Fidelity Mutual Fund, which started its India operations in 2004, recently announced its decision to quit the Indian Mutual fund industry. L&T Finance, a subsidiary of L&T Finance Holdings Ltd., is likely to acquire Fidelity’s India business. The new entity is likely to have a 2% market share and 13th position in the industry in terms of asset base. This will be L&T’s second acquisition in this market after the acquisition of DBS Chola Mutual Fund in 2010. India’s mutual fund industry has witnessed many such exits by market participants at different points in time, but this is perhaps the most high profile case of an internationally established major player deciding to shut down its India operations.
In India the mutual fund industry has been heavily dominated by the corporate segment, unlike other countries where retail investors account for most of the industry assets. Fidelity had a very high proportion of its business coming from the retail and the HNI segments. As a result equity investments accounted for bulk of Fidelity’s assets as the focus was on meeting clients’ long term financial goals. Therefore the Fidelity L&T deal has been priced much higher (5-6% of asset) as compared to other such deals in the Indian industry which are usually valued at 1-3% of assets under management.
Fidelity’s decision to quit the industry comes in the backdrop of its accumulated losses, driven mainly by a high cost structure. In 2010-11, the company’s staff cost grew around 50% over previous year and was around 90% of its revenue, while staff cost accounts for only 13% for some of its competitors in the  industry.
This decision has once again brought to the fore issues relating to the regulation of India’s mutual fund industry and its impact on firms’ profitablity. Many argue removal of entry load and limiting payment of upfront commision to distributors (to prevent misselling of products) is hurting fund houses’ ability to sell more and grow the top line at a time when costs are rising rapidly. At the same time it needs to be said that a recent study found that ‘among 15 of 46 AMCs operating in the fund industry, which collectively manage 85-90 per cent of the entire industry’s assets und­er management,10 large AMCs registered net profit in FY11 and 12 AMCs had positive accumulation of net profits over the years till FY11′.
This then raises the question if the Indian Mutual Funds industry is more favourable to the larger players and what is the critical asset base a fund house must garner to break even or become profitable, especially in the changing economic scenario. This also raises the question if the new regulations are affecting the smaller players more than the larger players.
In this evolving scenario when growth has been hit, regulations are changing fast and firms are increasingly finding hard to stay competitive, some Indian fund houses are looking to partner with global players to attract global funds, investors as well as expertise. In such arrangements, the local expertise of domestic firms complement the supeerior knowledge and capabilities of global partner to create a win win strategy for all.

The Indian capital markets regulator, SEBI, is talking reforms as it recently announced a blueprint that is potentially set to increase competition among exchanges. The regulator’s stance on increasing competition and allowing foreign investment in exchanges was closely anticipated in recent months, especially among large global banks. SEBI had to address pressing concerns on attracting foreign investment (Figure indicates the drastic fall in FII inflows into India in 2011) and failing to keep pace with developments in global capital markets.

The new move by SEBI has cleared the way for listing of stock exchanges. This decision comes after an expert committee headed by former Reserve Bank Governor Bimal Jalan submitted its report in 2010 on governance and ownership issues relating to market infrastructure institutions. While SEBI has broadly accepted the recommendations, it has gone ahead with the move to allow public listing of exchanges despite the committee recommending against such a move on ‘conflict of interest’ grounds. The blueprint indicates that public holding of exchanges should be at least 51%, while exchange operator, banks and insurance companies are allowed to hold up to 15%. Foreign investors are allowed to hold up to 5%. Exchange operators, however, would not be allowed to list on their own exchanges.

SEBI is watching developments in global capital markets closely. The developed markets in US and Europe are far ahead in terms of maturity of market infrastructure, while India is yet to reach a stage where alternative trading venues can compete with incumbent exchanges. The NSE started in 1994 to compete with the then singly dominant exchange, BSE. But ironically the NSE has today itself become what it set out to defeat, accounting for close to 75% of equity volumes. The attention is on regional exchanges to play more aggressively. With an intention to infuse more competition, the regulator has warned that dormant exchanges that are not attracting liquidity would have to be wound up. SEBI has stipulated a minimum annual trading volume of INR 1000 crores for exchanges to continue operating and the same would be reviewed after 3 years. While we see it as a timely warning bell, it is not enough. We have to wait and see how SEBI looks to empower and encourage regional exchanges. The Delhi Stock Exchange has already woken up to the competition by following in the footsteps of LSE in upgrading its IT infrastructure by partnering with MilleniumIT, a technology player which provides ultra-low latency trading solutions. The debate in ongoing in the case of clearing houses and the regulator is expected to come out with its view soon on having a single clearing house versus introducing interoperability. Although it appears that policy challenges facing SEBI are similar to those faced by regulators in developed markets in the past, and despite indications that SEBI is trying to align with developed markets, we should be careful while concluding that the Indian regulator would eventually follow in the footsteps of US and Europe.

