The retail push into finance

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Financial services in retail stores: Leveraging youth, data
Financial services in retail stores: Leveraging youth, data

Purvita Chatterjee

Are financial services going to be a logical extension of the retail business in India to push consumption? Considering the two big players, the Future Group and Reliance Retail, have launched their financial services, easy credit through instant loans and co-branded credit cards could well be the next line of business for such retailers in the country. While the recently listed Future Capital Holdings (of the Future Group) is already offering branded services such as Future Card and Future Money, the Citi Group has also tied up with Reliance Retail to help the latter enter the arena of financial services.

In the case of Mukesh Ambani’s Reliance Retail, it has been ambitious enough to spin off different companies for entering a range of services as an extension of its retail operations. From floating an NBFC (non-banking financial company) to an independent insurance and travel company, there are a slew of companies (Reliance Retail Finance Ltd, Reliance Insurance broking Ltd and Reliance Travel) being floated to complement its retail business.

While in the case of Future Capital Holdings, it is issuing products such as credit cards, loans and insurance products, its efforts are aimed towards increasing consumption at its stores which are also doubling up as distribution platforms for its financial products. As Kishore Biyani, CEO, Future Group, stated earlier, “By creating such financial products we are able to increase consumption.”

But finding a partner in the business will be important for these retailers as they progress in the business. Observes Hemant B. Patel, an analyst at Enam Securities, “There has to be an entity which can fund such retailers. Most retailers have to seek partners such as an NBFC to raise funds for lending to its consumers as they themselves would be having negative cash flows in the business. No retailer would like to deplete their capital base to fund consumers at this stage.”

In fact, getting into the consumer financing business in a full-fledged way is also being explored by the Tatas. Its relatively new company, Tata Capital, was launched to offer capital market services, merchant banking, housing finance and private equity. Vehicle financing, retail finance and other related areas could well become the group’s formal consumer financing arm in the future. Sources at the Tata Group have already indicated that its retail formats of Trent (Westside) and Infiniti Retail (Croma), which have already put their loyalty programmes in place, could get involved with Tata Capital at a later stage to have a common credit card across its group companies.

At the same time there are going to be risks involved for retailers. Observes Asitava Sen, Vice-President (Retail & Consumer Goods) of Technopak, a retail consultancy, “There has been a past history of some consumer finance companies experiencing difficult recoveries, particularly in consumer goods credit. This implies careful consideration of an optimal product mix to be offered and more importantly, the right segment. For example, a consumer credit and home loan would suit a home improvement or consumer electronics format, as the transaction value is high. Similarly, hypermarkets could be more suitable for insurance products and lifestyle/premium retail formats for high-end credit cards or holiday time share.”

In fact, the scale of the retail business would help as well. In the case of the Future Group, its several retail formats have helped in distribution of its financial products. Its Future Money kiosks for doling out instant loans and its newly introduced Future Card has ensured easy penetration of its products at its various formats across the country. Rakesh Makkar, CEO, Future Money claims, “For us it was a logical step to get into financial services as we realised the cost of acquiring customers is low for a retailer compared to a bank. We look at it as a full-fledged business and our advantage is that we are a large retailer with different formats which will ensure easy distribution of financial products.”

At present there are 95 Future Money outlets located in 26 cities, most of which are located within the Future Group-owned stores. With the purpose of targeting consumers with simple, easy and convenient loans at a time when buying decisions are being made, the final goal is to become a one-stop shop for all of its customers’ financial needs. In fact, there are also chances of Future Money becoming an independent company. Taking its financial products beyond the Future group formats, even its newly-introduced Future Card would be tapping into new customers and industries beyond retail. Entities which are not part of the Future Group are already in talks with the retailer to use its platform to increase the consumption of its own services. Says Venkatesh Srinivasan, COO, Future Capital Holdings, “There is a bunch of telecom and airline companies which is looking towards a platform of consumption and would like to expand the consumption basket of their consumers through our Future Card.” With future extensions into new businesses such as forex and travel, the Future card (empowered by ICICI Bank), which already has one million cardholders, is expecting to touch a membership base of 3.4 million customers in the near future.

As distribution is going to be the key to sustaining this business, the Future Group has already decided to target the youth shopping at its malls and outlets, those youngsters who are not averse to taking instant credit and even buying insurance products. “By introducing insurance products to customers who are visiting shopping malls and modern retail outlets, we have been able to acquire a significant number of individuals who had never bought an insurance product before. Mallassurance will help us create a market among the younger generation of customers who till now were not being attracted by the existing insurance players,” said Biyani recently. Future Generali, the insurance venture of the Future Group, has already acquired one lakh customers through its Mallassurance initiative.

Meanwhile, there are other retailers who are wary of entering into the financial services business. The oldest retailer in the country, Shoppers Stop, continues to stay away from this arena. “Financial services is a different business and we are not sure whether, being a retailer, we would be successful in it. As we do not have a credit validation process for giving loans, there is no need for us to get into financial services,” says Govind Shrikhande, CEO, Shoppers’ Stop.

Other retail analysts feel likewise and advise retailers would do well to stick to their core business. According to Hemant Kalbag, Principal & Consumer Head, AT Kearney, “Managing a credit-based portfolio can be a risky and complex business for retailers. Being a non-core function, it is best to outsource it. However, retail store-based cards tend to promote loyalty and are seen to take retailers to the next level of consumer marketing.” So while Shoppers Stop continues to stay out of hard core financial products, it continues to push its co-branded credit card for the purchase of big-ticket items. Says Shrikhande of Shoppers Stop, “Today we are looking at giving credit at lower values and there would be new versions and models offered with our credit card.”

Meanwhile, international retailers have ventured and exited the financial services in the past. In the UK, Marks & Spencer has been selling financial products since 1985 while Sainsbury’s and Tesco launched personal finance business in the mid-’90s. Other high street retailers selling financial products include names such as Virgin, Boots, Debenhams and Asda.

There are certain advantages for retailers in entering the financial services business. Apart from the low cost of getting consumers, there is a ready database of consumers (through their loyalty and credit cards programmes) whom retailers can always tap into unlike the rest of the financial companies. “The main advantage retailers have is that they can approach the customer as a retailer and not as a bank. Consumers can get attracted by that kind of convenience and service,” says Technopak’s Sen. Besides, customer frequency is always higher at a retail store than a bank which tends to have more closed holidays and this makes it easier to reach out to the customers who visit the retail stores.

With retail growing at an exponential pace, it is but natural that it is this industry which would emerge as a key channel for distribution of financial services. But whether Indian retailers will succeed in this business … the jury is still out on that.

Related Stories:
Reliance plans flexi finance service at retail outlets
Easy loans from Future Money add to Home Town’s topline

(This article was published in the Business Line print edition dated July 24, 2008)
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