The future of your money

It is a regular Saturday morning and you are on your way to buy groceries for the week. Once you have loaded your shopping cart with tomatoes, bread and eggs, you stop by the counter and sign up for a systematic investment plan in the new real estate exchange-traded fund.

You are of course, an Outlook Money reader who has already decided what product to buy. While there, you also decide to buy a term insurance on your housing loan. At the check out, you flash your new credit card - issued by the supermarket and earn four times the loyalty bonus over your regular card.

You step out and decide, maybe it's time to sell some shares. So you walk around the corner to your broker's kiosk and in three easy and secure steps book your 25 per cent profit before driving away to catch the latest thriller and some popcorn.

This is not something out of a science fiction movie about a time many eons from now. This is you in 2008, the next calendar year, if not sooner.

The Indian financial services intermediaries industry - a term that does not do justice to the profession or the excitement in the industry - is set for a face and body lift, and life for us, investors, may never be the same again.

Remember, the banking industry before private banks and ATMs, when every little need for cash or credit involved going to the branch and endless waiting? That is where the broking and distribution industry finds itself at present.

Big changes - in technology, service levels and costs - are set to completely change the way we look at investments and loans, and financial supermarkets and one-stop shops would change the way we buy them. Let Outlook Money hold your hand while we walk you to a cheaper, faster and cleaner future. A part of that future is already here, and the rest is soon to come.

Background buzz

Over the last year, there has been a definite buzz in the intermediation industry. Every once in a while there was speculation about Indian broking houses being acquired by foreign ones, large domestic groups setting up their own financial services companies and so on. In the last three months, several of these 'rumours' started becoming realities.

In November, BNP Paribas, Europe's second biggest bank, acquired over 33 per cent of Geojit Financial Services. Even so, market sources insist that this is not the end of BNP's ambitions for India - it is speculated that it is in talks with various domestic intermediaries with large mutual fund and insurance client bases to buy into.

In March 2007, Citigroup Venture Capital acquired 20 per cent of Anand Rathi Securities. And now JM Financial Services announced picking up 60 per cent of ASK Securities. Lehman Brothers is speculated to buy majority shares of Brics Securities.

The second phase of the buzz was large Indian companies setting up subsidiaries to offer broking and distribution of all financial products and services at a one-stop shop.

The biggest announcement in this category was about Reliance Money, started by the Anil Dhirubhai Ambani Group, and its ambitious plans of opening more than 10,000 outlets over 5,000 locations across India. Within three months of operation, 3,000 such outlets are running in 700 locations.

Retail giant Kishore Biyani of Pantaloon fame also set up Future Money, a consumer lending and investing company that will operate through his retail outlets. In June, the Tatas announced their foray through Tata Capital.

So why are so many players interested in giving loans, selling  funds, insurance and shares and helping us make our financial decisions? First is the oft repeated India story - let us just summarise it and get over with it.

Due to over 9 per cent GDP growth, booming economy, more jobs, better paying jobs we all have more money that we need help with. Second, is the interesting Indian savings conundrum. We save a massive 30 per cent of our GDP but have so far preferred to leave it at the bank or in fixed deposits, National Savings Certificates, gold and post office saving schemes.

Our money remains relatively safe in these instruments but earns uninspiring returns. The young, new 9-per-cent India wants to take more risks with her money and definitely wants it to work for her - so she is ready to look at MFs, insurance and direct equity.

What's more, the continued bull run in our markets for the last three years has not hurt. The Sensex has now breached 15,000 and no one is batting an eyelid. Foreigners are pumping in liquidity, and corporate growth is justifying valuations. Retail investors have tasted profits, and could do with lots more. And this is exactly why your broker's industry is multiplying players and branches by the day.

Just as the investment of big bucks in telecom, automobiles and airlines has meant a cheaper, faster and cleaner consumer experience, we predict the same will happen to the financial intermediation industry. The motley agent will morph into a corporatised interface with lower costs, similarity of advice across locations and portability of accounts across the country.

What we have here is the first information report to alert you to the new service paradigm, but do continue to track this segment in the subsequent issues since we are keeping a close watch. Here are the three changes that you need to watch out for.

