Last fortnight, fintech upstart CRED raised $120MM, within a year of its launch.

Starting Up?

Many venture capitalists will tell you that they would rather invest in repeat founders as opposed to first-time ones. 

That may strike you as surprisingly risk-averse for the risky VC business, but it is because of the trust that comes with someone who has grown a company before. 

Kunal Shah, who now literally builds trust, fits perfectly into this category.

10 years ago, Mr. Shah was sowing the seeds for Paisaback - an app built around giving customers promotional discounts. After his co-founder Sandeep Tandon and him realized that there was a bigger market in prepaid mobile phone payments, they founded Freecharge.

Freecharge which would go on to become one of India’s largest-ever startup acquisitions in 2015.

FreeCharge was a trusted platform giving bargain-hunting, lower-income youngsters and blue-collar professionals in India a chance to make quick and regular payments for their phone bills and receive coupons for payments. 

His new startup CRED is strikingly similar.

CRED is a trusted platform giving bargain-hunting, upper-income youngsters and white-collar professionals in India a chance to make quick and regular payments for their credit card bills and receive coins for payments.

Spot the differences to see how the same model has been applied to a diametrically different market.

The genesis of CRED came at an important crossroad in Shah’s life. He was working with two well-respected venture capital firms and had the opportunity to stick around as a senior member.

But Mr. Shah took a deep look at the Indian startup ecosystem in 2018 and knew which side of the table he wanted to be on. 

He wanted to be on the same side as FreeCharge, of course.

Building an InCredible Community

Shah’s new thesis was simple. He wanted to make a “gated community” of trusted individuals and provide them with the best benefits.

While companies both locally and internationally were striving to target the ‘next billion internet users’, Shah saw an opportunity in the people who already had access to the internet. 

A strong believer that a smaller number of high lifetime value users are more powerful than a large number of low lifetime users, CRED was started with the goal of rewarding good behaviour.

If you were listening to Kunal Shah give an interview for the first time, you might think he is walking a tight-rope between inspired and unrealistic. 

Kunal Shah describes CRED as a Lifestyle Brand

But that’s likely what it takes to raise a total of $145MM within one year of starting a new company, even if it is your second one.

As a founder who thinks “happiness is flawed” (and other interesting aphorisms), Shah wants the ‘CRED Club’ to be the gold standard to reach for a better lifestyle, network, and maybe even faster visas for travel.

CRED took off quickly, because of its unique proposition and a superior customer experience.

Kung Fu Pander

CRED built an app that very (frighteningly) simply got your card + you onboard.

A superior app user experience was enhanced by better offers as users used CRED more. A sense of ‘FOMO’ was created through an exclusive community of a ‘select few’. CRED is only for individuals with a credit score of 750 and above.

One is simply waitlisted if not qualified. ("The rejection hurts", we hear).

Few waitlisted users we spoke to are improving their credit score to align with CRED’s goal of good financial behaviour, in a similar way to saving up your monthly paychecks until you can afford that new phone you wanted to buy. 

Consumerism FTW.

An early indicator that CRED has succeeded in becoming the aspirational app for India 2.0, CRED’s user reviews are positive with the app having a rating of 4.6 on with ~100k reviews. 

What has driven it are features such as Card Protect and Smart Statements to analyze credit card statements and discover hidden fees and charges in the credit card bill. Other features include Kill the Bill, CRED Gems and a free credit score.

The basic model is the award of a ‘CRED coin’ for every point on the credit score. Equivalent number of cred coins for each rupee paid on the credit card bill are also given. The rewards range from a free tea cake for 750 coins to a free flight ticket for 200K coins.

CRED has made life a game, quite literally.

Earlier this year, Shah crowdsourced ideas from its users on the additional features desired in the app to make it their fintech platform of choice. In just a couple of days, the thread had 1k+ responses.

A user even quipped that the company didn’t need product managers because it had a community. Most of my friends at Google or Facebook would be artists if the two giants decided to do the same.

For the exclusive community playing the game of CRED, though, it appeared to be no pain and all gain.

