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Distribution of Financial Products

Changing trends, buyer behaviour

& some learnings

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Disclaimer!

• The views are purely mine. It does not represent the company/s I work for or have worked for earlier.

• Examples are for purely academic discussion and do not intend to act in support or against the product/s or brands mentioned

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Agenda

•Classification of Products•Two case studies

Break

•Analysis•Summarize

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Classification

• Savings Products: Future consumption with current earnings

• Credit Products: Current consumption with future earnings

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Classification

Requires consulting

Easy to buy

Pull Products

Push Products

Savings A/CsAuto InsuranceFixed Deposits

Loans Life Insurance

Health Insurance

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Classification

Requires consulting

Easy to buy

Pull Products

Push Products

Savings A/CsAuto InsuranceFixed Deposits

Loans Life Insurance

Health Insurance

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Easy to Buy: Pull Products

•Create New Channels

• Redefine Existing Channels

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Think different!

• No branch• No ATM• No cheque books

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The Orange Code: Rebel with a cause

• ING Bank entered USA in 2000• Under Arkadi Kuhlmann ING Direct’s simple

mantra was ‘save your money• Modelled as pure online bank; no brick and

mortar• 7.7 million customers accounts• As of March 2011 managed EUR 57 billion

funds and EUR 29 billion in own originated mortgages

• Sold in 2011 to Capital One for USD 9 billion

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‘We the savers’ campaign

Money doesn’t grow on fees!

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Finding the gaps

• Why should customers pay all kinds of fees?

• Is it too much to expect a real person to pick up the phone when you dial a toll free number?

• Should you have to jump through hoops to keep your personal information being sold to others?

• The McDonald way; simple straightforward product– Southwest flew airplanes without assigned

seats– Ikea sold design-minded furniture without

assembling it--so why not do that with banks?

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Credit Card success

• Started in 1988• Pioneers in ‘teaser rate’ and ‘balance

transfer option’• Power of information, technology and

testing and highly customized products

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Reasons for success

• For every action taken they capture the reaction

• Commitment to endless innovation• Intelligent call routing• Sell at every opportunity

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Esurance.com

• Competing against Goliaths like GEICO and Progressive

• Completely online sales model• Appealed to Gen Y who like to do things

online• No face to face interaction• Convenience, customer service and

best rates were reasons for success• Sold to Allstate for a Billion Dollars

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Redefining Existing Channels

• Turning branches into hangouts– Children play area– Yoga classes, ‘movie nights’, wifi internet access– Plasma screens instead of posters– Three dimensional ‘mortgage centers’– Staffers serve coffee while selling products– Open architecture, warm trustworthy atmosphere

• Encourage people to stay longer• Find ways to sell other products• Encourage people to consider branch as some

place to visit more often

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The fine art of finance

• ING branch displays art for HNI customers• Customers can appreciate art while they

bank• Globally more than 15000 artworks

displayed in 900 branches– Gallery open beyond bank timings– Senior artists conduct classes– Not just for investing in art but to create

awareness

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Classification

Requires consulting

Easy to buy

Pull Products

Push Products

Savings A/CsAuto InsuranceFixed Deposits

Loans Life Insurance

Health Insurance

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Making the Product easier to buy

Requires consulting

Easy to buy

Pull Products

Push Products

Savings A/CsAuto InsuranceFixed Deposits

Loans Life Insurance

Health Insurance

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Gold Loans: Runaway success

•Manappuram – Revenues 19 crs to 500 crs in 2010 (five years)– Profits from 3 crs to 120 crs– AUM of more than 10000 crs– More than 2500 branches; available next door– 12 lacs customer base– More than 18000 tonnes of gold – Very low default rate

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Success decoded

• No credit check required for taking loan• Rates significantly lower than local

pawnbroker• Loan terms are flexible• Gold has emotional value

– Customer willing to pay interest on loan rather than sell the gold!

