Third Party Products by banks Challenges & Prospects in Insurance and Mutual funds

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1 Third Party Products by banks Challenges & Prospects in Insurance and Mutual funds Author s Name & Address Ms. Joby Joy Assistant Professor SCMS Cochin School of Business Cochin Abstract: The banking industry in India has grown tremendously. The banks in our country now deal with third party products such as Insurance and Mutual Funds and have diversified themselves into a large arena of operations. This indeed has enabled most of the banks to strengthen their relationships with the customers. This research focuses on a detailed study on the various fee based third party products offered by one of the leading private sector banks in Chennai Region. Through this research, an analysis of theperceptions of various customers towards the fee-based third party products and the major impediments as well as avenuesin the sale of third party products has been carried out. The banking industry has been constantly evolving and this research can be applied to a large extent in the banking industry as majority of the banks in our country do offer fee-based third party products apart from the traditional banking products. Keywords Third Party Products, Insurance, Mutual Funds Introduction As the changing era has brought in a new outlook into the field of banking, these daysvarious value added products and services are being offered bythe banks to its customers to attract them and to induce them in staying with the bank. It has actually changed the outlook of the banking activities and has given a new appearance that has indeed been the factor or a pulling force in attracting the customers. This research focuses on the various fee based Third Party Products that are offered by the selected bank. These products includemainly the insurance products and mutual funds. This research involves a detailed analysis of the reasons or preferences of the customers for accepting the products and also their non-preference along with various reasons obtained through the survey. Research Methodology This research aims at analyzing the various fee based Third Party Products that are offered by one of the leading private sector banks in Chennai region. The major objectives of the research are; to evaluate the awareness levels of the customers with respect to the Third Party Products to identify the factors considered by the customers prior to the purchase ofthird Party Products to study the preference levels for Third Party Products by various age categories of customers 645

2 Here, as the research problem is clear and specific in nature and as the problem has been clearly stated a conclusive research has been carried out. Under conclusive research, descriptive research design is used as the problem is crisp, solid, definite, specific and well defined in nature. A comprehensive and detailed explanation of the phenomena under study has been carried out through this descriptive research. The sample includes the customers who possess an account with the bank. The sample size of the study that has been undertaken is 100 customers. The major sources of data collected are primary and secondary data. Primary data has been collected witha structured questionnaire by conducting a survey amongst the customers who hold an account in the bank. The other sources of primary data collected are by interviewing the staff at the bank.a little amount of secondary data was also collected from magazines, portals, and websites of the company. This has helped in obtaining the nature of various products and the features that have been included in each of these products. The sampling technique that has been used in order to carry out the research is convenience sampling method whereby all units get an equal chance in getting selected into the sample. A detailed analysis has been done in this research by studying the various fee based Third Party Products that have been offered by the bank in targeting its customers. The bank offers third party products broadly on two categories, namely, insurance and mutual funds. Data Analysis and key findings Third Party Productsrefer to those products that are sold by a bank for some other institutions. Here the bank receives revenue on the sale of these products in the form of commission. The fee based third party products offered by the selected bank are insurance and mutual funds. i. Awareness Levels about the various Insurance Products CHART 1 646

3 The above graph shows the awareness level of different customers towards different fee based Third Party Products offered by the bank. Out of the above five products offered, the product which majority of customers are aware of is the retirement plans, followed by the mutual funds and health insurance plans. The customers are more aware of the retirement plans as majority of the people are aiming at a safe and secure future. ii. Preference for difference insurance products among different age category CHART - 2 The above graph represents the preference for different products by the customers of various age categories. From the graph, it can be interpreted that the respondents of the age category prefer health insurance plans as they are more health conscious. The age category of and prefer retirement plansmore. The main reason for the preference of retirement plans by this category of people to provide security to the future. Awareness levels about the insurance products and the purchasesdone Is there any interrelation? On further analysis with respect to the respondents awareness levelsabout various insurance products and the purchases done by them, it could be identified that though majority of the customers are aware about the retirement plans, the purchases done are not much. As retirement plans aim at future benefits, the premium incurred is on a higher side, which many cannot put as an investment. Many are aware about mutual funds also but the investment in this case too is less. 647

4 iii. Factors considered before purchasing insurance CHART - 3 From the above chart, it can be inferred that within the age group of 20-30, a large majority considers the factors life coverage and rising health expenses before purchasing an insurance product. While in the category of 30-40, a large proportion of people consider the factor relaxed retired life feature. Same is in the case of the age group of 40-50, a small number of people consider the factor relaxed retired life again as they are concerned about the uncertain future. iv. Type of account holders and insurance product preferred 648

5 CHART - 4 The above figure gives a diagrammatic representation of the types of insurance products purchased by different account holders.term insurance plans are mostly purchased by the people who possess normal savings account. Those who have NRI account prefer child plans more, whereas Health Insurance plans and retirement plans are mostlypurchased by customers who have normal savings account. v. Mutual fund investment preferred CHART - 5 The above graph shows the different combinations of mutual funds that are offered by the selected bank and the combinations preferred by the customers. Among the three types, i.e equity, debt and the combination of both, majority of the customers prefer a combination of both since the risk is proportionate and also owing to the probable better returns on the investments made. vi. Factors considered before investing in mutual funds 649

