Redefining Distribution: Converge, Digitize & Achieve December 2017 Brochure / report title goes here | Section title goes here Redefining Distribution: Converge, Digitize & Achieve
Content
Foreword by CII 04
Foreword by Deloitte 05
Regulatory Challenges & Reforms 06
Ethics in Distribution 14
Financial Literacy & Inclusion – Reaching out to Rural Markets 22
Future of Distribution by Digitization 30
Glossary 54
About CII 56
About Deloitte 57
Acknowledgements 58
02 03 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Foreword by CII Foreword by Deloitte
India has a diversified financial sector Serving the truly excluded by the most undergoing rapid expansion, both in efficient service providers presents terms of strong growth of existing a huge opportunity at both ends of financial services firms, and new entities the spectrum. To reach the excluded entering the market. This leads us to segments, organizations will have the crucial role of financial distribution to adapt themselves, and build key ecosystem, in revitalizing growth in an capabilities by focusing on providing inclusive manner. The capability of our financial access, and building financial Keki Mistry financial distribution system is second Kalpesh. J. Mehta awareness (e.g. literacy, skills). Again, Chairman, CII Financial to none, despite its many pertinent leveraging digital technologies in the Distribution Summit 2017 and challenges. Efficiency gains presented by Business as usual will not resolve process, can benefit both providers, Vice Chairman & CEO, HDFC Ltd. the underbanked segments, combined the pressing challenges faced in the and recipients. This is not to understate with those that can be seen in the more distribution of financial services. the need for coordinated action by Over the years, the CII Financial advantaged segments, stretches the These are not permanent paradigms the Government, Corporates and our Distribution Summit has been focusing relevance of our distribution ecosystem, and therefore the rhetoric of financial Communities in building the required on themes related to financial inclusion, beyond rural or urban India, to our distribution, calls on the financial services architecture. Organizations that have the reaching out to rural India and the society as a whole. ecosystem to build new capabilities. ambition to take this path, and can be delivery of smart solutions. With the new disciplined in the process, can emerge as wave of digitization, reaching out to our This brings me to the focus of the Summit For instance, there is a need for adequate the “go-to” platforms in the foreseeable underbanked segments (with no credit & the CII-Deloitte Report which addresses regulations for all stakeholders to future. scores or history), in the hinterlands of some of these key dimensions of experience significant efficiencies, and for On the positive side, financial distributors the country suddenly, seems attainable, financial services distribution including: better supervision of adverse incidents are perfectly capable of restructuring and in fact lucrative. This is encouraging! Regulatory Challenges & Reforms, that frequently occur in the distribution themselves (as they stand to gain) with Ethics in Distribution, Financial Literacy process. Regulators in India are already the emergence of the digital channel as The profile of an Indian investor is & Inclusion – Reaching out to Rural steering efforts in that direction. They are a common platform across products diverse; ranging from being unaware Markets, and The Future of Distribution giving a voice to beneficiaries of financial and the channel is meeting many of their to tech-savvy, when using financial by Digitization. The Report will focus services qua steps taken to prevent mis- requirements, from generating leads to products such as insurance, mutual on critical aspects of these dimensions selling, ensuring better quality of advice, post sales service, and even cross-selling. funds and pension, with a majority in detail, justifying the Summit theme enhancing trainings, and transparency. On the other hand, the real-time insights of addressable investors needing “Redefining Distribution: Converge, Areas of improvement do exist, and a lot provided by digital channels about trustworthy consultative advice on a Digitize & Achieve”. can be learnt from supervisory practices products and themselves, is allowing continuous basis. New FinTech players in other countries. customers to make better quality are entering distribution markets, decisions. with new technology solutions. Their As new participants enter the distribution innovative propositions are very often, network, the role of all players in Our report provides granular insights well addressing the needs of the Indian helping customers make informed into the various dimensions of financial Investor. choices (leading to greater customer services distribution, the evolving confidence), cannot be emphasized environment within distribution, and enough. Appropriateness, integrity, the many opportunities for businesses objectivity, and competence in providing to emerge with impactful, innovative financial advice to customers is key for solutions. We hope our readers can start a true capability building in distribution coherent conversations within their of financial services. The potential of organizations, and with clients to put technology in reducing susceptibility to things that matter to financial services unethical attacks, must also be explored. beneficiaries, at the top of the agenda.
04 05 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
•• Protection of customers that are drawn pushed into fee-generating accounts to the complex nature of financial that were not requested. According to products the complaint, the bank’s employees imposed on customers, buying costly •• Financial institutions are defined by financial products that they didn’t regulations and offer visibility and equal require or request for3. treatment to their customers •• In a recent incident, a senior citizen, •• Enabling complaint redressal, and invested his retirement benefits in ensuring customer protection Fixed Deposits with one Private Sector bank. While the bank representative Recent events on regulatory penalties convinced the customer to prematurely imposed on financial service close his fixed deposit accounts, Regulators across the world have imposed and invest in an insurance scheme, penalties on Banks and other financial promising higher returns on maturity, institutions on account of various incidents the customer received lower pertaining to financial product distribution. returns, and on enquiry realized the A careful analysis of these events, representative no longer worked with points us to violations by the financial the Bank4. institutions, particularly in the areas of selling suitable and appropriate products, •• Another case emulated from sale of transparency and disclosures. Few notable insurance schemes by a third party. The global such events are detailed below: Direct Selling Agent (DSA) promised the customer loans from a specific NBFC at •• A leading private sector Bank was fined very low rates, provided the customer for mis-selling products: A couple in the bought a specific insurance policy. On UK sued a foreign bank for mis-selling receiving the compliant, and conduct of two complex interest rate hedging enquiry, it was noted that the NBFC did products. The products offered were not exist under the said name. not suitable to the risk profile of the Regulatory Challenges customer, and the Bank failed to inform •• A customer availed a home loan from the customer of the risks involved a Bank, and additionally took a life in “Credit limit utilization”, thereby insurance policy as a result of cross- incurring financial losses1. selling. The borrower’s unfortunate death, resulted in the Bank contesting •• Mis-selling of payment protection and Reforms the claim, stating that no insurance insurance in the UK, has had the biggest documents were submitted by the impact on customers, and further borrower. However on enquiry, it was aggravates the need for stringent realized that though the customer paid regulatory guidelines to prevent Need for regulations on financial The financial distribution channels across the insurance premium, the Bank failed mis-selling of products. The banking product distribution banks, mutual fund houses, insurance to process the insurance. The world of financial services has evolved companies and other NBFCs prioritize industry in the UK began cross-selling over the past few years, with financial differentiation, customer service, PPI products extensively on realizing •• Five leading broking companies were institutions exploring new and innovative efficiency, and convenience. the profitability of the product. PPI was served show cause notices from the ways to reach the consumer. Financial sold alongside mortgages, credit cards Securities and Exchange Board of India 2 institutions are quickly adopting smart While the financial industry has migrated and other unsecured loans . (SEBI). Investors who lent money using the exchange platform, incurred large technology, to keep up with the evolving to several innovative distribution •• A foreign Bank was fined for forceful losses when the borrowers defaulted landscape of the financial industry. channels, the need for regulatory reforms cross selling: The foreign Bank was on payments5 takes higher precedence. The need for fined in penalties and compensation In the new era of digital channels, there regulatory reforms is particularly required to customers that regulators say were is an increase in customer touchpoints, to address the following:- including mobile and internet banking, •• Prevention of mis-selling of products video channels, chatbots, artificial 1 through various financial distribution Indian-origin couple sues UK bank over costly mortgage: http://www.business-standard.com/article/pti-stories/indian-origin-couple-sues-uk-bank-over- intelligence based tools, and online robotic costly-mortgage-117111300968_1.html channels 2 advisors. India is witnessing a paradigm PPI — hundreds of thousands could still claim compensation: https://www.ft.com/content/2f03811a-5283-11e7-a1f2-db19572361bb 3Wells Fargo Pulls Back on Cross-Selling After Fraud Scandal: http://fortune.com/2016/09/13/wells-fargo-cross-selling-accounts-scandal shift to a digital environment from its 4Bankers mistrust: http://www.thehindubusinessline.com/catalyst/bankers-mistrust/article8650650.ece conventional banking routes. 5Five brokers named in NSEL scam may not get unified licences: http://www.moneycontrol.com/news/business/markets-business/five-brokers-named-in-nsel- scam-may-not-get-unified-licences-sources-2398129.html
06 07 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Current regulatory environment in The penalty under the ombudsman has ––Reviewed the commission •• IRDA has a Grievance cell that caters to a list of issues investors should be India on distribution been doubled from the earlier penalty structure and recommended the complaints raised by policy holders. concerned about while investing in The regulatory agencies/ bodies in India amount8. changes; examined the system of products registered in SEBI13. •• The Insurance Act, 1938 has laid out have released guidelines over the years referral providers, and provided clear cut provisions pertaining to •• SEBI has taken a decision to segregate with the objective of tightening their hold Insurance Regulatory and Development recommendations on the whole distribution across various channels sales from investment advice. SEBI has over banks and other financial institutions Authority (IRDA) structure, including remuneration including, licensing of insurance agents, specified that Mutual fund distributors to ensure regulated and transparent paid to the referral providers •• In 2007, the IRDA formed a committee privileges of agents, and code of cannot give unsolicited advice to distribution of financial products, and ––Examined the scope of direct to study the distribution channels. conduct of agents10. investors. Mutual fund distributors safeguard customers. marketing, e-marketing, web enabled In 2008, a report on committee are required to register themselves as sales points and other innovations, proceedings was released. The Securities and Exchange Board of investment advisors. Investors seeking Reserve Bank of India: and recommended the terms and Committee discussed on the various India (SEBI) to invest in mutual funds, may buy conditions to be prescribed to each •• Master Circular on Customer distribution channels and intermediary the investment advisory services at a mode of direct marketing, including •• The master circular for mutual funds, protection – Limiting Liability of systems including bancassurance and nominal price14. the remuneration structure requires all distributors/ agents/ Customers in Unauthorized Electronic referrals/ introducers9. ––Reviewed payouts made to persons employed or engaged in Banking transactions dated June 6th, Key challenges with the existing distribution channels and the sale of mutual fund products to 20176: The Circular covers the need for The committee: regulatory framework administrators of group businesses undertake a certification examination the Bank to provide customers with –– Reviewed the system of licensing conducted by the National Institute of •• Absence of guidelines regulating 24x7 access through multiple channels of corporate agents and suggested •• IRDA requires insurance agents to Securities Markets11. digital channels: The financial services (phone banking, SMS alerts, dedicated the criteria for the selection of the undertaken trainings of about 100 industry in India has been witnessing a phone banking, email, IVR, reporting corporate agents, and qualifications hours and clear an examination from an •• Additionally, mutual fund shift towards digital channels such as to home branch), allowing customers for the functionaries of the approved institute. intermediaries are required to register online chatbots, online brokers, availing to immediately report mis-selling, corporate agents with the Association of Mutual Funds, products and services through digital unauthorized transactions, frauds India12. marketing channels, etc. However, through different financial channels. •• SEBI has defined a code of conduct there are very few specific regulations •• Master Circular on Para Banking for its stock brokers and mutual fund or guidelines currently regulating activities dated July 1st, 20157: The distributors. SEBI’s guidelines for large distribution or advice being provided guidelines regulate Banks undertaking mutual fund distributors, requires through these online channels. insurance Broking and Agency the Asset Management Committee to •• Conduct Risk management: Currently Business. The guidelines require the mandatorily conduct thorough due the regulatory framework is still to Bank to formulate a comprehensive diligence on distributors, satisfying one evolve management of conducting risk Board approved policy regarding of the following conditions: by financial institutions. undertaking of insurance distribution. ––Presence in more than 20 locations Further, the guidelines require the Bank ––Having raised AUM of over INR •• In-adequacy of advice on investments: to ensure Customer Appropriateness 1 billion in the non-institutional Majority of the sale of mutual fund and Suitability, transparency and timely category, including high net-worth products/ insurance policies/ loans disclosures, as well as a grievance individuals is done through third parties such redressal mechanism. ––Received commission of over INR 10 as national distributors, corporate million per annum across industry agents, direct service agents, business •• The Reserve Bank of India has amended ––Received commission of over INR 5 correspondents. Customer/ investors the Banking Ombudsman Scheme, million from a single mutual fund often end up purchasing a cross-sell 2006, wherein the grounds for lodging product, due to the insistence of of complaints has been modified •• SEBI runs a SEBI Complaints Redress the distributor, with no research or to include activities such as sale of System (SCORES) website, wherein information on the same. Additionally, insurance, mutual funds and other third investors can register complaints there is no standard or governing party investment products by Banks. against the company and its guideline on which the distributor can intermediaries. The website also has be held responsible for what they sell.
