ValueMax

Had an interesting conversation over the weekend with the office caretaker- a young late 20′s chap who has his wife and kids back home in Nepal. He told me very excitedly how he managed to send across money to them in Nepal through a new option wherein the credit was showing in his Nepalese account the very next day.

The Mobile Wallet is here

The few interesting things that really stood out were

• He transferred all of Rs7000/- in one go. He didnt feel like testing the process as he was told about this option by a close friend. Referrals generate high sense of security and comfort
• He was given a secure PIN and this gave him immense confidence about the process being secure. Though he had to ask his friend to SMS the same to his better half back in Nepal.
• He was happy to pay a transaction fee of Rs100/- for an almost immediate confirmation of credit in the recipient account. Customers will pay decent amount as fees for specific features/benefits
• He hasn’t heard about Western Union etc and went straight to this PNB branch in Connaught Place for his remittance.
• He also talked about an option where money can be credited almost immediately (mobile based process) and was sure that this would be a great option to use during times of emergency. This gave him a lot of comfort knowing that his family would have access to immediate funds even when he is miles apart.

The above in my opinion is a clear indication of the kind of adoption payment instruments would see in the huge currently untapped market. While brand building will be a tough one, the player who invests early in training/educating users how to use this securely would see a huge advantage. I hope my friends in the Payments industry are listening and are as excited as I am.

Today’s announcement is big news for not only the mcommerce folks in the country but also for people in Telecom, Retail and Payments industry. This approval allows Airtel to act as a semi-closed loop operator for pre-paid transactions. The Customers can now deposit upto Rs5000/- with Airtel (not to be clubbed with talktime) and can then use this money to buy goods and services at Airtel partner stores.

While its too early to say how this would grow, its very clear that there are certain pockets which might show early adoption tendencies

- Customers without debit or credit cards & wishing to transact online

- Customers concerned about the security of carrying cash or plastic in the wallet

- Parents wanting to give some financial freedom to their kids but not comfortable with just cash or add-on cards

- Impulse purchases by consumers when they are not carrying enough cash or cards in their pockets. This will definitely be the preferred way to promote impulse buying in young spenders

The critical thing to note is that the RBI has not yet allowed peer-to-peer payments through this channel. While some say that the current mobile wallet is the first step in that direction, globally it has been seen that P2P mobile payments help increase the adoption. For the simple reason that P2P payments are inherently viral whereas C2B are not.

One more aspect is that aggregators are not allowed currently- or so I am told. Which means that a retailer who wants to accept mwallet payments from Airtel, Vodafone & Reliance customers would need to deal with 3 different players and systems. There will be no VISA or MasterCard equivalent (atleast for now) making their lives easier. When they allow this, its a space we would be very interested in.

What happens to loan disbursal policies immediately after recession?
- Do the banks tread a careful path & go slow & stricter in lending
- Do they see the improvements in economy a sign for them to also go bullish in lending
- Most importantly how do they cater to the now-able-to-pay but bad-credit-profile segment of the population

Lemme elaborate on the last point, coz I am really curious to see how this pans out. My underlying assumption is that due to the economic slowdown a lot of consumers would have been “forced” to default on their credit repayments. I say forced-to-default, because I want to leave out those ones which had an intention issue rather than repayment capability issue.

If this segment is substantial & the economic uptrend puts them where they can now repay on time, will the banks now consider them as credit worthy? if not, does it mean that the banks will have to remain satisfied with a smaller universe or look at newer segments (e.g. young salaried professionals without a credit track record). For segments that look promising but do not have a proven repayment track, what recourse do the banks have? Can they leverage payment track on non-loan products (there have been talks about a credit bureau that takes utility & LI payments as feeds apart from the pure loan & card products- will this be helpful)

Also do banks look at their existing portfolio and find pockets in the portfolio where the defaults were lowest & growth potential still exists? Most banks have found their Internet sourced portfolio to be of a higher profile (atleast from a risk perspective) & this continues to be a very small percentage of their overall base. Which means, there is a lot of growth opportunities through the direct channels. But are the banking systems & processes geared up to tap into these opportunities in a meaningful way?

There is a lot of change I foresee in the way business is done in retail banking. What do you think?

The telecom operators in our country have a really enviable position. They are probably the only ones who have in such a short span created a consumer base that cuts across almost all economic and geographic boundaries. Their elder cousins from the FMCG sector are still way behind in capturing the imagination of the rural consumers.

While it is debatable whether there is a genuine need for high mobile penetration in the rural markets, what we have to accept is that mobile industry can today provide a scaleable distribution platform- something that can be leveraged for very many things.

One of the most obvious (or so we would want to believe) is the financial services. Telecom co’s have been lobbying with the Finance Ministry to allow the Telcos to operate as NBFCs (or some similar avatar). They have used the argument that the government’s stated objective of financial inclusion can be best achieved through the mobile platform. One cannot ignore the sheer numbers that the Airtel, TATA indicom & Reliance report month on month to TRAI.

The RBI on the other hand has to play the devil’s advocate & so far it has done  a very convincing act, worthy of an academy nomination RBI issued its guidelines on August 14th 2009 allowing “other persons” to issue mobile based semi-closed system based pre-paid instruments:

The mobile phone based semi-closed payment instruments issued by other persons shall also comply with the following conditions:-

i) The maximum value of such instruments shall not exceed Rs 5000/-.

ii) The purchase/reloading of these instruments against the value of airtime/talktime shall not be permitted.

iii) This facility shall be enabled only to facilitate purchase of goods and services. Person-to-person transfer of value shall not be permitted.

