Change in India, and What it Could Mean for U.S. Financial Services Firms
Posted by Jim Eckenrode, executive director, Deloitte Center for Financial Services, Deloitte Services LP, on March 26, 2014
A major theme across our recently-released 2014 financial services Outlooks series is that the industry is shifting back into growth mode, but doing so under much tighter regulatory control and heightened client expectations. These factors are likely to challenge firms to double their efforts at finding creative ways to not only capture market share, but also expand into new product offerings and markets. Where can they look for inspiration?
I recently spent some time with my colleagues in India, and thought I'd share a few observations and trends gleaned from my visit, and what they may mean for the financial services industry more generally as it emerges from the effects of the financial turmoil of the past. It's important to mention that these observations are but scratching the surface of what's happening in this very diverse and rapidly changing country, given the brevity of my visit and the fact that I spent time only in Mumbai and Hyderabad, and not in the rural areas which are going through their own changes. With that said, I'm fairly confident that the contrasts I see are in line with India's rapid development and the increasing shift of its workforce into the services economy.
It might be good here to set a baseline: as many readers will know, India is the second-most populous nation in the world, and is expected to be the most populous by 2028, according to the United Nations.1 Among India's some 1.2 billion people are many cultures and languages, mixed between urban and rural populations and spanning the wealth and income scale.
To the latter point, we have heard much about the growth of the middle class in India. Estimates vary on its size, but there seems to be general agreement that it is growing rapidly, and therefore suggestive of profitable opportunities for multinational corporations of all sizes. Some context is needed here, because it's important to understand what "middle class" means in a developing country such as India. A recent study indicates that the middle class there can be measured by a per-capita consumption (daily spending) rate for all needs, which currently stands at anywhere from $8 to $40 per day.2 Even at that comparatively modest level, the latest consumer gadgets are quite popular and selling well.
As an example, many of the slum areas in Mumbai are seeing redevelopment on a massive scale, and according to some I've spoken to there, many slum dwellers' properties are relatively worth a good bit of money. While they wait for the developers to come, one can see in these slums a veritable forest of satellite dishes, affording these populations access to the latest entertainment from Bollywood and the world. How is it that individuals living in what appear to be such dire conditions have the wherewithal to afford satellite TV?
The reality is twofold: many living in slums do have jobs or businesses of their own, and I understand that a number of these residents may even own other properties. So some of these populations very likely reside within the middle class, as defined above. The second factor is pricing: loyal followers of our research may recall that we produced a study examining trends in consumer acceptance of retail-bank pricing strategies in the United States. One of the findings from that study was that survey respondents preferred transparency in pricing: almost a "pay-as-you-go" model.
So it is in India with television services. Many have converted from cable to satellite, which offers a consumption-based, rather than a subscription-based model. It is the same with online services: a new pricing plan for internet access offers access to individual online properties (or apps) priced by usage. As an example, one may pay 50 paise (or one half-rupee) for an hour's access to Facebook, or one rupee for a full day.3
Another example of how change is manifesting itself in India is in regard to life insurance. India has traditionally been a country with high household savings rates, and for many years, life insurance products were primarily used as a savings vehicle rather than for protection. With the modernization of the country, traditional family living arrangements across multiple generations, referred to as "joint families," are breaking down. As a result, there has been a shift in the value perception of life insurance products, to policies that provide a needed safety net in the event of injury or death, something the extended family formerly provided.
How can U.S. financial services firms profit from these examples? As stated above, the industry is beginning a return to growth mode, but the need for creativity has rarely been greater, and oftentimes good ideas can come from outside our market, where the challenges are frequently much greater.
My visit to India has taught me that if one is able to develop a valuable product or service, it's surprising to see how individuals will find a way to buy in. Another lesson is that flexibility and transparency in pricing can be key. Meeting the customer at their ability to pay and perceived value-for-price are imperatives, and an entirely different product configuration and pricing model may be required. Finally, given the accelerating pace of change in society — and not just in India — it's equally true that demographic shifts of all kinds create opportunities for financial services providers. As these changes happen, the perceived value and utility of existing products may change as well. Will domestic firms be ready to innovate to grow the size of the market and expand access to financial services?
1"World Population Prospects: The 2012 Revision," United Nations, Department of Economic and Social Affairs, Population Division, 2013.
2Christian Meyer, Nancy Birdsall, "New Estimates of India's Middle Class, Technical Note," Center for Global Development, November 2012.
3"Access FB and WhatsApp at Rs. 1 Each a Day with Uninor," advertisement in The Economic Times, 2014.
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