On the face of things, shoppers being able to buy mutual funds online—Sebi chief UK Sinha has just cleared this—appears to be natural progression for the fast-growing e-commerce business which began by selling just books and music not so many years ago. In reality, it is the new face of financial innovation in India, based on the Aadhaar platform as well as various other government initiatives—it represents a dramatic fall in the cost of acquiring customers and, as a result, will completely change the dynamics of the industry. Till now, the cost of acquisition was high because the front-end required both an in-person KYC and a physical signature of the person buying the mutual fund. With Aadhaar for online identity verification, e-sign for a digital signature and NPCIL’s unified payments interface, mutual funds can now do their authentication online, and can therefore cut costs of distribution dramatically. As Nandan Nilekani, who heads the Sebi committee on this, points out, if the cost of acquiring a customer is Rs 1,500, you need a mutual fund portfolio of at least R3 lakh for it to be profitable for the mutual fund—that, in turn, reduces the target market to around 3-4 million households. If acquisition costs can come down to Rs 100, you need a break-even portfolio of Rs 20,000 and can now target 34 million households; at R10, the break-even is Rs 2,000 and the target is 105 million households.
This revolution applies not just to mutual funds, already a Rs 13 lakh crore industry, but to other financial products like insurance as well—the sector can move from a low-volume, high-value, high-cost transaction paradigm to a high-volume, low-value, low-cost transaction paradigm. In the case of crop insurance, for instance, while Aadhaar-NPCIL will facilitate low-cost enrolment, a national network of automatic weather stations, satellites and drones will allow payments to be made quickly, directly into the Jan Dhan accounts of farmers. India’s quest for financial inclusion just got a big boost.