Last fortnight, KreditBee raised $80M, getting close to a $700M valuation in a funding market that was suffering from a lack of capital
Building a Comb for Hungry Bees
The Indian middle class is a large working population that depends primarily on wages to make ends meet. Jobs or small businesses do provide financial stability in some sense.
However, these folks need a cash infusion to fund emergencies like hospital treatment or big-ticket purchases like a motorcycle once in a while.
This target segment does not own large assets, due to which the process of acquiring a loan is fraught with heavy paperwork, long timelines and uncertainty. Moneylenders abound and can charge crazy interest rates of 100-200%. A quick, convenient and hassle-free way to secure funds can be a godsend.
Madhusudan Ekambaram was no stranger to this problem.
It was in 2016 when he got down to solving it and eventually dreamt of a ‘$600 million and counting’ AUM company around the problem. Until he dared to take the plunge, Madhusudhan trod a fairly beaten path.
Post graduating as an engineer, Madhusudhan honed his software development skills mostly in the telecom sector and then transitioned to business and product.
The idea for Kreditbee started to germinate when Madhusudan worked for a large e-commerce brand between 2013-2016. His work led him to travel to multiple countries across South East Asia and the Middle East.
While he learnt many aspects of local customer preferences and regional differences, many threads ran common across these countries. Customers demanded a certain level of quality and sought value, and they only gained access to credit through a credit card.
This got him thinking, and he began talking to lenders to try to onboard them as partners. He was convinced that the online store could see a sales uptick when this credit was made available.
BNPL was still in its infancy then.
However, lenders had massive apprehension about underwriting loans and giving money to people they have never seen. They struggled to define a digital process.
At the same time, Madhusudan saw how quickly unsecured digital lending was picking up in the US and China.
A founder was beginning to take shape
Tapping Students to Build Combs
Sensing an opportunity for the Indian market, Madhusudan built a solution to address two concerns.
First, digitise the entire lending process – from origination to underwriting to collections. Next, use data models to underwrite loans. Given 75% of the Indian market wasn’t covered by credit bureaus, data was going to be vital to control risk.
Kreditbee was born in 2016 to serve credit to the underserved.
The first product was a quick personal loan of Rs. 10-15,000, disbursed upon filling in basic personal details. Their first customers were students who used the money to pay semester fees or purchase a bike and employed professionals.
In the initial days, the process had a few physical elements, such as KYC, but with the India stack in the works, the days to fully digital were not far off.
The adoption was fast, and there was clear and hungry credit whitespace in the market.
Kreditbee was beginning to feed a credit-starved market.
The biggest challenge as they built the product was how to manage the risk
For student loans, the risk was controlled by adding the parent as a guarantor for large ticket sizes. Monthly instalments for 1,500 – 2000 rupees didn’t hurt pockets much, given the ease of acquiring the funds and satisfaction of immediate purchase.
The student community was a controlled environment to test the use case and a valuable source of feedback on the app interface, usability and disbursement process. These were vital learnings as they prepared to scale and go after a broader user base.
Kreditbee set out to be a full-stack digital lending platform and not merely a lead-generation channel for banks or financial institutions.
Building a Money Honey Trap
KreditBee soon realized that the way to go was becoming an NBFC themselves
After initially partnering with NBFCs to test the use case and understand their customers, by 2017, they acquired an NBFC license.
Through 2017, the company constructed the lending platform it is today. Multiple lending partners, including the in-house NBFC, were integrated into a marketplace where customers could seek quick personal loans.
Kerditbee made disbursements of about Rs. 25 crore a month in early 2017, largely funded by the in-house NBFC. A small fraction of loans were also jointly underwritten by a partner NBFC.
While the partner NBFCs improved supply on the platform, they also provided strength by sharing important data on customer risk and collecting repayments.
The platform played a key role in reducing fraud by screening customers and incorporating hygiene filters before seamlessly passing customer leads to the lender. This helped to solve supply – a vital cog in the lending and risk engine.
The capital for loans was funded by a combination of banks, corporate NBFCs, external commercial borrowings (ECBs) and partners on the platform. This hybrid approach helped reduce the overall cost of borrowing and keep the in-house NBFC well-capitalized to meet demand.
Co-lending, a big trend now, was already brought to motion by Madhusudan five years back
Madhusudan used his networks to raise a $1.5 million seed round to lift the business. By the end of 2017, the company was disbursing around 70-100cr monthly loans.