Win-win for both lender and borrower

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Classification

Requires consulting

Easy to buy

Pull Products

Push Products

Savings A/CsAuto InsuranceFixed Deposits

Loans Life Insurance

Health Insurance

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Life Insurance

• I am familiar with the friendly neighbourhood agent

MetLife circa 1930

• The dinner table representative

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Reason for Not Purchasing Insurance Online

The single largest reason for not purchasing Insurance Online is Consumers across countries still prefer “Human Contact” when purchasing Insurance…. Source: David Parry. The Future of European Insurance, available

[online]: www.ReutersBusinessInsight.com

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Classification

Requires consulting

Easy to buy

Pull Products

Push Products

Savings A/CsAuto InsuranceFixed Deposits

Loans Life Insurance

Health Insurance

TERM INSURANCE

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Classification

Requires consulting

Easy to buy

Pull Products

Push Products

Savings A/CsAuto InsuranceFixed Deposits

Loans Life Insurance

Health Insurance

Auto/Home/Travel INSURANCE

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Classification

Requires consulting

Easy to buy

Pull Products

Push Products

Savings A/CsAuto InsuranceFixed Deposits

Loans Life Insurance

Health Insurance

Auto/Home/Travel INSURANCE

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Technology creates new Distribution channels

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Two case studies

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Case Study 1

C.T Financial:

Personal Lending&

Understanding the ROLE OF DISTRIBUTION

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CT Financial

BEFORE• ‘Aveco’ started as a sub prime

lender. • Offered loans at high rates

– But USP was quick turnaround• Internal controls were tight

– First cheque bounce would lead to invoking repossession of vehicles

– Any default was managed very tightly

– All collections were outsourced but managed well

AFTER•MNC Bank buys Aveco and renamed CT Financial•Branches increased from 83 to 430 in less than 2 years

• Opened a branch a day• Rapid hiring• Experience v/s

responsibility mismatch• Reference check for

employee hiring compromised

•High incentives for top line

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The result

• Rapid increase in NPAs• Networth zero: lost 1400 crs• Made some turnaround in 2009; stopped

lending in 2010; reduced branches to 70• Trying to sell; no buyer till date!

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Domino effect

• Seeing apparent success of CT Financial, many players like Barclays, Fullerton expanded rapidly

• They all were not successful• Only successful player has been HDFC

Bank

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Learning

• The cornerstone of Personal Lending is Distribution coupled with Neighbourhood Lending

• Distribution should take you closer to customer

• Relationship and customer service is critical

• ‘Know your customer’ is non negotiable• Incentives need to be carefully designed

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CASE STUDY 2

D.E Capital:

Truck Financing&

The Importance of being GLOCAL

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D.E Capital

• A global MNC, D.E Capital stuck on credit parameters!!

• One of the world’s largest financial services companies

• Believes in credit mechanism

• Would not create an India centric credit policy

We work in more than 90 countries!

• Bought out Jaishriram Finance, one of the leading truck finance companies in India

• Established their credit norms on day one

• Believed that Jaishriram team was not ‘managing risks’ as per their global philosophy

• Comparisons with Sundaram Finance or Shriram Transport were trashed

We can buy them out!

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Truck finance customer

• Is a known entity; rather NOT an unknown!

• Very easy to check credentials– But very poor documentary

evidence available for credit evaluation

• Many trucks are owner driven; thus owner is often on the move and not ‘available’ to meet

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Local practices; Global view

Local Practices– Credit check was

through references and field visits

– NPA needs to be seen in context of customer’s situation

– Word of mouth in this business is critical

– Relationship is more important than process!

D.E Capital’s View– Credit needs to be

supported by documentary evidence

– Default can damage credit rating globally

– Offer the lowest lending rates

– Process is prime; relationship will follow

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Local practices; Global view

•Did not realize that – Recovery of asset (repossession) is easy

as customer cannot keep asset idle• He has to be on the highway!