6Limiting Liability of Customers in Unauthorized Electronic Banking transactions: https://www.google.co.in/ 10The Insurance Act, 1938: http://moj.gov.jm/sites/default/files/laws/The%20Insurance%20Act.pdf url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwiDKug9r_XAhUE3o8KHYyUA1kQFggvMAE&url=https%3A%2F%2Frbidocs.rbi. 11Master Circular for Mutual Funds: http://www.sebi.gov.in/sebi_data/attachdocs/1337083696184.pdf org.in%2Frdocs%2Fnotification%2FPDFs%2FNOTI15D620D2C4D2CA4A33AABC928CA6204B19.PDF&usg=AOvVaw088s3dB_PYeb4Ki8CujJ67 12SEBI mutual fund regulations: http://www.sebi.gov.in/sebi_data/commondocs/mutualfundupdated06may2014.pdf 7Master Circular on Para Banking activities: https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9837 13Scores website: https://scores.gov.in/scores/complaintRegister.html 8RBI amends Banking Ombudsman Scheme: https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=40853 14Is SEBI right in restricting mutual fund distributors from offering investment advice?: https://economictimes.indiatimes.com/wealth/invest/is-sebi-right-in- 9Committee study on the distribution channels: IRDA/Life/Dist. Channel/ 037 /2007-08 restricting-mutual-fund-distributors-from-offering-investment-advice/articleshow/56536584.cm
08 09 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
•• Overlap of regulations: Several as per the compensation scheme. The •• The Federal “Regulation E” Consumer details, and disclosure of the customers Australia distributors sell both mutual fund regulator has also imposed penalties on Protection Act, allows the customer personal financial details to a third •• The Australian Securities and products, as well as insurance products, the Banks for mis-selling17. to recover all money that may be lost party is only with the consent of the Investment Commission (ASIC) is the leading to fragmented regulation through a fraud (customer liability customer23. •• The Financial Conduct Authority has regulator for the Australian banking applicability and overlap in regulations. capped to 50 dollars), should the proposed steps to eliminate pension •• China has focused on consumer sector and has drafted the Australian For example: Mutual fund and ULIP customer report the fraudulent mis-selling and protect customers ready protection by setting up the following Securities and Investments Commission products have similar features, transaction within 2 days of discovering to cash in their retirement savings. consumer protection departments: Act 2001, to take care of customer however mutual funds are governed by the loss22. The regulator published a proposal to Insurance Consumer Protection protection26. SEBI and ULIP by IRDA. improve pension transfer advice and •• Mutual funds and Exchange Traded Bureau in China Insurance Regulatory •• The ASIC has created a MoneySmart provide protection through a “defined Funds (ETFs) are governed by the Commission, (CIRC); Investor Protection Global Scenario on regulatory practices portal, which covers banking, benefit” pension, wherein a guaranteed Investment Company Act of 1940. The Bureau in China Securities Regulatory on financial product distribution investments, borrowings, insurance, income is provided, calculated on salary investors in the US market, engage fee Commission (CSRC), Financial Consumer Regulators across the world have retirement plans, etc. Information and length of service18. based financial advisors, wherein the Rights Protection in People’s Bank of tightened their grip around financial regarding the products and their fee is paid directly to the advisor. China (PBOC), and Banking Consumer service providers, to ensure customer •• FCA has proposed that financial service sub variants, details of registered Protection Bureau in CBRC. protection. Some of the measures providers pay 25% of the Financial financial advisors, etc. are detailed China undertaken by regulators across Services Compensation Scheme to •• The Australian Securities and on the website. The portal is linked to various countries to curtail loss due intermediaries. FSCS is a compensation •• The China Banking Regulatory Investment Commission (ASIC) tools such as calculators for budget to mis-selling, strengthen customer scheme for customers of all UK Commission, objective is to protect and China Securities Regulatory planning, retirement planner, mortgage protection and provide transparency are authorized financial services firms. the interests of the depositors Commission (CSRC) have come to an calculator, etc.) which help customers summarized below. The scheme protects customers, in and consumers through effective understanding to share information make informed decisions27. case the financial service provider goes supervision. The regulator issued related to emerging themes and trends United Kingdom bankrupt19. a directive under “Guidance for the in the fintech sector24. •• Scamwatch portal created by the Banking Sector on the Protection of •• The Financial Conduct Authority, (FCA) •• China has introduced a cyber law, Australian Competition and Consumer United States of America (USA) the Rights of Consumers”, wherein all has a directive on “The Responsibilities wherein all data relating to Chinese Commission, allows consumers across banking institutions are required to of Providers and Distributors for the •• Consumer protection in USA is citizens shall be held on only Australia to recognize, identify, report adopt effective measures to protect Fair Treatment of Customers (RPPD)”, governed by the Dodd-Frank Wall Street Chinese servers25. scams through an online form28. the customers personal financial wherein the responsibilities of the Reform and Consumer Protection Act provider and distributor are clearly “To promote the financial stability defined. The MIFID Implementation of the United States by improving 22Electronic Fund Transfers (Regulation E); Amendments :https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/electronic-fund- in 2018, shall replace the equivalent accountability and transparency in the transfers-regulation-e/ 15 existing guidance in RPPD . financial system”. 23The CBRC Issued Guidelines on Banking Consumer’s Rights Protection: http://www.cbrc.gov.cn/EngdocView. do?docID=114FD30A25F545768CACD887A36A43E3 •• Revised Payment Services Directive •• The Act established a civil penalty 24China and Australia ink fintech deal to share information on new trends: https://www.cnbc.com/2017/11/06/china-and-australia-ink-fintech-deal-to-share- by the FCA protects customers, by fund, wherein any person or company information.html limiting payers’ liability at 35 pounds if violating a federal consumer financial 25China's new cybersecurity law takes effect today: https://www.cnbc.com/2017/05/31/chinas-new-cybersecurity-law-takes-effect-today.html 26Australian Securities and Investments Commission Act 2001: http://www8.austlii.edu.au/cgi bin/viewdb/au/legis/cth/consol_act/asaica2001529/ unauthorized transactions take place, protection law, may have to pay a civil 27Moneysmart app: https://www.moneysmart.gov.au/insurance 20 or incorrect transactions are made, or penalty . 28Scamwatch app: https://www.scamwatch.gov.au/ in the event of absence of complaint •• The US Consumer Financial Protection handling and unavailability of strong Bureau (“CFPB”), has proposed customer authentication16. principles for when a third party •• To tackle the PPI mis-selling scandal, accesses the financial data of the the Financial Conduct Authority (FCA) consumer, for certain financial products has imposed a deadline on Banks in UK and services21. to pay out to the impacted customers,
15The Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD): https://www.handbook.fca.org.uk/handbook/document/ RPPD_FCA_20130401.pdf 16Consumer protection and PSD2: https://www.fca.org.uk/firms/revised-payment-services-directive-psd2/consumer-protection 17PPI claims: https://www.ft.com/content/f221941a-89b6-11e7-8bb1-5ba57d47eff7; https://www.theguardian.com/business/2016/aug/02/ppi-claims-all-you- need-to-know-about-the-mis-selling-scandal 18FCA proposes changes to advice on pension transfers: https://www.fca.org.uk/news/press-releases/fca-proposes-changes-advice-pension-transfers 19Reviewing the funding of the Financial Services Compensation Scheme (FSCS): https://www.fca.org.uk/publication/consultation/cp17-36.pdf 20‘Dodd-Frank Wall Street Reform and Consumer Protection Act’’: https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf 21Consumer Protection Principles: http://files.consumerfinance.gov/f/201507_cfpb_consumer-protection-principles.pdf
10 11 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
•• The Consumer Action Law Centre has through Twin Peaks II. The new ––Track complaints arising from Way Forward launched a “DemandArefund.com” tool, guidelines further strengthen the customers on third party distributors The global regulatory framework on which help Australians demand refunds rules of conduct for financial service ––Maintain registers of all their third financial product distribution is evolving for add-on insurances and warranties providers and insurance companies party distributors with key details with an aim to ensure systemic health, which were charged to customers who and intermediaries. Additionally, the ––Financial institutions and their better reporting, and disclosure and didn’t have need for them. monitoring and supervision norms representatives to be professional governance requirements. Further, the have been tightened by: at all times, and not pressurize their regulators are also placing emphasis Europe ––Use of mystery shopping, by engaging customers into buying financial on customer protection, transparency, representatives of FSMA to act as real products or services product suitability and appropriateness. •• Markets in Financial Instruments customers, without disclosing their ––Financial institutions engaging with Directive II has empowered the identity third party distributors, should In the Indian context, the regulators European Securities and Markets ––Access to those parts of the websites ensure that their representatives have in place, a basic framework authority to provide protection to of financial intermediaries which explain the financial institution – third on product distribution and code of investors by ensuring good conduct are reserved for limited customers, party relationship to the customer conduct. However, the current regulatory by firms that sell financial services and commonly used to offer specific ––Representatives to undergo framework needs to evolve based on products. The ESMA has drafted the products and services adequate trainings on sales and the learnings from the global events, “investor protection policy” highlighting advisory conduct particularly in the areas of conducting risk the need for consumer protection29. Singapore ––Financial institutions to ensure management and product mis-selling. •• G20 High level principles on financial representatives have a good •• The Life Insurance Association consumer protection were developed compliance record before on- In addition, with the emergence of Singapore (LIA) is currently reviewing by the G20 finance ministers and boarding them as third party digital channels, hyper personalization its policies for recruitment of agents central bank Governors of Europe, distributors of financial products and introduction serving competitor service providers. where 10 principles have been drafted of robot advisors, it is critical that the The guidelines are expected to on consumer protection30. regulatory framework also evolves define the number of months under to manage the aspects of customer •• The Insurance Distribution Directive, which migrated agents have to be suitability, appropriateness, transparency governing the distribution of insurance accompanied by managers while at and ensures customer protection. products in the EU has modified its client meetings. directive to include the following: •• Monetary Authority of Singapore ––All sellers of insurance products, (MAS) has drafted “Guidelines on including insurance undertakings Standards of Conduct for marketing selling directly to the customers are and distribution activities by financial included in the directive institutions”32. The guidelines take into ––The Directive which previously account the following safeguards, which covered only those acting on behalf require financial institutions to protect of the policy holder, now includes any consumers: person assisting in the administration ––Conduct of call backs and surveys of and performance of insurance customers, to ensure customers have contracts understood their purchases ––Ancillary insurance providers and ––Conduct of regular mystery shopping websites are included in the directive and site visits that ensure that as well the marketing, sales and advisory •• The Belgian government has practices of representatives increased its consumer protection are aligned to the standards and strengthened the supervisory and procedures of the financial powers of the Financial Services service providers and Market Authority (FSMA)31,
29Investor protection policy https://www.esma.europa.eu/regulation/mifid-ii-and-investor-protection 30G20 High level principles: https://www.oecd.org/g20/topics/financial-sector-reform/48892010.pdf 31Financial Services and Market authorities (FSMA), through Twin Peaks II : http://www.allenovery.com/publications/en-gb/Pages/Essentials-on-Twin-Peaks-II. aspx 32Guidelines on Standards of Conduct for marketing and distribution activities by financial institutions: http://www.mas.gov.sg/~/media/resource/legislation_ guidelines/insurance/guidelines/Guidelines%20on%20Standards%20of%20Conduct%20for%20Marketing%20and%20Distribution%20Activities.pdf
12 13 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
