So far our fintech upstarts have by and large failed to convert the naysayers into believing that they will make enough money by selling somebody else’s financial products or cross sell their own offerings. Add-ons like insurance or asset management has typically been written off as side shows that are good to have but without significant scale, revenue potential or profit visibility.
But by harnessing the power of big data, machine learning and AI, Aladdin, the in-house platform, could reshape India’s investment landscape for ever. That potential for technology-driven change is what got the money managers charged up. Digital lending, Jio Financial’s other focus, will primarily sit on top of India’s Aadhaar and Unified Payments Interface architecture, a public good. But Aladdin is BlackRock’s proprietary platform. If Jio becomes a vehicle for the portfolio construction and management technology in India, then Ambani might already have a winner in hand.
Both partners have decided to deploy $150 million each in the Jio Blackrock alliance for a digital first offering. Capital markets businesses are never highly capital intensive. Even if the official communication does not explicitly talk about Aladdin, the hint perhaps lies in the fine print — “BlackRock’s deep expertise and talent in investment management, risk management, product excellence, access to technology…” married with Jio’s local market knowledge and digital infrastructure. In private conversation as well, people say Mukesh Ambani is personally invested to unleash Aladdin’s genie in India.
Think of Aladdin — that made $1.1 bn revenues for Blackrock in 2020 – as an super sharp AI that decides where to invest, when and why. Designed as a proprietary software tool, Blackrock sold Aladdin to clients as a software as a service to manage risk, move money across asset classes, analyse consumer data, track fund performance and changing portfolio values. And why does it have oversized influence? Through Aladdin Blackrock is actually nudging the financial world where to put money basis their ESG scores : A woke index that marks companies on their green credentials, governance and social responsibilities. Aladdin’s ESG assessment can singlehandedly break a CEO’s back and market value of storied corporations forcing them to strive for higher ESG grades, making Fink, a highly polarised figure around the world.
Blackrock owns sizeable chunks of Wall Street and Big Pharma along with a sizeable part of all stocks traded worldwide. It’s worth half of America’s total GDP and India is its next big frontier. Chairman Fink (70), has been craving to make a comeback to India after parting ways with long-time partner Hemendra Kothari of DSP in 2018. JFS will offer him that perfect partnership as like him Ambani too shares a similar digital vision.With a ‘theoretical’ $20 billion market value — even before it actually starts trading in the exchanges – JFS clearly packed a punch. Now it’s adding blue blooded pedigree.If JFS can move even a part of your bank balance to an Aladdin like proprietary tech platform allowing you to buy and sell Blackrock ETFs, imagine the competition it can create to the top 3 domestic bank led mutual funds that still have managed to stand its ground in spite of the presence of some of the largest Indian corporate houses like Tata, Birla, in this sector.
This is an area where Reliance could have room to differentiate by proactively focussing on passive investments versus active much like fintech’s like Navi. By leveraging Reliance’s network/feet on the street team rather than depending on traditional distributors, JFS could also be the disruptor. The reduced costs could then be partially passed on the consumers as well. Ditto for digital broking, argues Sachin Salgaonkar, analyst and an old time Reliance watcher from Bank of America.
And for a late entrant like Blackrock, who came and exited in a decade and has been craving for a replay ever since, a tie-up with Reliance will significantly reduce their investments to build a competing distribution network.
The pie for now may seem small. The annual profit pool in both are less than $1 billion each with the top 6 mutual funds dominating approximately 60% of the industry, according to Suresh Ganapathy of Macquarie Research. But overlay this with the speed of financialisation of household savings among India’s rising consuming class, and you will end up with 36 million mutual fund customers in 1 half of FY23, up 6.8% in just 6 months. This cohort is moving away from physical assets like gold, realty or even bank FDs towards investments in financial products. Last December, Crisil calculated a 2.5 X boost over assets gained in the past 5 fiscals as rising inflation, government incentives, middle class disposable incomes and financial inclusion has channelled savings towards newer investment avenues that throw up higher returns that the traditional alternatives.
Going by the management commentary, unsecured lending to retail customers and merchants will be the JFS mainstay in the initial years. But for all its day zero funding advantage, parentage, net worth and a near billion network of customers across verticals waiting to be mined and underwritten, consumer lending will be no cakewalk. It might bring down their customer acquisition costs but to translate all that to actual trades, one needs deeper engagements, physical touchpoints and execution, which still remains the single biggest risk for the entity.
Cross selling too is seldom seamless as we have seen with several of Ambani’s retail ventures. Point is, lending is least sticky unlike a bank account or credit card with a high intertia to move. Distribution, ease of processing and rates will always hold the key. Now if banks remain the cheapest provider of loans and have already cornered the cream of the market, then the price sensitive bottom of the pyramid can open up green space as would the mid-sized digital lending motley who are choking for equity. But for a business that thrives on leverage, an hyper aggressive price war is equally fraught with risks.
The consumer credit market has consistently grown 20-25% so there is room for newer player like JFS to coexist with, say a Bajaj Finance. Worry is, once you get listed, you are on the quarterly treadmill of profitable growth and target chasing. Remember HDFC Bank? That’s easier to showcase on a spreadsheet than on the retail shop floor. But setting the ball rolling with one the smartest suits shows the upheaval in all of finance that’s for the taking.
Views expressed are author’s own