Reliance is at it again. This time, the Indian giant -largest Indian group by market capitalisation- is planning a huge scaling up in financial services. It will do so by first “demerging” Reliance Strategic Investments Limited (RSIL) from the group and then aggregating a number of Reliance properties (Jio Payments Bank, Reliance Retail Finance, Reliance Retail Insurance Broking, etc) to the resulting company, which will be renamed Jio Financial Services (JFS). The goal is to dominate the industry with offerings across segments like payments, lending, insurance and wealth management. It will fall short of becoming a bank (for now), as it lacks the license to do so. It will behave much more like a NBFC (Non-banking financial company).
So the question in everybody’s mind is, can Jio Financial Services become a leader in this industry as well?
The Reliance/Jio playbook has usually been about shaking up the competition with low prices and deep pockets, creating aggregation and further scale advantages that result in a leading market position for the company. Jio Financial Services will be no different, coming into the market not only with the Reliance group standard financial backing but with a very special gift. It turns out Reliance owns a large number of its own shares as a result of previous mergers (about 6% of the total shares), valued at around Rs. 1 lakh crore ($12 billion) at current market prices. Reliance will move these shares to Jio Financial Services, thus providing the new company with an incredible war chest of its own. As capital is a key resource in businesses like lending and insurance, this can give JFS an advantage over the competition.
The Jio story was not only about offering cheap data but also about bringing hundreds of millions of new consumers to the market thanks to the cheap data. It remains to be seen what the target consumer will be for Jio Financial Services. Will it try to replicate the Jio data story by, for example, lending to low-income high-risk consumers? Or will it instead focus on the roughly 50 million higher-income Indians that are safe and monetizable in the short term? The first group is very interesting as no company has cracked it yet but it obviously carries a lot of risk and seemingly little profit. A new company like JFS, with no clear advantage in terms of underwriting and collection (two key issues in lending and insurance) is not particularly well placed to develop that market. The second group is well known and profitable, but it also has all the other competitors, from banks to NBFCs to fintechs.
And other segments in financial services like trading and wealth management already have a low-cost model. Companies like Zerodha and its imitators offer a simple and very cheap service that JFS could only hope to match, not beat.
Some other potential advantages for JFS that have been mentioned are a vast distribution network to sell financial services (for example, the Reliance Digital and Jio stores) and the ability to offer a “one-stop shop” of products and services that attracts more consumers. In terms of distribution there is no doubt that Reliance is better placed that many other companies that have to partner or invest heavily to acquire customers. But there is also a good number of very well-entrenched players such as traditional banks like HDFC and NBFCs like Bajaj Finserv, to name just a couple, that have a better network than Jio. It will not be easy to match them. And the one-stop shop idea, well, that tends to be overrated and, in any case, it is again a concept that many players in the market can also offer.
Overall, the financial services industry might be too different from telecom services to make the Jio success replicable. It is one thing to use brute force in an industry with a relatively simple product (a phone with a data plan) and a limited number of players with shallow pockets. It is a very different thing to do the same in a complex industry with a multitude of well-capitalized players plus a host of innovative and well-funded fintechs vying for the market.
Jio Financial Services is not destined to fail by any means. There is a large unexplored market that right now does not look attractive but could be developed with the right products. If Jio does what for example Bajaj Finance did a decade or so ago with a disruptive offering in the consumer lending segment, it might write the next chapter in financial services. But if the play is simply lowering prices of traditional products hoping to drive competitors out, the ceiling for Jio is much much lower.