of regulatory and technology related and adapt. They will need to build their developments. As financial institutions capabilities by leveraging technology aim to increase investor participation, and providing the consumer with up steps such as launching regulations that to date research/ information and allow investors to forge advisory-only options that will assist them in making arrangements with financial advisors, to well informed decisions. This in turn, the capping of mutual fund commissions, will help institutions in reaching out to to prevent mis-selling, to special a larger consumer base, as well as help commissions for mutual fund distribution reduce operational costs. in “below 15” cities (B-15)34 - have all been •• Alternate distribution models - With taken, to address issues and complaints the significant growth in e-commerce made by consumers. and a large population in India being millennials, e-commerce and a The last few years have seen a significant population in India being transformation in terms of the way millennials, e-commerce websites financial services are delivered, especially and online channels are increasingly with key developments such as the gaining popularity, not only in terms of financial inclusion programs taken by the dissemination of information, but also government, and new banking licenses for as a channel for financial distribution. payment banks. The rapid development These channels, either on their own, or of mobile payments has also created a by teaming up with banks to facilitate paradigm shift in the way consumers are transactions for investors, are providing accessing financial products and making detailed research on different kinds payments. The push by regulatory bodies, of portfolios, products and markets, initiatives driven by the government, as to help the end consumer make well as the digital revolution, have all been informed decisions. key drivers in transforming consumer expectations and experience. The importance of ethics in the They have led to: Ethics in Distribution financial distribution landscape •• Increased consumer reach – The While issues around ethics are common addition of new banks in the recent past and apply across all aspects of business has led to an increase in the reach of conduct, the financial services industry Financial products act as an investment Over the last few years, India has been the financial distribution network. It has involves certain distinctive ethical issues35 avenue and provide financial security to one of the world’s fastest growing helped tap into the unbanked segment that need to be looked at separately. investors. Traditionally, they have been economies, with banking and financial and made strides in the country’s Since financial activity is closely regulated, primarily provided by banks (deposits and services companies being one of the key financial inclusion efforts. Increased ethical issues tend to be viewed as savings accounts), insurance companies drivers of this growth. Despite a gross competition in this space will in turn, legal breaches of conduct, rather than 33 and others like post offices, chit funds, domestic savings rate of 28.9% (in 2016) , improve transparency and assure deeper behavioral concerns that need etc. However, the advent of liberalization a significant portion of savings continues fair treatment to the end customer. other remedial action. Therefore, to led to an increase in the number of to be channeled into non-financial assets It will also help move more people curb unethical conduct, one needs to financial products available, including like real estate, gold, etc. While the from informal lending to increased go beyond just the operational aspects but not limited to, open/ closed ended introduction of varied financial products access and reliance on formal banking of financial markets and institutions, to mutual funds, exchange traded funds, has increased avenues for investment, this channels, for their financial needs and include individual behaviors of financial systematic investment plans, unit linked appears to have been tapped into largely security. intermediaries. Financial intermediaries plans, education and retirement plans. by the urban market. This pattern can be commonly take decisions as agents for •• Reorientation of customer agents – Since the 1990s, the financial distribution attributed to a number of issues such as: principals in an agency relationship, and Over the years, there has been a decline industry in India has seen a rapid increase lack of awareness of financial products in can often assume fiduciary relationships. in the number of distributors or agents, in the emergence of private banks, non- rural India, concerns around mis-selling, They have the obligation to act solely in especially in the insurance and mutual banking financial companies (NBFCs), and and limited access to formal financial the interest of the client, and be aware of funds industry. As technological technology enabled brokerage platforms channels, among others. the conflict of interest scenarios, and avoid disruptions increase, financial etc. – with an additional push received mis-selling. institutions and agents will need to from the arrival of internet and mobile In recent times, the financial services based services, to meet investor needs. distribution landscape has also overhaul their existing business models undergone significant changes as a result 34“How fund distribution is evolving in India”, BSE India: http://bseindia.morningstar.co.in/posts/35579/how-fund-distribution-is-evolving-in-india.aspx 33The World Bank Group, Link - https://data.worldbank.org/indicator/NY.GDS.TOTL.ZS 35“Blackwell Companions to Philosophy - A Companion to Business Ethics”, edited by Robert E. Frederick, Published by John Wiley & Sons, 2008
14 15 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Ethical conduct and behavior are pivotal with misleading statements about the Walking the ethical tightrope investments. At the end of the meeting, to the ability of financial advisors to performance, features and risks of Financial advisors require the ability to you decide to take matters into your own retain the trust and confidence of clients/ recommended financial products, or exercise professional and ethical judgment hands and make her sign forms that stakeholder groups, and to ensure quality misleading statements about the business appropriately, in the identification and consolidate most of her portfolio into outcomes36. In a study released on reputations of those responsible for resolution of the often perplexing and equity funds that may fetch her potentially ethical issues in 2010, some of the most the management and administration of complex dilemmas they face in the higher returns - which you feel would common forms of unethical conduct that financial products, or managed investment provision of advice to clients, and in their be the best option for her. The funds were found amongst financial advisors schemes. relationships with their peers and other recommended also provides you with a included unethical conduct associated stakeholders. higher commission.
What can ethical dilemmas look like? Here Do you think you have acted in her best Table 1. Some of the most common forms of unethical conduct in financial advice are a few simple examples. interests? Have you perhaps failed to S. No. Theme Summary of unethical conduct Primary ethical principles properly understand her attitude to risk, Case 1 and to fully explain the product you have 1 Integrity issues Misleading statements as to performance, product features Integrity, Professionalism You are a financial advisor and have recommended to her? While you may or security, business reputations recently joined a large multinational bank. believe you are acting in her best interests, 2 Integrity issues Using client funds for own purpose Integrity, Professionalism Having been in the industry as a financial are you instead, perhaps acting in your specialist for several years now, you own? 3 Appropriateness of Advice did not meet client objectives or circumstances and Competence, Objectivity have been able to develop trusted client advice had no reasonable basis relationships. There are clients that would Case 3 4 Research into Lack of financial product research/ inadequate Competence, Diligence like to continue to work with you, despite You are a financial planner at a well-known product/ strategy understanding of financial product recommended your professional shift. One such contact, financial planning firm and have been in meets with you in your office. After a short the business for quite a while now. You 5 Disclosure obligations Failure to disclose remuneration benefits and conflicts of Objectivity, Integrity, Fairness discussion, you decide to switch your new have an opportunity to attend a training interest client’s investments to in-house financial on a new line of pension products that a 6 Disclosure obligations Failure to disclose information relevant to client decisions Objectivity, Diligence, Fairness products, which will also satisfy your global company ABC is introducing (this bonus and corporate objectives. training will also bring together others in 7 Recommendations/ Inadequate written advice or failure to tailor advice to client Diligence, Fairness the pensions business). Advice needs Would this represent a breach of trust? 8 Appropriateness of Inadequate explanation and examination of risks associated Competence, Diligence, Fairness Have you provided the true picture to your The training was able to provide you advice with investment client and provided him with a portfolio great insight into ABC’s products and of products that would be best suited you were also able to wine and dine with 9 Integrity issues Inadequate explanation of the risks associated with financial Integrity, Professionalism for him? Are you perhaps, prioritizing other financial planners. A few days later, product your professional goals over your client’s you receive a case of wine bottles of one Source: “Ethics and Financial Advice: The Final Frontier”, Copyright @ 2010 Dr. June Smith financial goals? your favorite brands (delivered to your residential address) from the contact at Case 2 ABC that had invited you to the training. You are a financial planner and part of a firm that has witnessed successful growth Do you believe there are any ethical risks In addition, using client funds for the financial product being recommended, over the last few years. This has allowed associated with a situation like this? Do advisor’s own purposes was another issue. and inadequate explanations and you to get a good grasp of the market you think that this ‘business gift’ was This could be in the form of falsifying examination of the risks associated with and forge a trusted relationship with your intended to influence your judgement? documents and signatures, and/ or particular investment choices. clients. A client asks you to take a look at What would be the right thing to do in a discretionary dealing in financial products his 80 year old mother’s random portfolio situation like this? without the consent of the client. Objectivity issues, such as the failure to of investments. reveal conflicts of interest or fees and Common Ethical pitfalls to avoid Diligence and competence in the provision commissions earned, and the failure to You drop by her residence, spending the While there are several justifications that of financial advice was another area that disclose information relevant to the client’s large part of the day looking through her can influence an individual’s decision was found to be breached. This could decision, were also prevalent situations. photo albums and assisting her in the making process, provided below are include the failure to conduct appropriate kitchen. While she was a very pleasant some common rationales that have been and independent research into the lady, she had little knowledge about her observed.
36“Ethics and Financial Advice: The Final Frontier”, Copyright @2010 Dr. June Smith
16 17 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Image 1. Common ethical issues and key points to consider: Ethical principle Good practice to follow
Justification/Rationale Consideration Integrity and A financial advisor should necessarily place his/ her interests and needs of the client ahead of all Everybody does it Are you doing what you promised/ are expected to do? Professionalism other interests. Any form of advice or recommendation should only be provided after a thorough understanding of the client’s needs, objectives and circumstances, and to then offer products or We have always done it, so why change now Are you using your best knowledge and intention in doing it? services to fulfill them.
This is how this business works Are you doing what public authorities, regulators and business partners Competence and Diligence •• A financial advisor should possess an appropriate level of knowledge relating to his/ her expect you to do? particular business and meet high standards of professional ethics, including acting with If I don’t do it, somebody else will Are you conforming to the values of your company or business partners? honesty, integrity, fairness, due diligence and skill. It is also the responsibility of the advisor to keep him/ herself educated and up to date in terms of keeping skill and knowledge levels It works, so let’s not ask too many questions Will your actions enhance public confidence in the financial sector? current, so that all regulatory requirements are met.
Nobody will notice and nobody will be hurt Would you behave similarly if your actions were made public? •• At no point of time, should a financial advisor misrepresent his/ her education, qualifications, or Source: Based on Deloitte Forensic experience in India experience. He/ she should ensure that all references to his/ her business activities, services, and products are clear, descriptive, and not misleading.
Objectivity •• Any situation/ advice or recommendation that may result in a conflict of interest should be disclosed by a financial advisor to the prospective client/ buyer. This would in turn help the client make an informed decision i.e. to either halt the transaction, to seek additional professional Ethical Decision Making process Step 3. Consider the alternative actions advice, or complete the transaction. To help guide the decision making, we and the potential outcomes and recommend a five-step process that can consequences of each action. Some of the •• A financial advisor should always protect the privacy and confidentiality of a client’s personal be used when there is no surety about aspect to consider: information that he/ she might be privy to. what action to take, or to test a decision •• What facts does one actually know? Fairness •• When recommending a transaction to a client, a financial advisor must disclose all relevant which has been made. facts, considerations, costs and risks necessary for an informed decision (which are reasonably •• What is someone assuming? available to the financial advisor). Step 1. When faced with a situation, •• What additional information does identify the problem or issue, and describe someone need to know to make a good the situation in your own words decision?
Step 2. Assess its potential risks – to the •• How does someone verify the accuracy firm, colleagues, others and oneself. Does of what someone know? this situation involve an ethical dilemma? To help frame the issue, ask: Step 4. If someone is unsure about the alternatives, he should obtain •• What values are involved? Are they in consultation, if required. conflict with each other?
•• What topics from the code of conduct Step 5. Does someone still view the are involved? situation or ethical dilemma the same way? If yes, decide on the best course of •• Is someone being fair and honest? action and implement it. If no, return to •• What group or individual may be Step 1 and restate the problem. affected by the outcome and how? A code of ethics should ideally apply Caution: Circumstances can sometimes to all financial transactions37, without blind us to the ethical consequences of regard to the product category, the type our decisions and actions. of intermediary, or the means by which the purchase of a product or service is transacted.