Change one: Faster

The more visible changes would be in how new and existing products would be made available to you. Today, you have a choice of going to a branch and making a transaction, dialling a call centre or accessing through the Internet.

Soon, you would be able to walk into a kiosk - much like an ATM - and buy and sell all kinds of investment products and apply for all kinds of loans. Reliance Money is betting big on the convenience and easy accessibility of these kiosks and has plans of setting up thousands of these.

While today you need to deal with at least five to six agents, at these one-stop shops, there will be one interface and one customer number.

The key words in your future financial transactions would be faster, more convenient, and hassle free. "I am sure this (entry of large players and consolidation in the industry) will result in a lot more sophistication in service delivery and spread. I can foresee the application of best of the class technology apart from building physical reach. I am of the view that investors should demand more in terms of service and quality now," says C.J. George, managing director, Geojit Financial Services.

Getting loans to buy that jumbo refrigerator or go on a dream holiday would also be as easy as buying your groceries. Future Money, the financial services arm of Future Group, would be selling you loans through all their retail formats across metros, as well as big and small towns. This would ensure two conveniences.

One, consumer loans would be processed quickly without you having to talk to multiple people and furnishing various sets of documents. The retailer and the financier would converge and you won't have to run between them.

Second, you could borrow money to buy a larger number of products. While regular consumer loan companies only finance standard goods like refrigerators, washing machines and other large ticket white goods, Future Money would finance anything that you buy from their stores that are above a certain value. "Even if you buy pipes worth Rs 10,000 from our home store called Home Town, we would finance that," says Rakesh Makkar, CEO, Future Money.

Future Money is aware that established competitors like Citi Financial and GE Money would offer customers best possible rates. What they are betting on is that they would offer more conveniences to the customer. Asserts Makkar: "Today, costs are already low for the customer. Convenience and speed are the key."  

Change two: Cheaper

The broking charges we pay are already one of the lowest in the world. With this in mind, it would be irrational to expect to pay significantly lesser in the future. But, it is likely that you would get more bang for your buck. Costs, across products, would get rationalised, some more than the others.

Broking charges vary from 0.06 per cent for day traders to around 1 per cent for delivery-based trades. While the bands per se may not dip drastically, the rationale behind these charges might. Several brokerages provide slab wise charges - the more you buy, the less you pay.

"Today, if I am a broker, I'm connected to the exchange through my screen. You call me up and say you want to buy 100 shares of Tisco; another person wants to buy 1,000 Tisco shares. Everybody charges a certain percentage as transaction fees.

The effort is the same but the charges are different. I answer the call, and punch in 100 for you and 1,000 for her. But, for the same effort, I am charging the other person 10 times of what I am charging you. This is not the way our industry should operate. Our cost structures would become more rational," says Bandyopadhyay.

With more and more investors buying MFs on the Internet, our front loads will come down from the current 2.25 per cent as distribution costs reduce for asset management companies. However, this change would not be immediate, say insiders. Large MF distributors have a stranglehold over AMCs and a rate slash would not be easy to force through. But, with time, this is not just a possibility but a certainty.

Insurance, on the other hand, focuses on restructuring of costs. The costs will not be front loaded in the future, but staggered over the life of the policy. Instead of charging up to 70 per cent of the intermediation cost in the first three years and the rest 30 per cent over the rest of the life of the 20-25-year policy, we may see a situation (probably the first in the world) of an equal front load for the life of the policy.

Not only will it stop commission-greedy agents from churning unit-linked insurance plans (Ulips) every three years, it will allow investors to switch between non-performing companies to performing ones, without losing too much money.

What will Reliance Money offer that its competition hasn't?

