RIL needs a new playbook to disrupt the BFSI market
A few months ago, Reliance Industries (RIL) announced plans to revive the iconic soda brand of yesteryear, Campa Cola. Knowing what kind of market disruptor RIL is, this move has yet to move Coke and Pepsi.
But just before Diwali, when RIL revealed its plans to make a splash in the financial services industry, it caught everyone’s attention. Despite a failed attempt – RIL’s joint venture with US major DE Shaw to create a financial services entity and the lack of clarity on where the banking business Jio Payments Bank is headed – experts are confident. But succeeding the third time around will depend on what RIL has learned from the past and which playbook he chooses.
Jio Financial Services (JFS) plans to be in all spheres of business – be it lending, insurance, asset management or brokerage. As noted industry expert Ashvin Parekh says, this is a perfect plan because financial services make sense for large conglomerates. “Unlike manufacturing, it is virtually recession proof and has the ability to generate consistent returns,” he explains.
With RIL using the pandemic to attract big investors such as Google and Facebook to Jio platforms and reduce debt to reasonably comfortable levels, “it appears that entry into the financial sector was well planned,” he adds. . Interestingly, JFS would “acquire liquid assets to provide adequate regulatory capital for consumer and merchant lending,” while being open to organic growth, joint venture partnerships, and inorganic opportunities.
In short, the plan is to stick to RIL’s tested playbook – have a wide range of services and build at scale. But over the years it has been established that neither factor is relevant if the end game is not in sight.
HDFC and Edelweiss are examples of how, in the financial services industry, size or spectrum doesn’t matter beyond a point. Despite being the largest mortgage lender, for operational and regulatory reasons the lender is merging with its banking arm to stay relevant in the game.
Therefore, if RIL chooses to climb the rankings through the inorganic route, it could attract more attention from the regulator, who has not yet accepted the idea of allowing business houses in the banking area. Therefore, pruning itself can become counterproductive.
Going the Edelweiss path of pocketing every pie in the industry would leave RIL with the question of what next, a question that Edelweiss and many of his peers face. Changing industry dynamics and varying risk management frameworks no longer complement each other and no longer ensure that an entity is a manufacturer of many financial products.
Although RIL has mastered the art of working in regulated businesses, financial services, particularly lending, are somewhat unique. There are regulations that state outright what can and cannot be done, and market forces that act as unspoken rules.
For example, predatory pricing or promotional pricing cannot be bait to attract customers. When money is borrowed at a certain cost, it must be lent out at a higher rate for the business to make sense. Even by regulation, it is not possible to lend below the repo rate. The ability to transpire capital and leverage invariably acts as a natural trade barrier.
Therefore, unlike a telecom sector where pricing was a powerful weapon, which helped cut across different layers of the market, in finance it will not work in lending; not even in the insurance sector, because if the pricing is not done well, the risk management framework may be compromised. Although AMCs and brokerage firms may be exceptions, they remain the peripherals of the financial services industry, not the core.
There are no shortcuts to market penetration, and RIL must be prepared for a painstaking process. Trying to reduce time by inorganic means has its limits. The cost of integrating loan books and underwriting practices, while retaining the customer base and employee base, can outweigh the cost of building a business organically. This is one reason why mergers and acquisitions are not a common feature in the financial services space.
RIL’s telecom strategy has its limits if it is to be extended to the financial services space. Instead, the ingredient for success may lie in its retail business. Established long before telecom operations, Reliance Retail has taken more than a decade to find its footing in the market. Even as critics dismissed him as a non-starter, he quietly acquired the trademark rights to numerous international labels, and now he’s built a formidable piece.
Similarly, JFS’s strength lies in operating RIL’s distribution network. To be lucky for the third time, JFS must choose his battlefield wisely. Where existing players are open to customizing products to meet the needs of borrowers, whether retail or corporate, and doing so with loans and insurance products, it may not be makes sense for JFS to operate in the same company.
But ensuring tremendous reach remains a challenge, and this is where JFS has a monetizable opportunity. Given its distribution network, it has the potential to be a formidable aggregator or distributor of financial products, and this option can prove to be much more lucrative than wanting to endorse the manufacturer’s hat.
Play the competition
RIL’s entry into the telecommunications industry happened just when the industry was at its peak and then disrupted the market using pricing. Financial services, in a sense, are at a similar stage. While reasonable innovation has occurred on the product side, bringing it to the masses or last mile availability is a challenge.
This is also where big tech and fintech are fully in play. Traditional banks and lenders have not had an easy task of replicating the tech game, where RIL has an edge. But then, for the first time, RIL would be pitted against national and global majors, and its ability to strike the right balance between growth, quality and customer retention will be tested. Ultimately, does RIL envision the financial services industry for the big game or as a source of existing big games? It will determine if he can be lucky for the third time and only time will tell.