When his brother and wife couldn’t figure out which was the best home loan on offer even after 10 days of research, Adhil Shetty, then working on Wall Street, thought of it as a business opportunity. Shetty relocated to India in 2007 and now has Bankbazaar.com, an online marketplace for loans, up and running.
The online service offers to find the best loan products and cut transaction costs by using technology and tie-ups with banks and home loan companies. Others in the same space of comparison shopping of financial products include Apnapaisa.com and Policybazaar.com, which offers to help you choose the best insurance policy.
All of them promise to find you the best deal in the loan, investment and insurance products you are seeking and help in facilitating the transaction. Sure, you pay, but they claim that because most of their work is done online, this cost is just a fraction of what you would otherwise incur. Shetty, for example, says that he can cut the transaction cost of a home loan by 70% from the current Rs10,000-15,000.
It’s early days yet, but I see a trend taking shape with a second wave of services and service providers coming to the consumer financial products market. The aim is to improve decision making, reduce costs, save time and spare the consumer the sense of harassment that comes from having to deal with financially illiterate hit-and-run entities, known as direct selling agents.
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Today, taking a home loan, buying and selling a mutual fund, paying an insurance premium, consolidating finances and making financial transactions are a cumbersome and fragmented process. So tedious is the process that most financial decisions hang until they become unavoidable, like at tax saving time. If, as the first generation of users of financial products such as home loans, credit cards and mutual funds, we go ahead and test uncharted waters, we’re finding that we need another level of service to stay on board. We need an upgrade in accessing these products, maintaining, switching and consolidating them. To get banks, funds, loans, credit-card companies and insurance agents to talk to each other or to a central place, so that a consolidated map of my financial life appears on a screen, is impossible today. Even transferring money across locations, vendors and products is a sticky task.
As the need—it is not demand yet—emerges for more order in dealing with a variety of financial products, we’re seeing a second wave of capital—both money and human—coming into the market. The first wave was the big-ticket investments into financial products such as mutual funds, insurance and broking. These were the large investments that went into developing financial products and seeding the market to create demand. Now, almost 15 years after the entry of competition into this market, we’re looking at an influx of players who are coming in to take care of issues that relate to how the consumer compares, buys, sells, stores and maintains these financial products. If the first wave built an inventory of products, the second wave is building distribution and other services that will go a long way in streamlining our financial lives.
Though the full-service suite is yet to come to India, first in the pipeline seems to be comparison-shopping and facilitating business that promises to trim the fat layer of cost in most financial transactions. If it now costs 10 cents for a credit card delivery in the US, the Rs2,000-3,000 that it costs in India is ripe for a cut. Similar is the fat layer in transaction cost in health insurance, home loans, mutual funds and life insurance policies. Commissions are already under fire in the mutual fund industry and insurance will have to soon fall in line—nobody can sit on such huge transaction costs in one part of the market.
Two things are preventing more such services from coming to the marketplace and are preventing costs from being driven down further. One, product structure often prevents an easy decoding of a product and does not allow a fair product choice mechanism to be put in place. The worst product in the space is life insurance, which is impossible to compare, and hence the consumer remains hopelessly confused about what she has bought. Even comparison modules find it difficult to compare investment-embedded insurance policies for a fair answer. Two, regulations prevent a seamless linking of financial products from their back end; the regulatory world-view is largely product manufacturer driven rather than user driven. If regulators would look at this from the point of view of the consumer, they would see that the world is not split into different silos. Regulatory convergence at some point will be needed to iron out this wrinkle and finally drive costs—both time and money—lower.
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.