The Reserve Bank of India has been mulling the possibility of introducing white-label banking correspondents. Earlier this year, RBI deputy governor HR Khan said that the apex bank was thinking of allowing banking correspondents (BCs) of a particular bank to get involved with payment services of another bank. A white-label BC will be allowed to sell products from multiple banks to a customer, the same way that investment advisors sell mutual funds from multiple companies
So what’s stopping them?
At IAMAI’s digital payments conference organized last week, G Padmanabhan, former executive director of the RBI explained the banking regulator’s concerns:
– A white-label BC will sell products which would merely get him more commissions rather than selling a product based on a customer’s needs.
– There aren’t enough checks and balances put in place to make sure that a white-label BC will not push a customer to an adverse selection.
Rishi Gupta, CEO of alternate banking channel FINO Paytech, agrees that there is a tendency by BCs to cross sell products which gives them more commissions.
Anecdotal data points that a banking correspondent makes around Rs 5,000-12,000 in commissions a month by selling financial products and cash handling, of which 60% is usually for selling new products and 40% is earned via cash handling.
Similar case in mutual funds
There is precedence to capping commissions on selling financial products. Earlier this year, markets regulator SEBI raised concerns about high commissions being given to mutual funds agents. Accordingly, mutual funds group AMFI announced that upfront commissions paid to distributors selling schemes would be capped at 1%. There were also instances where some fund houses paid upfront commissions of up to 8% to their distributors for selling a mutual fund scheme.
White-label BC will offer more choice of financial products to consumers and that’s always a good thing. But the RBI also has to put in suitable checks on how much commissions can be given to agents for selling a particular product. BC companies can also leverage technology to provide a credit score, gauging a customer’s financial needs, ensuring that they get the right product. BC networks and the RBI need to decide whether they will be self-regulated through associations or if the RBI has to lay down specific guidelines for them.