Can Lenders Also Sell Insurance and Investment Products?
Formal credit providers have increasingly gained prominence as a channel for distribution of non-credit products, such as insurance, investment and retirement products, to low-income households in India. Having access to an existing customer base with whom they interact regularly, microcredit channels in particular offer cost and informational advantages over those led by other credit providers such as commercial banks and the non-credit product providers themselves and their agents, who generally sell only one type of product.
Reaching customers in remote, sparsely populated or rural locations with a single non-credit product can become prohibitively expensive and the unit economics unviable. However, microlenders, who have already cracked the unit economics on small loans, are well-placed to sell these products viably and can take advantage of economies of scope which reduce the total cost per product. Indeed, some microlenders offer a small bouquet of microinsurance or savings products that piggyback on their microcredit operating model.
So why haven’t these channels taken off well?
Unfortunately, these pathways have not yet been successful in substantially increasing uptake of non-credit products. Microlenders in India had 58.9 million unique borrowers as of March 2020 and most of these microlenders are not engaged in selling life insurance beyond credit life products that ensure protection of the loan portfolio in the event of a borrower’s death. At a macro level, India’s insurance penetration (ratio of premium to GDP), which stood at 3.7 percent at the end of 2018, continues to be lower than the world average of 6.1 percent.
To understand why the financial system has not been able to deliver protection for India’s people, particularly in the low-income segments, we interviewed practitioners among non-credit product providers, agents, microlenders and newly licensed banks in India. We learned that microlenders face two common challenges when trying to sell multiple products:
1. Prioritization in the sales conversation
Microlenders tend to offer non-credit products to their customers in two ways: bundled with credit or offered separately but concurrently with loans. Insurance is often bundled with credit to mitigate credit risk for the lender, or simply because it makes sense for the customer to have protection. Various non-credit products are also often pitched separately as stand-alone products by loan officers at the time of offering a loan.
In both of these situations, credit is the primary product, and non-credit products often do not receive adequate attention. Prioritizing non-credit products in credit-dominated sales conversations is particularly challenging for loan officers whose main responsibilities are disbursing loans and collecting repayments. As a result, non-credit products are not fairly evaluated against customers’ financial needs. In addition, customers may hesitate to question the features of the non-credit product, thinking it might affect the chances of their loans getting approved. In the absence of cheaper or quicker alternatives for credit, customers can feel forced to purchase products which do not meet their needs.
2. Loan officer capacity and cognitive overload
The other challenge is that loan officers are not adequately equipped to sell multiple products. Multi-product sales conversations require loan officers to thoroughly understand and explain all the features of both credit and non-credit products, discuss with the client how they would fit with their particular financial situation and field questions. The ideal professional profile to lead such a complex interaction would be a certified financial planner, which most microlenders cannot afford. Loan officers, on the other hand, typically serve between 500 and 900 customers per month, and can experience cognitive overload when attempting multi-product sales conversations with their clients, an issue that cannot be overcome merely by the provision of additional training.
Ultimately, loan officers without enough information and decision-making support can end up mis-selling or providing bad advice, leading to customers buying products that are not right for them.
Is there a way forward?
To ensure suitable outcomes for customers, microlenders should first assess a customer’s financial situation, needs and objectives before offering non-credit products. Whether bundled with credit or sold separately, any non-credit products offered should be in line with the customer’s objectives, and must consider the customer’s risk capacity and ability to meet the financial obligations associated with such products. This process should be documented and required as a first step before selling non-credit products to potential customers. But who can undertake this process, given the loan officer capacity challenges we just discussed?
One solution is to take the decision on which product to sell away from loan officers and instead use tech interfaces with backend analytics to determine which products to sell to which customers. Only for exceptional cases, and with explicit permission from their superiors, could loan officers override the system’s heuristics. If the criteria in the backend analytics are thought through and set up well, they could prevent the sale of erroneous or inappropriate products to customers.
In addition, a tiered approach to training, equipping and grading individual loan officers can be considered to address the capacity issues of loan officers in selling non-credit products. In such a system, loan officers would be allowed to sell only those products for which they have successfully completed the requisite training and been evaluated as fully conversant to undertake a sale. Only the more capable staff would thus begin to sell multiple products and take on the more sophisticated sales conversations with customers.
Alternatively, microlenders could enlist a separate cadre of staff to sell only insurance, so that they can stay focused on perfecting their pitch and meeting sales targets on this front, without mixing the credit and non-credit product sales.
While selling non-credit products can be a complex process for microlenders, we believe that these measures could help microlenders to stay relevant and add new value for their customer base.
What have your experiences been? Do you know of any providers who have successfully managed these challenges?