BackgroundThis summit was organized by Inventicon Business Intelligence on 4th and 5th July in Holiday Inn Hotel in Mumbai. I got the opportunity to Chair the summit for two days. The background of the summit was to discuss how to fulfill the customer’s need in providing financial solutions that meet their demand; to identify the areas of customer education to enable them making right choice for their financial needs; how to innovate products and services making it useful for customers and what are the emerging trends in technology that can be leveraged to enhance the marketing and distribution. There is a changing landscape of Indian customers where their jobs are no longer secured, the spending pattern of the younger generation have taken a turn towards more spending and less savings side, there is an emerging trend about change in lifestyle with more emergence of diabetes and hypertension at an early age; the retirement benefits are to be self funded. Such changes over the last two decades require changes in the products to suit the emerging needs of the customers. Also need to be considering the change in the marketing and distribution from more traditional approach to online and digital mode. The present day customers require more ease of operation in their execution, so the providers need to be prepared for the present day change and emerging future. Digitalization is the new mantra for success. This change not only going to transform the Indian financial market in future but this will also giving totally new risks that this side of world have never witnessed. So this is a very challenging environment for the financial services players to operate in next one or two decades. Those who will manage the digital world better with better risk management will be the new leaders. The summit tried to answer some of the above questions whose details are given below
Customer’s needThere was almost consensus that the identification of customer’s need is one of the key requirement for the success of financial companies especially where some of the areas such as insurance and mutual fund require more of a push. Market research is one of the important tools to identify the customer’s need; however, many Companies still consider market research as luxury. It means that most of the financial players are manufacturing their products based on the sales feedback. There is a need to change in the approach of providers to reach the customer to understand their need, this could be expensive but the sales volume may recover an additional cost incurred on market research. Understanding of the customer’s mindset and their trust on the brand value are instrumental in the buying behaviour of the customers especially in the banking and insurance sector where traditional customers like to move more towards established brand. Customers are looking for simplicity over more choices responsible for the success of financial distribution; the providers are to understand the limited understanding of the customers and every customer should not be judged from the yardstick of metro city customers approach. More choices to the customers may confuse rather than providing more choices. May be for more sophisticated customers, more products choices may given compared to lesser sophisticated. It is important to read the customer’s mind, where they look to assured return irrespective of whether the providers are mutual fund or insurance. This mind set is more influenced by the various advertisements on the assured return along with past history of fixed deposits in the banks in the past. Manufacturing of products based on target market makes a more focused approach rather than fitting everyone with the same products. A lesser financial aware customer may not be ready to take more risk compared to more financially aware customer who may take more risks and invest in equity related products.
DigitalizationIn the first revolution up till now came through customers physically visiting the stores and making purchase; however, things have fast changed over last decade in India where there is a lot of focus on customer’s ease of operation with the use of online and digitalization. With the advent of smart phone, cheaper data and focus on online distribution are fast changing the way Indian customers make their purchasing. The providers of products are also spending more money in upgrading their infrastructure to meet the future demand of online services. Even in the villages, they have started using the cheaper smart phone imported from China. The size of the bank branches are shrinking even in the rural areas and mobiles are taking the place of bank branches. In the future, the bank branch may cease to exist with mobile doing the job of the bank. The banking industry is spending on digitalization, sensor based technology, artificial intelligence and internet of thing. As a result of this, there is already a paperless account opening/mutual fund and personal loan, one app for all bank needs, paperless credit and debit card etc. On the security side, strives have been made towards enhancing the security compared to current One Time Password (OTP) through face recognition, iris scan, speech recognition and finger print. It is acknowledged by everyone that Addhar has really helped in digital verification of customers and it is very convenient. All the financial services industries mutual fund, insurance and banks are spending on the upgrading the infrastructure. The future survival of financial services industries will depend on new technology for marketing and distribution. Some of the older methods of reaching to the customer may go away and taken up by softer mode. With such a rapid change in the landscape, new level of fraud and risks will emerge, so the future success will not only depend on the investment on digital but on the risk management of digital risk because the entire market will change. From the customer’s point of view, they also have to learn to store the soft files and retrieve at the time of need. In this regard some of teething problem may need to be addressed through the customer education.