India’s Multi Commodity Exchange (MCX) is going for IPO starting tomorrow (22^nd February). This development touches on a range of issues pertaining to the Indian capital market and regulations that Celent has been discussing for some time.

First, pricing of IPOs has been a cause for concern for many market players and also the capital market regulator, Securities and Exchange Board of India (SEBI). In the past SEBI had expressed its displeasure regarding overpricing of IPOs in a number of cases and asked the underwriting banks to be more prudent regarding IPO pricing. To protect investor interest, SEBI last year proposed that underwriting banks must disclose to investors the performance and track records of their earlier issues in their prospectus and on their websites. Consequently, the merchant banks (Edelweiss, City and Morgan Stanley) involved in the MCX IPO have all publicly disclosed their track record. The past details (IPO size, listing price, comparison to movement in benchmark indices for different periods for individual IPOs) are made available in the IPO document as well as on the websites of the merchant banks.

Second, this is the first IPO of the year in India and is eagerly watched, after a lackluster 2011 when companies raised less than 10bn US$ through share sales (compared to 24bn US$ in 2010). This is also interesting as MCX would the first Indian exchange to be listed. This may pave way for the other exchanges, though that is unlikely to happen in the near future.

Third is the case of transaction taxes. It is learnt that the finance ministry is considering imposing a commodity transaction tax (of 0.017%) in its budget proposal for 2012-13, initially on non agricultural commodity futures. The government had proposed commodities transaction tax before, in 2009, but this was not implemented because of objections raised from some quarters. India already charges transaction tax on equity derivatives. There is also speculation that this move will be coupled with a cut in securities transaction tax – the motivation behind this being boosting the cash segment and extending the scope of taxation to other asset classes.

Familiar arguments have been expressed from both supporters and opponents of this new transaction tax. Supporters argue this will raise revenues for the government and also check speculation in the commodity markets. Many have argued that speculation in commodities had significantly contributed to the rising food prices in the recent past and needs to be curtailed. Also it is argued that cut in STT will attract more investment to the cash market.

Opponents argue that this move will increase cost of transaction, reduce volumes at Indian commodity exchanges, result in migration of trades to international exchanges (commodities being global assets), reduce liquidity in Indian markets, impair price discovery and increase volatility. It has also been mentioned that some vested interests may be behind such move; the argument being bigger exchanges strong in cash segment are trying to grow their business at the cost of commodity trading business. This reflects the competitive landscape of Indian exchanges that Celent has discussed in the past.

Nomination for Model Insurer Asia 2013 is open. Nomination form on: http://www.celent.com/node/29673

Through our Model Insurer Asia Awards Program, Celent recognizes the top technology initiatives in the Asia Pacific region.

Past winners include Calliden Group (Australia), PICC Health (China), IndiaFirst Life Insurance (India), Nextia Life Insurance (Japan), Prudential Life Insurance Company of Korea, Baoviet Holdings (Vietnam), PT Prudential Life Assurance (Indonesia), Union Assurance (Sri Lanka), to name a few.

To find all names of winners for Model Insurer Asia 2012: http://www.celent.com/reports/celent-model-insurer-asia-2012 )

To find all names of winners for Model Insurer Asia 2011: http://www.celent.com/reports/model-insurer-asia-2011-case-studies-effective-technology-use-insurance 

Deadline for Nominations of Model Insurer Asia 2013: November 30, 2012.

