Fintech Inside #22 - 27th Feb, 2021 | CRED
Ever wondered what's CRED business model? I attempt a deep dive on its business. 2 Fintech's are planning their IPO's and another is doubling its valuation within 6 months. Tons more updates.
Hi Insiders, Osborne here.
Welcome to the 22nd edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets. Readers have rated this newsletter a solid 4.7 stars out of 5. What do you think?
This week I tried something very different - I attempt to do a deep dive on CRED. I explore what CRED is, its market, products, challenges and future. The post became slightly long and hence I cut out on some pieces from the other sections.
Other stories covered: In India, 2 Fintech's are planning their IPO and another one is doubling its valuation in just 6 short months. Also, Fintech stock brokers are chipping away at India's nascent stock market to garner the top two spots. Lastly, Indian Insurtech Association along with BCG released an insightful Annual Report, 2021.
Globally: UK is planning a Fintech visa fast track scheme. Mastercard launched a CBDC-linked card in Bahamas. Stripe offered BNPL in Australia. Saudi central bank launched UPI-like system. Microsoft launched its financial services cloud.
🤔 One Big Thought
Fintech Deep Dive - CRED
It's easy hate on something that we do not fundamentally understand (e.g. India's action on Bitcoin). This makes it that much tougher to take some time to truly understand those fundamentals. I'm not immune to this either. Back in 2015-ish, I hated on Paytm and even told a senior management person at Paytm that the business model made no sense to me. Instead of dissing me, this very senior individual took out their phone, opened the Paytm app and started explaining what the various design and product choices meant from a business perspective. I continue to have immense respect for that individual even today for making me think from a very different perspective. I hope to do the same for you through this post. Bear with me on this bull case for CRED.
To understand CRED you need to throw away your business books and refer to psychology ones. Better yet, bring a behavioural economics book. Actually don't throw out that business book just yet, we'll keep it for later in this post.
Any founder will tell you that to build a lasting business you need to have customer trust or customer loyalty. But very few founders know what that means, what needs to be done and more importantly how to maintain trust at scale. Kunal Shah is one of the few founders who is approaching his venture from that Trust-first angle. Think of CRED as a business trying to codify, scale and reward trust in an otherwise trust-deficit country. Interactions with every fintech product is transactional, CRED seems to want to change that. Every product or feature of CRED is a way to double down on trust.
But what is CRED? In CRED's own words "CRED is a members only credit card bill payment platform that rewards its members for clearing their credit card bills on time". To me CRED is the largest (6 mn users), exclusive, community of high spenders with the highest credit scores. High credit score doesn't equate high spending, but does mean sound credit behaviour. In exchange for this sound credit behaviour, CRED rewards its users.
An important feature of high credit score users is that they are Transactors i.e. they usually repay the entire outstanding amount on time and don't get charged any interest. Therefore, credit card companies don't really earn any interest income from Transactors, but earn commission (MDR) from the merchant. CRED's marketplace is its way to earn MDR from these users, because interest income is tough.
It's important to note that CRED rewards users for repaying their credit card bill as opposed to other rewards programs which rewards users on spends. This is a major difference which is very nuanced. There is no direct comparable anywhere in the world or in India that I know of. This makes it doubly tough to understand the business model, but more importantly tough to grasp what's the potential here.
What's the market for CRED? According to RBI, India has 60 mn credit cards and 886 mn debit cards issued as on Dec-2020. Annual value of spends at POS in 2020 using Credit Cards was USD 83.0 bn whereas Debit Cards was USD 85.8 bn (Jan-2020 to Dec-2020). This in a pandemic year, I assume spends are much higher in a normal year. Important point to note is – Far fewer credit cards issued but value of spends at POS is virtually similar to debit cards. Going deeper, average monthly transaction value of Credit Cards at POS in 2020 is INR 3,374 (USD 45.6) vs. INR 1,501 (USD 20.3) with Debit Cards. This shows that credit card users on average spend 2.25x more than debit card users per month. Avg. credit card spends will be much higher if you look only at active cards in use etc. but I don't have access to that data. This credit card spend is exactly CRED's market! Further, within a short 2 years, CRED has 6 mn users (60 mn credit cards are issued) and processes 20% of *all* credit card repayments in India. For a 2 year old startup, if that's not massive, I don't know what is.
