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A quick introduction to micro-wealth management using IndiaStack

Wealth Management. The very term conjures up images of High Net-worth Individuals (HNIs), big banks, and sophisticated financial advisors. Categorically speaking though, wealth management is just a way of allocating finances to maintain liquidity on one hand and to invest for growth on the other. The fundamental principles of wealth management have nothing to do with the quantum of wealth to be managed for an individual. So, how did the constraint or myth of a minimum net-worth enter our lexicon?

To understand this, let us look at a scenario that is all too common. Seema is a college graduate and has been working with a leading MNC in India over the last two years as an engineer. She earns about Rs 7.3 lakhs per annum. She plans to be financially strong and wants to pursue graduate studies to accelerate her career. She has saved Rs 1.5 lakh last year — her “investible surplus”.

She can put all the money in a savings account with low-interest yield, but she wonders if that is the best option available to her. What about investing in stocks? What about taxes? How much should she allocate to expenses and investments? How can she plan for short-term and emergency liquidity? She is bold enough to take some risks for higher returns but needs to plan out a balance between liquidity and growth. Rs 1.5 lakhs is a significant amount of money for her given that she just started working a year ago. However, for most wealth managers, this small investible surplus isn’t even a blip on their radar.

The micro-wealth management market in India

A report by Goldman Sachs Global Investment Research estimates that about 27 million individuals in India’s workforce have an earning capacity similar to that of Seema’s. A majority of this section of the workforce saves for something or the other — perhaps to buy a home or fund a startup business, to maybe travel the world, or simply to invest in higher education for themselves or for their family members. Each aspiration leads to a different micro segment of people requiring personalized wealth management advice. The total investible surplus from this target segment is estimated to be about $60 billion in assets. So, the question of the day is — why aren’t wealth managers lining up to serve this market?

To answer the first question, we need to dig deeper into the unit economics of the business from a wealth manager’s point of view and see the challenges. In order to enrol Seema as a new investor, a wealth manager has to perform a Know Your Investor (KYC) procedure approved by the Securities and Exchange Board of India (SEBI).

The first step in KYC registration is a KYC Inquiry with a KYC Registration Agency (KRA). There are five such KRAs (CVL KRA, NSDL KRA, KARVY KRA, NSE KRA, and CAMS KRA) in India chosen by SEBI under the KYA Regulations Act of 2011. The second step is actual KYC registration. Since Seema has never been an investor before, she has to get the KYC done with one of the five KRAs. The wealth management company will coordinate with one of the KRAs to get KYC done for Seema.

KYC procedure comprises verifying proof of identity, proof of address, PAN number verification, and an In-Person Verification (IPV), among other steps. In-Person Verification is where a person would physically meet the investor and check the original documents. It is complex, filled with paperwork and coordination calls between the investor and the wealth management company, and costs about Rs 1,500 for the wealth management company. The process also takes anywhere between 2–4 weeks.

(Note: There is an option to do an Aadhaar-enabled eKYC without using PAN, which costs very little and is instant, but this restricts investments to Rs 50,000 annually. For Seema, with her Rs 1.5 lakh investible surplus, this is of little help!)

Now, Seema is wondering, “Wait a minute. I already have a KYC done by my bank when I opened my savings account. Why isn’t that sufficient?” Well, that KYC (CERSAI), while approved by RBI, is insufficient for SEBI. So, if Seema has never been an investor, she needs this new KYC done, according to SEBI guidelines to be followed, by one of the KRAs!

Now, let us look at what this onboarding cost means for a wealth manager. A typical wealth manager charges around 1 percent per annum of the value of investment for advisory services. So, for a 1.5 lakh investment, the wealth manager makes Rs 1,500 as fees — and all this money is spent in the onboarding itself! So, getting Seema on board means that the financial advisor makes a straight loss for the first year at a unit level, and profits might roll in only in Year 2 at a unit level (assuming she continues to invest Rs 1,50,000 or more next year). Add marketing, branding, and other establishment costs, and this loss is deeper at an organizational level.

Not a very lucrative business opportunity, right? That is why even an ambitious, well-planned saver like Seema is not on the radar of any financial advisor. That is how a $60 billion market just lies out there, barely addressed!

Changing the story by leveraging IndiaStack

Now, you are an entrepreneur. You see this situation and think, “Hey, what can I do to address this latent demand?” Let us think about it for a minute. What if you could perform an end-to-end digital KYC service for, say, Rs 100–300 and provide it as an instant service? What if verified key documents such as proof of identity and proof of address are available on a single digital account accessible by Seema, and she alone can decide who gets to view the data and for how long? What if the in-person verification can be done via a video call? What if these documents are also digitally signed by Seema to serve as self-attestation?

This could be a powerful service for a startup to provide to the wealth management market. This is a long-term play, and startups can create tremendous value for multiple stakeholders in the wealth management industry.

A startup can leverage and become a “Digital KRA”. A Digital KRA can simplify the entire KYC process into a few clicks and provide paperless, presence-less, and instant KYC service to any wealth manager or fund using Digilocker, KYC, Electronic Consent Architecture, and UPI.

Let us look at a simplified workflow of a Digital KRA delivering a KYC service using IndiaStack:

  • Seema’s DigiLocker account is updated with key documents such as proof of address and proof of identity (Aadhaar, PAN, etc.).

  • Digital KRA uses DigiLocker Requester API as a guideline to request access to the documents.

  • Seema provides her Digital Signature for documents using a registered eSign Service Provider (ESP) via the eSign API specifications.

  • Seema also provides consent to access her documents guided by the specifications in the Electronic Consent Framework. She can decide who can get to view what and for how long.

  • Digital KRA performs a SEBI-compliant KYC registration process including a videocall-based In-Person Verification (IPV) and gets the KYC done.

  • Digital KRA provides confirmation of KYC completion to Seema’s wealth manager to begin service provision.

  • Seema can now use UPI to manage any money flow involved.

The entire process is digital, hassle-free, and instant! A Digital KRA can provide end-to-end KYC as a service to traditional wealth managers or robo-trading platforms. If you are a wealth management startup, you could use the service of this Digital KRA to simplify the onboarding process for your investors. You could also provide value-added services to Seema based on her aspiration to pursue graduate studies (better education loans and terms). What would you do? How would you build one of these services? What challenges and obstacles do you foresee in this journey? We would love to hear your thoughts.

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