For any inquiry, please send email to wyuan@celent.com

Hana Bank, well-known for being a smartphone banking pioneer in South Korea, launched a new digital wallet service called Hana N Wallet earlier this month. Hana N Wallet offers some new functionalities such as:
• Convenient money transfer without account number and troublesome public certificate key which Korean regulator requires to online financial trading users in South Korea.
Hana N Wallet 1 (P2P Money transfer)

• Cash Withdrawal at ATM with six digits after receiving SMS when someone sends money to the other.
Hana N Wallet 3 (ATM Withdrawal)

Hana N Wallet is designed for use with a smartphone. When consumer A sends money to consumer B through consumer B’s phone number, consumer B receives an SMS and a “cash nut” payment into person B’s Hana N Wallet.

What if person B doesn’t have Hana N Wallet in her/his smartphone? Just download it through the URL in the SMS!

The “cash nut” can be withdrawn at any Hana Bank ATM, without an ATM card. This is done by entering a six-digit number provided by Hana N Wallet.

People can use Hana N Wallet if they don’t have a Hana Bank account. Celent thinks that this service can attract potential customers and should lead to an increase in customer count.

Celent believes Hana N Wallet could bring a significant change for not only the Korean banking industry but the Korean payments market. If other banks launch similar services in the near future, the Korean digital wallet market will be more buoyed.

Hana Bank will launch other new services in a couple of months. Let’s wait and see how things go…

Celent held “Model Insurer Asia Summit 2012: Exchanging Ideas on Effective Use of Technology” on January 11 in Hong Kong. Insurance companies and solution vendors from Hong Kong, Singapore, Japan, China, India, Australia, Indonesia, Sri Lanka participated the event. 

What does it take to use technology effectively? Celent’s Model Insurer Asia award winners provide critical insights into this question. The Model Insurer components represent case studies on effective use of technology. Celent recognized insurers across a dozen or more categories in the second annual edition of Celent’s influential Model Insurer Asia Summit.

Celent analysts gave presentation on Asia insurance business and technology trends, previewed the “Model Insurer Asia 2012″ report, gave awards to 17 recognized insurers (you can find the list at  http://www.celent.com/reports/celent-model-insurer-asia-2012), share Celent insight on “Emerging technologies, Sustaining change in insurance organizations”, and conducted topical roundtables to give attendees an opportunity to exchange ideas. The event is very successful.

Celent will accept for next year’s Model Insurer Asia nomination soon. We’ll post it here when the nomination form is available online.

Following the hugely successful launch of the 1st Model Insurer Asia event last year in Singapore, Celent is going to hold its second Model Insurer Asia event next week on Jan.11th in Hong Kong. Insurers and vendors are welcomed to participate in this free event. Registration is required at http://www.regonline.com/builder/site/Default.aspx?EventID=1039793 

This year’s major presentations and events include:
- Wenli Yuan, Senior Analyst from Celent Asian Financial Services Group, will give a presentation on the trends in the Asia insurance industry, based on Celent’s annual CIO survey;

- Mike Fitzgerald, Senior Analyst from Celent Insurance Group, will introduce the Model Insurer Concept;
The vision for Celent’s Model Insurer research is to try to answer an apparently simple question: “What would it look like for an insurer to do everything right with today’s technology?” Of course, the question is not nearly as simple as it appears. The terms “everything” and “right” mean very different things to different insurers depending on their size, the complexity of their operations and product sets, and their technological starting points.
The approach Celent takes is to offer, at a high level, some key best practices in the use of technology across the product and policyholder lifecycle and in IT infrastructure and management that a “Model Insurer” would use.

- Neil Katkov, Senior Vice President, Celent Asia, will introduce 17 honored initiatives that have been selected as Celent Model Insurer Asia Components, and present awards;

Model Insurer Components are group the case studies and represent portions of the insurance value chain. The components represented in the Model Insurer Asia award are:
•Business Rules/Business Process Management
•Claims
•Distribution
•IT Management
•Marketing
•Policy Administration
•Product Design/Definition
•Reinsurance and Risk management
•Service
•Underwriting

- Mike Fitzgerald, Senior Analyst from Celent Insurance Group, will give a presentation on ”Emerging Technologies - Sustaining Change in Insurance Organizations”.

- Insurance Roundtable. General discussion with CIOs, CEOs, IT Managers, exchanging ideas on effective use of technology.

Don’t miss this opportunity to meet industry peers.

Register Now!

Hope to see you next week!

