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Building a Payments Led Lending Business | Vaibhav Lodha @ ftcash
289 Plays1 year ago
In the shadows of large payments companies exists a startup that is building with the reverse philosophy- ftcash first acquires customers for loans and then gives them payment processing services. Vaibhav talks about how his unique background helped him build ftCash using first principles thinking.
Insights shared:-
- Managing risks in the payments business
- The merchant lending ecosystem
- Keeping yourself on top of the game as a founder
Additional links:-
2.Indian Fintech Startup ftcash Wins MIT’s Inclusive Innovation Challenge
4. Vaibhav Lodha talks about India’s thriving fintech scene
5. “Faster Than Cash”: An Interview with ftcash’s Vaibhav Lodha
Recommended
Transcript
Introduction and Payment Processing Challenges
00:00:00
Speaker
Hi, this is Vaibhav here. I'm one of the co-founders of Deputy Cache.
00:00:16
Speaker
It is no secret that there is no money in building a payments business because thanks to the UPI, there is virtually no commission to be made in the processing of payments. Payment startups like Paytm and Bharatpay are taking the approach using their payments business to acquire customers for building a profitable lending business. Time will tell if their approach is the right one or not. But in the shadows of these large payment companies exists a startup that is building with a reverse philosophy.
FT Cash's Unique Approach to Payments and Lending
00:00:44
Speaker
FT Cash is a fintech startup that first acquires customers for loans and then gives them the payment processing services. In this episode of the Founder Thesis Podcast, your host Akshay Dutt talks with Vaibhav Lodha, the co-founder of FT Cash, about his journey of building a sustainable fintech startup. Vaibhav comes from the social impact space and in this conversation he talks about how his unique background helped him build FT Cash using first principles thinking.
Vaibhav's Background and XPRIZE Experience
00:01:11
Speaker
Stay tuned and subscribe to the Founder Thesis Podcast on any audio streaming platform to learn about building and scaling your startups sustainably.
00:01:27
Speaker
So it so happened that I was consistently still visiting, networking, meeting people. And Inc is an organization that is launching an organization in India called XPRIZE at the time. And they were launching their first prize. So they just held like a pre-launch event for us. And I happened to be there. So Mr. Datta was there. His sister Zinnia Datta was there. So I met both of them. And I wrote to Zinnia later saying that you're doing amazing work. So XPRIZE is an organization. Actually, I'm not sure if you're aware of it.
00:01:56
Speaker
But it has one of the most fascinating stories of origin that I can imagine. It was also a dream job for me. So in 1995, Peter Diamandas, who's the founder of XPRIZE, launched a prize saying that the entire space industry is completely government-owned, which is last year. So I want to privatize it. So whoever watches the first spacecraft that launches from Earth, goes to Zababata Space, 100 kilometers above Earth, comes back, and within, I think a span of two weeks, goes back again with a private space tourist. I'll give them $10 million.
00:02:25
Speaker
And so is Peter Diamandis. How did he get this debt with his daughters? So he didn't have money at the time. In fact, he was working out of his garage at the time. So he found a sponsor during the course of the price, when he launched the price. So for nine years, nobody was able to solve it. In the 10th year, actually, there's a company that actually sold it. They went to space, they came back. They used the same aircraft to launch it again. With the sponsor of the price, I think the lady's name was Mrs. Anoushay. She was also the first female space tourist ever.
00:02:55
Speaker
She's now the CEO of XPRIZE, by the way. And so when it landed in Mojave Desert at the time, Richard Branson actually bought it as Virgin Galactic at the time. So that was the origins of XPRIZE, Virgin Galactic, et cetera. So I was very fascinated by this organization. I was like, I have to be a part of it, irrespective. So then I met Senior, like it was very, I'm assuming that once this one prize was won and achieved, they would have continued to create new targets.
Founding FT Cash and Initial Challenges
00:03:21
Speaker
Yeah, it was a global prize. Basically, it becomes an institution.
00:03:25
Speaker
Yeah, so then this was an institution which was wanting multiple prices. So another price that they launched was like to create a car that could drive, I think, 100 miles in one gallon.