37Independent Financial Brokers of Canada. Code of Ethics and Statement of Principles: https://ifbc.ca/code-ethics-statement-principles, Copyright @2017
18 19 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Confidence and trust are crucial to the The use of technology to help deter unethical behavior financial services sector, and in turn While no one solution will ever work across all institutions, provided below are some can affect an economy and consumer cases that could help drive ethical behavior by leveraging technology. confidence. Apart from training and •• Mandatory self-registration of the sales lead (customer) before the financial advice inculcating ethical obligations to be upheld is offered. The registration information, apart from prospect research, could be by a financial advisor, we recommend that used for the following: the industry leadership38 demonstrates ––Automated analysis across social media and other data sources to ascertain any and establishes an industry framework personal relationship between the financial representative (FR) and customer. to practice and monitor ethical conduct. ––At the time of sale, artificial intelligence and correlations can be used to judge if The suggested initiatives can include the the advised product is in the neighborhood of the products that typically would following: be advised for customers in the same profile. This would be based on the self- •• Develop an industry point of view and registration data. ethical standard – Initiate a discussion ––Capture the pattern of the customer enquiry and meetings with the financial with various participants from the representative, by capturing technology footprints. These could be mapped with financial services industry, and develop patterns for similar customer segments and financial representatives, to help an ethical guidelines document raise alarms for possible anomalies. detailing the guiding principles and •• Have a mandatory questionnaire for the sales representative to record their expectations from each participant judgement in the industry, with specific focus on financial intermediaries. This should •• Real-time analytics can also be performed on the KPIs of the FRs and the type of provide specific dos and don’ts, as sale made. Indicators and thresholds can be used on the performance curve. well as details on doing the right thing, •• Mandatory declaration should be made by FRs on the source of the sales lead. instead of propagating a philosophy Automated searches on publicly available data can be programmed, to help of conducting business at any cost. validate the information. Any deviation can help raise an alarm for further review. As the next step, an industry ethics panel can be created, comprising of As a detection effort, the track record of the financial representative (FR) can be representatives from across regulatory matched to his/ her success in the customer segment and product category to the bodies and industry participants which current sale. In case there is a deviation from the normal, an automated audit can be can define and develop the framework, initiated to help understand the factors. and establish initiatives to be taken by the industry. Case in Action: •• Customer outreach - This would include As a distributor is closing the sale, the system can be programmed to present three regular newsletters highlighting key surprise questions specific to the sale that have to be answered satisfactorily, in order ethical or quasi ethical issues/ topics, for the sale to proceed. For example - In the case of a mutual fund purchase, the and the industry response to these questions raised, could be: initiatives. Further, contributing media •• What is your margin on this sale? articles, and organizing events and seminars to discuss such issues, can •• Is it less or more than the margin on another similar financial product providing also help demonstrate commitment to similar returns? ethical conduct. •• If more, do you have a satisfactory response to validate your decision to •• Ethical dilemma workshops - Designing recommend this mutual fund to your client? – Yes/ No option (Choosing ‘Yes’ would specific workshops for agents and lead to a further review by the fund manager/ company/ regulator as part of a practitioners can help reinforce good routine process) ethical conduct.
38“Ethics in Banking and Finance Report 2009”, Undertaken by Claire Payne, St. James Ethics Centre, Sydne
20 21 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Unbanked Underbanked Unbanked consumers face Underbanked consumers face unique challenges as they are distinct challenges as they utilize unable to establish credit without some formal financial channels formal financial channels and not others (potentially due to lack of access)
Financial Inclusion and its component parts
Intermediate Outcomes
Financial Capability Access to Finance The ability to make informed judgments and effective The ability to make informed judgments and effective decisions about the use and management of one's money decisions about the use and management of one's money
Financial skills, knowledge Awareness of rights and Availability of diverse Uptake and usage of Financial Literacy & and understanding grievances, etc. products and services products and services
Inclusion – Reaching Final Outcome
Full Financial Inclusion Access for all individuals to appropriate financial products and services. This includes people having the skills, knowledge and out to Rural Markets understanding to make the best use of those products and services.
Source: Monitor
Background •• Greater literacy and protection for Mandates that have made headway in based outsourcing that benefits the BoP However, advancing progress on the The former RBI Governor Raghuram Rajan consumers recent years, moving the field of Financial by providing higher income employment “Access” front, without adequate focus defined Financial Inclusion as: Inclusion forward, include: Priority opportunities can enhance the quality on building Financial “Capability” in While the first two tenets of this construct •• Broadening Financial services to those Sector Lending, Branch opening, Credit of life of the financially excluded. The the system will only result in improper focus on the “Access” aspect, the third with no access i.e. unbanked expansion, Pradhan Mantri Jan-Dhan beneficiaries of this model, are likely to dissemination of the financial inclusion tenet focuses on the “Capability” aspect of Yojana (PMJDY), Mudra Scheme (for small see multi-fold increase in income, and effort. Education models need to keep •• Deepening Financial services to those inclusion. loans), Small Finance Banks, Payment the approach may even stem urban/rural pace with the growth in access to finance. with minimal access i.e. underbanked Banks, etc. Alternately, the market based migration. Roadblocks to market forces Not only must these be targeted at approach holds promise to break the cycle such as inadequate infrastructure and customers, but also at sellers (e.g. to avoid of financial distress. For instance, “Base regulation could however, fail to generate mis-selling). of Pyramid (BoP) Sourcing” as a market development gains that were originally approach, has been contemplated as a expected from these initiatives. strong solution to poverty. Information
22 23 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Implicit Results Chain in Financial Education Opportunities for growth, for inclusion A case in point is the application of 01. Attractiveness of the Rural internet and mobile in raising awareness Segment of potential dangers for farmers, how to As per World Bank estimates, India’s rural prepare for them and supporting farmers population in 2016 stood at 66.86%39 with early warning systems (e.g. weather of the total population. India’s total conditions). Farmers can also compare population living below the poverty line wholesale prices and get constant updates (below USD 1.9 a day), at 2011 PPP was on market prices and demand. Digital 40 Customers have Higher Customer 21.2% of the population . Of the total platforms can thereafter be used for Better decision- 41 Better-informed better savings, incomes/better rural population, 25.7% itself, was living basic banking services such as investing making customers assets and use of resilience to below the national poverty lines, in 2011. savings generated by these farmers customers credit shocks Many living below the poverty line can be in basic products e.g. crop insurance, pulled out of poverty with basic access savings products. By mitigating certain to financial services such as payments, elements of risk, and investigating aspects Source: Monitor insurance and savings. of price to better serve markets, a farmer formerly in financial distress, is no longer The rural segment has basic financial likely to be financially excluded, owing to needs – daily expenses, medical, SMAC and ICT. Another example is of the education, and entertainment, social application of data analytics and cloud Barriers to growth for inclusion of not being able to get out of debt and •• Inadequate cash out – Rural customers obligations such as festivals and weddings, by FinTech companies that have lately We believe the following factors majorly becomes a perpetual cycle. Second, are actively seeking cash outs. A and retirement savings. Given the been seen disaggregating distribution. constitute the nature of the systemic the banker does not have information Business Correspondent (BC) network systemic barriers to inclusion, efforts to By frontloading payments for small inclusion problem: on the local poor, or very often does that can provide them this, or other serve this very attractive segment will businesses (at a discounted price) and not even have local staff to serve them methods of cashing out have been require fundamentally different business addressing their usual “late payment •• Financial Literacy – Very often, the (who are fully capable of understanding lacking in our current financial models. Innovative approaches will help problem”, these FinTech companies are financially excluded consumer does the customer). The financially excluded distribution system. achieve the desired social progress (not providing financial flexibility to the small not understand the product he is sold, do not typically have records or signed just economic progress). Innovation (both, seller (earlier in financial/distress). These or is mis-led into purchasing a product •• Stringent Know Your Customer (KYC) – documents that can be leveraged by a technology and non-technology), across companies can alter traditional factoring unsuitable to his/her risk profile. He Despite best efforts, banks have been Bank for due diligence. Combined, these all areas of impact in product and delivery by: improving time to market, by digitizing has the freedom of choice and should reluctant to relax KYC requirements, again reduce the consumer’s access of financial services (classroom, on the the process; and enhancing security, as therefore, be in a position to select the fearing liabilities in case of some to credit. job, bank account, mobile, tablets, local well as providing better access via cloud most suitable product. Literacy in India eventualities. This is a double edged language, videos, plays, lectures, teachers, infrastructure. took a long time coming and we cannot •• Unwilling lenders – Lenders are willing sword, pushing up servicing costs at etc.) will be desirable in making the rural have the same repeat itself for Financial to lend only if there is a collateral (which the Bank’s end, and making it unviable segment attractive to service providers, in It is important we bear in mind that Literacy. Low cost, high quality distance is most often missing in this segment), for illiterate customers to fulfil these a way that providers of financial services dividing focus between SMAC and ICT, financial education, where customers or the legal system imposes payment. requirements. in-fact, compete for these customers. along with exploring non-traditional are taught basic financial management, The financially excluded are as a result, •• Small size transactions – Are pushing methods such as building financial literacy and can put in place plans to reach their forced into borrowing from local up costs of servicing the unbanked/ 02. Leveraging Social, Mobile, on the back of “Mobile Device Fluency”, is financial goals, is currently missing. It moneylenders. underbanked (due to fixed costs Analytics, and Cloud (SMAC) and important to drive exponential adoption is no-doubt imperative that we find •• Products – Easy to use products that involved). Information and Communications of financial services, especially in our solutions which can help us deliver go beyond credit (those that allow Technology (ICT) rural population. With 4G, rapid mobile exponential progress on Financial •• Political Interference/vested interests funds transfer from bank account SMAC and ICT are enablers and powerful device penetration, and falling prices of Literacy. of service providers – is another to non-bank recipient, payments, accelerators of economic activity, and have smartphones, using financial literacy tools impediment to financial inclusion. •• Lack of information exists at 2 levels savings instruments, etc.), are missing. the ability to create, as well as sustain on mobiles can ensure rapid adoption of – First, customers do not have credit Products are also not compatible with demand. They can help us achieve our financial services. information, reducing their access to simple prepaid mobile, which is the economic and social objectives, and lift credit. They get pushed into predatory pre-dominant mode of delivery in people out of extreme poverty, as they lending and get caught in a cycle of rural areas. raise average incomes, and bring them out dependence. This also creates a sense of financial distress.
