What does a helpful MF platform look like?

SEBI’s sweeping transformations of its regulations driven with the retail investor in mind has spurred some of the largest distributors, advisors, and AMCs to rethink their approach towards the end customer. Yet, ~98% of the retail population is yet to be brought into the fold of the mutual fund industry. And ₹ 30,000 crores still reside in the savings account instead of liquid and debt funds.

This massive opportunity to bring these investors onboard through not just SIPs but true micro investing begins with technology. Traditionally, the finance industry has been running on mainframes. Then came the surge of web applications and mobile applications which were based on client/server architectures. However, to take true advantage of technology, what companies need is the ability to serve customers at scale and the ability to draw insights through their data with intelligent systems. The precursor to these benefits is moving to the cloud and taking a platform-centric approach respectively.

Evolution of finance systems

The genesis of a Platform

In general, platforms are driven by four key factors:

  • Building blocks, which move towards solving all problems over the cloud, unlike traditional systems that offer only order management.
  • Core business model, which precludes the platform from competing with its customers.
  • Trust factor that ranges across not only an increasingly open source technology approach but also business policies stating that the data created by the business customers is the property of those business customers, and not of the platform.
  • An end-to-end approach of digital technologies that allow customers to transition seamlessly from on-premises technology to the cloud, quickly automate key functions across the organization and enable an agile movement into entering new verticals.

The need for a mutual fund platform arose as a result of a multitude of factors that have converged towards the end customer. This has mandated the need for any mutual fund organization to convert into an investor-centric organization. Subsequently, this can happen only by undertaking a shift towards becoming a digital business which requires technology to infiltrate across the organization. Thereby, the platform makes itself indispensable to the organization’s ability to compete, to grow, and to create new value for customers.

What does a helpful MF platform look like?

The trust aspect

  • Who owns the data? – A helpful MF platform will have a team that spends time with various stakeholders at the customer’s end to clearly inform them that their data is their data. In addition, the platform’s IP and innovation are extended to all the customers as they move along the journey of digitizing their businesses. This is huge in terms of building the customer’s company especially in complex regulated markets like Indian mutual funds, and finance in general. In addition, a healthy sign is of the product and engineering teams actively engaged with the customer’s employees to help them navigate through with a list of things like integrations, data privacy, security and so on and so forth.
  • Your margin is not my opportunity – Be it the manufacturers or the distributors/advisors, each one should be excited about moving to a cloud-based platform with the comfort that the platform is not interested in eating into their hard-earned margins or will not suddenly begin charging additional amounts to them.

The business aspect

  • Investor centric A true MF platform has features that any B2C distributor would want to offer to their investors.

To quote Mr. Suraj Kaeley,  President – Sales & Marketing at UTI Mutual Fund,

“The new generations of investors largely look forward to digital mode of transactions. A digital strategy built around enhanced used of technology can fit well into ever changing environment.

We believe retail fund distribution is undergoing a structural change. Opportunities are plentiful and distributors need to provide a comprehensive solution catalogue in alignment with the needs of customers. A customer centric approach, technology enabled service capability, a healthy mix of customer types and a diversified product range is the way to achieve success for the new age distributor/advisor”.

  • Kickstarting new revenue streams – A fintech platform geared towards mutual funds would enable companies to take the bold decision to shelve their current workflows and migrate completely onto a PaaS model. This helps them grow their relationship management team, advisory team and drive topline revenue as well. The best part is that it helps them be much more agile in their implementation. In addition, if the platform has been built by a team that has been around for almost a decade serving a variety of finance companies, this aspect should add to the customer’s confidence to diversify their product offerings like insurance, etc.
  • Not COGS – While a platform is typically perceived as a manufactured product with COGS (cost of goods sold), a helpful API only platform instead focuses on transforming the customers business. When a platform company looks at a distributor or a registered advisor, it does not look at the development costs, server costs or the operations costs. It looks at the day in a life of the distributor from different angles – from operations to complex reports like capital gains / XIRR to RTA integrations to machine intelligence capabilities respectively. It then distills them into friendly APIs that can help reason over investor acquisition and retention inefficiencies.
  • While multiple products continue to portray themselves as the “real platform” offering, what they are essentially working on is a commodity business and a race to the bottom with low/nil prices. There are certain aspects to a fintech platform which will always be commodities. However, there are other aspects like domain expertise, complex reporting like XIRR, handling scheme categorizations, KYC solutions, etc that require R&D investment, teams comprising of regulatory experts, domain experts ,and product experts. An MF platform will have all of this come together to provide a true API only offering for distributors. A helpful platform will have this as an advantage in terms of COGS. The ability of a platform to operate at low prices then becomes a function of the platform services that are being offered, instead of racing to zero on commodities.

