I am sure that sliced bread is something you take for granted today. On the contrary, do you expect anything else but sliced bread when you pick that packet from the store? A walk down the annals of history would give you a completely different story. Otto Frederick Rohwedder was the first man to conceptualize sliced bread. But, surely to his dismay, it took 15 years and a brand called Wonder Bread to make it acceptable. Therefore, the phrase, “the greatest thing since sliced bread”.
The financial distribution space in India can be broadly categorized into three channels—banks, institutional distributors and individuals. Institutional distributors, for the benefit of better understanding, may have a national presence, regional presence or just a local presence. The number of participants increases as you start coming down from banks to institutional distributors to individuals. So, if you were to visualize a triangle, banks would be on top (few in number), institutional distributors in the middle (more than banks) and individuals (with maximum presence) right at the bottom. For all those who are at the top of the pyramid, distributing financial products is part of a large variety of offerings. This is evident when you walk into any of their branches—the services they offer vary from trade finance, loans and deposits to vending gold coins and selling insurance. Their core business is banking—do I have to say that? Their satellite business is everything else. But come to the bottom of the pyramid, have you wondered what is the core business of individuals? It is supplying you the choice of various financial products.
So, why I am sharing this theoretical core and satellite business concept with you, and of all things, what has sliced bread got to do in this entire story? The answer lies in choice. The choice that you exercise defines what stays and what doesn’t. And your choice can be influenced by various things—some being branding, advertisements, number of years in business of your service provider, references of your friends or family or, maybe, just impulse. But, whatever the reason, you can choose. That is the power you have as a buyer of a product or service. Now, how does your choice of a particular channel have any impact on financial distribution? Let me explain that.
A large part of what we earn is saved by us in either our bank accounts or tucked under the pillow or stashed into a cupboard. Numbers also speak that only a very small part of this saving gets channelized into investments—insurance, bonds, mutual funds and the like. Which means that in a large country such as India, there are many people who need to be made aware of the choices into which their money can be invested to work for them? Can that be achieved by only one channel? Maybe, you think banks can do it since they are everywhere. But is that their core business? Unfortunately, no. So, who can potentially contribute in this mammoth effort? Your next door individual adviser. And a few million people like him who have dotted the entire country in the hope that they will earn a living by giving you the choice for your money to work and by providing an end-to-end support for executing the decision. A simple example could be: “For a three-year investment, you can have a look at this postal deposit, this bond, or this mutual fund scheme and save tax.” Once you have made that choice, say a mutual fund scheme to save tax, he will help you fill up the form, collect the cheque, deposit it at the right place and come back to you with a receipt of this investment and follow it up with a statement of accounts from the mutual fund company.
But are you aware that regulations are fast changing for both mutual fund and insurance distributors? For mutual funds, regulations mandate that you, as a customer, will decide what to pay your distributor after evaluating his services. I hear that the day isn’t too far for insurance agents too. For individuals (and many institutional distributors), who make their living out of this activity (this is their core business), their first-year earnings have shrunk by over two-thirds. Imagine what would happen to you if your salary was slashed by two-thirds. The challenge for our mind is to start thinking differently—appreciate that service comes at a cost and one has to pay for it.
So, unless you, the customer, decides to pay for the services, we are headed for a sliced bread history in financial distribution. No commercial enterprise can afford to give you any free service—if they do, you would pay for that “free” service when you avail some other service from the same entity. Unfortunately, this cross-subsidization cannot come from people with only one core business. People who cannot afford to falter on their daily bread activity will start disappearing and, perhaps, it will take another 15 years (and realization that sliced bread was what it was all through) before we understand how costly their absence would be for us. Over 2 million existing self-employed and around 6 million over the next 15 years is what can vanish.
The greatest thing since sliced bread will then be every Indian investor paying for the services he has taken.
Rajesh Krishnamoorthy is managing director, iFAST Financial India Pvt. Ltd.
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