Intermediation is getting disintermediated

Rajesh Krishnamoorthy, MD, iFAST Financial, does some crystal gazing about the implications of the sweeping changes in the distribution space and what it means for distributors.

In the recent past, the debate between commissions and fees, distributor and advisor has been pretty intense and noisy. Rightfully so, because the intermediation that we have been seeing for many decades in India is in the process of getting disintermediated. Well, this is not a doomsday theory for intermediation. We have some very interesting scenarios that can play out and at the end of the day, shake up the established structure in the financial landscape.

Let us understand disintermediation in a little more detail. Disintermediation, in economics, is the removal of intermediaries in a supply chain or “cutting out the middlemen”. One of the primary reasons for disintermediation to happen is due to high market transparency, where buyers get enough information to buy the same product cheaper.[1]

Let us go back to 2009 when we saw the first such initiative (what media calls “daring”) from Aegon Religare when they launched the online term plan and highlighted through every possible advertisement or communication that it is the cheapest product in its category.[2]  About a year later, their CMO, Yateesh Srivastava and I happened to be on a panel discussion and the insights he shared were quite astonishing! Do take a minute to read his comment on Standardisation. “…If you are talking about the charges associated with insurance products, why should two absolutely similar plans have allocation charges ranging from 10 per cent to 85 per cent?...”[3]  Cut back to present, you have the very same company talking about strengthening their online basket even further with what is touted to be “nextgen” online insurance plans.[4] 

Talking about CMOs, it brings me to the next reference point. End of 2011, there was a very interesting post by Christine Moorman talking about the results of a survey with CMOs about their companies going directly to customers.[5] While she did have a word of caution to the companies who planned to go direct to the consumer, the point I am trying to drive is that disintermediation was high on the radar of CMOs well before 2009!

Disintermediation takes place in varied businesses.[6] For those who are familiar with Natixis (their AMC arm is IDFC AMC’s strategic partner) they came out with this interesting note which explained how banks in Europe started to lose out on corporate financing due to disintermediation.[7]

For those who have been following Elon Musk and some of the groundbreaking stuff Tesla has been doing, they sent a strong message to the American Car Dealerships and said they were going to sell direct to the consumer! The car distribution lobby has been using law makers, court rooms and the such to defend their business interest by proving that customers would benefit by having Tesla cars sold through dealers. Their arguments received a good pounding and it’s visible in the Harvard Business Review’s crisp article. [8] This is a seminal piece in my view. A very important homework I would have for you is to look at the four bullet points in this article and ask yourself, do you add value to your customer in your present form?

For those who are now getting a drift of where this is moving, I would further encourage you to spend half a day reading this piece from the baffler. I particularly liked the view “This growing trend suggests that disintermediation is the next arrow in Silicon Valley’s quiver” [9]

Having come this far, it is time I dived into India and mutual funds.

It is now a known fact that SEBI has given its blessings to the industry to share information about transactions and holdings of customers with intermediaries after taking customer consent. This will soon see a flurry of business models that will emerge, challenging the bedrock of existing intermediation – who is your paymaster?

I will soon follow this with a framework for you to use in your decision making on where your business should go from here. Before you immerse yourself in such an important decision of your professional and business life, take a minute to remember the great Gretzky – the wonder boy from Canada who was one of the greatest players of the game and who later went on to coach their ice hockey team “That’s all hockey is: open ice. That’s my whole strategy: find open ice.” [10]

The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.