The Indian Banker, Volume III No.10 October 2008
Dr.P.K.Khanna
Banks are so ubiquitous across our country that they have a better reach to the masses then any other institution. As financial institution, while providing banking services to individuals and organizations, they have immense potential to provide services which can help them add to their performance and profit, providing their customers an opportunity to do more then just money keeping with them. It is therefore necessary to explore the concept of providing franchise services by banks and identifying some areas where banks can be a franchisee and/or a franchiser. It is also necessary to bring out the difference between an agency, a franchise and outsourcing which at times are used interchangeably or any one of them is used to define or qualify the other.
Bank as agents and principal
According to sec. 182 of Contract Act an "agent" is a person employed to do any act for another or to represent another in dealings with third persons. Agency is a relationship between two people or entities where one is a principal and the other is an agent representing the principal in activities with other parties. Thus, an agency business has two aspects- either you are an agent or a principal. If you are an agent, you are representing and acting on behalf of some one i.e. on behalf of the principal and if you are a principal, some one is acting on your behalf. The Indian Contract Act deals with appointment of principal and agent.
Agency is an area of commercial law dealing with a contractual or quasi-contractual tripartite set of relationships between principal and agent which arises out of a contract either expressed or implied, written or oral, wherein the agent is employed by a person to do certain acts on behalf of the person in dealing with a third party. Under the agency arrangement, the agent does not purchase products. He only sells or markets the products on behalf of the principal. He acts as an intermediary between the supplier and the ultimate customer.
Sec 6 of Banking Regulation Act, 1949 (BR Act) deals with the types of business a banking company can undertake in addition to what is contained in Sec.5 (b) of the BR Act. Accordingly, banks can act as “agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods………………..” It would be observed that section 6 (b) has given wider umbrella to banks for undertaking agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers. Sec 6 (n) of BR Act permits banks to do all such other things as are incidental or conducive to the promotion or advancement of the business.
What is Outsourcing
Outsourcing is a contract, which an organization enters into with another for providing services that might other wise be performed in house. It is a lucrative and legitimate business strategy and a modern day boon.
Organizations generally outsource non-core business thus enabling it to focus on core competency areas. The advantage of outsourcing is the cost effective factor. Organizations save money, as they do not have to provide benefits to their workers. Moreover business issues are taken care by professionals in that field having world-class capabilities.
Outsourcing is generally done of those services for which organization does not have core competency and that which require care by professionals having world-class capabilities in that area. The professionals have their own systems, procedures, methodology and independence in handling the job keeping the objectives of the organization that has outsourced the job. The main aim is to deliver excellent results to the satisfaction of their clients.
What is franchising?
There is no legal definition of franchising. Franchising is not a business. It is a strategy and an innovative marketing concept of doing business and creating an image in the minds of current and future customers about the products and services that satisfy their needs. It is a contractual relationship, a strategic business alliance where the owner of a product or service (the franchisor) grants certain license, rights and authorises another individual or institution (the franchisee) to conduct business by utilising the brand, trademark, trade name, logo, design, business strategy, marketing strategy, and operations strategy for selling the products and services in return for a fixed sum of money or for a fee or a percentage in the sales etc.
The International Franchise Association defines franchising as a “continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organising training, merchandising and management in return for a consideration from the franchisee”.
The franchisee has to make initial and continuing payments to the franchiser. It is a commercial wedding between a franchisor and the franchisee for getting quicker returns on investment. The franchiser exercises continuing control over the franchisee. The franchisee enjoys business rights during the currency of the contractual relationship. On expiry of the tenure of the agreement the right to use the business format ceases.
There is no difference between the franchisor's own sales outlets and the franchised one. The hallmark of the business is standardisation, consistency, uniformity of the shop premises, layout, decor, signage, uniforms of the staff, services etc. Everything is identical in all the franchisees.
Advantages of franchising
Franchising has advantages over agency and outsourcing. In agency, the agent is bound to conduct the business of his principal according to the directions given by the principal. He has no independence to act. He may have expressed or implied authority. He has to pay the amount received for sale of goods or services to the principal. He is entitled to receive payment for the performance either by way of commission or fee or remuneration.
In case of franchising, franchisee is his own boss. His area of operations is restricted to a specific area or territory. He gets the goodwill, brand name and a known and well-established business platform. Before commencing the business, the franchiser provides necessary technical support, training to the franchisee and to his staff, advices how to deal with customers, improve sales and to deal with staff problems. Franchiser also provides both technical and psychological help in case the franchisee encounters any issue. The franchisee is also kept updated with financial and personnel regulations. A franchisee can have a quick start as hardly any gestation period is involved in establishing the business. The risk of failure involved in starting a new business is reduced to a greater extent as he is benefited from the well-established processes and is able to promote business, manage sales, expenditure and revenue.