39 World Bank, https://data.worldbank.org/indicator/SP.RUR.TOTL.ZS?locations=IN&view=chart 40 World Bank, https://data.worldbank.org/indicator/SI.POV.DDAY?locations=IN&name_desc=false&view=chart 41 World Bank, https://data.worldbank.org/indicator/SI.POV.RUHC?locations=IN&view=chart
24 25 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
The use of digital channels therefore raising incomes, provides jobs, and •• Opening a certain percentage of •• Client protection by putting in effect allows increased access and reach eventually translates into higher GDP Automated Teller Machines (ATMs) & grievance redressal mechanisms to the financially excluded, builds for the country. branches in rural/semi-urban areas •• Flexibility in repayment to provide trust among the segment by •• Putting in place a network of BCs that relief, which is much needed in this is well positioned to facilitate financial segment, without allowing mis-use Examples of Applications of SMAC and ICT distribution via easy cash-outs •• Encouraging competition among the •• Telecom kiosks as financial points as financial service providers to prevent Simplyifying KYC Competitive advantage Telcos with Payment Bank licenses start financially excluded population from Provide access to new markets (broadening operations being exploited by money-lenders. •• Facilitate account opening on a large scale customer base, saving time), lenders can •• Inter-person transfers via Unified •• Policies to facilitate access to innovative •• Cross leverage KYC across banks arrive at most attractive rates to lend at Payments Interface (UPI) and cheaper technologies for Small & Medium •• Monitor account activity for suspicious activity smartphones Enterprises (SMEs) •• Credit Bureaus in rural areas, that 04. Role of the eco-system can provide at least one free report Other stakeholders need to be brought Widening Product Portfolio Lower transaction costs to individuals and address the into future field building efforts. By way of: Increased information flows, online information problem •• In providing simple, easy to use products for citizen services e.g. Identification, Direct BoP customers, thereby increasing access to Benefit Transfers (DBT), innovative solutions basic financial services and products •• Online citizen services can be introduced Financial Inclusion Ecosystem leveraging SMAC Skilling
Accessing more Information Others •• The debt problem is likely Enhanced security, interoperability, develop to trend worse if credit •• In keeping information records that can help •• By fostering Cultural / Civil Financially create solutions (unique to communities), is given without skilling. increase access to credit. E.g. Digitization of land engagement with Organizations Excluded productivity gains for SMEs (labor, capital), Repayment is only records can facilitate the use of land as collateral communities, industry Greater Innovation possible if an individual players can design •• Information on defaults can be kept and shared, has the skillset to raise and implement which will keep borrowers from defaulting the funds for repayment sustainable economic of debt. strategies and wealth Source: Deloitte Analysis building opportunities Financial •• NGO networks, programs that are tailored to Foundations Institutions of Financial Institutions community needs can facilitate skill enhancement •• The potential present at the confluence Local Financial literacy 03. Role of the Government. and •• Allocate certain % of loans from the Employers Corporates Priority Sector targets i.e. Priority of these forces can Government •• School/Education In order to build trust in the establishment Sector Lending (PSL) in a focused unlock huge economic Institution’s curriculums from the customer’s end, and to ensure manner, such as the sectors operating benefits for the to introduce basic better financial literacy and inclusion, on the fringes of inclusion financially excluded financial concepts it is required that the Government and •• Trading of PSL certificates for better •• Economic impact can Corporates develop policies, frameworks •• Literacy missions by efficiencies be deepened for the various communities and actions. A few examples include: financially excluded •• Programmes such as PMJDY that were a Community Post Secondary can inculcate a habit •• Simpler, basic norms/requirements for via these communities stepping stone to financial inclusion, as Service Providers Institutions of savings among the KYC, therefore for account opening they will generate the network effects financially excluded (an of having bank accounts eventual shift from credit)
Source: Deloitte Analysis
26 27 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Conclusion: Many of these principles communicate Financial inclusion can be better the priorities expressed in the vision achieved once we steer towards the G-20 statements of the Committee on principles42 for developing Digital Financial Comprehensive Financial Services (CCFS) (DF) products/services, support innovation, for Small and Low Income Households, and manage risk to leverage the potential under Dr. Nachiket Mor43. These include: offered by digital technologies. The key •• A Universal Electronic Bank Account by principles include: January 2016 for every Indian citizen •• Adopt a digital approach to inclusion above the age of eighteen
•• Balance innovation and risk for Digital •• Ubiquitous access to payment services Financial inclusion and deposit products at reasonable charges, by 2016 for every resident •• Enabling and proportionate legal and regulatory framework for Digital •• Sufficient access to affordable Financial inclusion formal credit, by 2016 for every low income household •• Expand DFS infrastructure ecosystem for safe and low cost provision of DFS, •• Universal access to a range of deposit especially in rural areas and investment products at reasonable charges, by 2016 for every low •• Establish responsible digital financial income household practices to protect customers •• Universal access to a range of insurance •• Strengthen Digital and financial literacy and risk management products at and awareness reasonable charges, by 2016 for every •• Facilitate customer identification for low income household DFS, for a risk based approach to DFS •• Right to Suitability of financial services/ •• Track Digital Financial inclusion products progress through a data measurement and evaluation system to assess demand for DFS, and progress and impact of key reforms
42 Global Partnership for Financial Inclusion, http://www.gpfi.org/sites/default/files/documents/G20%20High%20Level%20Principles%20for%20Digital%20 Financial%20Inclusion%20%20Full%20version-.pdf; Inclusive Finance India Report 2016, Ffile:///C:/Users/grabani/Desktop/CII%20Financial%20Distribution%20Summit/Financial%20Literacy/Inclusive%20 Finance%20Report%20.pdf 43Committee on Comprehensive Financial Services for Small and Low Income Households Report, https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/ CFS070114RFL.pdf
28 29 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Indian households are aggressive savers, however, a larger portion of savings are held in the form of physical assets
01. Gross Saving rate (% GDP)1 02. Assets held by Indian Consumers2
Financial Assets Among top 20 8% saver nations in the world
31%
Non Financial Assets 92%
Gross savings rate declined from a peek of 37% to 31% Indian consumers invest a large portion of their wealth in assets over 2008-2017 like real estate, precious metal and durable goods.
03. Assets held by Urban and Rural Consumers2 04. Urban households awareness of financial Instruments3
100% 95% 11% 3% 89%
Future of Distribution Investment instruments 43% 89% 97% 28% 26% by Digitization 13% 10% Urban Rural Bank Life P.O. Pension Mutual Equities Deben- Derivative deposits insurance savings Schemes Funds tures Non Financial Assets Financial Assets
Overview of Financial Services However, the channelization of savings Urban customer hold more financial assets compared to Urban awareness about investment instruments remains very low Distribution in the financial services sector continues their rural counterparts in a sharp contrast to awareness about savings instruments 01. Saving and Investing Trends to be very low at 8% and presents large Source: Indian economy is witnessing a rebound opportunity for incumbent financial 1. 2014 – World Bank Report 2.National Council of Applied Economic Research, 2016 3. SEBI Investor survey 2015 after a brief period of slow down. Despite services providers. Awareness and the marginal decline in household savings financial literacy remain two of the ratio (% of GDP) from 22% to 19%, the stumbling blocks for Indian consumers household savings has grown nearly to transition to financial products. Within 5 times in the last fifteen years, as the financial products, the awareness remains GDP grew from INR 23 lakh crore to INR high for bank deposits and life insurance 152 lakh crore44. For the overall savings, as compared to the Mutual funds, Equities, India has been ranked among the top 20 Bonds and other securities. savings nations in the world with the gross savings rate of 31% (% of GDP)45.
44 RBI, Handbook of Statistics on Indian Economy 45 2014- World Bank Report
30 31 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Instruments held by Urban Customers46 Reasons for not investing47 Distribution channels across various products48
others Products Regulator % household savings Distribution Channels Key Observations 7% illiquid Safety concerns Insurance Insurance 17% •• Individual Agents (36%, 36%) •• ~11,000 branches, 22 lakh agents and 95% investment 29% Regulatory for life and non-life ~700 corporate agents for life 11% Development •• Corporate Agents (12% for life •• ~9,800 branches, ~600 corporate 62% Authority and 10% for non-life) agents for non-life, ~350 brokers
30% lack of •• Brokers (1.3% for life and 22% •• Life insurance sold primarily through expertise for non-life) agency channel 10% 8% 14% 4% •• Direct (49% and 31% for life •• Bancassurance model has picked up. Bank Life P.O. Mutual Equity Debt Inadequate returns and non-life) Open architecture for bancassurance Inadequate deposits insurance savings Funds 21% introduced recently information •• Banks 18% •• Digital channels
Mutual SEBI 3% •• Organized distributors (18%) •• 1600 branches, 85-100K IFAs, ~500 Funds corporate distributors, ~2000 •• Banks (21%) Certified Financial Planners •• Independent Financial •• SEBI removed upfront commission Advisors (IFAs) (21%) in 2009 which resulted in IFAs exiting 02. Distribution Channel Trends •• Current Distribution Channels – Overall •• Direct sales (40%) the market The Indian financial services industry Landscape - Indian financial sector is is rapidly expanding and transforming undergoing a transformational change •• Focus on online selling and digital at the same time. While the incumbent with technology advances, entry of platforms is increasing providers are transforming their offerings new players, changing regulatory Broking SEBI 3% •• Discount Brokers •• ~14,000 brokers, ~42,000 by aligning with the changing customer norms, changing customer behavior, sub brokers, ~360 depository behavior and expectation, the introduction •• Offline Brokers and Sub and integration of traditional financial participants, ~515 investment of new players including small finance brokers players with the emerging technology advisors, ~2000 Certified Financial banks, payments banks, FinTechs, digital players, to provide end to end service •• Hybrid (Online + Offline) Planners aggregator platforms etc., is causing a offerings to the customers. paradigm shift by providing disruptive •• Brokers have diversified into other offerings and enhanced user and service Besides traditional distributors, new products such as credit due to experience, at the doorstep of customers. players are entering financial services declining margins on account of distribution, offering accessible and market disruption by discount Within distribution, similar innovative convenient services through digital brokers entrants focusing on digital and mobile channels. Pension EPF, Pension 12% •• Banks •• NPS has majority AUM from channels have been introduced to the and Fund government employees •• N B F C s arena of traditional distribution players. Current distribution channels for 4 Provident Regulatory Additionally, technology is playing a vital segments – mutual funds, insurance, •• Personal pension schemes by MFs, Funds Authority of •• MFIs Insurers and NPS have seen limited role in transforming the way financial broking, and pension funds, have been India services are distributed and used by the summarized below. •• Insurance companies penetration individuals throughout the value chain. •• Agents
•• Digital channels
•• Mutual Funds
46 SEBI investor survey 2015, published May 2017 47 SEBI investor survey 2015, published May 2017 48 Deloitte Analysis
32 33 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
A common distribution channel which •• Technology based disruptions in •• E-KYC, C-KYC and E-sign - Aadhaar Several apps have been developed has emerged across all the segments distribution channels - With the based EKYC, centralized KYC, and E-sign which can be accessed through mobile/ is the digital channel. With the entry of new distribution players and have a deep impact on distribution of tablet apps or web browsers and widespread penetration of computers technology disruptions, sophisticated financial products. These capabilities enable investors to compare and asses and mobile phones in India, customers tools are being used to provide enable digital on-boarding of customers various product features, increase are shifting from physical channels customized and low cost services in banking as well as financial products awareness, make transaction and track to digital channels for searching and through digital channels. These new including mutual funds, insurance etc., and manage the performance of their buying financial products. Digital offerings/tools have the potential hence enabling seamless and efficient investments. These features not only channels provide a platform for to transform the entire distribution distribution of these products through increase customer awareness, but enhancing customer engagement landscape and revolutionize the digital channels. The E-KYC capability also empower customers to perform and a seamless customer experience, traditional way of distribution across enables the paperless processing transactions at their own convenience throughout the value chain. various financial products. of applications within minutes and in a way preferable to them. also minimizes the occurrence of identity theft, fudged signature and Example of mobile apps – Mutual fake documents. The entire process Funds: myCAMS by CAMS, KTrack app also reduces the cost of application by Karvy, InvesTap by SBI Mutual Fund, Role played by distributors and the impact of technology disruptors processing by making it paperless. HDFCMFMobile app by HDFC etc. The reduction in costs can be 2-3% Post Sale Customer for banking products and as high as Insurance: LICMobile, Aviva Life Lead Generation Sales Fulfillment Cross Sell/ Renewal Servicing 20%-30% for insurance products. Insurance, HDFC Life Insurance Central KYC reduces the need of •• Robo advisors - Robo advisor is an doing KYC for the same person while •• Customer education •• Document completion •• Customer awareness •• Cross selling other automated advisory system or online purchasing different financial products and awareness of performance of investment instrument portal which provides automated, •• Document collection by maintaining centralized repository instrument algorithm driven financial advisory •• Client profile analysis •• Educating customers of KYC records of customers engaged •• Cheque/ Premium services with little or no human •• Cheque collections about other investment in various financial market segments. •• Client requirements collection supervision. Customers can get online (Loans EMI) Claim instruments Electronic signature (E-sign) provides an analysis investment services, and can easily settlements online electronic signature capability Distributor’s Role manage their portfolio with the help •• Provider selection (Insurance) to facilitate an Aadhaar holder to of a robo advisor. These advisers digitally sign a document. The capability offer automated, personalized provides an easy and convenient way of investment plans at a low cost by digitally signing documents without the assessing the customer’s risk profile. Social Media Social Media need of a physical signature. They automatically rebalance the
