Archive for March, 2010

Debt Consolidation Comes To India

Sunday, March 28th, 2010

DC03_150As most readers would be aware, debt consolidation is big business in a consumerist society like the US. It’s also quite common in the UK with tubes in London, Manchester and other cities carrying ads for several debt consolidation companies. However, when it comes to India, a nation known for its thriftiness and propensity for a high savings rate, the very notion of taking one loan to pay off many others – which is the textbook definition of debt consolidation – should be totally irrelevant. After all, if people are tight fisted with their finances and are wary of taking even a single loan, there should be no question of their getting trapped in multiple loans and needing to be bailed out by a single consolidated loan.

This would be true except for the fact that, in recent times, the concept of consumer finance for purchase of consumer durables, white goods, electronic gadgets and other consumer goods has found a huge following in India. There’s ample anecdotal evidence pointing out that an increasing number of Indians – especially the youth – has been going on shopping binges fueled by borrowings. As a result, there seems to be a sizable population of people with distressed finances seeking a way out of their financial tight spots. This is the market that the recently launched DebtDoctor addresses.

Billing itself as a debt consolidation service for “managing financial breakdowns”, DebtDoctor provides counseling to financially distressed individuals in India and intervenes with financial institutions to reach amicable settlements on behalf of these individuals.

LOGO_DebtDoctorDespite its community-service undertones, DebtDoctor is not an NGO (non-government organization) and operates as a for-profit organization. It charges a fixed fee as well as a variable component to its customer who is the distressed borrower whose case it takes up with the involved financial institutions(s). This revenue model is different from that of debt consolidators in the West who consolidate consumer loans, credit card outstandings and other debts belonging to multiple financial institutions into a single package and collect a referral fee from the financial institution to whom they eventually broker the sale of this package. We expect the very nature of DebtDoctor’s revenue model to invite FIs to wonder, “How come the borrower can find the money to pay (say) INR 10,000 in fees to DebtDoctor when they claim that they aren’t in a position to pay us any more than the deeply discounted settlement figure we’ve offered them? Why can’t they simply hand over this money to us?” Since borrowers owe all this money – and, then some more – to the involved financial institutions, this is a valid objection that DebtDoctor needs to overcome.

DebtDoctor also needs to contend with resistance from financial insitutions with whom it has to intercede in order to reach settlement on behalf of its financially-distressed customers. This is more complex than waiting it out for the concept of mediated settlement to be well understood in India. The real challenge would come from the fundamentally different ways in which different FIs tackle the problem of overdue loans.  

According to a senior executive in a leading consumer finance company I spoke to, there are broadly two categories of financial institutions that are active in the Indian consumer loan market and affected by rampant delinquencies. 

The first category comprises of banks like Citi and Barclays who prefer the expedited “cents on the dollar” approach to settlements in which they accept a portion of the outstanding amount in full and final settlement, and write-off the balance. These financial institutions approach an individual who owes them (say) INR 100,000 and make an offer to recover only (say) INR 60,000 and write-off the balance INR 40,000. By collectively representing a group of such individuals, DebtDoctor saves such FIs the time and cost of dealing with each individual separately. DebtDoctor should find the going relatively easy with this category of financial institutions.

On the other hand, there are many other financial institutions who prefer to protect their principle amounts and eschew the “cents on the dollar” approach. They insist that their borrowers make full repayment of their loans. To improve recovery rates, they rearrange the loans so that borrowers receive reduced monthly instalments and longer repayment durations. Obviously, such FIs would find DebtDoctor’s approach contradictory to their basic strategy and could be expected to rebuff DebtDoctor’s attempts to act as a middleman in their relationships with their borrowers.

How well DebtDoctor is able to address these challenges will determine its future in this nascent market. Possibly aware of the tough road ahead of itself, DebtDoctor’s tagline doesn’t commit to avoiding a financial breakdown. Like nervous breakdowns, there’s only so much you can do to manage the aftermath of a financial breakdown – and DebtDoctor seems to be geared up for delivering that much!

Price Decontrol Doesn’t Mean Inflation

Sunday, March 14th, 2010

In the context of oil, a recent Swaminomics column in the Times of India made a passing reference to the notion that “price controls do not quell inflation, and abolishing price controls won’t accelerate inflation”.

Politicians and the average reader aren’t the only ones who’d disagree, as the author fears. I can easily imagine many marketers and others raised on cost-plus pricing model to find this notion highly counterintuitive. I can imagine them arguing along the following lines: If the cost of oil contributed five rupees to a soap’s selling price of 20 rupees, then a two rupee increase in the purchase price of oil would result in an increase of the oil component’s cost to seven rupees, thereby forcing FMCG manufacturers to hike up the selling price of their soap to 22 rupees.

This argument is valid in a cost-plus pricing regime where price is calculated after toting up all input costs and applying a ‘reasonable’ margin (which somehow people always tend to assume to be in the region of 10, 20 or max. 30%).  While cost-plus pricing may have been the only pricing mechanism used in the good-old days, it is not commonplace in today’s marketplace. Value-based pricing is the most widely used model now. Though it has been entrenched in the developed Western markets for a long time, value-based pricing has gained a lot of traction even in emerging markets like India for over two decades. 

Adopted for almost all B2B categories and even in bread, soap and other B2C items that are considered as basic necessities, value-based pricing bases the price on a number of external factors like brand value perception, competing prices, value of pain solved or gain delivered to customers using the said product or service, and so on. As a result, you don’t have to look too far to spot product and service categories where the sum total of all input costs is below $10, but average selling prices often exceed $25. While input costs have not (yet) exited the pricing equation, they play a very limited role under the value-based pricing model, which also goes by the alternative name of “what the traffic can bear”. 

