Some months ago, Reliance Industries (RIL) announced its plans to revive yesteryear’s iconic soda brand, Campa Cola. Knowing the kind of market disruptor that RIL is, the move hasn’t stirred Coke and Pepsi just yet.

But just ahead of Diwali, when RIL revealed it plans to make a big splash in the financial services space, it caught everybody’s attention. Despite a failed attempt – RIL’s joint venture with US Major DE Shaw to set up a financial services entity and lack of clarity on where the banking venture Jio Payments Bank is headed, experts are confident. But getting it right the third time will depend on how much RIL has learnt from the past and the playbook it chooses.

Jio Financial Services (JFS) plans to be in every sphere of the business – whether lending, insurance, asset management or broking. As Ashvin Parekh, a noted expert in the sector puts it, this is a perfect plan as financial services makes sense for large conglomerates. “Unlike the manufacturing sector, it’s pretty much recession-proof and has the ability to generate steady returns,” he explains.

With RIL utilising the pandemic to attract large investors such as Google and Facebook to Jio Platforms and pare debt to reasonably comfortable levels, “it seems that the entry into the financial sector was well planned”, he adds. Interestingly, JFS would “acquire liquid assets to provide adequate regulatory capital for lending to consumers and merchants”, while being open to organic growth, joint venture partnerships and inorganic opportunities.

In short, the plan is to stick with RIL’s tested playbook – have a wide spectrum of services and build scale. But over years, it has been established that neither factor holds relevance if the end game is not in sight. 

HDFC and Edelweiss are examples of how in the financial services sector size or spectrum doesn’t matter beyond a point. Despite being the largest mortgager, for operational and regulatory reasons, the lender is merging with its banking arm to stay relevant in the game.

Hence, if RIL opts to climb the league table through the inorganic route, it may attract more glare from the regulator, who is yet to warm up to the idea of allowing business houses in the banking space. Therefore, the size itself may turn counterproductive.

Going the Edelweiss route of pocketing every pie of sector would leave RIL with the question of what next, a question that Edelweiss and many of its peers are faced with. Changing dynamics of the industry and the varied risk management frameworks don’t complement and warrant for one entity to be a manufacturer of many financial products any longer.

As much as RIL may have mastered the art of working in regulated businesses, financial services, especially lending, is somewhat unique. There are regulations that outright specify what can and cannot be done, and market forces that act as unsaid rules.

For instance, predatory pricing or teaser rates cannot be a bait to attract customers. When money is borrowed at a certain cost, it must be lent at a higher rate for the business to make sense. Even regulatorily, it’s not possible to lend below the repo rate. The ability to sweat capital and leverage invariably acts as a natural business barrier.

Therefore, unlike in a telecom sector where pricing was a potent weapon, which helped cut across various market layers, in finance, that won’t work in lending; not even in the insurance sector, because if pricing isn’t done well, then the framework of risk management runs the risk of being compromised. While AMC and broking businesses can be exceptions, they remain the peripherals of the financial services sector, not the core.

There are no shortcuts to market penetration, and RIL must gear up for a painstaking process. Trying to cut time down through inorganic means has its limitations. The cost of integrating loan books and underwriting practices, while also retaining the customer and employee base, may outweigh that of organically building a business. This is one of the reasons why mergers and acquisitions aren’t a regular feature in financial services space.

RIL’s telecom strategy has its limitations if one is to extend it in the financial services space. Instead, the success ingredient perhaps lies in its retail business. Established long before telecom operations, Reliance Retail took over a decade to find its place in the market. Even as critics were dismissing it as a non-starter, it quietly acquired brand rights of many international labels, and now it has built a formidable play.

Likewise, the strength of JFS lies in leveraging the distribution network of RIL. To be third-time lucky, JFS needs to pick its battleground wisely. When the existing players are open to customising products to suit the needs of borrowers, whether in retail or corporate, and do so with loans and insurance products, it may not make business sense for JFS to operate in the same business.

But securing a formidable reach remains challenge, and this is where JFS has a monetisable opportunity. Given its distribution network, it has the potential to be a formidable aggregator or a distributor of financial products, and this option may be a lot more lucrative than wanting to don the manufacturer’s hat.

Playing the competition

RIL’s entry into the telecom sector happened just when the sector was at its peak and then it disrupted the market using pricing. Financial services, in a sense, is at a similar juncture. While reasonable innovation has happened on the products side, taking it to the masses or last mile availability is a challenge.

This is also where the big tech and fintechs are fully at play. Banks and traditional lenders haven’t had it easy to replicate the tech play, where RIL has an edge. But then, for the first time, RIL would be pitted against domestic and global majors, and how well it maintains the fine balance of growth, quality and customer retention, will be tested. Ultimately, is RIL looking at financial services business for the big play or as a feeder to existing big plays? This will determine if it can be third-time lucky and only time will tell.

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