Most of us were tempted to assume that the next gradual step would be complete mobile wallets- something that gives a really exciting opportunity to Telecom operators to move into the Financial domain. But just last week RBI came out with its clear instructions that mwallets is an option which it is NOT comfortable with- more from a KYC & regulatory perspective.

Will be interesting to see how this space pans out. From what I hear, TATA Indicom is already doing semi-closed pilots with the Rs 5000/- limit by being the merchant on both ends of transactions i.e. the TATA Indicom user walks into a kiosk – pays Rs 5000/- cash & gets his virtual prepaid loaded with that same amount (no news on the transaction or other fees). The same can then be redeemed for transactions where TATA Indicom would play the merchant role again (e.g. a shopkeeper with whom they have a tie-up)

I was having a conversation on CIBIL and how it has changed the lending process at most institutions in India when someone asked me this – ” A large segment of the population has become CIBIL -ve due to various reasons incl the slowdown. Will these guys ever get credit in future once the economy revives?”

The question is interesting coz when the banks want to grow their loan books again, they would have to become less credit-risk averse or increase their reach.

a)Assuming that the distribution cannot ramp up fast enough (due to branch license issues etc)it would mean more aggression in looking at borderline cases (in terms of credit profile). Banks would have to find innovative ways to lower the credit cut off. Am told its already started happening — reduction in the CIBIL cut-off for cards sourcing and some are looking at a lower CIBIL score (if the track history on own products is fine).

But the risk attached to this approach is pretty obvious. You are looking down another cycle soon with probably a bigger exposure this time.

b)what will be more exciting is how banks other lending institutions innovate on their distribution channels. Now we all know that the fast ramp up in loan books happened thru the DSA channel- which amongst other things was costlier but easy scaleable. The cost element meant that this channel was suited for only cases with significant ticket size, so that the DSA covered his costs and made exciting enough profits.

As I look at it, the next wave of credit growth will come from channel innovation- Looking at identifying, building and scaling channels which will make sourcing profitable- even for smaller ticket sizes.

Once this happens, the whole dynamics of lending side profitability will change.
Coz account management (of already sourced customers) is mostly automated and hence costs do not vary with ticket size – infact the more accounts the cheaper it is to manage them due to cost amortizaton. Its sourcing which has significant variable costs and needs to be efficient to handle not only small tickets but find CIBIL OK profiles upfront.

Agree? or you think it would be back to DSA days with larger marketing spends across channels?

Today’s ET had a front page article with the same headline “Free Pricing takes toll on non-life insurers” where it reported that the once lucrative Fire Insurance segment now makes private General Insurers bleed.

Its an interesting and important development because it could well become the case study in What not to do in a free pricing regime. Coz most of the current losses are being blamed on the price undercutting taken by these players to get more sales.

So one might be tempted to ask-Is price undercutting a good strategy?

I would say it is a good approach to capture the market share, but only if the following conditions exist:

- The final margins after the price cuts, still allow you to make “normal profits”

- If the above is not there, you have access to a source of funds that can sustain you for a long period in the market place.

- Also the nature of industry/product allows you to lock in the customers from shifting to competition or ensures a high wallet share.

If you ask me, Fire insurance which requires periodic renewals does not guarantee that the customer will be back with the same insurer next time also.Moreover given that most of these are corporate customers, it can be safely assumed that they would shop around for the lowest priced deal.

The worst impacted are the Private sector players, coz they had not built a large enough book, whose corpus could have given them returns to cover the operational losses in the interim. All these are relatively new entrants in the market.

It is not a surprise then, that some of these private sector players are looking for additional influx of funds or a party to even buy them out.The regulatory changes in General Insurance sector have just started and how the Insurance business pans out, will make for interesting case studies for Strategic Management 101.

Was remembering my days in the bank when part of my job was to increase Credit card spends by manipulating credit lines for individual customers or clusters. My friend in the same team had a similar goal, but he could manipulate only the offers that were made available to our carded customers.

While the role was really exciting and highly numbers driven, we were not really benchmarking ourselves to some base year/month prices. Consider this: a customer who uses his credit card for all his petrol purchases would have seen 10% increase in fuel spends only because of fuel price hike. This would have resulted in around 5% increase in his total card spends. Add to this the inflation on other consumable items and the average growth in spends would have been around 7-8%.

Now most of the metrics shared amp; reported in monthly decks are not indexed to a base month price at the start of the financial year- so how does the bank really know whether the non-inflation impacted spends have picked up or not?

The reverse should be true in a deflating economy- even if actual spends are falling, maybe there has been a genuine growth in spends indexed to base prices.

Which brings us to the next Q- how do we map spends across categories according to monthly inflation on those individual categories. Its easy to do for fuel- due to the high decibel debates surrounding it- but what about groceries, travel,health etc etc.

Is there a freely available source of monthly change in prices of commodities across categories and how can we easily integrate it into corporate MIS surrounding spends etc?

Taking a slightly different view on this- it also means that if we target categories with higher expected price rise, we might end up getting a higher share of wallet faster- which means that all card issuers who have been offering 0% fuel surcharge- will get to benefit more than the ones that charge 2.5% . I use my HSBC credit card for buying petrol and my Citibank Credit card for all other spends- suddenly the % spend on my HSBC card has increased- without any effort from HSBC’s side. Am sure the next will be grocery and air travel- no wonder I got a mail from HDFC amp; clear trip offering me 50% off on my next purchase.

The game for spend based offers has just become more interesting !