How do CRED's products make sense? As mentioned, IMO, each of CRED's product and feature is a way to double down on "mutual trust" and "exclusivity". CRED's first product, Card bill payments, settled within minutes – this gets users to trust CRED. Second, Rewards on bill payments, CRED trusts that the user will do good and rewards them via CRED Coins (can be used to spend off platform), Cashbacks etc. Third, CRED Protect - scans the user's credit card statement and alerts users of hidden charges. This tells the user that CRED can be trusted and depended upon - this is super important. Fourth, CRED Store, the marketplace of "exclusivity". Through the store users can access exclusive products and experiences – again builds trust that CRED will curate exclusive offers from high-end brands for the lifestyle of its users. Other products include RentPay (pay rent via credit cards) and CRED Cash (Instant loans). For users that don't make the cut (min. credit score of 750), CRED has a separate user journey to improve their credit score – again building trust.
Incredibly, CRED's trust building doesn't stop there, trust permeates through its culture as well! CRED pays its employees' salary on the first day of every month (as opposed to end of month), they have flexible leave policy, deliver laptops along with the offer letter, no designations and the list goes on. They even provided some employees with liquidity in their ESOP's – creating wealth for those employees.
Lastly, luxury, lifestyle brands, come with an air of exclusivity, brand value and signalling. Think Gucci, Prada and the likes. CRED's app is designed to signal the exact same thing to its users. No other Indian app is designed as a premium, luxurious app. It's a different thing altogether that we do not intuitively associate software with luxury or premium-ness.
What needs to work for CRED? Obviously CRED has to still prove to itself that this high trust, high spend userbase can generate revenue in the long term, but it's still early days. Secondly, CRED has to also make sure that it provides its merchant base with increased conversion to sale ratios for its CRED Pay feature. If these merchants don't see better conversion or higher basket value or even new user acquisition, it will be tough to sustain this exclusive marketplace. Users may still use the app for the incredible ease of card bill payment and hidden charge alerts, but surely CRED's ambition is to be more than that. Folks at CRED are incredibly smart and already know these things. Most likely they're already working on it. Sure, some products may work, some may not - that's part of company building.
What's the future like for CRED? This section is me skirting around speculation territory but hear me out. IMO, the biggest opportunity for CRED from its current product suite is making its CRED coins available for spending offline. That's where true value and revenue can be unlocked, with some serious moats. Offline coin spending is a significantly tough problem to solve for but also where massive volumes come from. For future products, I believe there is an opportunity for a subscription product, a wealth product, offline experiences, exclusive event access product, embedded insurance product, corporate card payments & benefits or even a NFT exclusive collectibles product. I slipped that last one in to sound culturally woke. With trust, users will use CRED's products assuming that CRED will always do the right thing for them. There are a lot of products that can be launched for such a mutually trusting user base.
As for whether CRED's USD 800 mn valuation is justified, honestly, that's for CRED's investors to care about. If you'd like to educate yourself as to how VC valuations work, listen to the first 10 mins of this incredible Paisa Vaisa by Anupam Gupta podcast.
Additional Reading: What's Under the hood at CRED. India, according to Kunal Shah.
This kind of a post is way out of my comfort zone. Everything in this post is my personal opinion and is based on whatever research I could do online. I may be entirely wrong about the business here. Did you like such a deep dive? Would you like me to cover another Fintech? I'd love to hear your thoughts email me here or schedule a meeting here.
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💼 Fintech's Hiring
Recko, a SaaS platform for finance operations, is hiring a Product Analyst for their Product Team. You can DM the founder (LinkedIn) directly.