Finding DeMo

Members got rewarded with offers from top brands for what they did “naturally”, which was paying credit card bills on time.

Added to this is a system that takes care of their financial management by dissecting spending habits, sending payment reminders and, most importantly, identifying hidden charges.

We all hate hidden charges. They make us go bananas.

Provision of such a benefit to creditworthy consumers at no cost is rewarding for ‘good behaviour’.  That’s where the real pain that consumers actually take is identified and rewarded.

CRED is built on a model that tries to solve the classic problem of ‘adverse selection’ in a lending economy. Adverse selection 101 is taught by selling second-hand cars, which incidentally is doing a lot better than first-hand cars in India.

Coming back to lending, given incomplete information on the creditworthiness of each potential borrower, the interest rate has to account for the presence of defaulters. This ends up being higher than what would have been charged to only creditworthy individuals.

The high rates push many borrowers out of the credit market, resulting in low penetration of lending products.

It reminds you of your really cheeky friend who also got you punished in school (or was that you?)

CRED wants to separate out these creditworthy borrowers (non-cheeky people) and turn them into a distinct community.

By self-selecting high-quality community members, the startup is flipping the adverse selection problem where high credit members self select themselves. 

This model benefits three parties - lenders, consumers and brands

In a system with high delinquency rates, a mechanism that enables lenders to receive full repayments helps them.

Opacity and the high risk of being charged heavily on a delay have made consumers sceptical of using credit cards, but CRED makes it seamless.

The many brands that have opted to offer on the CRED platform gain access to high value, ‘premium’ consumers.

There’s a reason why it is called CRED.club. But can CRED.club become a business? 

Market for the Brave

The estimated number of credit cards in circulation in 2019 are at around 50MM, with unique credit card users in the country at just around 25MM. 

If you have a credit card, you really are the 1% (okay, 2.08%).

Bearing in mind that CRED takes consumers with a credit score of 750 and above, we are looking at only a fraction of this pool.

This forms the addressable market for CRED – a small market in not just absolute terms but also when compared against other young Indian fintech startups that look at 100MM+ users.

How would CRED survive in an ecosystem that equates scale with success? This is where we should remind ourselves that Freecharge was sold for $400MM and that all the headings in this piece are puns on animated films.

25MM credit card users look like a small market, only until we realize how rapidly it has grown over the years. From 2015 to 2018, the number of credit cards grew at 26% YoY with the total amount spent growing at 36% and reaching a massive INR 6.07 Tn ($100Bn) this year. 

That is 2% of the people spending 5% of the GDP only via credit cards. Pareto Principle holds in random places and another random fact is that it was coined by a consultant.

Not only are a greater number of consumers using credit cards they are also spending larger amounts per card. The number of credit cards is expected to double to 100MM over the next four years and should help CRED in its quest for scale.

Except, there appears to be no quest for scale. We were just trolling you with random data that is only useful if you're a consultant.

Of course, CRED does want to scale, just not in the number of users.

A High Revenue Beast is Beautiful

CRED relies on the fact that the 20-25MM premium consumers drive 40-50% of India’s consumption. 

The argument is that the mass market in India cannot generate money for online players and can be addressed only by large incumbents with ready infrastructure. 

The fortune at the bottom of the pyramid was an elusive hoax, was it?

Focusing on a high average revenue per user (ARPU) model, CRED is tapping into this premium segment where the consumer has moved beyond booking tickets online and seeks more advanced forms of convenience.

CRED appears to be doing a good job of capturing this consumer base. 

One of CRED’s investors remarked that CRED’s Day 5 payment volume was similar to that of Freecharge at the time of its exit. Considering that Freecharge was for the masses, and thus had a low-value high-volume model, achieving the same level of volume for a high-value product like credit card bill payment is pretty striking.

It's time for some serious computation.

In 2015, the year of Freecharge’s exit, it had around 200MM transactions annually, amounting to an average of just under 550K transactions daily.

Treating this as the approximate transaction volume for CRED on day 5, and noting that a transaction refers to payment of a credit card bill on its platform, we get around 550,000 credit cards being used on the app, assuming one card per transaction. 

