understood. And the UPI stack that we have, right? So you had mentioned that around 1% of that overall 8%, right? 1% of revenue is coming from interchange and 6% to 7% is coming through the B2B payments. Whereas we have also mentioned that 37% of our customers are digitally active. So what's the definition of this digitally active because that 1% against that 37% seems a bit disconnected.
So -- okay, let me just attempt to demonstrate what does the digitally active customer means because that is also relevant from a CASA renewal perspective. As we've said that a person who is digitally active, their renewal rate is around 80% plus is what we are looking at. So guys who have -- who are our customers and are transacting on the UPI are defined as digitally active kind of customers. Their mainstream of revenue besides or the most differential besides what I just said about the B2B and the interchange fee also emanates from the CASA renewal kind of a scenario.
Now a scenario of comparing an interchange with the 37% is not the right comparison. Comparison of this 37% vis-a-vis the renewal income of 68% growth is the right comparison, 37% and as and when that increases off, our renewal propensity increases is what we are looking at. The remaining part of the digital income, which contributes 8% is as we've explained off, which can be on account of off-us people using our UPI handle may or may not be essentially our customers.
Got it. And what are the steps that are being taken to, let's say, increase this 37%? Let's say, by the time we become a bank, where do you see this number reaching while 100% is always desired, but where do you see realistically this number reaching?
Very interesting question. I can talk about it for the next half an hour, but I will try to break this into 2 parts. One is that the digitally accretion, which is happening is also happening on account of 2 factors. One is the people buying smartphones and the younger generation becoming more active on the banking ecosystem. So this we are seeing more on the urban side. We have started to see a little bit on the rural side. And I believe as the smartphone penetration will go up and not only the younger population, but not so young also will start using smartphones or UPI for transactions, the penetration would go up. 37% itself is quite remarkable and much higher than what we had anticipated about a year or so back.
And you would have seen the numbers have gone up in the last 1 year also, so we continue to believe that this number will continue to go with the new accounts which we are opening. I think on the new accounts, the number is 40% plus of customers which are being onboarded, more than 40% of them are actually using UPI, 40%, 45%. But because there are some old customers who have been there, which may not have smartphones and that is why it is still 37% on an overall basis. But on an incremental basis, it is much higher.
Got it. Got it. Understood. A couple of more questions if I can ask.
Sorry for interrupting sir.
I'll come back in the queue.
[Operator Instructions]
Our next question is from the line of Harsh Shah from Reliance General Insurance.
Congratulations on some strong set of numbers. I have joined the call a bit late. So I wanted to understand our strategy regarding the SFB model. So who would be the potential customers, what will be our strategies regarding branch location? And how we will be going ahead forward from here?
Harsh, actually, sorry for the interest of the larger people who are essentially there, this we covered it in our speech as well and there was a very detailed question as well. So if you're okay, we can separately pick up so that we can effectively utilize time of people who are on the call. I do understand this thing, but we can separately pick that up.
Our next question is from the line of [ Deepak Agarwal from APBL. ]
Congratulations on the great set of numbers. I have only one question. We have seen there is a quarter-on-quarter decline in CASA income. But we say there is annuity income, as you have mentioned in this call itself, what would be the reason of this decline?
Deepak, this question resonates with the earlier kind of a scenario. You're talking about the sequential kind of scenario, which we are looking at. Earlier, we were asked question that we are opening 2.5 lakh new accounts, do we want to aggressively go to that as well. From a new to bank customer, we have had around 7.76 new customers coming up. Our ratio between subscription and non-subscription typically varies between around 80 to 82 as well. So whilst our focus is on annuity income, are we seeing a subscription-based income suddenly going up as well. So relatively flattish kind of a subscription is on the back of the account, which we are limiting it off. However, our focus continues to be on the renewal, which will give us a higher annuity income.
And this actually is a similar question someone asked, will you open from 8,000 accounts a day? Will you try and open 10,000 accounts a day? We would rather not do that. Rather, we will focus how much of this will give us annuity income. And also point to note is, we have -- balance is increasing as well, which is under the treasury, which is coming across. So a 51% kind of increase, which is coming, is not factored into CASA, but comes under the treasury income.
Just to add to what Ketan is saying, don't -- there is no trend to this. It is coming down or -- it is more or less in the same range. It will -- our belief is that it is more of a product mix, which could change between subscription and non-subscription products.
80% to 82%.
Yes, yes, yes. So it will -- there is no trend as such in this.
Our next question is from the line of Dhruv Shah from Ambika Fincap.
Rishi, I had a question on your average balance, which has been constant for 3 quarters. Actually, it's been declining, and if I do a rough math for your FY '25 target, that's INR 1,500 per account. So can you just guide us how are we going to increase the customer balance in your account for next 1.5 years? Because I guess for 3 quarters, you've been constant around INR 1,100.
Yes, yes. Good question, actually. Again, so your observation is bang on. What we are seeing is that as the customers are becoming more digitally active and the new customer balances, which we are seeing ranges between INR 1,400 to INR 1,500 on an average, because of the average balance, older customer balance being low, the average balance has not grown to the level which is expected. With the new customers coming at a higher amount, so our average balance for our UPI customer is about INR 2,000. For transacting customer is about INR 1,400 to -- INR 1,300 to INR 1,400. And for non-transacting, it's about INR 800 to INR 900, which is there and that is why it comes around INR 1,100 or so. So as the customer mix changes from low transaction, no transaction to more transacting and UPI-induced digital customers, the balances will go up.
