I’m not sure it will work. I’m in Pondy (Puducherry) on holiday and almost out of cash. I have my ATM card but my bank does not have a machine here. And you can’t pay an auto guy 30 bucks with a credit card—at least not yet. I confess to never having used my ATM card on another bank’s machine—never had a need to and a basic distrust of machines that chew up cards has kept me faithful to my own bank’s ATM machines. But this is an emergency. I need cash. With a fair bit of reluctance, I stick the card into another bank’s ATM machine, punch in the password and watch the transaction get under way with a wrinkle of doubt. As the machine counts the currency notes with a whirr and spits them out, I let out a small cheer. For being liquid again. For technology that makes this possible. And for the regulator who made this happen, though there is now a limit of Rs10,000 a day with a maximum of five transactions a month in other bank ATMs.
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“Portability” of a service, says Wikipedia, is “the general characteristic of being readily transportable from one location to another”. Portability allows customers to move from one service provider to another, without cost or loss of accumulated benefits (think no-claim bonus on car insurance), for reasons of being unsatisfied with service or performance. Restricting this movement to a maximum number of times the customer can move, prevents needless churn in business yet allows customers flexibility. Portability is usually a demand from existing customers and from the new entrants into a marketplace, with the incumbents always fighting it.
Mobile phones in India are a case in point. Mobile number portability, which has been on the cards for so long, looks as if it will get pushed to April 2010.
I find it fascinating that the need for portability is being felt simultaneously across many different areas—telecommunication, banking, investments and investment services—in India.
I see portability as a Stage 2 reform. State 1 reform is usually one that gets a new service into a marketplace, most often with private sector participation. This could be mobile phones, the use of ATMs or long-term market-linked investment products. There is an initial period when the newness of the service is good enough for customers. It takes a while for users to get used to the service and experiment with it. In seven to 10 years, customers figure out glitches in the system and the need for portability emerges. Frustrating experiences with the service provider and the inability to shift out to a new market entrant who is offering a more efficient service make portability a demand. The inability to shift could stem from a high cost of exit in terms of loss of an address book, or hooks embedded in the system that prevent exit, or the loss of benefits accumulated during the years with the current provider. Or simply front-loading costs in a long-term product.
In the long term, non-guarantee carrying financial products, one feels the need for portability after about five years of holding a financial product. My hesitation in recommending a unit-linked insurance plan (Ulip), other than the fact that the product is built like and sold like a trap, is its lack of portability. It’s a 15-20 year product that has costs loaded into the first one or two years. So imagine that you are in the eighth year and you find that your stock market-linked product is lagging the benchmark index by 5 percentage points. The least a managed fund can do is beat the index plus cost. Quitting at this point would mean exiting a product midway, while having paid for the full term. To enter another Ulip would mean another set of costs, with the same lack of portability risk.
Other products in the market are portable. Mutual funds have no load and if you choose to go to a no-load vendor of funds, you get full portability. The New Pension System has been designed as a fully portable system, where the investor can, once a year, switch fund managers at no cost. (I was an advisor to the Pension Fund Regulatory and Development Authority till November).
A recent example of portability is the freeing of mutual fund investors from distributors who were reluctant to let them (and their trail commissions) go. The ridiculous need for investors to get a no-objection certificate from existing distributors is now not there. Another area that is portable is in medical and car insurance. The no-claim bonus that you can build into the policy is portable to the new company, if you decide to shift for lower premiums or better service.
Smart investors worry about portability when they enter into financial products, especially those with a long-term horizon and those that carry huge entry costs.
Monika Halan works in the area of financial literacy and financial intermediation policy. She is consulting editor with Mint and can be reached at firstname.lastname@example.org