Since the total number of credit cards stood at around 50MM at that time, this is equivalent to CRED capturing close to 1% of the cards in 5 days. 

CRED was moving fast and acquiring things.

From Outside Revenue to Inside Revenue

Though the user base of CRED has scaled, it has attracted scepticism on its revenue generation or lack thereof.

“Acquire now, monetize later” is a mantra oft-repeated in fintech, and has to do with the company’s “community-building approach”. It currently earns a fee from only some of its 150+ partner merchants for giving them access to their lucrative customer base.

In a recent interview, the CEO indicated a revenue opportunity of $5-10 per consumer in the future. This can amount to $125-250MM in revenue if all credit card users have a high credit score. 

With a total of INR 6.07 Tn ($100Bn) in annual credit card spending, we are looking at average monthly spending of INR 10K per consumer. This highlights the large amount of deal flow CRED is sitting on, even with a small consumer base.

Sitting on the flow of money to make money, like we saw Razorpay does is the way to go. How do you think banks got so big?

The key question, though, remains on how CRED will differentiate itself from fintech players in the market doing exactly this.

A lot of fintech players have taken a vertically focused approach e.g. Groww for mutual funds or InCred for lending, and as we have observed regularly - dominating a niche provides unfair advantages over horizontal players.

Google has been dominating the online advertising niche for decades, you know?

Assuming CRED sits on all the credit card transactions and takes a 1-2% fee, it still is $1-$2Bn of revenue for a company that is valued at north of $500MM. 

The “acquire now, monetize later” mantra will need the later to arrive. 

Break it like Wreck it Ralph

Started with the concept of incentivizing credit card payments with reward points, CRED necessarily has bolder ambitions.

The quantum and timing of fundraise for the 10-month-old ‘baby’ startup with a largely unproven record, appears to be surprising.  

But the rationale for the fundraise is one word - potential. That word is also the rationale for every startup's valuation (so please don't ask "Why does Swiggy get such a high valuation despite being loss-making")

CRED has created a community of ‘high trust’ individuals and is collecting data to potentially offer a myriad of financial products. Data is the new ‘oil’ for it as it banks on transforming ‘transactions’ to ‘trust’. 

Information is gold for offering financial instruments, and CRED is mining it for high-income consumers. 

Did you ever think that King Size Behrouz Biryani credit card transaction would be gold for anyone? It is. Feel special. Somebody cares.

There was a moment of epiphany for Mr. Shah when he saw the contrast between the developed markets where the system rewarded good, trustworthy individuals but back home the ‘good actors’ still had to subsidize the bad ones.

The platform remains free for users, with the focus being to build for scale rather than look at monetization models as a priority. An important focus has been the intent to create an ecosystem so that members don’t need to look elsewhere.

Could the community evolve into more than just an app, or as everyone in China calls it - WeChat?

How to Trust Your Fintech Dragon

The idea of trust being concentrated with a few organizations in low-trust, developing markets has been highlighted by the CEO himself.

The founder suggests that he wants to achieve three main things for customers: Lower costs, enable earning more and investing better. 

A fintech focused “super” app which is able to integrate finance and real-life needs is a potential evolution for this “community”. As Mr. Shah tellingly observed, Reliance and Tata are super apps. 

CRED could be a luxury fintech super app available for a select few. A Bvlgari for Bonds. A Hermes for Homes. A Lamborghini for Lending. You get the drift.

In the next 6-9 months, CRED aims to allow highly sought-after customers access few financial services from banks in a single click (read: insurance, personal loans, new credit cards). 

CRED is taking a bet on consumer fintech and the high-income consumer to be one of the biggest markets in India for the next two decades. The hope is that it will find a way to scalably monetize its community. 

As a brand, CRED seeks to become a third party that can be trusted by its users. Anyone who uses CRED will know that another CRED member qualifies a fairly high financial bar.

CRED is becoming a fintech luxury, but the key question remains - how will the Devil pay for Prada?