Madhu also knew that Kreditbee was just scratching the surface of a huge mountain and getting started
Attracting New Bees
By December 2017, the business had raised another $8 million round.
Kreditbee became the largest ‘seller’ of Xiaomi phones thanks to the financing model that enabled quick and easy purchases, leading to the investment!
This was quickly followed by a $43 million Series B round in 2018 to expand the customer base and diversify the product portfolio.
Kreditbee had a model that was gaining traction and validation from credible investors. That few banks participated in the funding round showed the trust they were able to build with the financial community.
Post multiple pilots and experiments across customer segments, the company launched the fully digital lending platform for salaried and self-employed customers in 2018. The thesis of quick digital loans to customers proved true, and they began to see a 100% monthly growth in loans disbursed.
Kreditbee was mounting the growth wave.
This growth wave was also facilitated by an undercurrent of changing dynamics in the Indian lending industry.
Up to the mid 2010s, banks were the primary lenders in India, followed by the unorganised sector, where money lenders charged exorbitant interest rates.
With the increase in consumer spending and growing digital penetration, the lending landscape started to change. NBFCs and digital lending platforms started to gain a share of the pie.
The total size of the lending market in India grew by 100% from FY-17 and was expected to reach Rs. 156.9 lakh crore by March 21. Retail and commercial lending make 49% of the total lending while 2% comes from microfinance.
From 2017, personal loans witnessed 3.8x growth in volume. However, small ticket personal loans (< Rs. 1 lakh) saw volume growth of 11.5x! Lending was being enabled for categories completely left out of the credit pie.
Digital lending was being made available to businesses too. Business loans grew by 17% between 2017 each year.
KreditBee was now riding this wave of transformation,
Making a Bee-sness
The new-to-business startup had started to innovate for customers needing access to credit
Salaried employees could get loans with ticket sizes between Rs. 10,000 to Rs. 2,00,000 and pay in 3-15 months. ‘Flexi-Personal loans’ had an even shorter tenure, ranging between 3-6 months for loans between Rs. 2,000 to Rs. 30,000.
These ticket sizes helped to acquire customers who could experience the platform and the repayment process before migrating to higher ticket sizes and tenures. It also worked for Kreditbee to gather data on repayment behaviour and increase loan amounts for the disciplined borrowers paying on time.
A growing market, favourable regulations, and razor-sharp control on repayments meant that Kreditbee was disbursing about Rs. 100 crore per month by the end of 2018.
The rocketship was about to launch, but the real question was whether they were making money in the entire process
The model works with three modes of making money. Commissions from lenders it onboards, fees for processing loans from consumers and spread from its loans.
Lending commissions are usually 2%, loan processing is usually 1.5%, and the spread from loans can be 3-4%. In a blended manner, Kreditbee could be making a net 3-4% of each rupee it disbursed. The AUM it reported would only be its book, the rest would be origination.
The core of this was the quality of technology they had built, which they had perfected over the past two years.
KreditBee had effectively spent its first years operating in pilot mode. They offered loans to students and new employees for their educational purchases. Their focus on this market segment ensured their marketing spending would be low due to the geographical concentration.
The focus on education needs such as laptops meant that the loan was being used to increase the sell-through rate of e-commerce marketplaces such as Amazon and Flipkart. KreditBee effectively financed Flipkart for selling laptops.
Underwriting was a critical aspect of the lending business. A good underwriting system/algorithm had lower delinquencies, which led to higher profits.
As they scaled, they provided financing for e-commerce and working capital loans for the salaried and the self-employed. From the start, they had focused on a completely digital workflow.
This would not seem such a big deal today, but it was a unique value proposition in 2019. A value proposition of quick and easy disbursement in 15 mins, flexible repayments, and low-interest rates led, KreditBee to disburse around 1,500cr in 2 years.
In FY19, they had a revenue of 151 crores and a small profit of Rs 4.4 crore. In FY20, KreditBee ended with a revenue of Rs 583 crore with a profit of Rs 9.8 crore.
Then the world would be hit hard.
Creating a Bee-line for Loans
Before the pandemic hit, KreditBee had already become financially profitable.
When the pandemic hit in FY2020, they were doing approximately Rs 800cr of lending every month. KreditBee has claimed that its key success factor was the customer market segment that it was targeting. Middle class, high credit score, underserved by lenders in metro cities.
