The Hindu Business Line : Mutual banking — An emerging tool in retail banking

FEE-BASED income through hybrid product and service offerings has already emerged as a profitable business model in the retail bankscape, and mutual fund (MF) distribution has become a fashion statement among all banks. With the projected growth rate of 30 per cent in the retail banking space, fee-based income is also expected to grow at a rapid pace.

MF distribution by banks is emerging a key element that is fuelling this growth. Alliances between banks and mutual funds have become a daily occurrence. Alliances are arranged, (bank and MF belonging to the same group), between families (bank and MF are standalone entities) and also multiple (one bank ties up with more than one MF).

A new concept — mutual banking — has emerged offering new product and service innovations for the customers who avail of mutual fund products through banks.

The result: One MF launching a co-branded debit card for withdrawal upto specified limits of investments in MF schemes through bank accounts. Maximisation of comfort for the customer, bank and the MF is the basic premise on which these marriages are happening. A scientifically structured business implementation model will reap benefits for all concerned.

Why tie up?

MF distribution offers good scope for augmenting fee-based income of banks. Upfront Commission, Trail (loyalty) Commission, Mobilisation Incentives, Special Incentives, Collection Charges are the income triggers for New Fund Offers. For a single application, there are multiple revenue streams.

The existing customer base serves as a captive prospective investor universe. The stage and the setting are already there. Only, players have to play.

Banks as a distribution channel have huge potential to build and improve the retail side of the investors' universe of MFs, which is skewed towards the institutional side now. There is no other distribution channel for MFs that can offer such a lucrative retail base on a platter by a tie-up.

Trained frontline staff of the bank will serve as ready-made marketers for distribution. For the bank, a strike rate of even 10 per cent of the targeted customers will translate into huge volumes for the MFs to encash. In addition, the database can be used effectively for "Experience Marketing" of future products and "Product Co Creation" based on segments.

The opportunity for the customers to avail of non-banking financial products with multiple return matrix from their banking services providers without the strain of shopping in the market. Customers are offered a buffet of MF products with different themes and return expectations through the bank, based on their risk appetite. They are also offered counselling support from the bank and the MF personnel.

The distribution paradigm

The art and craft of MF distribution should be clearly understood. The art (strategy) should be clearly drawn on the canvas and the craft (implementation) precisely delivered.

Developing a PROPAGATE (Product, Risk, Opportunities (Returns), People, Appetite, Geography (Place), Attributes, Training & Education) matrix for MF distribution is the key for the success of the distribution strategy. Right structuring of the matrix will synergise the efforts of the banks and the MFs. Since banks are selling the MF products to and through their customer base, any deficiencies in the matrix directly creates an imbalance in their desired objectives and customer satisfaction levels. Following are important ingredients of the matrix:

Product: Banks with multiple tie-ups should decide on products of different MFs based on their customer segment and time preferences. New Fund Offers are there for all but in the case of existing schemes, a careful selection of MF products is a precursor for customer-oriented selling.

Risk: Unlike fixed deposits of banks, MF schemes carry capital risk and return risk. MFs should not normally guarantee returns for their investments and investments are subject to market vagaries. Banks should have in-house research to identify schemes based on the risk profile of their customers. Selection of products with performance above the level of their benchmark indices will minimise risk in a big way.

Opportunities: Investments in MFs are opportunities for customers to create wealth. In case of growth schemes, buoyant capital market creates better opportunities for capital appreciation and returns, and the expertise of professional fund managers enhance the opportunities and deliver better returns.

Products, which offer better returns over a period over the benchmark indices will increase the return expectations and should be factored in while structuring the matrix.

People: People are the driving force. People relate to both the internal and external customers. Internal customers comprise line staff who actually market the schemes and external customers are target customers to whom the schemes are marketed to by the internal customer. Selecting a marketing staff with the right aptitude and attitude will make sure that schemes reach the external customer and trigger the purchase intentions that are translated into sales.

A careful selection of internal sales staff (who is going to sell) and right targeting of the external customers (to whom it is going to be sold) will make the distribution model more effective.

Appetite: The penchant for risk taking varies with customers across segments. The risk appetite for a rural affluent customer will be comparatively less than his urban counterpart. Product offering across segments should match the risk appetite of the respective segments.

Geography: Geography of the bank is the foremost advantage for the banks and MFs in the distribution model. In a single tie-up model, the idea is to simply sell across geography.

With multi tie-ups, borders have to be clear. Banks should draw the distribution design based on the brand equity of the MF in specific or across geographic boundaries for better distribution efficacy. Banks should first decide on branches through which they are going to distribute MF products.

The awareness level about MF in general and schemes, in particular, varies across geographies (rural, semi-urban, urban and metro) and also customer segments. A properly graded geography strategy will propel a smooth, seamless customer penetration and sales volumes.

Attributes: Attributes of products are borne out of product structuring and investment objectives.

Growth Schemes, Income Schemes, Balanced Schemes, Index Schemes etc., are some of the product attributes and Monthly Income Plan (MIP) and Systematic Investment Plan (SIP) are return and investment attributes. Attributes and their impact should be effectively communicated to the investing customers. Otherwise, it will result in customer dissatisfaction at a later stage.

Training: Training is the axle on which the entire mutual fund distribution revolves.

Teaching the nuances of mutual funds to the sales staff is the starting point of implementation. Training and Certification Programme by the Association of Mutual Funds in India (AMFI) for distributing mutual fund products is essential for successful implementation of the distribution strategy.

The content and communication of the trained staff will translate to better counselling to the target investors and better satisfaction levels. Banks should aim to achieve the training objectives for distribution objectives.

Education: Educating the external customer about the mutual funds first and the nuances of mutual fund investments next will be the ultimate decider for distribution success.

Customers will always look for the direct assistance by the staff whose responsibility it is to educate and guide them into investing based on their risk return appetite, life cycle and wealth cycle. The education exercise is to be on a continuous basis.

Developing and implementing a robust PROPAGATE matrix will definitely give direction to MF distribution.

The staff involved in the banks should be convinced about the distribution as a potential profit generation model for the bank. There may be apprehensions among staff in selling an alien product and about its impact on the liability base of banks.

But history has it that any investment is recycled over a period of time and outflows are almost always matched by inflows and there is benefit in the form of income from outflows also.

Moreover, if banks give customers other financial products also, customer satisfaction increases and brand loyalty improves. Ultimately that is what matters.

So, banks, race now with a PROPAGATE matrix and reap the benefits of fee-based income by MF distribution.

(The author is a Post-doctoral Research Fellow in bank management and Senior Manager in Indian Overseas Bank, Retail Banking & Marketing Department, Central Office, Chennai. Views are personal. He can be reached at dr_jsethuraman@yahoo.com)