The technology aspect

  • Building Blocks – A platform that does interoperability and flexibility since before they became buzzwords would be classified as helpful. A 100% heterogeneous platform makes multiple complex scenarios like reporting or orders or KYC available through simple APIs. Mutual fund related building blocks form the Platform as a Service model, which powers companies to build their customer experiences with friendly APIs for whatever they deem as an immediate business need.
  • Security – The security layer built as a part of SEBI recommendations and regularly evaluated by government regulatory bodies helps customers quickly become compliant with whatever new security, data privacy and regulatory concerns they could be faced with. And if customers choose to enter new verticals like insurance, so the flexibility that comes with already being compliant acts as a huge shortcut for time to market.
  • Scale – As an example, a platform processing ₹ 163,00,00,000 in just a few months is a leading indicator of the ability to handle large volumes. And the deep investments made in this space having a common framework for KYC, order management, ledger, payments, and reporting usually morphs into a common development model applicable to all customers. A helpful platform would have taken into consideration all of this and been built from the ground up with open source and scale in mind.
Platform as a Service (PaaS)

Summary

For many financial companies serving investors today, the best part of the story is that they are in the opening chapters of the mutual fund book. While companies who have made the monumental mental shift from being just a distributor to a fintech player are lapping up the rare full-fledged platforms available in the market, the bullish part of the story is that the opportunity to delight end customers is never-ending. Hence, the most investor-centric platform will not just help its customers or their end customers, but will also help the mutual fund industry gain a significant upside through increased adoption.

References

  • Conversations with fintech companies
  • Forbes cloud columns
  • Cafe mutual columns

Are cognitive biases killing your bottom lines?

Let’s take a look at a brief history of mutual funds – 

 

 

Now, let’s take a look at the true meaning of the following words – 

Probability values for words

 

If you are reading this as a distributor or a registered advisor or someone looking to kickstart their journey into the mutual fund business, your mind would have ventured into the range of probably to very likely. That is, you would have perceived the above historical changes to create a 60-90% chance of a downside to your business. Which brings me to an interesting nugget about biases with regards to mutual funds.

Cognitive Biases

Cognitive bias is a systematic error of perception within one’s environment. Our environment shapes our observations, the data we absorb from it and the insights we try to derive from it. Which is how different biases seep into our minds and distort our realities.

Your brain’s perception of mapping the above regulatory changes to a 60-90% negative outcome for your business is a cognitive bias respectively.

Now you might be wondering; “All this sounds fascinating, but how is it killing my business?”

Confirmation Bias (The domain perspective)

What it is? The tendency to only listen to information that confirms one’s preconceptions, which makes it difficult to have a fresh view. Or in some cases, a meaningful conversation.

What are the biases? They are as follows – 

Bias 1 – The above three changes will –

  • Bring my business down / reduce the potential to increase AUMs
  • Force me and other distributors to change our business models
  • Increase entry barriers for new distributors to get into the industry

Our take

  • SEBI’s focus over the last decade has been the retail investor
  • A recent analyst report released an astounding figure of ~98% of the retail investor population still being untapped.
  • New investors are comfortable with digital investments and are open to advise through robo-advisors as well as a combination of offline advice + online investment.
  • A few distributors cannot capture the entire ~98% population, especially in the present scenario of offline businesses or of poorly architected technology systems that pitch themselves as platforms but are purely basic transaction management systems.

Entry barriers have progressively reduced with the above factors. Distributors armed with scalable technology and a great customer experience are the ones that will be able to survive in this market.

Bias 2 – Economies of scale is with AMCs as they control the expense ratios and other costs.

Our takeEconomies of scale lies with distributors and advisors, as they are the ones in touch with the customer.

Bias 3 – AMCs will continue with the existing junkets and rewards

Our take – AMC reward programs for distributors will also undergo changes based on incremental AUM instead of net assets, falling in line with full trail commissions. Thereby propelling a focus on bottom lines instead of commission based top lines. This again pinpoints to focusing on better investor experience in order to increase AUM and create a win-win situation for all.

Industry speak – 

Mr. A. Balasubramanian, the CEO of Aditya Birla Sun Life AMC Limited and Chairman of AMFI recently mentioned in an event that SEBI has been slowly moving the needle from the manufacturer to the distributor to the investor respectively.