Hit by the pandemic, the revenue for FY21 fell by 72% compared to the previous year.
Unlike its competitors, KreditBee was focused on providing credit for e-commerce transactions and personal loans to new credit customers in both the salaried and self-employed space.
KreditBee focused on customers in Tier-2 and Tier-3 cities, which were not the focus of its competitors.
The laser-eyed focus on the customer segment and the superior credit underwriting policies faced their acid test during the Covid-19 pandemic.
After the initial bout of uncertainty, by April 2020, KreditBee saw that most of its customers were paying back their instalments on time. In a typical month, KreditBee claims that they typically saw a loss rate of 3.5%. This doubled in the pandemic to 6.5% in the first wave and settled at 6% during the second wave.
Although the losses doubled, the prior profits made by the company in FY 2019 and FY 2020 helped them survive the pandemic. With the gloom and doom lifting shortly, they felt that returning to normal was not far off. Post the pandemic, they became laser-focused on their customers.
By 2022, they doubled down on middle-class, salaried, trustworthy customers in non-metro cities with high credit ratings.
Of the total disbursements since April 2022, almost 89% has been to those with CIBIL score >700, over twice the proportion earlier.
KreditBee also doubled its efforts for new-to-credit customers by launching Cards.
Launched in partnership with RBL bank, the card provided unserved and underserved banking customers quick and secured access to short-term liquidity with multiple repayment options, eliminating the need to avail of a separate loan.
The cardholder could make multiple withdrawals or purchases within the credit limit while paying lesser charges.
The product saw massive traction. More than 100,000 cards were sold within 60 days of launch. On average, they added 5,000 new customers daily to their card business. This superior traction enabled them to visualise growing the cards portfolio to over 1 million within six months till April 2022.
After getting stuck in the pandemic, KreditBee was flying
Buzzing on the Right Side of Law
As KreditBee scaled, the firm moved towards a full-stack lending offering.
This included adding loan-linked micro-insurance and credit scoring to the products. Additional credit scoring methods were needed to segment the existing customer base further and identify customers who were more willing to pay back
In mid-2022, the RBI came up with a lending guideline bazooka that destroyed the models of existing fintech lending businesses
The RBI digital lending guidelines did not significantly impact KreditBee as it was already an NBFC and partnering with other NBFCs. KreditBee was already following RBI guidelines on disbursal and collection.
A few small technical changes concerning the process flow of funds and data meant that KreditBee was well poised for the next round of growth.
The pandemic-induced defaults and the RBI’s Digital lending guidelines adversely affected a lot of the competition. KreditBee, due to its better credit norms, was poised to take advantage of the adverse winds facing the sector.
From the beginning, KreditBee’s brand campaigns have highlighted the ease of receiving personal and business loans.
The Covid-19 pandemic exposed the lack of financial awareness among people. KreditBee started a series introducing the basics of personal finance to improve their customer’s financial awareness. This knowledge was particularly important for customers who had fallen into a debt trap during the pandemic and had seen their credit scores decline.
Kreditbee knew that to win trust and repeatability with the segment, it needed to educate them first
When KreditBee started scaling, only 15% of Indians were credit served. Many companies, including Kreditbee, had made a lot of trial and error with customers. At the same time India required a few things for better lending.
Better infrastructure to share data to improve data, lesser underwriting costs, cheaper distribution costs, and a quicker acceptance or rejection rate.
All this led to more credit users. Fintech firms were serving the majority of these new credit needs.
Multiple fintech firms started various types of credit. Personal loans, corporate loans, MSME loans and more. Large banks typically stayed away from this group due to poor credit histories
MoneyView, MoneyTap, and Kreditbee operated in the direct personal loan space, while Earlysalary served the salaried employees. Education loans had players like Leap Finance, while BNPL had exploded with players like LazyPay and KrazyBee.
In this competition, standing out required continuous innovation.
Kreditbee also started its offerings from personal loans to various experiments like BNPL, professional business loans and increasing the credit limit of the consumers.
Many companies in various spaces had built up the economy. While all companies started on a different note to serve different segments, they all started serving similar purposes, as other forms of credit were not fruitful.
As the loan book of India increased, the credit served also increased drastically.