– Customer needs to build a good track record if he needs to expand• Cannot afford to default

– Word of mouth in this business is critical

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Local Practices

• Sundaram Finance– Built business on good relationships; managers

know the client and his family well– Built business on conservative but consistent

credit policies

• Sriram Transport Finance– Higher rates of interest but quick approvals– Very strong collection mechanism– Used repossessed Trucks to build second hand

finance business; backward integration

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D.E Capital’s fallout

• Continued losing top customers due to insistence on credit process and rigid documentation

• Was unable to adopt local credit practises– No one willing to battle global hierarchy!

• Exited the business after 8 years of acquisition

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Learning

• Marry global processes with local realities– Look at family credit rather than individual credit– Look for references from existing customers– Bank statement may be more useful than IT

returns

• Direct sales is key– High employee cost compensated by lower NPAs

GLOCAL is the way to go

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What changes distribution landscape

Regulatory

Technology

Buyer behaviour/

Social

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Disruptive factors

• SocialThe emergence of Banca Takaful was a prime

reason for success of Insurance companies in Islamic countries

Widespread mis-selling lead to the death of the traditional Insurance agent in UK. Only brokers and banks survive

The American belief in Individual advisor continues

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Disruptive factors

• Technology– Internet leads to Disintermediation– Web created a new type of intermediary: The

web broker/ aggregator/ comparator– Technology enables banker and customer to

interact as and when required– Opens new avenues for customer satisfaction

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Disruptive factors

• Regulatory The Glass Stegall Act prevented the evolution

of Bancassurance upto 1999 in USAContrary to USA, Bancassurance flourished in

certain European countries like SpainThe recent changes by SEBI are a serious

threat to distribution of Mutual Funds through brokers and advisors

Korea encouraged payments through electronic means leading to huge credit card penetration giving tax concessions

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Buyer behaviour..

• Always looking for returns• The immense popularity of ULIPs• Why whole life does not sell much

• Housing scams, ponzi schems….many such examples of the buyer falling for the trap

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Buyer behaviour..

• ‘Sabji ke saath dhaniya’ mindset• ‘Towel ke saath hanuman chalisa free!!

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Buyer Behaviour..KILB!

• We hate to quantify risk• Social structures mitigated insurance

needs• Continued exposure to risk may numb you

against need for protection– Vikrant’s postulate!

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Buyer Behaviour..Gen Y

• Has seen many economic downturns• Has seen parents and grandparents

surviving beyond 90• Has seen implications of losing a job• Rising health costs• Rising debts• Technology savvy• Socially networked• Believes in peer groups

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Learning for Manufacturers

• Create products which suit current generation– Premium holidays; stand alone critical illness

covers– Reverse mortgages

• Allow customers to ‘do their own thing’– Highly interactive websites– Online support

• Explore innovative distribution channels– Shopassurance

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Learning for Manufacturers

• There is a clear trend towards ‘search’• 70% of customers in developed countries

search for the financial product before buying

• Role of web aggregators• Keep your focus:

– Customers who don't fit our business model don't fit our business model, and that's totally O.K.- ING

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Emergence of Web Aggregators: UK example

• More than 25 million people used price comparison sites for purchase of Insurance in 2010.

• In UK Moneysupermarket.com is the most valued price comparison site with 38% market share. Some of the other notable sites are gocompare. com (20%) and confused.com (13%)

• Moneysupermarket.com has on an average more than 3 million visitors per month.

• The most searched products online were car insurance followed by auto, travel, credit cards, savings account and Life Insurance.

• Phone sales continue to be almost 25% of the online ‘search’ market wherein the customer searches for information online but prefers to buy it through a tele sales or face to face channel.

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Why not Kolaveri di?

• Viral marketing in financial services is more often for negative publicity

• Can be disastrous

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Conclusions

• Technology creates new opportunities AND challenges for manufacturers

• Technological advancement is NOT necessarily a substitute for– Intermediaries– Detailed advice– Reducing costs

• Buyer behaviour changes with socio-economic changes; Banks and Insurance companies need to be congnizant of the changes

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Conclusions…

• Leaders invent the ‘HOW’• True leaders are not conquerors; they are

pioneers• Leaders challenge the paradigm• People copy fast so you need to constantly

innovate if you want to be on top

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The best way to predict the future is to create it!

Peter Drucker