For one, let's look at where all the reputed brokers are today? They are in the metros, mini-metros and B-class towns. Beyond that, there is hardly anything. Whenever there is a good public issue, the places from which the applications come are far larger than the places in which there are large financial intermediaries. The ground reality is that there is a huge demand for financial services from a credible player, which is not being met. We are trying to spread our reach, which is a strength that most large players do not possess today. Today, we have over 3,000 outlets in 700 cities and towns. If you analyse the country there are about 5,645 tehsils. We want to reach all of these by the end of this financial year with 10,000 plus outlets. These would be a combination of franchisees and company-owned outlets. The second aspect is cost, we want to enter in a manner that is beneficial to customers. We analysed the industry and how things have changed in the broking industry. A broker is connected to the exchange through my screen. You call me up you want to buy 100 shares of a company and another person wants to buy 1,000 shares. The effort is the same - I answer the call, and punch in 100 for you and 1,000 for her. But, for the same effort, I am charging the other person 10 times of what I am charging you. Our cost structures would be more rational. What are the products and services you would offer? As a broker, we provide a financial transactions platform, which enables you to go and trade. We have equity, commodity, offshore investments, mutual fund distribution, life and general insurance, money changing and money transfer. We have started distributing credit cards and we will get into loan products also. You can even go to our website and buy mutual funds. Online you need to be a registered user to transact, offline you can walk into any of our stores and transact. Our outlets will have the entire gamut of services under the same roof. We also advise based on a financial planning module. So, will you give the customer what he asks for or will you advice him based on what's best for him. For example, will you sell a unit-linked insurance plan or a diversified equity fund? If a customer walks in with a preconceived view that he wants to buy a Ulip and he knows which Ulip, then we give it to him - we are brokers and we will facilitate the transaction in that space. However, if someone is coming for advice - we have a financial planning module based on which we give advice. The customer fills in a questionnaire, based on which we will tell her to take a term insurance as it is cheap and invest in a mutual fund. I know that Ulip may not be advisable. But 90 per cent people come with the intent of buying one. But there is a scope for giving advice in a structured manner and we are trying to do so. Sudip bandyopadhyay, Director and Chief Executive Officer,  Reliance Money

Change three: Cleaner

With financial agents mistrusted across the globe, this is one of the toughest areas to regulate. What happens in the close confines of an agent's office or your living room when the product is sold is almost impossible to regulate. Though some intermediaries are partially regulated, there is no single set of rules for the intermediation industry.

In the broking business, players are regulated by the Securities and Exchange Board of India and the exchanges. Non-banking finance companies, such as Future Money, come under the purview of the Reserve Bank of India.

The Association of Mutual Funds in India and the Insurance Regulatory and Development Authority have indirect control over distributors and insurance agents. The financial advisors and planners, who sell all products, are regulated by nobody today.

Even as we go to press, the rules for the regulation for financial intermediaries under Sebi are about to be made public. Sebi, under Chapter Four of the Sebi Act, can regulate all distributors in the market, irrespective of what they sell.

If on one hand there is regulation coming to clean up the problem of mis-selling, competition will ensure that the rest of the problem is solved to some extent. While no quantitative analysis can be provided, R. Venkataraman, co-promoter and director, Indiainfoline, says that competition will ensure that products are not mis-sold to a large extent.

"A one time-sale is not enough, our teams go back to existing customers and sell them more and more products. If we mis-sell once, we lose the opportunity to sell again to that customer. No one wants that," he says. But finally, it is up to the consumer to ask the agent the relevant questions. For no amount of regulation can replace investor education.

Convenience, speed are key

World over, supermarkets have been growing rapidly in the consumer finance area. Even Wal Mart is reportedly looking to open its own bank. In India, Kishore Biyani and the Pantaloon and Future Groups are clearly the trail blazers of retail, and are now looking at a slice of the consumption loans and financial services pie. With a format that interlinks seamlessly with its retail operations, we would be hearing more of Future Money soon. What is the Future Money format going to be? For us, the biggest advantage is that we can ride on our stores. We get about 150 million footfalls a year and we expect this to go to a billion by 2010. To these customers, we would offer all kinds of loans and financing services. Also, it is a fact that it is very easy for us to offer finance schemes to customers. What happens today is that there is no convergence of the retailer and the financier. The guy who is financing is only interested in financing and the retailer does not care whether the customer takes a finance scheme or pays in any other way. Now, for the first time these two are converging. The retailer wants every financier to be there - we are in the store and are going to finance our customers. At stage one, we would offer finance through all our formats. At the next stage, we would offer credit cards and personal loans. After this, we will roll out investment products like mutual funds. What percentage of interest do you charge? That would depend on market factors. Today we have gone and tied up with a lot of manufacturers for consumer durables. We are offering interest rates that the rest of the market is. Our stores will have only us as the financing option. While the consumer is free to go and look for other offers outside, he may choose not to do so. Our stores already offer very competitive prices. What Future Money would do is only improve the whole process. Today, if you go to a retailer it will take you about 3-4 days to get your finance. We would make it faster. We've been able to turn around applications in 24-36 hours and are looking at 1.3-1.4 million customers by 2010. Costs are already low for the customer. Convenience and speed are the key. In the investment area, would you also advise your customers on what products they should buy or invest in? We are not looking at getting into the advice area of personal finance. The people who we would deal with are the masses, and they may not understand these complications. We could suggest funds based on their historical performances but we would not actively provide a financial planning module. We will enable the transaction, and that is all we are looking at currently. We will offer the customer what he wants, but we will not be wealth managers for the customer. Rakesh  Makkar, CEO, Future Money