Franchising is a win-win relationship for both the franchisor and the franchisee. The franchisor is able to expand business rapidly, accelerate growth and profitability by penetrating new markets that too without pumping any additional capital. The franchisee gains access to the established business systems and gains commercial advantage. The business is run as per the rules framed by the franchisor so that there are similarities in all the franchisees. Franchising offers people a mix of management responsibility and business security.
Franchising in
Llibralisation of the Indian economy has opened flood gates for franchising. A vast country like ours offers the most favorable environment for franchising. Corporates are adopting franchising route for faster growth of their businesses. Both national and international companies are eying on domestic market. There are more than 600 franchising systems operating in the country with a large number of foreign and particularly American brands that include McDonald’s, Pizza Hut, UPS, Medicine Shoppe, and Kentucky Fried Chicken(KFC). In addition, there are many homegrown companies going into franchising in a large number that include computer education, study centers, restaurants, healthcare, courier logistics, beauty parlors, cosmetics, jewellery, apparel, e-commerce ventures etc. Even Indian Railways has opted for franchising of rail tickets for the convenience of masses.
In a country like ours where unemployment is a problem amongst educated youths, franchising can provide a relatively safer route into self-employment. Franchising offers a successful business concept, proven marketing and operational methods, ongoing support and an established identity. The risk involved is minimal in comparison to that involved in starting a new business from scratch.
Various Statute affecting Franchising
There are no specific laws governing franchising in
The Foreign Exchange Management Act, 1999 (FEMA) regulates the terms of payment under franchise agreements (such as franchise fees, management fees, development fees, administrative fees, royalty fees and technical fees) where one party is a non-Indian entity.
Franchising of Banking Services
Technology, globlaisation and liberalisation have revolutionised banking industry across the globe and
Business that a bank may franchise
§ By financing franchise business.
§ By entering into arrangement with a franchisor for selling their financial products i.e. acting as a franchisee.
§ By becoming a franchisor i.e. by outsourcing ancillary and allied business to a franchisee
Banks can outsource some of its activities by adopting franchising route. This would enable banks to save expenses on the one hand can and on the other, add to its revenue. Franchising has two-way source of income.
Banks do not encourage installation of locker cabinets as they find that this business is not viable from the cost benefit viewpoint. In the absence of banks expanding these facilities and in view of the large demand for lockers, in some cities private institutions have entered into this business. Hence, providing locker facilities is no more the exclusive business right of banks. Establishment of the business of locker depends on the reputation and standing of the private business entities providing these services in some cities.
Banks can outsource their locker business by entering into franchise agreement either with some of the financial institutions, non banking financial companies (NBFC) or with other reputed organization that may be ready to enter this business. Banks can lease out their locker cabinets to these franchisees to earn lease rent, a share in the locker rent and also avail the benefit of depreciation on locker cabinets / lockers. Banks can save on the space for providing locker services, thus saving substantial outgo on rent. Even the services of staff members looking after locker business would be spared for some other core business activities. Franchising locker facility would also be convenient to customers too as the franchisee would be able to provide service in the extended hours or at select centres round the clock service can be extended.
However, utmost care will have to be taken in selecting the franchisees since bank’s whole reputation will be at stake on their dealings. Of course the bank would have to provide training to the franchisee, decide décor, lay out, safety norms, lay down operational procedures and have a tight supervisory control over the franchisee.
b) Remittance Business
Banks have entered into draft drawing arrangements with exchange houses in gulf countries and also with their correspondents. Banks can outsource its remittance business through franchise route. The Multi-city or payable at par cheque facility available in core banking solution (CBS) branches can be leveraged for franchising such draft drawing arrangements. The franchisee may open a current account with the bank and issue such payable at par cheque for remittance activities as demand drafts charging exchange for the same. These franchisees may also establish draft drawing business in unbanked areas to aid financial inclusion. Banks can share exchange income or may earn on floating funds in the current account besides income on service charges that would be collected from such franchisees. The customer gets benefit of purchasing the instruments at any time of the day.
Conclusion
Agency, Outsourcing and Franchising are three dimensions of doing business having common goal i.e. growth and profits. Every system has both advantages and disadvantages and none can be said to be better than the other.
The Indian banking has to align with new trends in business. Fusion of technology with new business lines will be boon to the industry. Banks have to be in constant look out and evaluate the franchise opportunity for new business. There are many more business avenues in which banks can plunge through franchising route. Only imagination and innovation will help banks to explore this great emerging potential.
References
- Banking Regulations Act, 1949
- The Foreign Exchange Management Act, 1999
- Indian Contract Act, 1872
- The Patents (Amendment) Act, 1999
- The Shops and Establishment Act, 1948
- The Specific Relief Act, 1963
- www.coventry.ac.uk
- www.franchiseeek.com
- www.franchisebusiness.in
- www.franchisedirect.com
- www.rbi.org.in
1 comment:
Great article.
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