A Vision for Fee based Distribution in Indian banks

R.Krishnamurthy

The time has come for banks to develop a clear vision for fee based income. At a time when the treasury operations are beginning to post lower profits, or even negative results, and the profitability trends in most banks point out to a dangerous slowdown, this is the right time for banks to embark on a serious exercise to explore avenues to multiply fee based income.

Banks' profitability is being dented by the upswings in the interest rate. After a gap of 8 years, the yield on 10-year government paper rose by 150 basis points during 2004-05, pointing to a serious erosion in the value of government securities that banks hold in their portfolio, and sharply reducing the scope to make capital gains on unloading them. In the past, banks have regularly relied on treasury operations when interest rates were on the softening curve to boost their results.

An analysis of the profit reports of 33 banks for the year 2004-05 reveal that they had posted a collective reduction in the net profit by 6%. For a few major banks such as Bank of India, Central Bank and Bank of Maharashtra, the net profit is lower by more than 40% last year. 28 of these 33 banks have shown a reduction under the category of 'Other Income' with an average decline of about 15%, with some banks suffering reduction by as much as 70%.

Pressures on 'Other Income'

While banks face uncertainties on treasury operations, there are also growing pressures on their exchange and commission income arising from the traditional remittance and collection businesses. While a substantial part of exchange income used to accrue by issue of drafts and telegraphic transfers for customers, these forms of money transfers are fast disappearing with the arrival of Real Time Gross Settlement of funds across banks and across locations with the power of technology. With cheques that are encashable at any location, and facility of instant transfer of funds through telephone banking and ATMs, there is a sea change happening in the remittance business. Similarly, bills collection business as practiced over the years is fading due to basic changes taking place in the trade financing mechanism.

Commission income on guarantees issued by banks, the other traditional fee earner, is facing serious pressure on rates. During the last five years, competitive pressures have brought down the rate of commission on guarantees at just or below the level required by banks to meet the capital charge for this contingent liability item. Scope for issue of guarantees on behalf of customers for long periods, such as deferred payment guarantees to support buyer credits for purchase of machinery and other assets, has become rare, since clients are able to get more cost effective alternate financing arrangements.

Dynamic changes from Core Banking technology

The huge spends that almost all major banks are making to adopt core banking solutions are beginning to unleash a major change: the disappearance of the back office operations at branches as practiced at present. Core banking technology shifts repetitive work to a central location, within the same centre or at a far different location. Routine, repetitive daily work such as balancing books, clearing cheques, issue of customer statements and filing MIS reports, would all get displaced by technology, thereby freeing up valuable space at every branch premises that are now taken up for such chores. In the process, thousands of branch staff may also soon need to be relocated, or given more meaningful work

Banks therefore need to draw up clear plans to engage the staff to perform more productive roles, by entrusting them with functions that help interface with customers more actively, and offering customers a new range of services beyond the conventional bouquet of banking products.

Insurance distribution

Distribution of financial products is clearly the important option available to banks against this background. By engaging in distribution of third party products, banks would stand to draw additional value from millions of customers, and offer them a useful range of services with their branch infrastructure. Insurance and mutual funds stand apart in this respect as two important products that provide a ready opportunity for banks in India.

Among the above, life insurance and pension plans are the preferred products for bank distribution world over. While mutual funds are suited to customers with high saving potential (and for those with the skill to spot the best investment schemes and the ability to promptly offload investments with adverse changes in stock market conditions), life insurance plans are ideal for customers in every economic segment. Life insurance schemes are in the nature of long term saving plans and they complement the banks' other saving products.

As per a recent study of Personal Financial Services in India by the management consultancy firm McKinsey, there is already a clear trend that customers are buying more products from their banks, beyond the traditional saving deposit schemes. The study found that over the last five years, the average number of personal financial products per person sold by banks in India has increased from 2.71 in 1999 to 3.27 in 2004, insurance being the foremost.

A similar recent study by the European research agency Datamonitor reveals that banks were the dominant distributors of insurance and pension products throughout Europe in 2003 with an overall share of 32%. In some countries such as France, banks hold 60% share in insurance selling.

For most customers buying insurance products from their bank, convenience in buying and ease of payment of premiums are the key motivating factors, and customers would not be too tempted to make premium comparisons. Customers generally tend to prefer to buy additional financial products from their bank if the facility is available, rather than routinely shopping round at various places. According to a study, about 69% of the customers in the high and upper middle income group would tend to remain with their bank when choosing to buy a financial product even if the bank did not quote the best price.

Attractive commission from insurance

Both life and non-life insurance distribution fetches attractive commission to banks. For regular saving insurance plans, insurance companies pay commission in the first year at 40% of the premium collected, and more. The commission continues to come in at about 5% as long as the policy remains in force and the premiums are collected. This means on long term policies, such as 20-year endowment plans, as the bank keeps on remitting the premiums from the customer, it stands to collect commission till the final maturity payment.

On general insurance products, the commission payment is lower at about half the rate of life insurance products, but the sum assured under a general insurance policy could be large in business loans. Banks stipulate a mandatory requirement of insurance cover for all types of assets financed. This is applicable to every loan, from small loans against cattle and livestock, to large industrial assets. Apart from the primary security of fixed or current assets, banks take collateral security which can also be brought under the insurance coverage.

