A fortress of regulations

For the past 6 months or so, I have been involved in building up a fintech based business. You might have seen me post about real estate and how the young Indian workforce needs help to own a house. This organization is HomeCapital which provides home down payment assistance for first time home buyers. In fact, it’s India’s first home down payment program.

The product itself is pretty unique and involves a bit of financial engineering. It’s an unsecured personal loan made available to the home buyer at 0% interest. To know more feel free to drop by our office for a chat and a cuppa!

Business traction and growth

The business is doing well and therefore it has quickly attracted a good set of investors. As we are gearing up for a Series A run, one of the question that I am increasingly seeing in conversations is this –

What technology barriers to entry does your business have?

The first time I heard this question, I was stumped. It’s not as if the core product was a technology driven product. Given enough time and money, any competent person should be able to build any of the following systems –

  • Loan origination
  • Application management
  • Loan management
  • Customer Relationship Management

These are business support systems, and they will never be a technology differentiator. The simple reason being that there are too many service providers and SaaS products out there which provide alternatives for them.

Yes, I could always claim a better UX, a robust and secure system. However, these are fast becoming hygiene factors and thanks to cloud based solutions fast becoming a commodity.

How does this impact a relatively new industry?

Read on. It’s a good case of how the mayor of Paris has decided to take matters in her hands in order to stop an overcrowding of a young industry.

There are a dozen electric scooter companies operating in Paris right now. There are so many that the Mayor just announced that she will reduce that number to three with new rules for electric scooters in Paris.

via Low (No) Barriers To Entry — AVC

Artificial barriers are being constructed in order for three of the businesses to be sustainable. The young electric scooter industry is being protected in this case by Paris.

Very similar to this, the FinTech industry in India is relatively young, and the Government of India has taken an active interest in this. One of the instances where the banking and lending industry in India was protected was where RBI drastically changed the P2P startup landscape by limiting individual investors to 10 Lakh INR.

Most developing countries are taking this approach for multiple industries. A wait and watch approach with a beady eye on the innovations and changes ensures that most policies that are being passed are in situ with the economic environment.

Protecting lush markets

What the mayor has beautifully done is protect the largest european market of electric scooters. One reason for more than a dozen startups to spring up in this market was that it was fairly easy for someone to join a business, learn the ropes and then start on their own. However, what will happen if one of these fly by night operations were to suddenly go down under? Suddenly the entire market starts stumbling. Would you as a governing body allow this to happen?

No. I would rather have 3-4 stable operators providing this service as opposed to 12-15 firms. It’s regulation, yes. It’s against the natural laws of economy, yes. However, it is being done to protect the market. Over a period of time this triopoly will try creating a seller’s economy, however the regulation will ensure that no one player can generate super normal profits. This creates a pretty strong barrier. An impregnable fortress of regulations that cannot be overcome.

India and FinTech

If you now look at the FinTech industry in India, then there are many regulations. This is not so much a concern as much as the fact that these regulations keep evolving as the industry evolves.

Take the fact that since September 2018 the Aadhar based KYC norms have come to a standstill. It is only last week that the RBI has allowed for e-KYC to be re-initiated. Now through in a recent trend such as DeepFake in their, and now you have regulators in a dizzy. What the major players in banking and lending are doing is looking up to the regulator to take decisions … these decisons are being taken over a long period of time (approximately 6 months in the case of e-KYC).

That’s two business cycles. Enough time for an upstart to start-up. India is a lare country and we haven’t really started making fintech products for the 66% of the non-english speaking Indians. There is hope of growth there, and hence the regulation barriers will be slowly built in that area.

Is a barrier needed?

A barrier to entry is needed when the market becomes small and the players have to compete for transactions. However, what is unique about billion people economies such as India and China is that the sheer volume of users is so high that there is always room for more.

Even in such a space where every month there is a new lender or two cropping up, the Indian real estate and lending space still remains under utilized. Housing for all still remains a distinct dream, and until then, instead of building barriers, perhaps we might want to think about building bridges.

The tragedy behind Indian IT Services

Understanding Indian IT Companies (TCS, Infosys, Wipro, HCL Tech, TechM)

via Understanding Indian IT Companies (TCS, Infosys, Wipro, HCL Tech, TechM) —

An excellent infographic of the top IT/ITES providers in the country.

The bulk of the revenue comes from abroad, and this seems to be a problem. As technology keeps getting more simpler and easier to adopt, the reason to outsource the contract to another country will keep going down.

Combine this with the recent spate of visa issues, and you have one impending slump in the near future.

Living without Cash

Oh my god! The Modi government has made a huge announcement today. All 500 INR and 1000 INR notes have been invalidated in one fell swoop.

Banks are closed the next two days and ATMs wont be operating more than 2000 INR until the end of the year.

अब की बार मोदी सरकार। नोटों की बजा दी जोरदार।

 

Information markets in Third World Economies

One of the great things that attracts investor capital is the ability of third world countries to show double digit growth. This story of almost all developing nations mean a scope for investments for other organizations present world-wide. Various countries have different economic policies, such as the open policy by China to attract huge FDI, and the partially open economy by India which invites FDI but limits the amount which can be withdrawn.

