This year will go down as one in which a fog of confusion enveloped consumers and distributors of financial products. While mutual fund agents feel as if the regulations are trying to kill their business, insurance agents are protesting reform that is yet to be announced.
Consumers are confused about what to pay, to whom and how much. I have been tracking this change fairly closely and have written frequently on it. Mails and comments on previous columns and off-line views tell me that there is much confusion out there on what the distribution market will look like once this second wave of financial sector reforms is over.
The first wave opened up the gates to financial products that an average Indian needs—mutual funds, insurance products, pensions, home loans—and they are all there in a largely usable form. The consumers are all there as well. But the conversion of demand to supply is not happening. Issues of trust, access and transaction ease are holding back the demand and supply from meeting.
If we read the spirit of the regulatory changes in 2009, the second wave of reform is aimed at clearing the way for easier, swifter and more transparent transactions. I’ll take a shot at what the financial product distribution will look like in 2015.
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Distribution will not die. It is an integral part of the handshake between consumers and product manufacturers. And distribution will not be free. It cannot be. But the manner of the distribution, and its compensation, will change. From a largely low-value-add agency business, a structure that has compensation linked to the service provided will emerge. The biggest, in terms of numbers, will be the bank distribution network vending funds, insurance and pension products, at a small transaction cost to its customers. At the mass level for the financially included population, the banks will be the biggest beneficiaries of the regulatory changes we’ve seen so far. The banks have the trust, the distribution reach and the customers to most efficiently sell products across the country. In addition to the banks, there will be a few large retail distribution powerhouses, not unlike the Charles Schwab model of the US. Those that have the money to invest in technology and building a distribution chain will put in place a pure vending plus advisory service system. The key reason for this corporatization and streamlining will be economies of scale since one of the key costs will be technology and a centralized system driven by administrative needs.
The small agent, who today just collects signatures and forms and has neither the knowledge nor the intent to advise, will either become an employee of one of the large distribution powerhouses or upgrade his services to become a higher value-added financial advisor or planner. These will be boutique services by financial advisors and planners, and will be serviced by centralized administrative service providers like the platform that is already being put in place. There will be greater reliance on some form of certification to allow this market segment to distinguish itself from the pure vendors.
The third part will be the small (and in India, even small has many zeros) do-it-yourself population who will choose products and transact on their own. Most transactions will be online or through large clearing houses, such as stock exchanges. They will like the virtual comparison shopping and delivery modules and will be willing to pay a small transaction cost to avail of these services.
While this takes care of the financially included population (those who have a bank account), there is yet the issue of distribution to those outside the banking system. Expect mobile banking and the microfinance pipeline to transform this space. The banking regulator is already removing many roadblocks to mobile transactions and some microfinance initiatives are already moving beyond credit delivery. A uni-product distribution system is high-cost waste. Expect micro insurance, mutual funds, pensions all flowing through this pipeline in the times to come.
While some reform has got underway in 2009, there are still roadblocks to this world view. The direct stocks, mutual funds and pension pieces of the market are largely in place for this changeover to begin. What holds this process back is the blinker-wearing insurance regulatory system. The Indian insurance industry is a textbook case of regulatory capture by a small group of deep pockets. If this were not true, how would we have insurance products that are designed like investor traps? But 2010 should see some big-bang regulatory changes in insurance, with either the regulator finally understanding that it is not an industry association that they run in Hyderabad or change coming anyway to the industry.
2010 will be a year of much more change and uncertainty for the distribution industry. But some smart companies are already preparing for 2015 and putting in customer-friendly business models that aim at cutting cost, easing transaction efficiency and significantly enhancing transparency in financial products and services.
Monika Halan works in the area of financial literacy and financial intermediation policy. She is consulting editor with Mint and can be reached at email@example.com