Thailand’s Insurance market is small but one of the fastest growing in the Asia Pacific region next only to China & India. The country is relatively underdeveloped both in terms of insurance penetration and insurance density as compared to some of the developing countries with in APAC region. Both insurance density (Thailand USD 199, world average USD 267 in 2010) and insurance penetration (Thailand 4.3 percent, world average is 11 percent) is considerably low.

Life insurance premium constitutes about 2.6 percent of GDP and non-life insurance premium about 1.7 percent of GDP. In Asia, Taiwan’s insurance market’s contribution is the highest accounting for about 18 percent of GDP, followed by Hong Kong, Korea and Japan contributing 12 percent, 11 percent and 10 percent respectively in 2010.

Growing number of young population, new pension policy and inadequate health insurance are some of the growth drives in Thailand’s insurance landscape.

 Life and non-life insurance in Thailand are mainly sourced by insurance agents. However, other channels, such as bancassurance, are quickly catching up. The number of insurance players in Thailand doubled from 12 in 1995 to 24 in 2009. As the insurance market is introduced to new players in terms of foreign ownership, capital requirements, and solvency ratios, it is likely to see mergers and acquisitions in the years to come. Thailand’s life insurance market is highly concentrated, with the top five life insurance players holding nearly 70 percent of market share, and the remaining 19 players fighting for the remaining 30 percent.

Thailand’s property/casualty insurance business (US$2.8 billion) is nearly 4 times smaller than the life business ($9.5 billion), which experienced negative growth in 2009 due to the financial crisis. Property/ casualty insurance in Thailand is highly fragmented, with 71 non-life insurance players operating in the space. The top five players held nearly 40 percent market share, with over 40 additional players possessing less than 1 percent market share.

IT investment by Thai insurance companies in 2009 was estimated to be US$413 million. Due to the impact of the financial crisis, IT spending in 2010 was limited to maintenance of existing systems. Celent expects IT investment in the market to reach US$1.5 billion by the end of 2013.

Several nominations for the inaugural Asia Insurance Technology Awards are about the usage of new technology to help sales.

Insurance companies provide the sales force with handheld devices equipped with camera, internet and navigational tools to enable sales force to close the sales call right in the first interaction with the customer. Some popular functions are lead management, benefit illustration, product audio video presentation, application form filling, online payment, scan document, take photograph, upload data, allows sales to convey underwriting result to the customer immediately and provide application number of the policy, issuance and printing policy, enable sales to track policy issuance status, additional requirements triggered, etc. 

We also see vendors develop process driven sales and compliance tool that helps financial and insurance institutions to speed up sales closure and drive new product launches. The tool is designed around touch technology enabling an immersive selling process that is fully integrated with back end systems and also fully documented via audio visual recording. Every pen movement is captured and available for review. Both screen and voice can be recorded and indexed. In this way every element of the sale is measured and managed. The tool also can be configured to draw on information from core system to provide customer with persuasive information, to help customers identify the right product. Products are presented through a variety of interactive multimedia mediums such as animated graphics, digital brochures and videos. This could increase cross sell, as well as to ensure that customers have been offered supportive products to minimise risk.

Field Programmable Gate Array (FPGA) technology has been receiving a lot of attention in the high frequency trading community in recent months. It is essentially a hardware related technology pioneered by scientists in the semiconductor/electronics industry. FPGA, as its name suggests, consists of programmable logical gate arrays, which can be used to implement desired logical functions on a piece of semiconductor chip. The beauty of this technology is that the desired logical functions are implemented at the hardware level itself, unlike conventional software based methods where analytical functions are implemented by software processes queuing up and waiting for a slice of the processor’s time. The hardware based method is much faster, and especially at a time when high frequency trading institutions are looking for latency advantages in the order of milliseconds, the technology provides significant competitive advantage. We are therefore witnessing a great deal of interest, and not surprisingly HFT institutions are investing resources on FPGA related technology R&D. However, the market for FPGA based analytics for HFT applications is still at a nascent stage. While the advantages of FPGA to HFT institutions such as ultra-low latency and reliability are appealing, the downside to this technology viz. time and cost of fabricating, limited ability to handle complex logical operations will prove to be bottlenecks. As mentioned, the technology is borrowed from the semiconductor/electronics industry where significant advancements have already been made in dealing with technology-related bottlenecks, leaving out factors such as cost constraints and difficult regulatory environment as major factors that will decide the future of this technology.