Extracting Honey from Ripened Combs
Over 2022, while unsecured credit fintech was in deep trouble, Kreditbee kept growing
Kreditbee raised 200M at a staggering 700MM valuation with two rounds raised. Through its journey, it did not have typical venture backers, instead raising from India-domiciled private equity funds. Its latest round, though, got global backers.
While Kreditbee continued to enter multiple other businesses like checkout and POS finance, its Northstar product was still personal loans.
The alpha target audience was the non-metro cities population, as 70% of their total monthly disbursal of INR 1,350cr in December 22 comprised this segment.
KreditBee reported a loss of Rs 84.9 crore in FY22, as expenses nearly doubled. Its revenue rose 2.7X to Rs 445.4 crore with over 7 million customers, and 2 million active customers on the platform.
Kreditbee had only scratched the surface. Along with its peers, it has a long way to go and serve the Indian market, with nearly a billion still credit-starved.
While it was doing well, the bigger question was did it deserve the valuation.
Being in a high cash-generating business can be a boon or bane. The boon is that assets under management would be substantial, but the bane is one downturn can create a mess of accounts.
Credit businesses across the globe are valued with high beta as one downturn can turn the books around. Any other company in another industry that would have raised so much money would already have a unicorn valuation status.
Direct lending companies get lesser multiples, public direct credit companies get less than 15 P/E in India and less than 10 P/E globally.
Despite all the challenges, Kreditbee has been making money. It’s an uncool high, generating cash cow. While making money, the potential is still huge
Only 22% of Indians have access to formal credit; the rest are either unserved, underserved, or new to credit. 17% do not have access to formal credit compared to the United States.
Kreditbee can continue to go deeper into the market to expand the credit net by sharply targeting the right users for decades to come.
Becoming a Lending Hive
In fintech, the joke goes that for you to make money, you have to lend.
But like every joke, there is a deep truth in it. The next decade belongs to leveraging credit to the many retail and business-holding Indians.
Many of these potentially have multiple assets, are income generating, have half cash in the account, and despite that, do not get access to the credit amount, interest rate, and loan duration expected.
As unsecured loans are given only until a certain limit for retail, anything high-ticket is given based on the net worth derived from the assets they hold.
Therefore, over the next decade, the various assets Indians hold will be used to provide more credit to Indians.
Creating liquidity for high credit value would be more challenging for India and Kreditbee.
Its aim to hit $1B AUM of its book by the end of 2023 is a bold mission, with the current AUM being at $600MM. The loans it is disbursing would be larger.
Any economy by the total loan value always has secured lending to nearly 70-75% of its lending. Therefore for Kreditbee to tap into the high ticket loan value, Kreditbee may have enter the secured lending space to tap newer customers
As Kreditbee enters high-ticket secured loans, this pushes them into the gold, vehicle, home loans, and other digital assets like stocks, mutual funds and capital loans to SMEs up to 5L.
With the increase in digitisation, more APIs should be readily available to pledge and de-pledge assets easily to take credit or better underwriting data.
These APIs will also play a vital role in reducing the existing high operational costs of pledging hard assets. It is much more feasible to provide credit to Indians through software and mobile devices they already hold.
The real rural India is still taking credit via pawn brokers and informal ways despite holding some form of an asset. Lenders refrain from lending due to the credibility of the individuals.
By penetrating deeper into providing credit to the underserved credit Indians and helping them underwrite easier, Kreditbee may have to go into assets they hold and provide credit.
This is very much like life insurance
To understand this, one needs to analyse the human credit lifecycle in a lifetime. From low-ticket to high-ticket credit value, people aspire to purchase higher-value items as life progress, from as small as a mobile phone from a personal loan to as large as a home with a home loan.
Kreditbee will have to solve the human credit lifecycle mantra.
By fintech standards, at a scale of Kreditbee, it promises to accelerate to increase the digital credit from $270B today to $1,300B in 2030.
Kreditbee aspires to be the go-to credit platform for achieving India’s credit aspirations. With the right underwriting mechanism and superior collection systems, it has shown it can execute in an extremely tough market where others have come and perished.
The key to its success has been its discipline, accounting and focus. In a business which is not really new, it has perfected the art of executing the boring well.
KreditBee could push India’s aspiring middle class into the next orbit by providing loans
Writing: Keshav, Nilesh, Rajiv, Shreyans and Aviral Design: Chandra and Omkar