In this week’s newsletter, we talk about the government’s KYC plans, why IRDAI is noticing a recent ad, TV show tourism and a lot more.
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KYC is getting a makeover. But why?
Imagine that it’s the year 2000. You’ve gone with your parents to the bank. They want to open a new bank account. What do you think would have to be done?
They’d most likely filled an account opening form, pasted a latest photograph and signed a few papers. Their presence was probably enough to trust that they’re the ones opening an account. Identity proofs may not have really been a norm. And address proofs may not have been questioned.
But that meant dubious individuals could go and open a bank account on behalf of just anyone else. And that made nefarious activities such as terrorist financing and money laundering easy.
So in the early 2000s, the Reserve Bank of India (RBI) finally chalked out KYC regulations for the financial industry to clamp down on these practices. Maybe it was inspired in part by the 9/11 attacks in the US. While the US already had KYC rules in place, they realised that the rules needed to be stricter. So they clamped down. And maybe that had a ripple effect that reached India too — by 2005, the RBI strengthened its Anti Money Laundering Standards.
So now, anyone walking into a bank for a new account had to prove their identity and place of residence with valid documents.
Cut to today, KYC has come a long way. You can’t really initiate any financial transaction without it.
But, while these stringent rules might reduce the chances of financial crime, it seems to have become a pain point for businesses.
Why, you ask?
When KYC was introduced, banks and other financial institutions were expected to abide by the rulebook. But not every customer had a proper document to prove their identity and address. There could have been mismatches. Or people’s photographs in their identity cards could have differed from how they looked then. Authentication was still hard. Financial institutions too wouldn’t want to lose out on customers because of cumbersome KYC procedures. So you can be sure that their level of due diligence wasn’t up to the mark.
Then came Aadhaar in 2010. It was a unique 12 digit number that gave Indians an identity record which was authenticated by individual biometrics. Now this made lives easy for the folks performing KYC checks at banks and financial services firms. To put things in perspective, the average cost of verifying documents came down from ₹500–700 per person to just ₹3. At least that’s what the Finance Minister Nirmala Sitharaman claims.
So yeah, acquiring customers was now cheaper and simpler.
But here’s the thing. Organisations tapping into Aadhaar data to onboard customers could become a privacy nightmare. If their systems weren’t secure enough, customer data could be tapped for easy misuse.
So that led the Supreme Court to turn the screws on this practice. In 2018 it struck down a law that allowed private entities to use Aadhaar authentication to establish customers’ identity before onboarding them to provide services.
Okay, but how does that change anything for banks?
Well, let’s just say the big impact was felt on the fintechs who were riding high on India’s digital revolution. For context, between 2016 and 2021, 14,000 startups kicked off, almost half of which were in the fintech sector. And if they wanted to innovate with digital services and get new customers to try them, they had to abide by the KYC norms.
But not having easy access to Aadhaar data increased their costs. At least ₹120 per customer. Besides, they had to shell out more money to secure their systems so that they could be trusted enough for the law to let them tap into the Aadhaar-based KYC method.
So they struck on an idea. They said “Hey, let’s just get digital copies of customers’ identity and address proofs and authenticate their existence by sending OTPs to their mobile numbers. That way we could get them to start using our services and nudge them to do a full KYC later if they want to keep using it.”
That folks, was the partial KYC trick to keep something called drop-offs at bay. Simply put, it made sure that customers weren’t hesitant to try a new service because completing a long KYC process would take time.
The government’s DigiLocker, a digital service that allows companies to access digital versions of customers’ documents like driving licences, academic mark sheets, PAN cards, etc. also helped them sail smoothly through the partial KYC process.
You also had something called the c-KYC (Central KYC) which helped various organisations obtain customers’ KYC through a common online registry. Companies would just have to check if a customer had completed their KYC with another bank or financial institution. If yes, they’d upload that to a common pool on the internet, and other entities could simply look customers and their identities up.
But you can imagine that the RBI wasn’t happy with this. Simply because it has only aspired to make things as foolproof as possible in the financial sector with stringent KYC rules. When it rolled out a whole set of KYC guidelines in 2016 it wanted to ensure that entities who weren’t complying would be penalised. Albeit not directly, but at least in the form of putting a freeze on customers’ accounts if the KYC rulebook wasn’t being followed.