Therefore, in the modern world where value-based pricing is the norm, an increase in the input cost does not push up the cost of production to anywhere near the prevailing selling price. So marketers in many product and services categories aren’t under any great pressure to increase selling prices, especially if that created the risk of losing customers. Which is why decontrol in prices of basic commodities like oil doesn’t automatically mean an upward tick in wholesale or consumer price indexes.

ET Does It Again!

Monday, March 8th, 2010

The Economic Times does it again!

Can anyone explain the connection between the headline and the text of this article?


Beware Of “Q’Jacking” In Online Rental Services

Sunday, March 7th, 2010

QJ02_300Subscribers of NetFlix (USA), LoveFilm (UK), BigFLIX (India) and other DVD-rental services would be familiar with queues. They browse titles on the service provider’s websites and add the ones they’re interested in into a queue, from which the service provider makes shipments, depending upon availability and other criteria related to the subscriber’s plan.

The same concept is followed by, the first and only online book rental service I’ve ever come across. With a decent collection of books and a range of attractively priced plans, Librarywala promised good value for money and I signed up soon after it launched around a year ago.

QJ01_200My experience with Librarywala has been mixed.

On the positive side, it has lived up to the promise of offering a good assortment of books, including latest ones, so I’ve always been able to fill my queue with enough titles to last the following 3-4 months (btw, to quote a contrasting example, my LoveFilm queue was never more than a month deep – admittedly, in part, due to my more restricted taste in movies).

On the negative side, Librarywala has rarely met its committed delivery period of 24 hours. And, recently, my queue seems to be hijacked because

  1. I started receiving books that I’m quite sure I never added to my queue.
  2. Books that I hadn’t added to my queue and never delivered to me suddenly started appearing in the list of books to be picked up from me.

Looks like I’m the victim of “q’jacking” – if I may coin such a term.

The way the system works, the moment a book is shipped from Librarywala’s warehouse – but before it’s delivered to me – it disappears from my queue, so a review of the queue post my receipt of the book doesn’t prove anything. My emails to Librarywala pointing out these incidents of suspected “q’jacking” have their staff flummoxed. Their lack of response suggests that, even with access to richer information they’re bound to find in their internal audit trails and elsewhere, they haven’t been able to unearth something concrete one way or the other.

While I resolve my issues with Librarywala, let me hereby alert other subscribers to the clear and present danger of “q’jacking” in online rental services!

Why Pay By Credit When You Don’t Have To Pay By Kwedit

Tuesday, March 2nd, 2010


If credit cards don’t lead to overspending, then Kwedit needn’t lead to any spending.

Positioned as an alternative payment method for purchase of virtual goods used in online games, the newly launched Kwedit only extracts a promise from you to pay in due course. If you break your promise, it doesn’t threaten to send goons to your house to collect. Instead, it affects your online reputation by kwedit02lowering your so-called “Kwedit Score”. You might be tagged as a credit risk in the Kwedit world as a result, but your kneecaps will be intact. 

Smart alecks who’ve spoiled their Kwedit Scores by reneging on their promise(s) would be able to start on a blank slate by creating another Kwedit account using a different name and email. But, they’d quickly realize that the ‘blank slate’ extends to their online game: they wouldn’t be able to resume playing at whichever advanced level they’d reached while playing under their former identity. When they log on to the game with their new identity, they’d be bumped off to the first level like any new player. Since that’s so “uncool”, it acts as a deterrent to gaming Kwedit. 

Kwedit says it’s meant for people who don’t possess credit / debit cards. However, it’s bound to tempt one-off gamers who do. After telling themselves “why pay by cash when you can pay by credit (card)” every time they’ve used their plastic in the past, they might suddenly start asking themselves, “why pay by credit (card) when you don’t have to pay at all (by Kwedit)?” As Mike Arrington points out in a recent blog post on TechCrunch, Kwedit poses the risk of cannibalism, “where a user chooses Kwedit instead of paying directly even though they have a credit card”. This would result in lost revenues for gaming companies. Without convincingly refuting this charge, Kwedit’s founders claim that it would eventually prove to be revenue positive. 

Going by the  rapid revenue growth of Zynga and other players, the online gaming industry has clearly established that it can attract enough customers who are willing to pay by GenY Mobile Payments if not by credit cards, debit cards and other conventional payment modes. Against this backdrop, it might prove exceptionally challenging for Kwedit to persuade online gaming companies to add Kwedit as one more payment method, especially when it poses the risk of tempting otherwise-paying customers to Kwedit, and thereafter into defaulters.

Kwedit might want to expand its target market to other forms of virtual goods where merchants would benefit more obviously from Kwedit’s ability to tempt users away from other payment methods. One low hanging fruit is American media companies who’re planning to charge their readers for access to online news and articles. Although many players in this market are apprehensive that their moves might drive their readers away – resulting in lowering of advertising rates – they’re forced to try out something in this direction because they recognize that their present practice of giving away content for free threatens their very existence. Unlike onling gaming companies, the key challenge for these media companies is not how to prevent paying customers from turning into non-paying ones. Grappling with the problem of converting non-paying customers into paying ones, they might find Kwedit’s allure working to their advantage. Kwedit offers them with a novel payment method that could convert a portion of their website visitors into paying customers – some because they can’t resist the novelty of Kwedit, and others, because they might not have a “rep to protect”!