Basis, financial services for women, is hiring an Android Lead. Email your CV's to email@example.com or DM the cofounder - Hena Mehta
Help these Fintech's find the right talent. Share this in your network. You can email me to get introduced to these founders directly, too.
If you’re a Fintech who’s hiring I’d like to help. Write to me and I’ll put your requirement here.
3️⃣ Fintech Top Three
(This section was cut short because of the lengthy deep dive)
1️⃣ Indian Fintech IPO's - MobiKwik, Policybazaar
Policybazaar and Mobikwik are finalising their bankers for an upcoming IPO. Policybazaar may list as early as Sept-2021 while Mobikwik may list in 2022. Policybazaar may raise USD 500 mn at a valuation of USD 3.5 bn. Both are expected to list in India.
Takeaway: Homegrown Fintech's going public domestically - what more could we ask for! There are rumours that even Paytm and PhonePe are evaluating an IPO. This will be big not just for those involved at both Fintech's but also for the larger Fintech ecosystem in India. Hopefully this will bring more investment in Fintech in India, will increase talent interest in Fintechs, will prod more people to startup in Fintech and most importantly, give regulators and incumbents confidence to work with Fintechs. Indian Fintech is just getting started!
2️⃣ Discount Brokers increase market share
That chart in the tweet says it all - two Fintech startups have been chipping away at the stock broking market and created a big mark for themselves. Their offering of better product and transparent pricing has certainly played a role. From negligible 0.7% market share in Mar-2015 to 35% in Dec-2020 - that's a big jump. Zerodha still rules the roost with 2.9 mn active trading accounts, followed by Upstox with 1.6 mn accounts as on Dec-2020.
🚀 Featured Fintechs
Featuring 3 Fintech's weekly that have a unique business model, unique product or have recently launched.
MyShubhLife | Pre-Series B (Website)
MyShubhLife is a personal finance platform for blue collar workers. It was previously known as ShubhLoans and rebranded during the pandemic.
MyShubhLife provides mini and micro loans, insurance, mutual fund SIPS, tax filing service and a feature rich savings Accounts
It aims to bring 10 mn people under the formal credit system by 2022 by providing a proprietary "MyShubhLife Credit Score"
The company raised USD 4 mn this week from impact investor Patamar Capital and USD 4 mn in the past.
Finin | Seed (Website)
Finin is India's first neo bank platform that formally launched in Dec-2020.
Finin partnered with SBM Bank to offer banking services for example savings account, debit cards, spend management and several banking features on top of the bank account
I've personally used Finin and the experience was seamless, account opening was 100% on the app and within minutes, features make it easy to use for payments.
Finin raised an undisclosed amount in Jul-2020 and this week completed two years since founding.
BimaPe | Seed (Website)
BimaPe aims to simplify insurance and help users put their "Family's insurance on autopilot"
It's first product was "Know Your Card" which helps users identify free, hidden insurance coverage on their credit cards. To date, they've helped users identify USD 2.4 bn in hidden coverage.
They've also launched some really informative "insurance awareness" products e.g. Awareness, EDL, Know Your Insurance and so on.
This week BimaPe launched on IndiaStack's DigiLocker to automatically fetch insurance documents.
Let's get your startup featured here. Submit your Fintech startup
(Updates up to Thurs, 25th Feb, 2021)
- 📰 Market Updates:
Crimes involving cryptocurrencies fall by half to USD 10 billion, India ranks high on illicit darknet activity. Rakesh Jhunjhunwala calls for ban of bitcoin. IAMAI finalised a Code of Conduct for blockchain and crypto-firms. Unicas' crypto-neo bank opened its 3rd physical branch in Delhi.
Razorpay to raise USD 150-200 mn at USD 2bn valuation, 6 months after raising funds at USD 1 bn valuation. US-based Indian entrepreneur staked his claim on shareholding and Director rights in Paytm. IndiaGold eyes national expansion.
Amazon, ICICI Bank, Axis Bank and VISA are setting up a New Umbrella Entity for Payments. NSE hit by technical glitch, halts trading in all segments.