Will the friendly neighbourhood salesman disappear?

Unlikely, especially if he has a well-established personal connect with his customers. If you have been handing over your insurance cheque to the same person for the last 15 years, you are likely to continue doing so. But, due to competition in the market, he would have to ensure that he too gives the best.

"Most of the products will be branded and to that effect, there will be few big players. However, I see a definite chance for one-shop service-providers who will thrive on relationship and service. The medium type may have to be part of a bigger organisation," says George.

With large players pushing for the one-stop shop format, independent advisors will also have to improve their product basket. Those advising high net worth individuals would now have to look seriously into being able to transact on offshore products.

Those who have clients in non-metros would have to be able to advice on commodity trading. Even planners with small operations are now being wooed by large companies and investment banks who want to buy a part of the business. His relationship with you makes the planner or the agent an important cog in the wheel of their big machinery.

With the industry buzzing, look out for announcements of takeovers, acquisitions and new products - these would flow in by the week now. The future of your money is no more a vague factor of time - it is knocking on your door now. Stay tuned with us, as we track the industry.

'Market looks exciting now'

Indiainfoline, along with Indiabulls, is part of the select group of rare successes of the Internet boom. Over and above the equity trading platform, they offer their clients commodity broking, and distribute mutual funds, fixed deposits and insurance. The company is frequently in the news for attracting buying interest from various large foreign players, but so far it hasn't sold stake to any of their suitors. Is this a point of inflection for the industry? This is an exciting time in the industry - the market is expanding rapidly, a lot of big players are entering, a lot of foreign players are interested and are looking for ways to enter. This phase is probably similar to what the banking industry went through soon after private players came in. The reason why actual consolidation is not happening is the pace of expansion. Who wants to sell a business that is growing at 15-16 per cent every year? Foreign players do not understand our markets. In the US, $100,000 is retail, here retail sums are as little as Rs 5,000. So, there is a difference and we need to play our market in our way. How would the investor benefit from the changes taking place in financial services intermediaries now? Investors will certainly have a good time now. Earlier, products were often pushed to the investor, but now he will get better services. Foreign players will bring in best global practices. You will deal with far more informed intermediaries and the research reports that you see would be of higher quality. Investors can look forward to better research, better technology and better service. Also, with the entry of large foreign players, there would also be new products hitting the markets. What would these products be? It is only a question of time before capital guaranteed products get launched. Several other investment areas that are successful abroad will make their way here. These could be commodity exchange traded products, or real estate exchange traded funds. What are Indiainfoline's plans? We are a retail one-stop shop and we would continue to offer the entire gamut of financial service products to our customers. We have about 600 branches and will have 2,000-3,000 trained finance professionals to advise our clients. Our customers can access us through our branches, telephone or Net. We will continue to do what we are doing currently, but in a better manner. What are the key changes among Indian investors today? There is a lot of interest in new areas of investment, such as commodities. A larger number of investors are looking at it. On the other hand, a lot of customers would rather not invest even in direct equity. They mostly invest in mutual funds and insurance. So, there are all kinds of investors even within diverse profiles. R.Venkatraman, Co-promoter and Executive Director, Indiainfoline