Why financial entities become customer unfriendly as they grow in size
Posted by: Uma Shashikant on Apr 17, 2017, 06.30 AM IST
By Uma Shashikant
The horror story of a decomposed bat found in a packed bag of salad leaves at the supermarket made news recently. I grow vegetables in my backyard, and having just harvested radishes that still hold earthworm babies, I can only feel sorry for the bat and the grocery chain. We believe it is expensive, impractical, time-consuming, risky and even primitive to grow our food. We do not bother about it because an entire industry is around to serve our needs without us having to dip the tip of our toe in dirt. Then the bat turns up dead and we wonder what went wrong.
An early lesson in economics is about the economies of scale. Division of labour and specialization bring down costs so that a large quantity can be produced and sold to a large number of people. The pursuit of this idea has many businesses aspiring to become big.
While they begin with an idea that solves the prospective customer's problems, as they grow and develop into specialised businesses-big, efficient, and profitable- the customer ends up with standard salad bags. I feel our financial lives too are made up of dead bat moments that have not captured our attention.
A bank could remain a local operation, enabling people to deposit money and offering loans when they need it. The locals identify with the manager and trust him, since he keeps their money and offers them loans at a reasonable cost and at short notice. But then, the bank is unable to meet customer needs and be profitable at the same time. It thus expands its customer base to include more people. Then it offers several types of loans to this base of customers. It expands.
Soon enough there are systems, processes and procedures and its many employees do specific tasks. There is nothing local about the branch. Customers are kept away from the branch as it is cost-effective. Customers use ATMs, Internet banking and phone banking, and if they call the bank they are directed by an automated voice response system.
KYC is a mechanised and centralised process, and the local manager may not even know his customer by face. This system is seen as modern, cost-effective, efficient and fair. It is not difficult to imagine how such a process has taken over several goods and services we consume.
The trade-offs are many. Those who do not meet the pre-defined criteria do not get loans. Farmers continue to borrow from the usurious moneylender who meets the need for cash during the sowing season.
They also end up steeply discounting their produce at the APMC yard for immediate cash while selling their harvest. The “system” cannot accommodate those who have need for credit that does not neatly tie in with the bank’s goals for growth and profit.
The urban customer pays the price too. The changing terms of a floating rate home loan, the high rates on the credit card which is not different from an unsecured personal loan, or the not-so-innocuous services charges are all prices paid for large scale business that sell salad packets. It is just that many customers are too busy to open the mail from their bank to discover the dead bat.
Consider the insurance business. Risks that seriously affect an individual, but do not affect a large population simulataenously, can be covered, if the members of that population are willing to pay a small premium. The burden of loss of life, property and health is substantially reduced. Pursuing a large number of subscribers is required for this business.
Thus in pursuit of size, a large army of agents who solicit the business of insurance from members of the public are engaged. As it grows and finds that it has corpus that provides it power, it begins to use this strength of being able to invest large amounts, to lobby for special privileges.
Soon enough, tax concessions for its products are earned, and more and more product variations are pushed into the market, where people pay premium not because they want to manage risks, but because they want to save tax and an insurance agent is at hand to complete that purchase.
We have a selling machine to push a large number of low return investment products disguised as insurance. Many buyers do not even add up the premia they will pay for the promised lump sum far into the future. They don't even know there is a dead bat in their portfolio.
We cannot begin to speak about the broking business and its online trading platforms. There was a time when buying and selling stocks happened in a closed club, where outsiders could not figure whether they were getting a fair price.
In the interest of fairness, equity and liquidity, we built an electronic exchange for trading securities. The costs dropped, volumes zoomed, stock markets got democratized, and tickers showing the traded prices on real-time basis are now ubiquitous.
The low costs and easy access should have ideally made the middle class look up the opportunity equity investing offers in an emerging market like India. In a country of our size, equity ownership remains indescribably small. What we got instead are housewives who trade stock futures after sending kids to school.
Trading accounts have made broking houses rich from the frenzied transactions of millions seeking the elusive multi-bagger. In the ups and downs of the market, stock picks routinely go bad, but this crowd thinks dead bats is part of the deal.
Stories about people being bored with their jobs run along with wide-eyed enthusiasm for big data that will convert all our actions into traceable data points to be used to sell more stuff to us.
We still do not know what the future holds, but we do know big businesses that sell "healthy" salads are influencing who grows what, using fertilisers to deliver the perfect leaf, chemicals to control pests, growing cold season salads all year, and picking and packing them to retain moisture. We celebrate all of this as signs of progress, modernity and development. Ironically, we are also shocked when a poor bat finds his way in.
(The author is Chairperson, Centre for Investment Education and Learning.) This article appeared in Economic Times dated Apr 17, 2017, 06.30 AM IST