Banks that have been successful in insurance distribution realize that insurance selling brings a new sales culture in the bank. Bank staff in general is not used to a sales approach, but they remain service oriented. Our usual experience at bank counters is mostly by way of reaction to a request or query, and not a voluntary sales pitch by bank staff. Several banks have found that successful bancassurance initiative creates a new culture among the staff of being alive to customer needs, and it prepares them to approach customers with specific product offers, all with an eye to `win' the transaction. This marketing culture for insurance rubs on the other business segments in the bank, and thus bancassurance acts as a catalyst to creating a new sales orientation. Besides, in the course of bancassurance efforts, the employees are regularly exposed to interaction with specialist sales personnel from insurance companies who have aggressive sales attitude. This helps the bank staff to acquire a new sales dimension in their dealings with the bank customers for selling bank products.

Develop a blueprint

Banks serious about fee based income from insurance distribution need to prepare a blueprint to cover all aspects of entering this service. While this should cover several steps, a few important aspects are given below:

• Choice of insurance partner. Banks need to enter into corporate agency relationship with a life insurance company and a non-life insurance company in order to distribute the products. The insurance regulations permit banks to distribute the products of only one life and non-life insurer. The choice of the insurance company for the bank should be based among others on the insurance product range and their suitability to the bank's customer profile, and the nature and extent of support forthcoming from the insurance partner.
• Agency vs. Broker. Banks sometimes face the question whether the products offered by one insurance company whom they represent would ideally meet the needs of all the customers in various economic segments, and across all branches in the country, or whether they should make available products from several insurance companies for the choice of customers. The insurance regulator has made it clear that banks wishing to offer products of more than one life/non-life insurer need to do so under a broking license acquired in the name of a company separately set up for the purpose. While banks require the approval of RBI to set up such independent companies, RBI has announced that broking ventures of banks would be approved on a case-by-case basis.
• Insurance sales process. Banks need to understand that the best value from bancassurance is realized where the sales process is handled as far as possible by the frontline bank staff at branches. This is the most important aspect in insurance distribution. In some bancassurance models, the sales agent of insurance companies visit bank premises every day, take leads from the bank staff and try to covert bank customers into insurance buyers inside or outside the branch premises. The banks in such cases receive a referral fee for directing the customer to the agent. In other models, while the bank staff closes simple insurance product sales himself, he refers more complex products to the insurance agent. In most mature bancassurance cases, the bank staff handles the entire sales process within the bank, with simple products being handled by junior frontline staff, and complex insurance requirement of customers are taken care of by highly trained specialist insurance staff of the bank.
• Training needs. Insurance selling requires a good deal of technical and other communication skills. An intangible financial product such as insurance is usually not bought by customers as a voluntary effort, but needs to be sold by trained persons. In bancassurance, training of the sales staff assumes considerable importance. The training could be brief for simple products, but longer and continuous for complex products. Banks would realize that even where a customer agrees to buy an insurance product from an agent of the insurance company referred to by the bank, the customer would be under the impression that the bank has kept his interests as priority and that the product sold would be in the best interest of the customer. It is therefore important that bank staff understand the insurance products on offer to bank customers thoroughly, and the risks and rewards associated with them.
• The training should cover should cover not only the initial sales aspects, but all aspects of servicing the customer after he buys the policy, such as changing nomination, assignment, taking loans, completing maturity claim etc. In the case of complex unit-linked products sold, the staff should be familiar as to how to assess the continuing performance level of the returns generated by the policy so as to be in a position to advise the customer on utilizing the options to switch to other alternatives under the policy from time to time.
• This is why training the bank staff on insurance is important. While the insurance regulator has prescribed a simple syllabus for front line staff to enable them get a fair foundation, banks should encourage staff members to acquire more specialist qualification on insurance related subjects. Banks should clearly list the role and responsibility of the insurance partner in this respect. Banks should also utilize their training institutes and other forums to spread the knowledge about cross selling insurance to bank customers.
• Developing products. Most insurance companies tend to offer to bank customers the same set of products that are sold by the general agency force. To be successful, banks need to sit with insurance partners and develop products that are tailored to the bank customers. This could be simple insurance products offering just death benefit, or regular saving products that combine an element of insurance cover. Banks in India have considerable potential in this regard to suggest to insurance products to design products for each business segment, such as SME clients, agriculturists, NRI clients and so on. Such product development customized to the bank needs would help to generate wide ranging selling interest in the bank.
• Staff incentives. Bancassurance opens up scope to create incentive programmes in banks to reward marketing initiatives of staff. There is a new awareness even in public sector banks about the need for well designed rewards and incentives to motivate the staff. There are several ways of designing incentive programmes in bancassurance with a view to motivating the entire staff at branches, or star employees who have helped generate insurance fee income by personal efforts. The incentives can be in cash, or by gift vouchers. Banks need to arrange with the insurance partners to help design such programmes to motivate staff during promotional campaigns as well as normal sales periods. At the same time, banks need to take care that the incentive programme does not create an undue bias at branches in favour of insurance selling at the cost of normal growth in banking line products.

Distribution of insurance at banks is a win-win for banks as well as insurance companies. For insurers, bank customers are the ideal targets made available on a ready platform. For banks, insurance selling is a painless way to increase their fee income with the available infrastructure and raise the productivity level of employees.

(Mr.R.Krishnamurthy is the former CEO of SBI Life Insurance Co. Ltd. He is currently the Managing Director of Watson Wyatt Insurance Consulting Co. Ltd.)

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