Can Jio Financial Services ltd disrupt the disruptors?

Reliance Group Chairman Mukesh Ambani has his plans in order after successfully listing Jio Financial Services. He even touted this to be the fourth pillar, after Oil, Telecom and Retail. But, will the new NBFC shake up the banking industry the way Jio shook up the cellphone industry despite coming in late? And unlike for telecommunications or Retail in the financial sector, even with deep pockets, [favourable government policies], and a massive footprint, success is no guarantee. So let us find out what is the story behind JioFin in this edition of the Fintech Chronicler.

As of writing this newsletter (22nd Sep) Jio Financial?services share price today ended at ?227.8 down from their Listing price of ?262.?

History of Jio Financial Services Ltd

Recently spun out from Reliance Industries, Jio Financial Services, India's fifth largest financial services company, was valued at ?1.45 trillion. But the seeds for this were planted a long while back. Reliance Industries founded Reliance Capital & Finance Trust in 1986, when Dhirubhai Ambani ran the company. There were fewer loan options available because of the dominance of public banks at the time. Lease financing, bill discounting, and corporate deposits were the company's first sources of revenue. In addition to its 1990 IPO, the company changed its name to Reliance Capital in 1995.

The company branched out into new areas in 1993, including investment banking, project finance advisory services, custodial services, money market activities, and lending against securities. In 1998, it was granted official status as a "non-banking finance company." It later expanded into new areas, including as stock brokerage, mutual funds, commercial and industrial finance, life insurance, and asset management.

When Mukesh Ambani first introduced the group's telecom service in 2002 under the Reliance Infocomm brand, he did so with banking services in mind as well. Unfortunately, the split between the ambani brothers meant that Reliance Capital then went to Anil Ambani.

And while Mukesh Ambani was focusing on building the Telecom business, which could then act as a distribution channel for Financial services, Anil Ambani tried yet again to master the world of Finance. By forming a financial services JV with global PE and hedge fund behemoth DE Shaw in 2011, he made yet another attempt to enter the financial services market. The JV's far-reaching, future-looking objectives included the introduction of derivatives for trading in energy and carbon as well as private equity, mutual funds, and other securities connected services.

This JV failed to take off like the company's telecom division, which caused widespread disruption and eventually dominated its industry, and in 2017 the joint partners abandoned their memberships at the BSE and NSE. (Ahem… just last week NCLT rejected the latest bid ot take over Reliance Capital btw).

?Coming to Mukesh Bhai, RIL can use its payments bank and non-banking financial firm licences to start consumer/merchant lending, and may even enter insurance sectors because IRDA is open to insurance licencing. challenging fintech and NBFC business models.

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Company Details

Jio Financial Services Limited, was founded on July 22, 1999. It is a Mumbai-based public limited company with Authorised share capital is INR 15,005.00 cr and paid-up capital is INR 6,353.28 cr. It is professionally managed, with 7 directors and 3 key managers work for the company.

The longest-serving director is Sethuraman Kandasamy, appointed on November 21, 2005. Kandasamy has served on the board for almost 17 years. On July 7, 2023, Rajiv Mehrishi, Bimal Manu Tanna, and Sunil Mehta became directors.

Other employees are

• Abhishek Pathak - Chief Financial Officer
• Vishal Kumar - Chief Compliance Officer
• Ashoo Mote - Company Secretary

This is all i could find from public information.

JFS shareholding pattern & company profile

The RIL promoter group will control 45.8% of Jio Financial Services, while the public at large, including GDR holders, would own 54.20%.

KV Kamath is tasked with developing Reliance's financial services division. The former MD and CEO of ICICI Bank, at 75 years old, is widely regarded as a reliable source for Prime Minister Narendra Modi on financial policy issues. So, that makes this stock an interesting one to watch out for, despite it hitting lower circuits in it stock market debut.

Business model: Is this what will disrupt India's Fintech??

The one thing I am very circumspect of is that Reliance's huge customer base will automatically transfer over to help JFS. That will not be happening, because RBI and all other financial regulators, like SEBI, take breach of Personally Identifiable Information (or PII for short) very seriously.?

Undercutting rates to capture market share, a ploy Jio used in the telecom world, also will not work in a highly regulated environment.?

Besides, for non-deposit taking non-banking financial company, lending is one business avenue. But if you have been following this channel for a while, you'll know its not the lower rates of interest, but rather the collection strategy that is crucial to such businesses. Besides, for JFS to cut down rates will be hard. Given they do not have access to low capital costs, that comes from banks accepting deposits.?

Then there is asset management. But as the founders of NAVI found out, just cutting down the TER, or Total Expense Ratio, was not a sufficient condition for capturing market share. When it comes to wealth management and MFs, the king of all metrics is Returns. Followed by distribution. And Jio in that department does seem to be lagging.

So, how are we expecting this giant of an NBFC compete with and disrupt the innovative and incumbent players in the market?

Peer comparison of JFS

when a new stock, lists at a market cap of ?1.65 trillion, it is unseemly to compare it with new age fintech stocks that had listed before it. Even though those are the players that Jio Fin seems to be targeting.

