Fintech Inside #34 - 22nd Aug, 2021 | Agents
Hi Insiders, Osborne here.
Welcome to the 34th edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.
Can financial services be sold direct to consumer? Or will it need an agent network? Discussed that in today's edition. There were several loan products launched in India and quite a few regulatory updates from Asia. Want to know what's Amazon's fintech ambitions? read on!
We’ve had a bunch of product launches this week - 11 in total (7 in India, 4 in Asia)! There were 9 fund raises for a total of $815mm raised ($700mm raised by one fintech).
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If you’re an early-stage fintech startup founder raising equity or debt, I may be able to help - reach out to firstname.lastname@example.org
🤔 One Big Thought
Can financial services really be sold direct to consumer?
The strongest opinion I ever held was that "the internet will enable businesses to cut out middlemen, these middlemen will no longer be relevant". In my view, the benefits of cutting out the middle person were obvious - it brought efficiencies, reduced misselling, brought transparent pricing, reduced costs, improved profit margins, direct communication between brand and users and the list goes on. The first dent to this view of mine came when I evaluated the PropTech market in 2014/2015. Startups like Housing.com were revolutionary - providing a marketplace for home sellers and buyers to transact directly, without any broker in between. The Rahul Yadav (founder of Housing.com) controversy (simpler times...) aside, Housing.com was just not able to scale. Brokers started finding ways to exploit the platform and the real estate market continues to be a broker-driven one with brokers only becoming stronger in the value chain. The internet did not cut out the middle entity.
The story of India's smartphone and internet penetration post 2016 is well documented. At my previous company, an investment opportunity in an agent-driven distribution startup was declined because "we've seen this play out in China and it is not a long term business model". This time, again, for the financial industry, I thought "no way the middle entity will be relevant anymore". But this view is once again getting shattered.
Why is the agent/broker still relevant? The middle entity i.e. agent or broker continues to play a pivotal role in financial services distribution in India. Us Indians are used to have a chottu (person) to do our work for us. Similarly in financial services, we want to be able to speak to someone to get advise, to understand a concept or yell at if things go wrong. To some extent we trust this broker/agent network because the person is from our community. Further, agent networks work on a fixed percentage commission unlike Google and Facebook that have ad bidding. Amazon itself partnered with StoreKing to build rural acceptance for Amazon via StoreKing's general trade stores.
Well, how is the agent network relevant in financial services?
Insurance: Insurance is the most well known case for agent driven distribution. Life Insurance Corporation (LIC) is the state-owned, life insurance behemoth that continues to have it's most loyal agent network. We all have at least one person in our extended family that is/was an LIC agent. Even today, only 10-15% of the insurance industry's policies are sold direct. Rest are through agent networks. The agent network is so strong in insurance that one time I heard that an insurer was asked to remove a hoarding (that promoted the insurers direct website/app) that was in front of a car dealership who was a major distributor for the insurer. Not sure if it happens anymore. From a consumer POV, most don't easily understand insurance and think of it as an expense. The agents provide that understanding and are also the first point of contact for claims.
Wealth products: Direct mutual fund distribution accounts for only 20% of total mutual fund AuM. The majority of individuals outside the financial industry still find it tough to understand whether to invest in mutual funds, stocks, bonds, fixed income products, ETF's, NPS, fixed deposit and more. Agents and investment advisors solve for this.
The banking sector too needs banking correspondents to increase distribution, open accounts, cross sell and more. Moreover, people in remote areas still largely deal in cash and need a place to deposit or withdraw their earnings - this is managed by banking correspondents. Small business lending is also driven by agent networks that not only acquire borrowers but also verify business operations and physical addresses. Similarly for home loans, auto loans etc. all are done through brokers/agents.
What are fintech startups doing about agents? Simple - fintech startups are building apps that empower these agents. Agents now have access to SaaS platforms that help them become more productive - agents get pricing, in-principle approvals, product comparisons and more. Agents no longer need to get certifications with each financial firm, they partner with fintech startups and get access to a whole plethora of products. Agents become 2-5x more productive with solutions assisted by technology.
Surely agent driven distribution is not a global phenomenon: Even in the most developed countries agent-led distribution is growing. This fact caught me by surprise - I wrongly assumed more developed markets would have direct financial services distribution. US has Vise and Altruist, Germany has WeFox, China has eBroker and several more globally. Goldman Sachs even acquired Folio to further empower their financial advisors.
Of course this doesn't mean that only agent-led models will succeed or will be the future of fintech. It needs to be evaluated as per the context but we definitely cannot rule out agent-led models.
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3️⃣ Fintech Top Three
1️⃣ It's raining loan products!
