"It is difficult to get a man to understand something, when his salary depends upon his not understanding it."
- Upton Sinclair
There is a worry among Indian policymakers and overpaid and unaccountable financial sector executives that Indians are saving less. Gross domestic savings went down from 36.8 per cent of gross domestic product (GDP) in 2007-08 to 30.8 per cent in 2012-13. During the same period, financial savings of households fell sharply from 11.6 per cent of GDP to eight per cent. This is accompanied by both anecdotal evidence and hard data suggesting that individual investors are investing less in stock markets or through mutual funds. Dematerialised, or demat, accounts are growing at a snail's pace; the market for initial public offerings (IPOs) has dried up; insurance as investment can only be sold by Life Insurance Corporation of India to the gullible; and mutual fund folios are vanishing.
The cause for this is easy for all to see, provided we want to see it from the only perspective from where it makes sense - the customer's (in this case, the saver's) perspective. At the core, the story of customers' behaviour is simple.
(1) The current market of financial products forces savers to educate themselves about these, other than simple banking products.
(2) But all financial products are complex and boring.
(3) Savers, being average humans, will find a million ways to avoid doing the difficult and boring things.
That's the end of the story for financial services. How hard is it to understand this?
The financial services sector is large and employs a lot of bright people. But there is something that deters people working there from seeing this cold truth about their own industry. What could be the reason? It can only be what Upton Sinclair has said. Their salaries are too dependent on not seeing this - or rather, their salaries are too dependent on trying out every means to trick the saver into a transaction.
Amazingly, this applies to even some very smart people who ought to know better, because they have their "skin in the game". Take, for instance, the private equity and venture capital firms. Their partners must have an open mind and see hard facts because they risk their own money alongside their investors'. And yet, many of them are stuck with thoughtless investments in broking companies made at the height of the bull market in 2007. Now, theoretically, broking firms ought to be among the worst investments. Their business thrives when too many savers turn into punters - a rather abnormal situation.
One of the most outstanding global private equity firms is Sequoia, which has made tonnes of money backing some very smart people around the world, the latest being WhatsApp. In India, too, it has a portfolio of outstanding companies. But its portfolio also includes a struggling Edelweiss and Star Health Insurance. Sequoia's business dictum is: "a great business is built when a passionate entrepreneur meets a large market". What Sequoia failed to see is that there is no large market for financial services (outside banking) because of the three points I have mentioned above.
Passionate entrepreneurs
What about passionate entrepreneurs, the other ingredient of great businesses? There are none, because no one is willing to treat the customer like a king. A customer of financial products is someone to whom you sell your products in order to meet the quarterly sales and commission targets - not someone you want to be delighted with what they have bought and come back for more. If your customers are merely targets, it can still work out to be a profitable business - only for standardised products such as mobile phones or microwave ovens. But what happens when the products are non-standardised or half-baked, which is what financial products are? You can sell them only once or twice. This is exactly why the IPO market has dried up and mutual fund portfolios are shrinking. Even if the products per se are all right, timing can make a big difference to the outcome and customer (dis)satisfaction.
This line of thinking will be heresy to most people. Once you accept it, drastic changes will have to be made from top to bottom: a change in regulatory philosophy of shifting from "buyer beware" to "seller beware"; a more active grievance redress system; listening to savers' issues in open forums; simple products that deliver what they promise and so on. Nobody has any interest in this. It will also mean laying as much emphasis on research as is put on sales so that the products that come out are not harmful or irrelevant.
Instead, most people seem to be satisfied with the current industry structure and have convinced themselves (Sinclair, again) that the "blame" for the poor penetration of financial products lies with the savers for not being smart enough to know what is good for them. Oh, there is a way to lift them out of their ignorance too: investor education mandated by the regulator, which includes breakthrough ideas such as hoardings of financial products in metro cities! In December 2011, I wrote an article here arguing that the financial services sector was showing signs of premature ageing. It has aged some more, without growing. This ageing process will reverse when peddlers of financial services decide to make the customer king.
The writer is the editor of www.moneylife.in editor@moneylife.in
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