6 CHART - 6 The above graph represents the various factors considered by the different age categories of people before making an investment in mutual funds. The age group of considers tax benefits as a very important factor whereasthe age group of considers the factor of reduced risks as important. The age group of too considers the factor reduced risks as they are at the age of retirement and hence do not prefer to take up large volume of risks. vii. Type of account holders and preference towards mutual funds 650

7 CHART - 7 The above graph shows the types of mutual fund investments made by the customers who possess different types of accounts. From the above graph, it can be inferred that with respect to investment in equity, it is the NRI account holders who invest more. The privilege account holders do the majority of investment in debt whereasthe combination of both is preferred mostly by the NRI account holders. What more may be considered to make Third Party Products attractive The fee based Third Party Products that the bank offers to the customers is highly beneficial as the customers can get their work done by simply visiting a bank branch and as far as the bank is concerned, it generates large amount of revenue. Besides the traditional banking business in which margins are becoming lesser, it is advisable for the banks to judiciously market the Third Party Products, such as insurance and mutual funds. For many of the customers, ease in buying the Third Party Products from the banks coupled with the trust factor towards the banks prevent them from doing too much of premium comparisons. They normally choose to purchase all the available financial products from their bank itself, rather than shopping around at different places. Nevertheless, when the bank is unable to provide Third Party Products to its customers, they would definitely purchase it from the others. It is indisputable that the Third Party Products become attractive when the costs involved are low.the Relationship Managers should be given incentives in order to motivate them to bring high volumes at low costs.in general, thebank employees are more service oriented.this marketing culture for Third Party Products can spread onand can build a new sales orientation in the banks. The trainings given to the bank employees should not be limited to thesales aspects. Thrust on the procedural and technical aspects focusing on post purchase servicing should also be given to facilitate customer retention. 651

8 From the research it could be identified that though the awareness levels about retirement plans is more irrespective of the age category, when it comes to purchase of products, it is not preferred much. It could also be found out that there is a strong relationship between the age of the customer and the nature of the insurance product preferred. Another major issue to be addressed is with respect to the minimal purchase in insurance by the senior citizens. Appropriate steps can be taken by the bank to cater to that category too.in the mutual funds sector, the bank generates less business. It is imperative for the bank to probe more into the areas of concerns and to devise prudent promotional activities to improve the business volumes. Conclusion The demands of today s customers change rapidly. They look for flawless multichannel sales and services from the banks, which in turn force the banks to go for a more balanced and integrated approach to position their Third Party Products as value addition for their customers. The customers expectations from the bank are mainlybased on how this proposition is structured.the success of Third Party Products depends on whether those are feasible enough to generate sufficient revenue that justifies the costs involved. The research undertaken reveals the challenge for banks to transform to a model that focuses more effectively on the customers requirements, identifying that theymostlydiffer across various segments. Many banks in our country doventure to such new opportunities, but the industry as a whole needs to be open to cater to the needs of a more challenging and assorted customer base. Bibliography [1] How banks can improve third-party product distribution, economictimes.indiatimes.com [2] Alexandre, C &Redcliffe, D. Regulating New Banking Models that can Bring Financial Services to All, Bill & Melinda Gates Foundation, [3] DeYoung, R and Rice, T (2004), How do banks make money? The fallacies of fee income, Federal Reserve Bank of Chicago Economic Perspectives, Vol. 28 QUESTIONNAIRE APPENDIX Name:.. Marital Status: Single Married 652

9 Occupation: Business person Professional Self- employed Student Housewife 1) What type of account do you possess? Normal savings account Privilege account NRI account Fixed deposit Recurring deposit 2) Are you aware of the following investment products? Products Awareness (Yes/ No) Invested (Yes/ No) Term insurance Children plans Retirement plans Health plans Mutual funds 3) How frequently do you invest in various products? Also, specify the type of investment which you do usually. Weekly Monthly Yearly Rarely Never Type of investment(s).. 4) Which type of insurance product do you prefer? Term insurance Retirement plans Children plans Health insurance I don t prefer Reason. 5) If you have availed an insurance cover, please specify the factors considered by you before purchasing the same. Attributes Life cover, Protection against rising health expenses Financial security for family Planning for Children s education Planning for Children s marriage Very much important Important neither important nor unimportant unimportant Not at all important 653

10 Planning a relaxed retired life Long-term investment Tax Benefits 6) Which mutual fund investment do you prefer? Debt Equity Combination of both I don t prefer Reason... 7) Factors generally considered by you before investing in mutual funds: Attribute Very much Important neither unimportant Not at all important important nor important unimportant Reduced risks Affordability Tax benefits Convenience and Flexibility 8) Feedback or suggestions... Author s Profile The author is an Assistant Professor at SCMS Cochin School of Business and also a research scholar at Bharathiar University, Coimbatore. 654