investment portfolio according to E-KYC capability is widely used for E-KYC and C-KYC market conditions, keeping in view opening new accounts for mutual the investor’s needs, and also deliver funds, insurance, broking, and pension transparent, real-time and on- products like NPS. Online Aggregators Online Aggregators demand reports. Most importantly •• Mobile apps - With the changing robo advisors give unemotional and customer behavior and their increasing unbiased advice, as compared to Customer analytics and Customer analytics and preferences for the digital channels, human advisors who can give advice Big Data Big Data financial players are increasingly basis the fact that they earn high
Technology based disruptors Robo Advisors adopting tools to provide digital commissions when they recommend offerings for both distributors and costly products to their clients. clients, creating an enriching and Mobile Apps customer-centric user experience. Examples: Arthyantra, Bigdecisions
Source: Deloitte Analysis
34 35 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
•• Social media - With the increasing •• Customer Analytics - Analytics helps •• Lack of focus in Tier 2 cities - Most of the digital channels and customized penetration and engagement of in enhancing both the distributor and the distributors focus more on the products, distributors need to keep customers on social media, it has the customer experience. Advanced Tier 1 cities and lack distribution focus a strong track of the customer emerged as one of the most effective analytics such as trends in Assets in Tier 2 and the rural cities. This is preferences, and keep pace with platforms for customer engagement. Under Management (AUM) growth, primarily because these players want changing customer requirements. For financial services, social media client acquisition trends and AUM to avoid the comparatively high costs Financial distributors are considering enhances customer engagement in two mix, client’s recent financial activities, needed to penetrate the rural cities, adoption of better technology tools ways. Firstly, it helps in dissemination specific industry behavior etc. can help given that they would have to invest and processes to increase customer of information amongst investors in distributors suggest the right financial enormously to increase investor convenience and provide customized a faster and convenient way and thus product to the customers which they awareness and distribution channels products, and are moving towards impacts brand perception of various may/ may not be aware of. At the same in these cities, as compared to the mobile/ tablet app based and browser financial products. Investor decisions time analytics may also help customers more educated investor base and based, paperless investments. are also impacted by the products and understand their own requirements established distribution channels in the services endorsed by other people of the financial products as per their urban areas. Another reason is that the Products Deep Dive known to them. Secondly, financial financial behavior and the trends of the margins are perceived to be lower from 01. Mutual Funds players can make use of the immense industry they are operating in. the low amount of investments made in •• Current Landscape - The mutual fund data available on the social profiles the rural cities. industry in India manages approx. INR of the investors, to understand their 03. Operational challenges in •• Low distribution focus by Public Sector 19.5 lakh crore (March 2017) in Assets investment and financial need patterns Distribution Banks - Public Sector Banks, having under management (AUM). While the and hence, recommend the products Following are some of the operational a strong distribution and reach in industry has been growing at a CAGR and services most suitable for them. challenges that limit the penetration of the the rural areas have low focus in the of 28% from March 2013 to March 2017, financial products amongst the consumers •• Online aggregators - Online aggregators distribution of other non-banking it only accounts for 3.6% of individual49 and investors: help customers make informed financial investments products such as wealth in India based on Financial decisions by combining and comparing •• Low customer literacy and awareness - mutual funds, insurance etc. Assets.50 The industry is dominated all the products, for a financial stream, Lack of financial awareness and literacy by six asset management companies51 •• Changing customer behavior - With in a single window. For customers, plagues the distribution of the financial accounting for around 2/3rd of the total the changing customer behaviors and it means easy access to product products. Investors perceive several industry AUM. their increasing inclination towards information and readily available investment options as risky, and lack comparisons for different products in the basic knowledge about concepts a specific category. However, it has an such as risk-return, diversification, asset even deeper impact for the physical allocation, equity etc. Mutual Funds contributes only 3.6% of the individual Top 6 players contribute around 66% of the market distributors and the financial advisors, •• Risk perception of customers about wealth in Financial Assets share by AUM as it empowers customers to make their several financial products- There are own investment decisions by providing specific perceptions amongst the 3.6% them the information about various 13% investors about different investment products. Hence, online aggregators products which limit them from enable direct customer-to-digital set up. investing in these products. These 34% 13% perceptions often create situations of Examples of aggregators for Insurance: miss-selling where financial products Coverfox and Policy Bazaar are sold to investors without explaining 12% their true purpose or implication. 8% 9% 11%
ICICI HDFC Reliance Birla
SBI UTI Others
Source: Karvy, India Wealth Report, 2016 Source: AMFI
49 Individual wealth is calculated by collating private wealth in all assets classes in which individuals make their investments, it does not consider government and institutional investors 50 Karvy,India Wealth Report 2016 51 AMFI March 2017
36 37 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
The AUM in the mutual fund industry measures and for overall expansion of Segmentation of Distributors by AUM has seen a significant growth in the the distribution base. last few years. The expectation is that the growth is likely to continue as both AMFI is also evaluating the possibility 3% SEBI and AMFI are making substantial of a single window registration process 14% efforts to increase investors’ awareness for distributors that could eliminate and penetration of mutual funds. the requirement of empaneling with 36% Measures have also been taken to each fund house. On the same lines, improve transparency in the disclosure AMFI is also evaluating introduction of 19% of distributors’ commission expenses, a common/standardized application improve investor education and form, to ease the transaction process awareness, implement pro-investor for investors. 28%
Mutual Fund AUM Trend (in INR Lakh Crores) Number of Folios (In Mn) Direct National Distributors Independent Financial Advisors
19 Banks Others 55.4 46.5 47.7 CAGR: 28% 42.8 41.7 Source: AMFI 12.3 39.5 11.2 8.5 7.2
With the emerging digital wave, the operational efficiency and reduction current modes available52 for both web in transaction processing cost of the and online app based platforms are: MF industry. The prime objective of Mar '13 Mar '14 Mar '15 Mar '16 Mar '17 Mar '12 Mar '13 Mar '14 Mar '15 Mar '16 Mar '17 –– Mutual Fund websites: Mutual Funds MFU is to consolidate all transactions Source: AMFI Source: AMFI have enabled online investment received from multiple sources on their respective websites, which and transmit the same to the allows investors to seamlessly invest Registrars, bringing in operational in/redeem/switch their mutual fund efficiency by reducing multiplicity units in the schemes of the respective and duplication of activities. The MFU Over the past few years, the Though Banks remain a primary fund house. portal operates as a “Transaction distributors mix for the mutual distributor, there is a huge potential –– RTA platforms: The Registrars & Aggregating System” for the Mutual funds industry has been changing for the banks to further increase Transfer Agents (RTAs) of mutual Fund Industry as a whole. MFU is with increase in direct channels, and penetration due to their strong funds (such as CAMS and KARVY) established on a co-operative model, decrease in national distributors. distribution network. have also enabled online investment with all participating AMCs being in mutual fund units and tracking equal shareholders of the MFU. Direct channels have been increasing Individual financial advisors (IFAs) facility thereof, on their respective Being a browser based utility, MFU owing to the upcoming digital channels. have increased their share in mutual websites, in respect of the mutual promotes industry level self-service This trend is going to continue as fund distribution over the past ten funds serviced by them. for investors/distributors/ registered young internet-savvy customers are years, however their share has recently –– MF Utility (MFU): MFU is a investment advisors (RIAs), and more inclined towards the digital declined because of the cap on the technological platform promoted provides multiple modes of access channels. With the increasing use of upfront commission and removal of by the Indian Mutual Fund Industry and transaction submission options. mobile apps, tablets, and browser service tax exemption status. under the aegis of AMFI, as a not- Investors and distributors/RIAs can based apps, customers are shifting for-profit, shared infrastructure for submit transactions either online, from the physical way of undertaking investor & distributor convenience, or physically, and make physical and transactions to digital channels.
52 Crisil, AMFI report
38 39 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
e-payments. MFU provides broad and •• Future Outlook - Technology has become Towards the digitization of financial 16, the total premium generated by the neutral “Points of Service” (POS) for an integral part of the MF industry, and services, SEBI has already allowed the insurance industry was INR 4.7 Lakh enhanced coverage and geographical is expected to play a pivotal role in the use of e-wallets for making investments Crore of which INR 3.7 lakh crore was reach, investors and distributors/ distribution, specifically catering to the of up to INR 50,000 in mutual fund contributed by life insurance, and INR RIAs enjoy the convenience of challenges from India’s vast geography schemes, in order to make it easier 0.97 lakh crore by non-life insurance55. submitting transactions in a single and servicing smaller locations which to purchase these instruments. Asset place, irrespective of the Mutual Fund are commercially unviable. With the management companies (AMCs) have Contribution of the insurance sector in which they transact. This is likely to increasing use of smartphones, tablets, also been allowed to provide instant towards the total individual56 wealth save a lot of time, effort and cost to and internet, there is a huge potential online access facility to resident in financial assets is 14.8%57, primarily the distributors/RIAs. to directly reach the customers and individual investors in liquid schemes. because of relatively high penetration of –– Stock Exchange platforms: Customers pass on the benefits of commission to life insurance. can also buy mutual fund units the end customer. It is expected that 02. Insurance through BSE - StAR MF and NSE in future the mutual fund industry will The insurance penetration rate, defined Mutual Fund Service System (NSE- primarily depend on the technology and •• Current Landscape - Over the last as the ratio of premium underwritten MFSS). These are primarily online digital innovations to understand client decade, there have been various in a particular year to the GDP, stands order collection systems provided by requirements, their risk ability, future transformational and regulatory changes at 3.4% in FY16 which is far below BSE and NSE to eligible members, for goals, and spending behaviors, and in the insurance industry. The insurance the global average of 6.2%. However, placing subscription or redemption accordingly make calculated suggestions industry is primarily dominated by insurance penetration is expected to orders. to them with the right products. Further, the life insurance segment, which increase and reach 4% by the end of –– Online aggregators/ third-party the performance of the customer’s constitutes around 79% of the industry FY17, owing to the increasing household platforms: Portals of aggregators or portfolio will be automatically tracked size by premium53. The industry consists savings, and increasing awareness and distributors also allow customers to and the customers will be informed. of 57 insurance companies, of which 24 requirement of life insurance. invest in schemes of multiple mutual are in the life insurance business, and 33 fund houses. are non-life insurers.54 In the year 2015-
Insurance contributes 14.8% of the individual wealth in Life Insurance constitutes around 79% of the insurance Financial Assets industry (by premium) Customized, Easily accessible Improved distribution customer centric solutions efficiency and reach 14.8% solutions across the country 1 21%
Enhanced customer Robo-advisors experience and Artificial Analytics 2 Intelligence Seamless customer Future Trends and 79% landscape onboarding Better Process investor 3 Automation education Efficient decision Life Insurance Non Life Insurance making and portfolio management 4 Source: Karvy, India Wealth Report, 2016 Source: IRDAI Annual Report, 2015-16
Easy buying and E-commerce redemptions Digitization and Mobile apps 5 53 IRDAI, Annual Report 2015-16 54 IBEF Insurance report, November 2017 Source: Deloitte Analysis 55 IRDAI, Annual Report 2015-16 56 Individual wealth is calculated by collating private wealth in all assets classes in which individuals make their investments, it does not consider government and institutional investors 57 Karvy, India Wealth Report 2016
