25. Payments in — Mutual Fund Sector

So far we have covered many topics on payment processes and many more will come in future. In next few topics, I will touch of various industries (sectors) and how payments work in those sectors. Let’s start with Mutual Funds.

Mutual Funds (MF) collect funds from investors and invest in equity and debt portfolios. MFs are interesting and complex investment vehicles as there are different flavours (Equity, Debt, Hybrid), various types of entities (AMC, MF-Aggregators), different types of investments (regular or direct) and other important aspects (SIP, STP, AUM, expense ratio, dividends, exit loads, ELSS… so on and on). If you are interested in knowing more about MF then start from AMFI Site

Payment Use cases in MF:

An investor can invest in Asset Management Company (AMC) directly by opening account with the AMC (Aditya Birla, Mirae Assets etc.) or invest in AMCs through MF-Aggregator (FundsIndia, Scripbox etc). So AMC and MF-Aggregator need payment mechanism to facilitate investments.

Key requirements of MF Industry

Requirement 1: Support for SIP and ad-hoc purchase

• For SIP use-case, both online and offline recurring payment solutions are used. Offline solutions: NACH and Online Solutions: e-Mandate, e-NACH (now defunct)
• Ad-hoc purchases can be done with Payment Gateway (by aggregator) or NEFT/RTGS transfer
• Recurring solutions can be used cleverly for ad-hoc purchases. Merchant can trigger debit on registered mandate (either paper based or online) whenever investor wants to purchase MF

Requirement 2: Credit cards (products) and wallets are not allowed

• Credit card are not allowed to buy MF as credit card is a short term loan that may be invested in liquid funds so SEBI doesn’t allow credit card
• Wallets can be loaded using a credit card and credit cards are not allowed (SEBI guideline) thus wallets are not allowed
• Loopholes: One can withdraw cash using credit card and deposit it in bank account or transfer wallet balance to the bank account. Then bank account can be used for MF purchase. Although there are deterrents for these methods such as high interest rates (on CC) and bank transfer charges (for wallets) but at present there are loop holes
• Future: SEBI is in process to allow MF purchase using wallets provided source of wallet funding is bank account or debit card (complicated to implement and not that useful)

Requirement 3: MF purchases to be done with registered bank account

• Payment solutions that use bank account as source of funds can be deployed. Example: NACH, e-mandate, Payment Gateway (net-banking, UPI, Debit Cards), NEFT/RTGS
• In recurring payment solutions (NACH, e-NACH, e-mandate) the account validation can be done during mandate registration
• In case of payment gateway transactions using net-banking and UPI, the account validation is done with TPV (Third Party Validation) flow. (TPV: Registered account is passed as parameter and validated against transaction account. TPV can be done during transaction (for 30+ banks) and will be done in offline for remaining banks
• At present, there is no mechanism to validate account number of a debit card during transaction so merchants that allow debit card transactions are expecting investor to comply with guideline and passing the liability/penalties (if any) to customers

Requirement 4: Funds to be credited to AMC account (directly or through nodal A/C)

• AMC/MF-Aggregator can pool the amount to nodal a/c and then credit the relevant AMC’s account — Single settlement account will work
• To settle funds directly to AMC’s account, payment gateway has to support scheme code integration. (Scheme code: every fund account will be assigned with scheme code and that scheme code is passed during transaction. Based on scheme code, settlement is done to corresponding account)
• Settlement time for MF industry is T or T+1 depending on fund type

Requirement 5: Entire investment amount should be credited to AMC

• Option 1: Merchant will bear the charges. But as charges cannot be deducted upfront from investment amount so charges will be invoiced to merchant
• Option 2: Surcharge the customer wherein customer will bear the charges
• For MF sector the charges will be Flat Fee (Recurring solutions always work in flat fee. Even the PG charges of on net-banking, UPI and DC will be in flat fee (Example: Rs.5 per transaction)

There are two main ways customer invests in MF.

A. SIP (Systematic Investment Plan): User can pay fixed amount on periodic basis. This fixed amount can be increased or decreased. Both online (e-mandate) and offline (NACH) recurring payment solutions are used.

B. Ad-hoc purchase: Investor can invest in a MF one time (ad-hoc basis). Payment Gateway is pre-dominant solution for these transactions. Also, recurring payment solutions can be used to run one-time debit on existing mandates.

MF use cases and Solutions

Additional points on solutions:

• Higher amount is taken in mandate so any increase in SIP amount is accommodated without registering mandate
• Periodicity of mandate debit is kept ‘as and when presented’ so same mandate can be re-run the debit (if investor’s account didn’t have sufficient funds on debit date) or use for ad-hoc purchases
• e-NACH (e-Sign) is discontinued and NACH (net-banking) flow is yet to be launched
• SI on Cards solution predominantly covers credit cards and selected debit cards. As credit cards are not allowed and debit coverage is less and inconsistent. Moreover debit cards fail to meet requirement number 3 so SI on Cards solution is not used
• Third Party Validation (TPV) will be implemented for UPI and Net-banking transactions

Payments for Brokerage merchant work similar to MF merchant as requirements are similar and above mentioned solutions are used.

Few other aspects of MF industry

A. Tertiary payment use cases of MF industry

AMC/MF-Aggregator has other uses for payments such investor account opening or advisory services. For such payments, typically payment gateway or SI on Cards (monthly fees, if any) are used. And payments can be done using any payment model (CC, DC, NB, wallets)

B. Success Rate:

We covered about importance or value of success rate earlier topics. In case of MF merchants the success rate is not that critical as that for an eCommerce company. Even if transaction fails, investor will retry again. Having said that, it is always good if transaction goes through first time.

C. Payment Solutions in MF withdrawal:

When investor triggers Mutual Fund withdrawal or when AMC has to distribute dividend then AMC pushes funds to customer’s account using IMPS/NEFT/RTGS or NACH-Credit solutions

• NACH-Credit solution allows merchant to push money to investor’s account provided customer has set-up NACH mandate
• For cases where NACH mandate is not available then merchant uses IMPS/NEFT/RTGS to push money to the registered A/C

Cases that I have seen:

• Zerodha is not a MF aggregator so monthly SIP is nothing but buying new MF every month and expect funds to be deposited to Zerodha’a account
• Fisdom uses paper based NACH solution but whatever happens on paper is replicate on mobile (including signature) — Amazing flow
• On Scripbox, one can buy bundle of MFs and settlement is done directly to AMC’s account with scheme code integration
• FundsIndia, collects the paper based mandate (NACH) and same can be debited for SIP, ad-hoc purchase and even for equity investment. Alternatively, one can pay using net-banking

Conclusion:

Many companies are interested in tapping MF industries. Apart from traditional distributors and AMCs, there are more than 100 FinTech companies that working in this space. MF is one of the largest and growing industry. Industry doesn’t rely on cash-back or discounts to attract customers and also, customer stickiness is higher.

A year back, one the leading Payment Container company’s alliance head rejected my views on MF industry and now same Company is gearing up to launch MF buy/sell on its platform. May be it took time for Companies to realise that there is sector that can be captured without burning money on customer acquisition.

Like I said earlier, Mutual Funds are interesting and complex and so are the payments in this sector. I don’t think of any better line to end this topic than AMFI’s tagline ‘Mutual Funds Achche Hai”