Besides, in Fintech, while a large customer base helps with loan origination, but? other considerations, such as cost of funds, smart underwriting, and recovery, are equally crucial in the lending industry. Additionally, JFS will face stiff competition from well-established firms. These include Bajaj Finance Ltd and HDFC Bank Ltd in lending, Phonepe and Paytm* (One 97 Communications Ltd) in payments, SBI MF and ICICI Prudential Asset Management Co. in mutual funds, Life Insurance Corporation of India in insurance, Zerodha Broking Ltd in stock broking, and many others. There is a lot of competition in this market.

So, lets pick on a person their size shall we?

BTW. Even LiveMint is confused as to who JFS is competing with.

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Bajaj Finance?

Bajaj Finance Ltd. is the standard by which all other NBFCs are measured. The present market leader is nearly four decades old, is valued two and a half times as much as its unproven opponent, and is aiming for 29% to 31% increase in assets this fiscal year.

Bajaj Finserv is the only large NBFC to have outperformed the BSE Financial Services index in the last six years. Other significant NBFCs include Aditya Birla Capital, Edelweiss Financial Services, and Motilal Oswal Financial Services. Despite being in business for a long time, the other three have failed to meet expectations. Shares of Motilal Oswal, Aditya Birla Capital, and Edelweiss have fallen by between 25% - 80% in that time, despite the fact that the index as a whole has risen by 68%.

is JFS the Ant financials of India?

Many are touting that Reliance will become the Alibaba of India. And that Jio Financial Servic is what ANT Financials is to Jack Ma. So lets decode this comparison.?

BTW, here is how my AI visualises the two entities interact. In the same blue ocean, but with a huge mark created on both sides.?

Ant Financials is a chinese giant, despite its name.?

Alipay, the most popular payment network in the world, served as the inspiration for the creation of Ant Financial in 2014. Alipay, Ant Fortune, Ant Financial Cloud, financial reporting, and private banking are all currently managed by Ant Financial,?

The firm controls the largest money market fund in the world, which has assets under management of $230 billion. It runs a massive credit scoring system that tracks hundreds of millions of Chinese internet users. With more outstanding consumer loans than China's second-largest bank, Ant has grown into a financial behemoth with an estimated worth of $60-150 billion (up to 50 percent larger than Goldman Sachs). Alipay is just one of several financial services offered by the Hangzhou-based firm.?

Being a part of Alibaba, a global e-commerce powerhouse, has been beneficial to the organisation. Alibaba has celebrated Single's Day, a digital shopping festival, on the company's Taobao online mall every year since 2009. Online sales were close to $25 billion in the previous year's 24-hour event. While the actual buying and selling takes place on Alibaba's marketplace, Ant Financial processes the payments for the vast majority of the transactions. Alipay has been called "the glue that holds together Alibaba's online shopping empire" by analysts.

This organisation is more than just a payment processor; it also offers loans. Users' purchasing habits, debt repayment histories, and savings rates are just some of the data mined throughout the company's many service offerings. Consumer and small business loans are disbursed once the data is analysed by the company's lending systems. Analysts believe Ant Financial can increase its profitability by focusing more on its clients. Despite a more stringent regulatory environment, Alibaba Group's affiliate has loaned more than $95 billion (about 600 billion yuan) to far. In China, it is more difficult for internet finance companies to issue ABS, which are complicated financial products that repackage debt and are sold to investors.?

Its easy to see why the comparisons formed right??

Reliance Retail has over 18,000 stores in the country serving above 250 million customers. JioMart alone has over 5 crore downloads on the PlayStore. They have partnered with over 30 lakh merchants. Jio, the telecom service, has over 438 million subscribers, while their closest competitor, Airtel has 374 million,?

The playbook for JFS is straightforward right?? Start with consumers lending, especially in the consumer durable space, and offer BNPL in retail and fashion. Move on to replacing existing payment service providers at their partner merchants' outlets with JFS. Take over the invoice processing and financial reporting. Build a base, and then give merchants' working capital loans.?

But all that looks good on the payments and lending side. What all the talk about Investments and Insurance then?

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Joint venture with Blackrock

The company has formed a 50:50 joint venture with BlackRock to operate in the asset management industry in India, although no specific plans have been announced as of yet. The asset management firm will initially form as a legal entity. An unnamed source recently mentioned to The Morning Context with first-hand knowledge of the situation says, “For now, first the asset management company will get incorporated. Then the executives will be hired, who will decide on the strategy.” Since BlackRock is a global asset management responsible for managing roughly $11 trillion in assets, the partnership will bring tremendous operational knowledge into the business but will limit Ambani's input. Investments from large companies like Facebook and Alphabet as well as sovereign money from the Middle East did not come into his telecom and retail firms until after the business models were established. The asset management joint venture with BlackRock comes before the official debut of the company. Meaning, this will be one business where unlike the other 3, Mukesh Ambani will not be able to call all the shots.?

Besides, BlackRock recently severed their ties with an age old partner, DSP just in 2018.

Domestic fund houses are aggressively marketed. To distribute their products, they employ every available method and even set up retail outlets. Most international AMCs would be unfamiliar with such tactics. While the initial investment needed to comply with Indian regulations for a mutual fund firm is likely to be low, the cost of establishing distribution networks and growing the company could be substantial. The arduous road to profitability is disheartening. A well-managed fund house may take 6-8 years to turn a profit.?

So Blackrock realised that Capital is not as important as execution, the correct products, a consistent team, appropriate distribution channels and brand name recognition when it comes to managing MFs in India. Hmm... Does seem like Jio checks all the boxes doesn't it?