Why is this story selling for the past 5 or so years?

The answer is simple. Third World nations represent an inefficient market. A place where the buyers and sellers do not have access to complete information about the transaction. Since there is hardly any organized sector in such markets, there is virtually no analysis done on the varied types of transactions. This absence of information creates an inefficiency in the market … the simple act of saving each and every market transaction and making it available to the public creates the huge value of wealth maximization for both the buyer and the seller.

Wealth Creation by Information Symmetry

Imagine a scenario where a seller wants to sell a book for five dollars, it’s slightly used but the book is not easily available in the market. But the seller does not know that … the seller implicitly assigns a value of 5 dollars and expects the same amount in return. Now if a buyer who values the book a lot more than that were to find about the book, then he will finish the transaction at five dollars (even if he were ready to pay more). So what just happened back there? A book was exchanged for a lesser amount than what it would have fetched. Had the seller known that it could have fetched more (if he had access to that information), then the seller would have generated more wealth by selling at a higher price.

Information Markets

So in developing countries such as Brazil, Tanzania and India, the one sure shot formula for wealth creation is by creating an information market and making it available to the general public. We can also refer to information markets as Free online Classifieds, a site where people can post information about their buying and selling requirements.

We wanted to sell our six year old car and used a similar service to get the highest price for a used car. Access to such an information market not only ensured that we got the highest bidder, but also reduced the transaction hassles for us.

Conclusion

Any information market (such as an online classified) brings the buyer and the seller on the same platform and ensures that the seller gets a higher price and the buyer gets a chance to purchase the same price at a lower cost.

An information market is hugely successful wherever the market is fragmented and does not have any organized player.

An information market also increases the reach of local organizations.

Customization in Retail Fashion

Back in the year 2006, when I was working for eYantra (which is a firm specializing in brand merchandise for corporates and corporate gifting), the buzzword in the merchandising industry was customization.

If it was a good looking merchandise, then it’s value rose by nearly 30%-50% if you could customize it to the customers needs. That was the time we got into a narrow niche of branded merchandise. Everything from iPhones to t-shirts used to be branded by the target corporate’s brand logo (as defined by their marketing team’s brand logo guidelines).

The going was good, and soon we had acquired our series A round of funding. This obviously attracted other players and companies based completely on customization were formed – companies such as Myntra.com (whose ads you see even today). Needless to say that Myntra has grown beyond customization and is now almost a full blown e-commerce portal.

It’s been almost 6 years since and I had almost forgotten about the retail and fashion industry. That was until I came across this smart company – they specialize in providing woven labels with the text customized as per your needs. You can check this site out – look here. The thing is that woven labels is not a new idea, in fact they have been around in Britain (in Coventry) for more than a century now.

The cool thing about these labels, is that you can order any amount you want and have them customized right there on that site. There is almost zero manual intervention in the order placement process and that’s what makes a strong case for customization in the retail markets.

If this kind of technology and business processes were there in India, then it would have taken the branding and merchandising market by storm. In a developing economy wherein almost everything needs to be branded, having a custom made woven label takes the branding experience in retail merchandise to the next level. The good part about developing economies is that they have ready access to the developed markets to look at successful business models.

In fact this idea is so awesome, I won’t be surprised if I start seeing a Label Yourself outlet in India within a few years!

Equity Release: Debt Instrument

Just when you think, what will these crazy bankers think of next … and boom comes the latest financial instrument ready to stupefy you … with its sheer ingenuity and innovativeness.

This latest debt instrument I came to know recently from a friend in UK is the equity release. Lets take a case of a country home in the UK which has a bit of mortgage attached and the owner wishes to make some new purchases. The first condition of this instrument is that the owner has to be above 55 years of age and the value of the house needs to be higher than the mortgage value. This difference is called the Equity of the house … now private financial institutions will provide these house owners with a method to slowly sell their house for a part payment on that equity value.

What’s so great about this opportunity is that the house owners are not on the streets trying to sell the house directly. Take for example, this equity release from Age Partnership, the ownership will be transferred only after a long long time … until when the house owner has access to a ready pool of funds. With the minimum age requirement of 55, and the average age in UK rising to 78, this means that the house owner has typically a good 20-25 years access to this pool of funds, which otherwise would only be made accessible post the sale of the house.

Thus, finances which would have opened up very later … and mostly by the inheritors, are now suddenly available to the house owner itself. This is great news for elder citizens who are having a hard time trying to maintain a lifestyle. This instrument clearly benefits both the institution and the individuals … a win-win instrument. I wonder, does this idea seem as good as those CDO’s back in 2008.

PS – The problem of all such financial instruments is the same – lack of regulation. With this, we can be sure to see the same … without any overseeing authority to stop malpractice, rogue institutions will realize the loopholes in the system (or lack of one), and exploit this. Any system without regulation is bound to the same problems. So the CDO statement back there really is not fair, but it’s always a risk to consider!