40 41 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Insurance Penetration* (%) •• Non-Life Insurance – The non-life constitute the majority of market, with only accounted for 0.22% for new insurance industry underwrote total 44% and 29% share respectively60. business premiums61. With changing 4 direct premium of INR 0.96 lakh crore in customer preferences and digitization 3.4 India for the year 2015-16, as against INR From the perspective of distribution in of the entire financial ecosystem, it 3.3 .085 lakh crore in 2014-15, registering the life insurance segment, direct selling is expected that online channels and a growth rate of 13.81%, as against contributes the maximum share of other alternative channels such as 9.20% growth rate recorded in the 56.92% in 2015-16, compared to 49.67% Customer Service Center’s (CSCs) will previous year59. in 2014-15. The second highest share is have increased share of distribution in of individual agents contributing 29.68% the coming years, thereby increasing the Amongst the non-life insurance segment, in 2015-16, which has decreased from entire size of the life insurance industry. motor insurance and health insurance 36.44% in 2014-15. The online channel
FY 15 FY 16 FY 17E Growth in Non-Life Insurance Premium (INR Lakh Crore) Share of various channels for new business premium of life *Penetration defined as the ratio of premium underwritten in a particular year to the GDP Insurers (2015-16) Source: IBEF Insurance report, November 2017 0.0007% 0.2% 0.05 0.01 0.35
•• Life Insurance – India’s share in global the next five years, as the advances 0.03 30% 0.01 life insurance market was 2.24% during in medical sciences are expected 0.3 2015, where as it was 2.08% in 2014. to increase life expectancy, and the However during 2015, the life insurance regulatory framework is expected to 57% 2.9 premium in India (Inflation adjusted) give companies more incentives to come 2.1 0.05 increased by 7.8%, when global life with customer favorable and affordable 0.06 0.04 0.04 0.03 11% 0.02 0.48 insurance premium increased by 4%. insurance policies. 0.39 0.43 As of March 2016, the combined AUM 0.31 0.35 0.4 1% of the life insurance industry is INR 17 The life insurance market consists of 24 FY 12 FY 13 FY 14 FY 15 FY 16 1% Lakh crore. The total premium of the players, 23 private and 1 public sector life insurance segment stood at INR 3.7 company. Life Insurance Corporation is Individual Banks Other corporate Brokers Private Public Lakh Crore in the year 2015-1658. The the sole public sector company which agents agents life insurance segment is expected to dominates the market, having 71% Standalone Health Insurer Specialized Insurer Direct CSCs Online increase with a CAGR of 12 to 15% over market share. Source: IRDAI, Annual Report 2015-16 Source: IRDAI annual report 2015-16
Growth in Life Insurance Premium (INR Lakh Crore) Market Share of Major Companies in terms of first year life insurance premium collected (FY 17)
13.67% Amongst the non-life insurance segment, important channel was brokers, which digital channels currently have low
5.80% the analysis below depicts the channel contributed 24% of the total health penetration of distribution of insurance. contribution of various distribution insurance premium. Bancassurance However, with recent initiatives from 2.6 channels in health Insurance. Among contributed only 7% and online sale of Government of India, as well as the 2.5 4.97% 2.4 2.0 2.1 the various channels of distribution, health insurance policies contributed industry, thrusts including emergence 4.49% 71.07% individual agents continue to contribute only 2% of the total health insurance of aggregators, simplification of KYC a major share of health insurance premium. procedures, introduction of online
0.9 0.8 0.7 0.9 1.0 premium at 33%. Direct sales - other insurance channel etc., it is expected than online is the second major channel Considering the channel distribution that usage of digital channels is likely to FY 12 FY 13 FY 14 FY 15 FY 16 for distribution of health insurance in both, the life insurance and health increase in the coming times. business (by premium) at 28%. Another insurance industries, it is evident that Private Public LIC ICICI HDFC SBI Life Others
Source: IRDAI, Annual Report 2015-16 Source: IBEF Insurance report, November 2017
59 IRDAI, Annual Report 2015-16 60 IRDAI, Annual Report 2015-16 58 IRDAI, Annual Report 2015-16 61 IRDAI, Annual Report, 2015-16
42 43 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Share of various channels of distribution in Health Insurance (2015 -2016) Additionally, alternate distribution line of business, and distribute other channels for insurance are going to financial products such as mutual By Policies Issued By Gross Premium grow. The Insurance Industry has funds, National Pension System (NPS), witnessed emergence of the following banking and financial products of 0% 0% 0% distribution channels in the recent past: banks, and non-banking financial 0% 0% 3% 4% –– Direct Channels: Direct selling of companies. Under IMF, there are two insurance through digital channels kinds of licensed individuals: first, an 14% 24% including: online, mobile/ tablets insurance sales person responsible
3% apps. Additionally, regular payment for selling insurance and second, 2% 33% of premiums, and also filing of claims a financial service executive who can be carried out through these distributes other financial products. 68% 9% 7% digital channels. –– Customer Service Center (CSC): 03. Pension Funds 2% CSCs were set up by Government 2% •• Current Landscape - India has witnessed 28% of India for the purpose of financial a constant growth in the number of inclusion. CSCs enable distribution of pension subscribers with a CAGR of government, private and social sector 24%, from 2012 to 2015. Similarly, assets services to citizens to India. Brokers Corporate Agents: Corporate Agents: Direct Sales: Online Direct Sales: Other under management has grown from INR Banks Other than Banks than Online –– Insurance Marketing Firms (IMFs): 8.5 lakh crore in 2012 to INR 13.7 lakh IMFs are allowed to distribute policies Individual Agents Micro Insurance Web Aggregators Others crore in 2015. Agents of two insurance firms in the same
Source: IRDA annual report 2015-16
Composition and Growth of India's Retirement Corpus, and Growth of Pension Subscribers •• Future Outlook - Technology innovations macro-economic landscape with lower are transforming the insurance industry interest rates, changing customer Pension Fund AUM Split, India (INR Lakh Crore) Pension Fund AUM Split, India (INR Lakh Crore) at an ever-increasing pace. These behavior, increasing digital adoption, advances will have an impact across evolving competitive landscape, and CAGR: 17% the different aspects of the insurance dynamic regulatory norms are likely 28.5% 8.5 9.9 11.9 13.7 business including distribution, to transform the way the insurance 22.1% underwriting, claims and customer industry is operating. Key upcoming CAGR: 24% service. Additionally, the rapidly evolving trends in the insurance industry are: 4% 3% 4% 4% 16.9% 3% 4% 5% 6% 14.9%
Process Digitization 65% 64% 62% 62% across customer Journeys Customer engagement through digital 2012 2013 2014 2015 2012 2013 2014 2015 channels EPF NPS PPF Insurance New tailored and integrated end to end products Note*-No. of subscribers for EPF, NPS, ULIPs and APY. Does not include number of subscribers of PPF and MFLRPs. Sources: EPFO, PFRDA, Finance Ministry, LIC, and Deloitte Analysis Usage of analytics
Technology driven companies driving innovations in Insurance New innovations like robotics and machine learning Source: Deloitte Analysis
44 45 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Despite steady growth in subscribers the coming years with regards to Unfavorable commission structure for pension products as compared to other products for Banks and pension AUMs, Indian market still regulations, to introduce interoperability, remains highly underpenetrated, with design and structure of NPS, pension Products Incentive to distribute only 7.4% of the working age population plans offered by life insurance Mutual Fund •• Recurring Charges (Annual): 1.5% – 2.5% being covered by any pension scheme62. companies, and retirement plans offered by mutual funds. •• Exit Load: 0.5% - 3.0% There are a number of structural issues
specific to the Indian pension market •• Product part of end to end wealth management offering- Demand pull / customer awareness Additionally, macroeconomic changes such as: a large share of workforce and demographic changes are likely employed in the unorganized sector Insurance •• First Year Commission: Upto 40% to drive the demand for pension (which is not covered by any workplace products, with sophisticated distribution •• Subsequent Years Commission: Upto 5% pension scheme), limited awareness mechanisms. about pension products, but most •• Corpus formation that can be used to generate income through investment activities
importantly, the limited distribution Currently the following factors limit the Saving Bank •• Low cost deposits that can be used to generate higher interest through lending activities network. distribution of pension products: Account –– 82.7% of the Indian workforce is •• Bank branches are closely tracked against Saving Bank Deposit targets –– Low distributor commission for employed in the unorganized sector63 pension products as compared NPS •• Registration: INR 125 –– 54% of the workforce in the organized to other financial and investment sector is informal (temporary workers •• Contribution Processing: 25% products. who are not entitled to social security –– Limited distribution capacity and •• Non-financial transaction processing: INR 20 benefits provided by employers such product focus: Banks have multiple as pension)64 PPF •• Transaction charges: .055% financial products that generate higher fee income for them, limiting APY •• INR 100 per account Primarily three models are used for their interest in actively promoting the distribution of pension products65: •• Additional incentive: Upto INR 50 per account pension products. Pension is a –– Direct Aggregator Model – The complex product and warrants pension products are sold by Source: Industry Discussions subscriber handholding throughout organizations as additional products the process. Banks do not seem to be to their existing product portfolio. willing to invest time and effort due to Aggregators already have an existing 04. Broking Industry revenue of INR 0.17 Lakh crore in FY16, lower incentives. client base (e.g. NGOs, MFIs, banks, which has grown at 17% in the last –– Issue of limited skill set of last mile •• Current Landscape – The broking regional rural banks etc.) four years. staff: Last mile employees have industry in India is estimated to have a –– Promoter Model - Aggregators limited understanding of pension work with client-facing partner products, to be able to handhold the organizations to promote subscription customer in his pension journey Broking Industry Revenue (USD Bn) to pension schemes. (e.g. LIC in partnership with its micro-insurance To cover these challenges, the following agents and corporate agents) trends are anticipated to impact the 2.6 –– Independent Agent Model - Agents CAGR 17% pension industry in India: 2.1 are engaged by an aggregator 1.8 –– Increased engagement with 1.6 with the purpose of providing last- distributors to highlight long term mile outreach to rural customers, benefit of distributing NPS and making pension schemes –– Expanded distribution network accessible to these customers (e.g. to include other categories of LIC appointing facilitators with players such as small finance banks, FY 13 FY 14 FY 15 FY 16 Confederation of NGOs in Rural India). payments banks, FinTech companies Source: SEBI Annual Report 2015-16, Deloitte Analysis –– Empowered and well trained •• Future Outlook - Owing to the increased distributors focus towards the pension industry, –– Increased usage of digital channels for significant changes are expected in pension distribution
62 Global Human Capital Report 2017, World Economic Forum 63 Ministry of labour and employment 64 CII – An Analysis of the Informal Labour Market in India, 2011-12 65 The India story of Micro Pension, Microsave, 2013
46 47 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
The industry is in the midst of structural competition. The key characteristics of transformation driven by change in the industry are mentioned below. Distribution customer preferences, technology and Network •• In addition to online presence, Broking houses are also expanding their offline distribution network, which is adding to their cost of doing business
Current State of Broking Industry •• HDFC Securities has presence in 189 cities through 262 branches at the end of FY16, compared to 200 branches in 160 cities at the end of FY14 Concentrated Cost pressures in Product / Service 1 Industry 2 Broking Industry 3 Diversification
Technology Indian broking industry is Cost drivers remains challenging Players are increasingly Investment •• In order to maintain their competitive advantage, large broking houses are investing concentrated with few player driven by increased investment diversifying into other financial significantly in technology development to enhance customer service and increase holding majority of the market in technology, physical services to reduce cyclical effect operational efficiency distribution, and compliance of broking industry •• Development of online channels (mobile/internet), robo-advisory, etc. are result of some requirement of these tech-investments
Source: Deloitte Analysis
Compliance •• SEBI regulations – such as the need to provide basic service demat account to retail –– The current market for broking Percentage share of Top ‘N’ members in Equity cash Cost investors – is adding to the cost of servicing these small investors is highly concentrated, with Top turnover, NSE 25 brokers commanding half of 80% •• Increased reporting requirements as a result of scams such as NSEL scam, penny stock 74% the market turnover. The broking scam industry is increasingly getting further •• The increase in Base Minimum Capital requirement to Rs. 50 Lakhs (USD 0.75 Mn) from concentrated with consolidation. 48% earlier Rs. 10 Lakhs (USD 0.15 Mn) added to the cost component for brokers Smaller brokers are finding it tough to 44% compete in the market, and are either gravitating towards the sub-broker 17% model or are closing down business. 14% –– Faced with increasing pricing Employee Cost pressures, smaller brokers are finding •• Increasing complexity of the business needs higher skilled people, which has increased it tough to profitably compete in the Top 5 Top 25 Top 100 the cost of high skill people market. Key revenue drivers have Dec'10 Dec'15 •• High employee turnover adds to the cost weakened over the years for the
broking industry, as services become Source: NSE , *as on 31 March 2017 commoditized, resulting in pressure on the topline, and profitability. Even though the overall market turnover has increased over the past few years, the trading turnover has Source: Company Website, Deloitte Analysis shifted to derivatives, with increased participation from institutional / –– Large full service brokers are expanded into adjacent business proprietary traders, leading to an evolving from a pure transaction lines such as research and advisory to overall lower brokerage yield for the business, to provider of larger manage cyclical earnings, other large broking industry. Additionally, cost gamut of financial services solutions. brokerage houses have moved into drivers remain challenging driven by While few brokerage houses have higher margin lending businesses. increased investment in technology, physical distribution, and compliance requirement.