CRED launched CRED Mint, its P2P lending platform for CRED users to lend to other CRED users. Facebook launched a small business loan product for its small business users. CapitalFloat partnered with Razorpay to launch a BNPL product for 100K small businesses' end customers. Uni launched its Pay 1/3rd Card.
Takeaways: If you've seen Ray Dalio's How the Economic Machine Works (30mins), you know that credit enables productivity and keeps the machine moving forward. This week's launches target specific users and interestingly all with different products. On the consumer side, there are three: Cred Mint (P2P loan), CapitalFloat + Razorpay (BNPL) and Uni (credit card). Facebook's offering an unsecured loan to small businesses that advertise on Facebook.
If CRED launches something, it's the rule in "Fintechland" to talk about it. So I'm merely following rules here. CRED Mint is... surprising. India had mostly given up on P2P loans as a vertical with existing players mostly stagnating. Given this and the user behaviour towards P2P (last resort loan option for creditworthy individuals), it’s surprising that CRED launched a P2P product. CRED already has a loan product - CRED Cash, for its users where it claimed to have disbursed $325mm with <1% NPA within 12 months since launch. It seems the motivation is to provide an alternate wealth product to its users where they can earn min. 9% on idle funds with easy (one-click) liquidity. (Would have been good for Kunal to disclose he's an investor in Liquiloans)
The CapitalFloat and Razorpay update is the most interesting one to me. Win-win for both parties - CapitalFloat gets distribution (not that it didn't already have that with Amazon as an investor) and Razorpay gets a way for its businesses to increase sales conversion (CapitalFloat claims to increase sales by 30%) and make these businesses sticky. It's one of the more ambitious and synergistic partnerships I've seen in a while.
2️⃣ SEA Regulatory Round up
The Philippine central bank is pausing digital bank license approvals for three years. The South Korean central bank is expected to announce stricter norms for cryptocurrency exchanges. The Thai central bank, following an internal study, is going to test its CBDC in Q2 2022. The central banks of Indonesia and Thailand launched its instant, cross-border, QR-code based payment platform.
Takeaways: The Philippine central bank started approving digital bank licenses in 2018/2019 and wants to limit the total digital banks to seven for now. Five out of seven licenses have already been given out and two applications are already under review. The central bank is doing this to be able to monitor the traction and growth of these platforms before it can fine tune the regulations and then give out more. 70% of Philippines does not have a bank account.
Several global cryptocurrency exchanges have discontinued servicing their South Korean users in anticipation of stricter regulations to be announced by the South Korean regulator. "By Sept. 24, cryptocurrency exchanges targeting Korean investors must register with the nation's anti-money laundering body and disclose their details on risk management. Under the tougher regulations, banks will issue real-name accounts in line with stricter guidelines to prevent money laundering. Beginning Sept. 25, cryptocurrency exchanges will be banned from withdrawing money for cryptocurrency trading if they have no real-name bank accounts." (source)
3️⃣ Amazon furthers its financial services ambitions
Smallcase, an Indian wealth management platform that allows individuals to invest in a thematic "basket" of stocks, announced a fund raise of $ 40mm from Faering, Amazon Inc. and Premji Invest. This is Amazon's first investment in the Indian wealth sector.
Takeaways: It's no secret that Amazon will invest in anything and everything that directly grows its commerce business. Everything around commerce - it owns. But with financial services, it's taking the partnership route. Financial services is what oils Amazon's commerce machine without actually owning any of the licenses (except the payments one in India). Since it started in India, Amazon has invested, in the fintech sector, in Qwikcilver (gift cards), BankBazaar (credit marketplace), CapitalFloat (credit), Acko (Insurance), Tonetag (payments), M1Exchange (trade finance) and now Smallcase (wealth). It even acquired Emvantage a payments company that now powers Amazon Pay.
Except the recent Smallcase investment, all others make sense to me and in some way contribute to the Amazon commerce machine. If you stretch your imagination, you could say that Amazon tell users to "invest and save for that large purchase", but that's a stretch too far. Ecommerce companies targeting our financial lives is not new, just ask Flipkart that owns PhonePe or even Alibaba that owns ANT Financial. Both Flipkart and Alibaba have a separate entity to build their financial services ambitions but not Amazon. Interestingly, when surveyed, 46% of US Millennials and 38% Gen-X's said they would open a checking account if offered by Amazon, far more than those who chose to open it with Google or even Facebook. Interestingly Amazon hasn't made any investment in the wealth sector globally but their financial services strategy is very makes for a very interesting read.
Looking for the news digest? Read all the week’s fintech news and updates in India and SEA over at This Week in Fintech - India and SEA Edition. You can also find our US, Global and European coverage.
🏷️ Notable Nuggets
👋🏾 That's all Folks
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