Bandwagon Bias (The technology perspective)

What it is? The probability of a person adopting a belief increases in direct correlation with the number of people who hold the belief. It is a powerful form of group thinking. Also referred to as herd mentality.

What is the bias? The tendency to use commoditized basic transaction management systems.

Our take – Ask yourself the following questions –

Q – Do I specialize in platforms?

Why would you want to spend the time, energy, and labor necessary to manage a team of platform techies when a platform as a service is already providing great turn-key functionality to your business? Also, why would you spend energy on this effort when your focus is on figuring out market movements and advising your customers.

Q – What level of control do we need on our software system?

At any level of business operations regularly used by organizations, the best way to maintain control and security will actually be to outsource to platform experts who understand how to secure a platform in today’s VUCA (volatile/ uncertain/complex/ambiguous) universe.

Q – Who are our customers?

  • Digital savvy, more so after the Jio effect.
  • Willing to go online through micro-investments

Q – How much money do we want to spend on building a platform?

Rather than focusing on managing hardware (cloud-based computing) or building your own in-house platform, you can focus your income on purchasing an intuitive platform to host your customer-facing application and let the platform manage the underlying complexities.

A pay as you grow platform is the most suited for such offerings.

Q – How much time do I want to spend on deploying the platform?

It takes time to design and ship any platform which is solving diverse complexities into API’s.

The better question to ask is – how much time do you want to spend building the foundation of your software rather than actually building your customer-facing application?

An outsourced PaaS will give you the foundation to build your application without the wait around to finish your own platform.

Q – What does success mean to me?

You can use a high-quality PaaS offering to distribute your funds, make recommendations, and scale through an efficient and affordable solution. While you can focus on your relationship management, advisory efforts and other acquisition and conversion related problem statements. This is what success could mean to you, using the best of your team and the best of others to create an incredible solution for your end customers.

Industry speak – 

To quote Mr. Suraj Kaeley,  President – Sales & Marketing at UTI Mutual Fund,

It is crucial to create a low cost model or bare bone business model targeted at cost conscious investors. Leveraging technology and/or platforms are an absolute must in today’s day and age. The margins would drop and building volumes would be crucial. Fixed income products coupled with technology could serve as an ideal tool to build the core business for the distributor / IFA.

Survivorship bias (The friendly API perspective)

What it is? – Errors that come by focusing only on survival, causing misjudgment of a situation. And avoidance of the long-term market scenario.

What is the bias?

  • Build our own instead of subscribing to a platform
  • Use a product that only handles basic transactions management and figure out the rest when customers complain or worse still, when customers drop out of your application.
  • Think about all of this only when the offline business or poorly architected online business begins hitting issues with scale and growth.

Our take

Ask yourself the following questions –

  • Are you only interested in doing this business for the next 1-3 years?
  • Do you also wish to expand into other verticals like Insurance, bills (based on BBPS), etc?
  • What is your end customer, the investor looking for?
  • What if you could offer a holistic one-stop shop for any financial instrument for your customer?

In order to answer the above, we would suggest you ask a different set of questions to a platform offering –

  • Is the platform built by an experienced team of product and engineering professionals? Has the team served any other key companies in the mutual fund/finance industry?
  • Is the platform team focused on their own profit margins or on solving my problem of serving investors better?
  • Are the APIs friendly, that is, are they robust, RESTful based that any small development team can begin using?
  • Is the platform capable of handling more than 1 lakh transactions a day?
  • Does the platform have unnecessary costs or does it offer me the flexibility to choose whatever I need for my business in my current situation?
  • Has the platform failed at any time?
  • How soon can I get started on using the APIs? Does it require some complex setup to be initiated for my development team?
  • Can I close my development in three weeks? That is, can I start offering my application to customers in 3 weeks?
  • Do I have the flexibility to use my own technology team or hire any development agency I deem fit a? And can I build my customer facing application using any programming language/technology stack?
  • Do my investors get insights into their portfolios through capital gains, XIRR, etc?
  • Do I get insights into my business through MIS reports without the headache of calculating them on a daily basis?
  • Am I restricted by the platform or can I use my own creativity to come up with an awesome customer experience for my investors?

Summary

There are close to 20 identified cognitive biases which the human mind has to deal with. It takes vision, critical thinking and customer centricity to overcome the same. This effort directly correlates with utilizing the already reduced entry barriers and serving the untapped ~98% through a platform-centric approach. The only way to overcome the above biases is to ask yourself the above questions. And hopefully, they shall help you figure out the right path not just for your technology / platform choice, but also your distribution business and your customers respectively.

References