48 49 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Distribution in the broking industry online and offline channels. Basis the Brokerage Asset •• MOFS, one of the top 10 has been dominated by offline brokers customer preferences of the product and related management broking houses in India, and sub brokers, discount brokers and the distribution channel, five broad activities and advisory was established in 1987 and financial planners across, both distribution models have emerged. as primarily broking house
•• Currently, broking revenue constitutes 43% of the group’s Discount Brokerage Model Service Brokerage Model Housing revenue Others Finance •• The group has diversified •• Target Segment - Active Traders •• Target Segment - Investor in the age group 25 to35 yrs interest in multiple 0.4-0.5 Mn users •• Low cost, “No-frill” trading model •• Margin funding and other services forms the USP business lines – Private 4% market share Equity, Institutional Growing at +30% •• Focus on frequent traders, age •• Convenience and breath of product offering is the basis Equities, Investment group between 20 to 35 yrs to compete OnlyOnline Banking, Asset •• Price sensitive segment •• Prefers online interaction Management, Wealth Investment Fund based Management, Advisory •• Minimal interaction •• High growth segment banking and Housing Finance •• Digital on-boarding Low base •• Digital on-boarding and online but high growth segment service facilities
•• Segment targeted by large broker 3.4-4.5 Mn users ~50% share Growing at +25% Hybrid Model
•• IIFL, one of the first player •• Higher acquisition and servicing costs to provide a trading portal Capital market, •• Typical customer segment includes – 5paisa.com – is among equity broking Wealth FII, DII and retail the top 10 broking houses and related Management •• Business model would require deploying RM and in India PreferenceChannel activities physical infrastructure •• The revenue from Offline + Online capital market •• Higher ability to cross sell activities, equity •• Segment targeted by large brokers broking and related
Asset activities provided Delivery Mode: Physical store, Telephone, Website, Mobile Project Assisted Brokerage Model Influenced Brokerage Model management only 11% of the group’s Financing and advisory revenue •• Target Segment – Traders in age group •• Segment dominated by Independent •• The group has since >35 years Financial Advisors, Sub brokers diversified into multiple business lines – Wealth •• Dealing with sub-brokers •• Focus on relationship with the local Management, Asset community •• Higher loyalty, less price sensitivity 3 - 4 Mn users
Management, Institutional Only Offline Distribution 46% market •• High loyalty, low price sensitivity Retail Finance Equities, Research •• High acquisition cost (Insurance / share (Home, Gold, CV) and Advisory, Project •• Higher cross sell ability Mutual Fund) Growing at -12% Financing, Retail Finance (Home, Gold, CV) and Distribution business
Low Breadth of Product Offered High
Source: Motilal Oswal Annual Report 2015-16, IIFL Annual Report 2015-16, Deloitte Analysis Products: Equity, Debt, Mutual Fund, Insurance, Derivatives, Commodities
Source: SEBI, NSE, BSE, Deloitte Analysis
50 51 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
•• Future Outlook - With the upcoming –– Use of Big Data analytics - Use of big technological innovations, evolving data analytics (like sentiment analysis) investor expectations, the broking to provide investment advice. For industry is in the midst of a structural example, Reliance Securities uses transformation. Key trends being analytics to provide automated insights, observed in the broking industry include: by running advanced algorithms on big –– E-KYC and E-Sign – Digital customer data; Angel Broking - Analytics based on-boarding process with the use of advice on 30 days intraday and 20 years electronic KYC and central KYC thus historical data, with 70+ studies. making almost real time account activation. Along with these trends, there is a huge –– Digital platforms - Broking houses shift of trading platform from being are extending trading facility through completely offline, to support both offline- mobile apps, with significant trading online channels, and it is gradually moving volume shifting to the mobile channel. towards being completely online. With –– Robo-advisory - Driven by technology this shift, discount brokers are gaining evolution, market players have a significant share. These players are introduced Robo-advisory, offering developing and marketing their ability to automated advisory services based help customers meet their goals, with a on a pre-defined set of rules and suite of products and services, and also algorithms at significantly reduced offering low brokerage charges. India has costs. over 15 discount brokering companies. And now, with discount brokerage hitting the digital space, these brokers have access to a larger number of clients.
52 53 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
Glossary
AMC Asset Management Company IRDA Insurance Regulatory and Development Authority
ASIC Australian Securities and Investments KYC Know Your Customer Commission LIA Life Insurance Association ATM Automated Teller Machine MAS Monetary Authority of Singapore AUM Assets Under Management MFU MF Utility B-15 Below 15 cities NBFC Non-Banking Finance Company BC Business Correspondent NPS National Pension Scheme BoP Base of Pyramid NSEL National Spot Exchange Limited CBRC China Banking Regulatory Commission NSE-MFSS NSE Mutual Fund Service Scheme CCFS Committee on Comprehensive Financial Services PBOC Peoples Bank of China CFPB Consumer Financial Protection Bureau PMJDY Pradhan Mantri Jan-Dhan Yojana CSC Customer Service Center POS Point of Service CSRC China Securities Regulatory Commission PPP Purchasing Power Parity DBT Direct Benefit Transfer PSL Priority Sector Lending DFS Digital Financial Services RBI Reserve Bank of India DSA Direct Selling Agents RPPD The Responsibilities of Providers and Distributors ESMA European Securities and Markets Authority for the Fair Treatment of Customers
ETF Exchange-Traded Fund RTA Registrar and Transfer Agent
FCA Financial Conduct Authority SCORES Sebi Complaints Redress System
FR Financial Representative SEBI Securities and Exchange Board of India
FSCS Financial Services Compensation Scheme SMAC Social, Mobile, Analytics and Cloud
FSMA Financial Services and Market Authority SME Small and Medium Enterprises
GDP Gross Domestic Product ULIP Unit Linked Insurance Plans
ICT Information and Communication Technology UPI Unified Payments Interface
IFA Individual Financial Advisors
54 55 Redefining Distribution: Converge, Digitize & Achieve Redefining Distribution: Converge, Digitize & Achieve
About CII About Deloitte
The Confederation of Indian Industry diversity management, skill development, We believe that we’re only as good as the For us, good isn’t good enough. We aim (CII) works to create and sustain empowerment of women, and water, to good we do. to excel at all that we do—to help clients an environment conducive to the name a few. realize their ambitions; to make a positive development of India, partnering industry, All the facts and figures that talk to our difference in society; and to maximize the Government, and civil society, through As a developmental institution working size and diversity and years of history, as success of our people. This drive fuels the advisory and consultative processes. towards India’s overall growth with notable and important as they may be, commitment and humanity that run deep a special focus on India@75 in 2022, are secondary to the truest measure of through our every action. CII is a non-government, not-for-profit, the CII theme for 2017-18, India@75: Deloitte: the impact we make in the world. industry-led and industry-managed Inclusive. Ahead. Responsible That’s what makes us truly different at organization, playing a proactive role in emphasizes Industry's role in partnering So, when people ask, “what’s different Deloitte. Not how big we are, where we India's development process. Founded in Government to accelerate India's growth about Deloitte?” the answer resides in are, nor what services we offer. What 1895, India's premier business association and development. The focus will be on the many specific examples of where we really defines us is our drive to make an has over 8,500 members, from the private key enablers such as job creation; skill have helped Deloitte member firm clients, impact that matters in the world. as well as public sectors, including SMEs development and training; affirmative our people, and sections of society to and MNCs, and an indirect membership action; women parity; new models of achieve remarkable goals, solve complex In India, Deloitte member firms are of over 200,000 enterprises from around development; sustainability; corporate problems or make meaningful progress. spread across 13 locations with more 250 national and regional sectoral social responsibility, governance and Deeper still, it’s in the beliefs, behaviors than 40,000 professionals who take pride industry bodies. transparency. and fundamental sense of purpose that in their ability to deliver to clients the underpin all that we do. right combination of local insight and CII charts change by working closely with With 67 offices, including 9 Centres of international expertise. Government on policy issues, interfacing Excellence, in India, and 11 overseas Our hard work and commitment to with thought leaders, and enhancing offices in Australia, Bahrain, China, Egypt, making a real difference, our organization (C) 2017 Deloitte Touche Tohmatsu India efficiency, competitiveness and business France, Germany, Iran, Singapore, South has grown in scale and diversity—more LLP opportunities for industry through a range Africa, UK, and USA, as well as institutional than 245,000 people in 150 countries, of specialized services and strategic global partnerships with 344 counterpart providing multidisciplinary services yet our linkages. It also provides a platform for organizations in 129 countries, CII serves shared culture remains the same. consensus-building and networking on as a reference point for Indian industry key issues. and the international business community.
Extending its agenda beyond business, CII assists industry to identify and Confederation of Indian Industry (WR) execute corporate citizenship 105 Kakad Chambers, 132 Dr A B Road, programmes. Partnerships with civil Worli, Mumbai - 400018 society organizations carry forward T: +91 22 24931790 corporate initiatives for integrated and F: +91 22 24939463 inclusive development across diverse E: [email protected] domains including affirmative action, W: www.cii.in healthcare, education, livelihood,
56 57 Redefining Distribution: Converge, Digitize & Achieve Brochure / report title goes here | Section title goes here
Acknowledgements
Kalpesh J. Mehta Monish Shah K.V. Karthik Himanish Chaudhuri Debabrat Mishra Shyam Govindan
We would also like to acknowledge the contribution of Anindita Singh, Rami Reddy, Rabani Gupta, Samridhi Wadhwa, Sneha John, Vaibhav Anand
Contact us [email protected]
58 Copyright © (2017) Confederation of Indian Industry (CII). All rights reserved. No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), in part or full in any manner whatsoever, or translated into any language, without the prior written permission of the copyright owner. CII has made every effort to ensure the accuracy of the information and material presented in this document. Nonetheless, all information, estimates and opinions contained in this publication are subject to change without notice, and do not constitute professional advice in any manner. Neither CII nor any of its office bearers or analysts or employees accept or assume any responsibility or liability in respect of the information provided herein. However, any discrepancy, error, etc. found in this publication may please be brought to the notice of CII for appropriate correction.
Deloitte refers to one or more of Deloitte Touché Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.
This material is prepared by Deloitte Touché Tohmatsu India LLP (DTTILLP). This material (including any information contained in it) is intended to provide general information on a particular subject(s) and is not an exhaustive treatment of such subject(s) or a substitute to obtaining professional services or advice. This material may contain information sourced from publicly available information or other third party sources. DTTILLP does not independently verify any such sources and is not responsible for any loss whatsoever caused due to reliance placed on information sourced from such sources. None of DTTILLP, Deloitte Touché Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this material, rendering any kind of investment, legal or other professional advice or services. You should seek specific advice of the relevant professional(s) for these kind of services. This material or information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser.
No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person or entity by reason of access to, use of or reliance on, this material. By using this material or any information contained in it, the user accepts this entire notice and terms of use.
©2017 Deloitte Touché Tohmatsu India LLP. Member of Deloitte Touché Tohmatsu Limited