Misra, CDO, Aviva India
Retail financial services businesses tend to have thin margins. Profitability is, therefore, dependent on driving efficiencies. With a large component of the expense structure residing in distribution costs, improving distribution efficiency is centre-of-plate for most organizations. Thanks to rapid digitization and increased online consumption, most financial services firms are competing fiercely for a larger share of the online pie. An increasing number of customers are buying insurance online. credit cards and lending products, too, have attractive offerings. The number of people operating their bank accounts from home is growing rapidly.
For the consumer, buying online offers enormous convenience. With the advent of price-comparison sites, they are also able to make more informed decisions on pricing and features of comparable insurance or loan offerings. Manufacturers and distributors are able to reduce cost of acquisition and also provide an elegant buying experience to their consumers.
On the flip side, though, there is the perceived hassle of numerous verification checks that are carried out by most companies. These telephonic and physical verifications of documents and customer credentials tend to peeve many prospects even though they appreciate the underlying necessity for doing so. The financial services industry tends to be tightly regulated and some verification checks are regulatorily mandated.
Additionally, the nature of these products lends to frequent incidences of attempted fraud, which typically occur though impersonation or misrepresentation of personal and financial information. Frauds impact not only the personal savings of a targeted individual but an organization’s profits as well. Therein lies the dilemma on the trade-off between customer delight and prudent fulfilment. The solution lies in integrating data, harnessing technology and a forward looking governance mindset.
Let’s look at each of these in a bit of detail. In many developed markets, creditworthiness and customer authentication is done online by linking up with numerous data sources such as enriched credit information, motor vehicle or social security records and property ownership information. Many of these data sources are in safe custody of private operators and can be accessed simultaneously. In India, we have two primary challenges. While most of these databases are readily available, they are not centralized. It is possible to obtain two driving licences from different states, for instance (this is illegal but currently goes unchecked).
Secondly, each individual information set is under the purview of a separate ministry. There is no overarching body that can act as a common decisive link to get all of them together. There have been a few laudable measures—Aadhaar card being one; it is possibly the closest India has to a social security number—but these haven’t been able to fully achieve their original objectives. While considerable progress has been made, there have been too many instances of a step forward only to take two back.
Central Registry of Securitisation Asset Reconstruction and Security Interest of India (Cersai), the e-repository of property data, is another progressive idea that has not received support from many quarters. The Insurance Regulatory and Development Authority’s drive to create an e-repository that digitizes physical insurance policies is also an important initiative that will help in better contactability, reduce the need for repetitive know-your-customer (KYC) processes and bring down operating costs. Staying with insurance, if data sources were integrated, it would permit insurance companies to offer a much wider bouquet of products given that a significant part of financial underwriting could be carried out through surrogates. The essence of risk management in insurance is predictive modelling, i.e. the ability to predict future outcomes on the basis of historical trends. Often, the constraint can be over-reliance on internal data sources or unreliability of other options.
As insurers have access to more and more validated external data sets, they will distil out useful information and build it into their pricing models through nuanced segmentation. Intermediaries continue to play a vital role in insurance sales and many customers seek their counsel especially while contemplating complex or big ticket risk covers. Data integration will help reduce their coordination costs, both during the sale process and during subsequent service delivery. Several progressive intermediaries are proactively building a wider digital footprint for themselves through effective use of social media.
As digitally acquired information gets more sanctity, it will help intermediaries broaden their access and improve productivity. Policy administration could be a lot simpler as customers would have self-serve options giving them the ability to amend personal details a lot more seamlessly or re-allocate portfolios on investments linked to their insurance policies.
Some of these are already available but fulfilment can involve multi-step authentication. In the re-insurance leg, too, straight-through processing can be facilitated and electronically captured data can be used in all legs, from underwriting to issuance to claims. The benefits of digitization therefore extend to each phase of the business cycle with perceptible value addition. In most cases, the resources and bandwidth allocated seem to be a function of conceivable end-use in the near term.
The medium-term impact on financial inclusion, transparency of monetary transactions and fraud prevention is seemingly not being taken into account. As a first step, there needs to be a super regulator of sorts to identify and scope the data sources to be covered. There is little or no harm in privatizing many of these activities as is the norm elsewhere. In certain cases (such as information about passports), one will be guided by internal security considerations. But many other records can be centralized and eventually integrated. With the spurt of online gaming sites, for example, e-authentication is carried out in numerous European countries to prevent under-age gambling.
Lastly, one needs to have a progressive governance mindset. Unless numerous regulators and government ministries accord the necessary sanction to electronically obtained confirmations, any initiative will come a cropper. Paperless authentication will actually prove more credible and secure should organizations be permitted to build the appropriate safeguards. It will also permit a wider segment of the population to be insured or banked given their enhanced ability to provide validated information about themselves. The end result of converging each of these steps will be a more efficient financial services industry, better service levels for consumers and also a healthier services ecosystem.