SBI Payments to launch YONO Merchant App. SBI shelves plan to hive off Yono app. Elevation Capital (SAIF Partners) increased its shareholding in Muthoot Capital to 9.52%. Fino Payments Bank upgraded to universal bank status.
Angel investors in BharatPe made 80x returns through secondary exits. CredoLab, alternate scoring platform, strengthens India senior leadership team.
- 📝 Regulatory Updates:
- RBI (Central Bank): Voiced "major concerns" regarding cryptocurrencies. Issued new guidelines that will payment aggregators & e-commerce websites from storing your debit and credit details.
- SEBI (Securities): Told promoters to square crypto-currency investment before IPO. Sought a report from NSE after NSE halted trading for 4 hours caused by a technical glitch. Floated a consultation paper to introduce the concept of "Accredited Investor".
- 🚀 Product Launches:
Pravin Jadhav, ex-Paytm Money, launched his Fintech venture Raise. BimaPe launched it's integration with DigiLocker (India Stack) to automatically fetch insurance documents. Unnati Agri launched a Farmer Card in partnership with Paytm Payments Bank.
Walrus, teen banking platform, launched a UPI gaming feature. Basis, women fintech startup, launched Basis First, its premium plan for members.
- 💰 Funding Announcements:
- Fund Raises: Kinara Capital (SME Finance). MyShubhLife (blue collar finance). Raise (consumer financial products)
- Acquisitions: Fisdom acquired Tax2win, income tax return filing startup.
(Updates up to Thurs, 25th Feb, 2021)
- 📰 Market Updates
China tightens rules for banks on internet lending. China and UAE central banks explore CBDC for cross-border payments.
Standard Chartered's retail virtual bank - Mox, captured USD 5.1 bn in deposits in 5 months since launch. South African Digital bank - Tyme, raised USD 110 mn and applied for Bank license in Philippines for expansion.
MYBank, Ant Group's digital bank, signed up for digital yuan test drive. DBS enables SMEs to open accounts using facial biometrics. Mizuho Bank and LINE Financial increase investments to launch Digital Bank in Japan.
Indonesian P2P SME Lender - Amartha, raised USD 50 mn debt facility to invest in Indonesian women micro-entrepreneurs.
Singaporean digital escrow service Tazapay launched for SMEs on Proxtera marketplace.
- 💰 Funding Announcements
Fund Raises: Fundtastic (Indonesia). ErudiFi (Singapore).
It's been a busy week in fintech! If you missed any of it, check out Nik Milanović's This Week in Fintech for the headlines of the past week.
- Astra launches a transaction automation platform
- Sezzle partners with Discover
- New launches from Affirm (debit card) and Afterpay (banking)
- ADP launches a payroll app
- Robinhood adds Dogecoin
- Digital wallets surpass cash in-person transactions for the first time ever.
👋🏾 That's all Folks
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See you in the next edition.
1. Credit card spend per card being over 2x the debit card equivalent is fascinating. Any thoughts as to why this is?
2. In a world where banks and credit cards always seem to be ripping you off, building a brand as “the nice guy” is surely a good thing.
3. For those of us who don’t know the market well, who are the primary holders of credit cards in India? Is it still a very upper / upper middle class thing or has it spread to other groups of people? I also assume that CRED only allows people with good credit to access their card...?
3. Overall CRED is giving me AMEX vibes in that being a CRED card holder could become a social status signal.... AMEX tended to signify that you‘re rich, CRED shows that you’re a financially responsible person .... a great, distinctive and more accessible brand. I’m curious to how the financially responsible brand will balance with the luxury brand CRED is giving me over time.
OS, Cred's business model and positioning seems like a philosophical discourse to me. What does "creating a community based on trust" actually mean? What problem is Cred solving for an average user? I am a heavy credit card user and I don't have any problem paying my card bill. And my card company rewards me for doing that with mutliple offers cashbacks etc. Just don't get why I need Cred at all.