This is a story about the pest control industry and its similarities with the home loan industry. Can there be any parallel between the two industries? Read on to know how.
Pest control companies quote a price for an annual contract for undertaking pest control treatment of your house. Before selecting the vendor, you look around in the market to find out the fee various companies charge. You find that the particular company you are intending to choose is a known company and offering good services at competitive prices. You go ahead and sign the contract. The charge is on an annual basis but the company reserves the right to vary the price during the year, subject to market conditions such as rise in raw material (chemicals) prices. From time to time, the pest control company sends you a communication stating that the prices of raw material used have gone up and accordingly they increase the price. Everything is hunky dory as you are being rendered perfect services by your chosen vendor, till Mr Sharma moves in next door as your neighbour.
Mr Sharma has exactly the same flat as yours, and now it is his turn to get the pest control quotation. He enquires about your pest control vendor and you recommend him your company. He also checks on the annual contract fee you are paying. The real shocker comes nearly a month later when a chance meeting with Mr Sharma on the building staircase brings forth the startling revelation that he (Mr Sharma) has been offered a much lower price by your pest control company for exactly the same annual contract. You feel cheated.
With a little bit of research, you realize that the company has hiked prices nearly five times since the time you signed the contract. Though you remember reading in the newspapers, that raw material prices have come down, they have not passed any of the reduction to you. You begin wondering how this industry not only survives but is also thriving. The industry that is extremely competitive, takes new customers at competitive prices and then goes on to milk them by continuously hiking the prices whenever raw material prices rise, but refusing to drop prices when the raw material prices drop. This goes on ad infinitum despite the competitive nature of the industry.
My apologies to the pest control industry for using them as a prop for this story (fortunately this is not how it works in the pest control industry). But if you replace the pest control industry with the home loan industry and the annual service contract with a home loan, it will strike a chord with millions of households across the country.
All of us have read that acquiring a new customer is several times more expensive than retaining an old customer. But retail lending industry functions in a different world altogether. Here you have an industry that is spending money to acquire new customers, but once a customer comes into their fold, they extract extra money from him over the years. And each and every company in the industry does this, though the degree can vary. So how does the hyper competitive home loan industry thrive in spite of doing this year after year after year?
Customers only pay attention to what they are paying at the time of entering into the contract. After that they stop even opening the envelope of communication received from their lender from time to time. Most of them blindly sign the papers that the lenders ask them. In fact, once they take the loan, there is not much to choose between them and a flock of sheep being led by a shepherd (the lender). This way the entire activity of this highly competitive industry is focused towards acquiring new sheep (customers).
When a few of the sheep dare to question the practice and threaten to desert the flock and join a rival flock some of them are placated by offering a few sops. For those who still insist on desertion, many barriers are erected. The biggest is that they cannot go to a rival without taking their documents, which they cannot get unless they make the full payment and they cannot get the payment from the new flock unless they get the documents in the first place. A perfect catch-22 situation. Only a few very persistent customers can overcome these created hurdles to shift to a rival flock where the story starts all over again. Therefore, this industry goes on working in the cozy environs, where the entire competition is towards getting the new customer to be treated shabbily later and getting away with it. The conspiracy of silence makes sure that the state of affairs continues.
What’s the solution
So what could possibly break this catch-22 situation? Of course if all the sheep turn ferocious and jump ship or demand to shift and are determined to do that, the entire conspiracy will fall in tatters. But then sheep are sheep. This looks like a far-fetched dream in a country like ours, where financial literacy and awareness levels are quite low.
A better possibility is the arrival of an aggressive well-known lender who wants to get a market share. After all the new lender gets access to a customer with a proven track record of payment and with the property probably already being lived in (hence construction risk is also eliminated) and more valuable than when it had been bought, and probably with a better income profile compared with the time when he had taken the loan makes the proposition attractive from the new lender’s perspective.
The only thing that he has to manage is the process of breaking the classic catch-22 situation for which there are several solutions if the spirit is willing. Being customer friendly is just an added bonus.
The home loan industry has left this gap wide open. The last time a big competitor came in, the unfriendly annual rest system of interest calculation was laid to rest forever. This time it can possibly make the floating rate loans truly floating.
Harsh Roongta is CEO, ApnaPaisa.com.
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