Customer educationThere is a need to invest in the area of customer’s education; this is true at least in mutual fund and insurance as banking is known to everyone. It was made to know that the penetration of mutual fund is lower compared to the insurance industry. It was also informed that the mutual fund is investing around 2 basis points of the total mutual fund towards the customer’s education. A similar approach is required in the insurance industry as well. The penetration in the insurance industry is largely due to the regulatory push either due to tax benefits in the insurance products or mandatory purchase in the motor insurance. Even for the health insurance is largely driven through mediclaim sold by the general insurance companies and purchased as a bulk product for employees by the employers. The true insurance penetration would come only if customer walk to the insurance company branch to purchase for the protection or savings need, for this purpose customer’s education is must. The regulator may keep few percentages of Assets Under Management for insurance companies mandatorily putting in the customer education kitty.
Insurance SectorCustomers continues to pose challenges to insurance companies in all the three areas of life, health and general insurance with regard to meeting the top line and stickiness with one insurance company. Customer’s need continue to be the prime criteria of products manufacturing focal point. The key challenges in the distribution have been what customers want, managing the distributors and their needs and satisfying their demands, creating a balance between various stakeholders such as shareholders, regulators, customers and distributors, time lag between the concept stages to launch stage such time lag may wipe of short to medium term opportunities. The regulator has brought up simple product concept through point of sale (POS) , where the short term demand can be catered. On the technology side, insurance companies are heavily investing into the digital world and it was acknowledged the help online system have provide in knowing the customers through the use of Aadhaar. On the health insurance side, some companies are focusing on customer’s wellness side rather than focusing on sickness pitch. This means that insurance companies are focusing on the customer’s wellness through regular monitoring of customer’s fitness and adjusting the premium in the subsequent year. This helps in customers in the good health, help insurance companies through increasing the customer retention and also help in managing the claim ratio to the manageable level. However, such connect with the customers has its own cost, which if managed well can be very useful for all the stakeholders. This wellness approach helps reaching the customers with existing disease as there morbidity will improve with regular monitoring. A similar approach can also be made in the life insurance sector subject to regulatory approval. This approach may however present some challenges in adjusting the future premium due to improvement in health as premium remain level through the policy term. This could be possible under reviewable term products after a frequency of five years where the experience of term portfolio may be passed to customers by increasing the sum assured.
Mutual FundThough mutual fund is in existence since the days of Unit Trust of India in 1963-64, however, relatively a new player in the game compared to insurance and banking. The penetration of mutual fund is lower than the insurance partly due to lower exposure of people to these products and partly due to little regulatory push compared to insurance products where tax benefits are there. For common man, mutual fund presents different opportunities in maximizing the return based on their risk appetite. One of the key features of mutual fund products is that it presents inflation linked return. On a one hand the availability of liquidity in the mutual fund presents a good opportunity for the short to medium term investors to liquidate their assets in case of need, while on the other hand could pose challenges for long term investor who may get lured with liquidity defeating long term needs. However, this is design issue of the products, may add more variety and vitality if the locking period in increased to 15 years matching with PPF by tenure and higher return due to exposure in mix of equity and bonds. The mind set of customers are now changing from assured return mode to taking more risks, however this phenomenon is observed in metro cites compared to other places. The customers need to understand when taking risk that they may not make money all the time, for this purpose, long term investment is necessary. The industry has seen tremendous growth over the years –as of May 2018, AUM stands at Rs. 22.60 lakh crore; there are 7.35 crore folios or accounts, and 39 fund houses or AMCs. SIPs contribution more than doubled from Rs. 3,189 crore in May 2016 to Rs. 7304 crore in May 2018. In the mutual fund advertising and marketing is governed by SEBI MF Regulation 1996. There is a requirement of use of no celebrity in the advertisement; the advertisement cannot display of future prediction, this could be due to uncertainty that market presents to the investors. There are defined parameters for print media as well as for the audio-visual where disclaimer on the screen for at least 5 seconds, in a clearly legible font-size covering at least 80% of the total screen space and accompanied by a voice-over reiteration.
