Author: shyam

Bad Idea: Indian banks selling insurance

This is a bit of a rant and I am generalizing my experience to the entire system. But something tells me that I am not too far off.

The RBI briefly flirted with the idea of allowing Indian banks to sell insurance. But have you met your bank manager? Most bank employees, managers included, are aces at accounting and process. They can point out the exact color of the forms you need to fill out, how many people up and down the chain it needs to get signed by, documents required for taking out a loan, etc. But when it comes to having a grip on finance, economy or the markets, those are not the people you want to be taking advice from. However, most people can’t tell the difference between accounting and [finance, markets, economy] and look up to them for advice in those areas. Advice that bank employees are more than willing to give.

The escape hatch is built into the system. Most employees get transferred around. My dad, who used to work for a public sector bank, was transferred almost every 3-5 years. The concept of “roots in the community” doesn’t really apply. Add to this is the fact that most insurance commissions are front-loaded. And employees don’t get a commission for taking fixed deposits. Most people follow the advice that their bank manager gives them.

So imagine this scenario where you have scraped together some savings and you go to your bank to make a fixed deposit. The banker makes more money for himself if he convinces you to take out an insurance product instead. You are a farmer with only basic knowledge of personal finance. What are you likely to do?

The skewed incentives that this presents can only lead to disaster. Plus, there is proof that agent-sold insurance in general doesn’t actually benefit the consumer:

Prices of online term plans are much lower than that of agent-sold policies and the sum assured is significantly higher. An online term policy is as much as 50% cheaper than an offline term plan for some companies. More importantly, the sum assured (money your family gets if you die) of online term plans is an average of Rs.72 lakh as compared to Rs.1.47 lakh for the insurance industry in India.

 

Private insurance agents obviously don’t like the idea and neither does LIC. Hopefully, this will be buried and the whole market moves online.

Source:

  • Why the global insurance industry is wrong (LiveMint)
  • RBI plan to turn banks into insurance brokers bad idea (IndianExpress)
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A Simple Bollinger Band Trading Model

Bollinger Bands have quickly become one of the most commonly used tools in technical analysis. Bollinger Bands consist of three bands – an upper, middle and lower band – that are used to spotlight extreme short-term prices in a security. The upper band represents overbought territory, while the lower band can show you when a security is oversold. Most technicians will use Bollinger Bands in conjunction with other analysis tools.

A simple BBand strategy is buying stocks that break the lower Bollinger Band. It is expected that the price of the stock will revert back above the lower band and head toward the middle band.

You can build you own Bollinger Band based strategy that scans all the Nifty 50 stocks for a potential break using the StockViz Technical API in a few lines of code.

# get the index constituents and loop through them
constituents = common.getConstituents("CNX NIFTY") 

for cc in cleanConsts:
     ticker = cc["SYMBOL"]
     # get the latest technicals
     techs = common.getTechnicals(ticker) 
     t = techs[len(techs)-1]
     # get the latest price
     price = common.getLivePrice(ticker)

     #make the decision
     if t["BB_DN"] > price:
		#there was a breakdown

		print "Buy:", ticker
		common.placeTrade(ticker, 1, "buy")

You can read the whole code on GitHub

Source: investopedia

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When the bell-curve meets the shark-fin

To be good at long-term investing, it is essential to understand the impact of innovation (previous posts.) Previously, we discussed how banking, one of the most highly regulated industries, is getting disrupted. There is a bigger under-current at play here. Accenture’s Larry Downes and Paul Nunes have this to say in their book Big Bang Disruption: Strategy in an Age of Devastating Innovation.

The new disrupters attack existing markets not just from the top, bottom, and sides, but from all three at once. By tying their products to the exponential growth and falling costs of new technologies, their offerings can be simultaneously better, cheaper, and more customized. Not just for one group of users, but for all (or nearly all) customers. This isn’t disruptive innovation. It’s devastating innovation.

 

Earlier research into innovation had modeled it in terms of a bell curve – you have your early adopters who pay a premium for a less-optimal product. This helps you finish up the product for a wider audience, aka “crossing the chasm.” However, innovation in the age of cloud computing, social networks and always-on internet should be modeled as a “shark fin.”

shark fin innovation

Traditionally, incumbents have been able to stave-off disruption by observing what their competitors were up to. For example, if Panasonic caught wind that Sony was working a high-def portable system, then it too would embark on a research project to head-off Sony. But increasingly, innovation is coming “sideways.” For example, Google Maps did not intend to kill off the map making industry, it was just collateral damage caused by Android + phone GPS + 3G network.

These “big bang” disruptions also have a tendency to tail off just as suddenly as they show but, but not without completely throwing the existing incumbents in to disarray. One of the competitive responses has been to buy off the disrupter. But this could end badly if there is no easy answer to the questions “What next?”

zynga omg

Case in point: Zynga’s acquisition of OMGPOP for $180M

But that is not to say all acquisitions are doomed. Consider Google’s acquisition of Waze for $1B in 2013. The company itself was founded just 5 years ago in 2008 but had 50M users at the time of its acquisition. Instagram’s user base grew from 30 million users when it was acquired by Facebook in 2012 and over 150 million by the end of 2013. And let’s not forget Google’s acquisition of Youtube and Cisco’s strategy of “accretive acquisitions.”