Over and above that, as I mentioned, we are doing a lot of initiatives also on liability buildup, which is both at the merchant level, at the customer level. We have recently launched our new FinoPay app also. We have launched a new website also, which is there. We are also engaging with the merchant to build up their own revenue -- recurring revenue for merchant from the balances, which the customers are keeping and customer experience initiatives are also being taken. Merchant engagement models have been built so that we can do more deeper engagement with the merchants.
So a lot of work actually is happening on building up the liability franchise, which will become the foundation for the SFB model as we get into it. So there is definitely a lot of work which is there. Generally, what has been seen in the -- and you would see that trend, which is there is generally, not because -- not specific to Fino. But generally, there has been a relatively subdued growth on the liability business for all the banks. And some banks, we have seen that their numbers have actually come down also. So fortunately for us, at least, we have been holding and there's an 8% growth vis-a-vis last year. But a lot of efforts are being put on, and some of them will definitely gain traction and we should see a positive trend in the quarters to come.
Fair point, Rishi. Just on a follow-up question. As you mentioned that banks are right now facing a CASA issue and still you're projecting because your whole model is based on the liability franchisee. You still think that you will be able to achieve such a good growth in your deposit franchisees?
Yes, yes, absolutely. Ketan, you want to take this?
Yes. I think it just goes by a couple of quarters back when we had given our thoughts on liability-based franchise on SFB, our growth in liability is based on 2 things: One is, as Rishi just alluded towards the liability incentive, et cetera, we are doing the higher proportion of the digital accounts, which have a higher average balance. And the third one is on the normal acquisition strategy. I don't remember maybe 2 quarters back, we had actually given a building block that with the kind of around 30-odd lakhs account, which you expect to open year-on-year this thing, we will have a substantial growth coming on account of these new accounts as well.
So it is both the value as well as the volume kind of increase, which we are showing. And to mind, currently, our cost of funds, as I said earlier, is around 2.2%. Maybe we will, at some stage, take it to somewhere around 3%, 3.5% as well or maybe even more. We'll still have some arbitrage coming over SFB. The function -- external function or the external events, which are happening in liabilities, which we are all aware of, and we will take a call as and when it comes on changing any of these strategies, but liability like franchise will be our mantra for SFB.
Our next question is from the line of Chandrasekhar from Fidelity.
On the AePS business, how much of the issue is -- what you did highlight about the UPI and cash shift, how much of it is related to offers, there were some issues around the frauds? Or I mean, how much of it is basically recoverable after that the issue gets sorted or how much of it is basically just not going to come back? That's one.
And then second is, how do we just think in terms of top line growth? Is that still the 20% number over the next few years, something still on given the pace at which AePS is coming off, I don't know, how do you think about that? And then just as a follow-up, again to a previous participants question on CASA, I'm still not very sure on -- I don't want to be reading too much into the sequential decline in the CASA numbers, but when the renewal income has gone up and you've added a lot more subscriber in this quarter, the number of CASA accounts have gone up, I'm just curious to understand how the CASA income actually gone down.
So let me just start with the AePS part. On the AePS side, there has been a drop in the total AePS volume as such, offers volume in the last 1 year or so. So that has partly affected the AePS degrowth, which we are seeing. The second is also the fraud, which was happening in the ecosystem in the last 1 year. Part of it has already got addressed. In Fino's case, we have largely been able to address that. So we -- from where we are, I think we should see a positive turn on the absolute number of the AePS in rupees, in crores. While the percentage may still continue to be in the range bound because our other businesses will grow faster than that. So that's on the AePS side. The other question was on the...
Revenue growth.
On the revenue growth. So revenue growth, we have been projecting a 20% growth as such over the last couple of years, and we have been achieving it. This year also, we have a 20% growth target, and we seem to be largely in place. 19% is something, which we have achieved in the first 9 months. Hopefully, with a better quarter in quarter 4, we should be in the 20%. We should be in the same 18% to 20% range in the next couple of years also to come. And as the lending portfolio will start to build up the numbers would start showing more than 20% growth also as we get into that business.
And coming to your CASA part, Ketan, you want to take that?
Let me attempt to address it with some numbers, Chandra. Rishi or maybe I also said earlier, I don't think we should read too much into number of accounts getting opened or CASA revenue on a sequential basis remaining flat or marginally up and down. The reason essentially is the change in the product mix at times, which happens. As I mentioned earlier, typically, our subscription to non-subscription remains in the range of around 80%, 82% to 2018. On the sequential quarter, I think in quarter 2, our subscription had gone to around 83%, which has come to around 79-odd percent.
So that is why it is remaining flat essentially. But for us, the continuance of the renewal income, which will create a sustainable annuity is where we are focusing on. Having said that, do we expect any material or substantial change in any of these percentages? The idea is, no. We will want to maintain this equilibrium of subscription and non-subscription largely in the range, which I just mentioned.
Ladies and gentlemen, due to time constraint, that was the last question for the day. I now hand the conference over to management for closing comments.
So thank you, everyone, for joining the conference. As I said, our TAM strategy is largely working fine. We are pushing transactions both on the digital as well as on the physical channel. While digital is showing a higher growth largely because of the ecosystem shift, which we are seeing. Acquisition is running fine in terms of acquiring customers and leading to renewal income as such. Monetization plans linked to SFBs are largely -- with the application going is largely getting into place as such, so the discussions around digital Fino 2.0 has also progressed well.
As we discussed on the UPI as well, the throughput increase on the UPI and product availability on UPI has been there. Technology plans are much in line with our expectations and we expect to launch our new core banking platform, along with Hollow the Core over the next 12 to 15 months and that will help us to be ready for the next 5 years as far as technology is concerned. And that's from my side, and we'll be happy to engage with you on a one-to-one basis as we meet. Thank you.
Thank you, everyone.
On behalf of Go India Advisors, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.