And now that it sniffed that digital entities were using a turnaround to push their services, it had to chip in again. It simply felt that the whole process was back to square one. Physical KYC verification just wasn’t happening to prevent fraudulent services or customers.
So it threw another spanner in the works. It simply said that it would tag customers’ accounts with such partial KYCs as “high risk”. And if that had to be undone, companies would have to either do a full KYC via video calls or in person.
Just think about it. Downloading data from the c-KYC registry hardly cost a Rupee per customer. But switching to a video KYC would cost 15x. And switching to an in-person KYC would cost a whopping 100x! The bottom line ― The RBI’s move was quite a death knell. It threw fintechs into a tizzy, derailing over 8 lakh corporate credit card users from startups and SMEs (Small and Medium Enterprises) in just a couple of months.
Fintechs couldn’t handle it anymore. They had to voice their opinion. So they kept some ideas on the table. The government could bring in a single repository to authenticate KYC documents. Or even expand DigiLocker in a way that KYC processes will become more reliable.
And maybe the government has finally heard them.
The Financial Stability and Development Council (FSDC), headed by the Finance Minister, met last week to discuss it. Think of it as an apex body that monitors large financial conglomerates.
The Council discussed ideas to simplify KYC in a way that would not just keep the norms strong but also simplify the process for fintechs. So soon we could have uniform KYC norms and a way to bring about inter usability of KYC records across the financial sector.
So yeah, that’s exactly why KYC is getting a much needed makeover. We’ll only have to hope that it shapes up quickly enough. Godspeed!
A ULIP in Mutual Fund clothing!
You walk into the bank to get some stuff sorted with your accounts. And your relationship manager plonks a leaflet in front of you. It says,
Launching, PNB MetLife Small Cap Fund
₹10,000 invested per month since 2004 in NIFTY Smallcap 100 Index
₹1.1 crores now
Avail PNB MetLife Small Cap Fund @ ₹10 NAV
From 19th Feb — 29th Feb’ 2024
It looks like a mutual fund. It talks like a mutual fund.
So when the relationship manager says, “Think of how this investment could pay for your child’s education,” you don’t actually think much. You fall for it hook, line, and sinker.
But here’s the thing. It’s not a mutual fund. That ad is just a wolf in sheep’s clothing. The product being touted is actually part of an insurance scheme — a ULIP.
For the uninitiated, a ULIP is a Unit Linked Insurance Plan. Think of it as an insurance-cum-investment product. That means you don’t make an ‘investment’ but you pay a premium. And when you pay the premium, of say ₹100, a part of it, say ₹10 goes towards the insurance component and some other charges. That way, if the worst were to happen to you, your family would get a lump sum payout. And the remaining ₹90 gets invested into either the stock markets or some government and company bonds depending on what you choose. And for managing these investments, they charge a yearly fee of around 1.35% too.
Now here’s the deal. Normally, when an insurance company advertises a ULIP, they make it evident that it’s a “unit-linked, non-participating, individual insurance plan”. Or they might even say ‘monthly premiums as low as ₹xx.”
But in this case, there’s really no disclaimer of that sort.
If you ask PNB MetLife about this, they’ll probably say something like, “But, we just want to talk about the new small-cap fund launched by our insurance team. We’re not talking about the insurance product.”
And that’s a fair argument.
The only problem is that you can’t waltz into PNB MetLife’s office and tell them you want to invest all your money into the plan. You can only access it if you buy the ULIP itself. It’s a bundle.
But you don’t see that being highlighted in the ad, do you?
And it’s pretty obvious why they’ve resorted to this sneaky advertising tactic.
You see, small-cap mutual funds had a rollicking time last year. They raked in over ₹41,000 crores of net inflows while their counterparts, the large-cap mutual funds, actually saw a net outflow of nearly ₹3,000 crores. Everyone was chasing returns. If you opened up the website of a fintech selling mutual funds, you’d find these small-cap funds front and centre on their pages. They’d be given 5-star ratings to nudge people to invest in them. Who cares about risks, eh?
And this meant that the mutual fund industry boomed.
You’d imagine the insurance folks wouldn’t want to be left behind, no? So they too decided to tap into this small-cap craze that had gripped Indian investors.
In 2023, for the first time ever, the insurance industry launched a small-cap fund that would be bundled with a ULIP!
Yup, over the previous two decades, insurance firms launched large-cap funds, multi-cap funds, and even mid-cap funds. But for some reason, they’d kept a safe distance from small caps.