Some Indian tech companies, recognizing that innovation is increasingly occurring outside their walls, have remade themselves into venture capital firms. Case in point: Info Edge and Persistent Systems. If the key to Big Bang Disruption is to run a large number of small experiments, then their strategy of making small investments into teething companies might allow them to drive the disruption rather than become victims of it. As the era of “big iron” gives way to on-demand-computing, my money would be on these two to overtake the present-day incumbents in the Indian IT space.

[stockquote]NAUKRI[/stockquote] [stockquote]PERSISTENT[/stockquote]

 

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Institutional Investing Trends

Last year has been a wonderful year to go elephant hunting. Banks were hurting and buried under bad debt, FIIs were selling Indian debt on the back of a collapsing Rupee, this pretty much made domestic bond funds the lender of last resort. Supply, combined with the fact that commissions on selling debt funds are way more lucrative than those on equity, lead to a DII (Domestic Institutional Investor) debt binge.

DII Fund Flows (Cash)

dii cash

FII Fund flows (Cash)

FIIs were in full on panic mode in June, July and August last year. But haven’t really participated in the equity markets this year.

fii cash

DII Fund Flows (Derivatives)

After being short net short in December and Jan, are we seeing a change of heart?

dii derivative

FII Fund Flows (Derivatives)

FII participation remains low. Waiting for elections?

fii derivative

FII Favorites

J&KBANK +26.43%
TATAMTRDVR +19.96%
TECHM +18.30%
DEN +17.51%
NHPC +17.26%
UPL +13.05%
HDIL -36.60%
HEXAWARE -23.00%
AMTEKAUTO -19.25%
SINTEX -12.81%
IVRCLINFRA -12.65%
WELCORP -12.1%

Mutual fund trends

Equity mutual funds’ actions over the last 4 months:

Added on aggregate
ITC
MARUTI
BHARTIARTL
POWERGRID
WIPRO
SUNPHARMA
TCS
TITAN
AXISBANK
ALSTOMT&D
Removed on aggregate
RELIANCE
NMDC
BAJAJ-AUTO
IDEA
TECHM
CAIRN
PETRONET
NTPC
LICHSGFIN
CIPLA

Note:

  • All figures in Rs. crores
  • Data from SEBI, fund portfolio disclosures and corporate filings
  • Only open ended funds that were in the “accumulation” phase were considered
  • Funds named “growth” and with the “direct” option alone were considered
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The Facebook National Bank

Amid all the hoopla surrounding Facebook’s acquisition of Whatsapp, this gem of a news item didn’t get the attention it deserved:

BBVA buys banking start-up Simple for $117M

Founded in 2009, based in Portland, and having opened its (online) doors in July 2012, Simple just crossed the 100K customer mark – it has no physical branches and does not offer paper checkbooks. It has no fees and offers customers slick apps with which they can monitor spending activities. The bank’s main revenue stream is from intercharge fees from debit card usage. (SA)

The thought process for this deal was outlined in FT by the CEO of BBVA back in December thus:

Some bankers and analysts think that Google, Facebook, Amazon or the like will not fully enter a highly regulated, low-margin business such as banking. I disagree. What is more, I think banks that are not prepared for such new competitors face certain death.

 

The competitive response is believed to be rooted in big-data:

Yet while this is disconcerting for banks, the good news is that we still have one significant advantage, which is the vast array of financial and non-financial data that we accumulate. This information reveals a lot about habits, tastes, needs and aspirations. Banks need to turn it into knowledge and use that knowledge to provide users with exactly what they want, precisely how and when they need it.

 

The fact of the matter is that this disruption is already under way. China’s Alibaba became a $16 billion lender in less than three years, and China’s largest seller of money market funds in only seven months. Accenture estimates that competition from non-banks could erode one-third of traditional bank revenues by 2020. (HBR)

The risk for banks is that new competitors will consign them to a limited role as back-office utilities.

The competitive landscape

Payments: PayPal, Square and Stripe.
Retail: nearly one-third of domestic Starbucks revenues are paid through its own loyalty cards.
Debit card: Google Wallet. Walmart’s prepaid card that functions like a debit account captured more than a million customers in less than a year.
Checking account: T-Mobile launched a new checking service with a smartphone app and ATM card.

The competitive response

As non-banks stake claim to traditional banking functions, will banks move in to the retail turf?

Coupons: Garanti, one of Turkey’s largest banks, offers a free mobile app that gives customers personalized offers and advice based on their location and past spending.
Loyalty: Bank of America analyzes transaction data to give customers cash back on transactions at frequently used merchants.
Information: BBVA has long made available to its US customers information on the actual selling price of cars (as opposed to list prices)

The Indian scenario

An FT article back in November had this to say:

The RBI also plans to grant more regular licences for a broader range of financial institutions, providing what Mr Rajan described as a “substantial change” to bank structures.

“We could have wholesale banks, we could have mobile [phone] companies doing some banking activities, within certain constraints. We could have small banks, which we currently don’t allow, and we could allow co-operative banks,” Mr Rajan said.

Connecting the dots, I think its time we have a VC funded online-only bank – aka, The Facebook National Bank.

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