BankingThe banking industry faces comparatively lesser challenges in reaching to the customers compared to insurance and mutual fund, due to historic presence of banks for savings. Some of the banks are making innovative ways to reaching the rural areas, where the marketing is based on the tools available within the rural areas such as sponsoring the local sports where the rural population participates in a big way. Such banks are also analyzing the customers’ behaviour to identify suitable product for them. It is observed that even in the rural areas, smart phone has reached and they leveraging this tool to reach to them. A similar approach may be used by the mutual fund industry and insurance industry; this will also reduce per unit distribution cost. The needs of the customers in the rural areas are very different compared to urban areas and banks are using such differentiation. It is observed that in rural areas, the ticket sizes are smaller, say the personal loan could be in the range of 20K to 30K.
Housing FinanceHousing finance is a relatively new product compared to banking and insurance. The post liberalization of the economy has given boost to the income younger generation leading to increase in purchase of housing at an early age compared to earlier regime of 1990s and earlier. Since the year 2000 there have been spurt of housing projects where many people purchasing multiple houses for investment purpose. The economic turmoil and demonetization have taken a hit in the housing sector affecting adversely the housing finance. The repayment of loan by the customers is dependent on job security which in turn dependent on not only the local economy but also global economy due to many back offices jobs in India. The risk of property market crash will be there till the time we are dependent of the development of the global economy. Similar of other financial products, housing loan also have low penetration at 2.5%, which is much lower compared to China at 5.4%. The maximum housing loan penetration is in Sweden at close to 60%. This indicates that there is lots of scope for improvement in the future. The tenure of the loan is lowest in Turkey at 7 years and 45 years in Sweden with median term of 25 years. The Government’s initiatives of housing for all by the year 2022 will increase the housing loan demand. The customer segmentation is based on income level and their attributes are different; more elite customer is digital savvy, their credit history is relatively easily available and income details are easy to access. The customers with lower income segments, credit history details are not so easily available, the income documentation availability is challengeable and they are lesser digital savvy. In this sector, the loan disbursement process cannot be all completed online as the customer is to visit the bank branch. The establishment of Real Estate Regulatory Authority (RERA) by the government in 2016 has helped the buyer restoring confidence in the sector. The projects by the builder and agents are to get registered with the body. Until now the terms and conditions were in favour of builder, this will create more equity among the customers along with the confidence. The 2018 budget have taken sheen out of buying the second house, this may impact the housing loan industry. From customer’s point of view, the second house investment may not be easy now. This would mean that customer will park their money in other financial instruments such as mutual fund, insurance or directly in the equity market.
ConclusionOverall, the summit was a success with many different topics coming for discussion ranging from banking products; insurance, mutual fund and housing finance. Some of the common theme coming out was focus on customer’s need, the market research was acknowledged as luxury, but agreed that this is great tool highly underutilized. There was almost an consensus that there should be another summit on the customer education. The investment on customer education will go in long way helping the financial services industry in gaining the strong foot print for long term. The customer education will also reduce the mis-selling. Digitalization is a next wave and those who manage this platform better will be the future market leader. Those embarrassing the digitalization late may go in a Nokia way. The rural sector presents large potential, they need to be leveraged as a separate customer segment and deal with them separately, there needs are very different compared to the non-rural areas.
CMIRM, FRMAI, PIOR, SIRM, CRICP
Ambassador in India of Institute of Risk Management, London and Joint Secretary of Risk Management Association of India
Disclaimer: The views expressed are mine and not necessarily of my employer.