And maybe the boom was too big to ignore. So Bajaj Allianz Life Insurance decided it would be the first off the blocks. In May last year, they announced a small-cap fund for ULIPs and in less than a year, the fund already manages ₹1,100 crores. For context, their biggest large-cap fund launched in 2010 manages only a little over ₹4,500 crores.
And once the other insurance companies saw this success. they jumped on the bandwagon and launched their own small-cap funds. With the latest being PNB MetLife.
Okay. But why couldn’t they simply advertise it as a ULIP and talk about its small-cap capabilities, you ask?
Well, maybe it’s because ULIPs typically have a bad rap in the market. Just Google ‘ULIPs Reddit’ and you’ll see what we mean. Most of the discussions are around “bad experience with ULIPS”, “why are ULIPs disrespected so much”, and “mental turmoil because of ULIP”…you get the drift.
Now we won’t go deep into why everyone hates ULIPs. But just know that ULIPs used to be loaded with sneaky charges. The only ones who’d make money were the insurance companies and the agents selling ULIPS. Investors were left high and dry because of these exorbitant charges.
Things have changed over the years but the internet never forgets, no? All it needs is a quick Google search. And the negative news could dissuade any potential investor from buying a ULIP.
So yeah, that’s probably why PNB MetLife chose to masquerade as a mutual fund.
But that’s also the problem. Because ULIPS aren’t mutual funds.
For instance, unlike most mutual funds, ULIPs come with a lock-in of around 5 years. So you can’t withdraw the funds the next year if you feel like it. You’ll have to wait.
Oh, and unlike a mutual fund where you can stop your investments as and when you please, a ULIP doesn’t allow you to do that either. You’ll have to pay your premiums every year till the lock-in period is done. Or else, all the money you’ve paid and accumulated gets transferred into something called a ‘discontinued fund’.
And that’s as bad as the name suggests. Because that small-cap-like return you were dreaming of just evaporates. For instance, a discontinued fund from PNB MetLife has delivered yearly returns of around 5%.
Crazy, huh?
So maybe the regulator should get involved in regulating these sorts of ads. Maybe they should call it out for sneaky advertising that could result in misselling. After all, the ULIP industry won’t want to end up being the most hated product in the Indian markets again, do they?
What do you think?
Today’s Discussion 
: How GOT Changed Travel Forever
Before Game of Thrones burst onto our screens in 2011, Northern Ireland wasn’t exactly topping anyone’s vacation bucket list.
But oh boy, did that change once Westeros took over our TV screens!
Suddenly, it was like Northern Ireland became the coolest kid in school…. Why?
Well, because all those epic landscapes, rugged coastlines, and ancient castles you were mesmerized by in the show? Yup, they were real places you could actually visit.
And visit they did! Tourists started pouring in like there was free gold at King’s Landing.
They even had a nickname for them – “set jetters” – folks who just had to see where Jon Snow brooded and Daenerys ruled.
Every year 350,000+ visitors would come to Northern Ireland, bringing in over $50 million to the local economy.
But it wasn’t just Northern Ireland cashing in on the hype!
Spain saw a 15% boost in visitors checking out spots like the Castle of Zafra. And Croatia? It got so packed with tourists that the then-mayor was considering implementing restrictions on the travel!
But it didn’t stop there.
One superfan, Rob Dowling, saw a golden opportunity. He started his own Game of Thrones tour company, whisking fans off to see the very spots where Tyrion Lannister schemed and Arya Stark roamed.
He even hired extras from the show as guides! Crazy, right?
What other show/movie themed tour would you like to go on? Let us know!
Finshots Recommends 
This week’s recommendation is Billions.
In this high-stakes financial drama, a ruthless hedge fund billionaire & a brilliant U.S attorney engage in an intense game of power, manipulation and revenge.
Watch it on: Disney+ Hotstar
#AskFinshots 
This week’s question comes from Kashish from Delhi University. Kashish asked-
“Last week you mentioned that Finshots & Ditto is a 300+ people organization. I’m wondering what is it like working at a company that big?”
Well, it’s a whole lot of fun Kashish! And no I am not being held at gunpoint 😉
But just so you have more evidence, hear what our team has to say about working at Ditto. You can check out the video here.
Have a question for us at Finshots & Ditto?
Write to us at colleges@joinditto.in. And we’ll get our founders/experts to answer!
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