00:03:35
Speaker
They have one prize for education, one prize in ocean cleanup. So the prize that they had in mind for, and this was the first prize that they were launching outside of India. So I was basically after my discussions with Zinnia and the other team members, like I got invited to join as a global development for them to launch their prize in India. And that prize happened to be a water related prize because of my experience now in water, having worked in multiple places.
00:04:00
Speaker
Can we create drinking water out of thin air? Because at that time there was an article in Economist in 2012-13 saying that the next world war in 2025 is likely to happen because of the water crisis. So can we create an atmospheric water generator that can actually just draw atmospheric water and then convert that into drinking water as well?
00:04:22
Speaker
we launched surprise and then like it was just the start of it like we did a lot of research background we created the guidelines etc around it as well though unfortunately express at the time in india had a relatively short stint because so express was non-profit and for non-profits to launch prices they need to have funds and funds require fcra
00:04:43
Speaker
What is FCR? Foreign Currency Regulatory Act. Yeah, something of that order. So it requires three years of financial records to be able to get that itself. And I think because of the misuse of some of these organizations in the past having FCRAs, there was also tightening of FCRA certificates in the years preceding. And I think in recent years also has been very hard.
00:05:08
Speaker
So then they realized that to launch this prize, the prize money cannot be given itself because all the donors wanted to give the prize to the Indian entity and that would not happen without FCRA. So then we had to actually curtail that prize. It launched in a very smaller format in the US itself, but then it didn't have the same fee. So at that same time, like I realized that, okay, unfortunately, I think my path in this organization might not go the same way I wanted to.
00:05:34
Speaker
So I was also trying to create a product in a different space, which is with a friend actually in the, you know, in a civic governance space, civic tech governance space. This was an organization. Now I think I find that name funny. We call it Citizen Kane.
00:05:49
Speaker
We were trying to say that, okay, can we create technologies and products to measure large corporations, government nonprofits to track the large projects better using tech? And I think those projects probably can be a lot, those ideas can be a lot more feasible today with the advent of, I think, loans and IODs, et cetera, and the tech related to it. But at that time, I think it was a little more far-fetched than I think it was, and I was very naive as well. But I think what helped me was that one understanding, again, that there's no product market for it.
Impact of Demonetization on FT Cash
00:06:16
Speaker
that users need to have a paying ability for every product. And in this case, what I was also trying to do was create a product to bring out corruption across organizations. And the people who want to buy this product were also people who were corrupt.
00:06:33
Speaker
So it would not really happen at the same time. So it was a lot of pilot projects. We were able to create a good team as well, a very elaborate team actually. But at the same time, it didn't take off. So that time is when it just happened to meet my co-founders. So Sanjeev, I met him and I had an Ivy League mixer at the time. And it just happened that
00:06:54
Speaker
He has been out in the US for the longest time since 2007. He was working at WDC Airport, Deutsche Bank at the time. We started speaking about financial services and then this idea came about small merchants and why we don't have payment systems for them here. This was obviously much before some of these larger players had picked up as well.
00:07:16
Speaker
quite got sunk in the idea as well. I realized that if you're not going much with it, it doesn't gain anyway. So then we said that let's take this forward. Sanjeev, Deepak and I, then we got started with empty cash at the time. We left our respective jobs. And then this is what we got into full-time as well. So that was 2015. Mid-2015 is when we got started with this.
00:07:38
Speaker
The problem you identified was that a credit card post machine is present in very few margins and more margins need a way to accept digital savings. That was the problem you identified. Yes. Having spent, like all of us had spent time outside India as well. There's a norm there than an exception. In India, that's not really the case. We said, how do we change that?
00:08:04
Speaker
as simple as that. Like why is it that this is not a norm in India and how can we change that? So our initial service said that the cost or the monthly rentals of cost machine was the deterrent to it. And also I didn't really have any reason to service like a smaller merchant because the transaction volume would be so low that they'd hardly get
Transition to a Lending-Focused Model
00:08:22
Speaker
anything. So we said like why don't we take that set of merchants, not like the big bazaars of the world.
00:08:28
Speaker
But the smaller retailers that actually have a need and we don't need to create like a hardware pass because hardware has a cost. Can we create like an app-based payment system wherein from the app you're able to make a payment? We can create a link-based payment system. We can create a QR code where you can make a payment which would eventually direct you to a link itself. That term obviously UBI was not existing as well.
00:08:49
Speaker
But so we created that entire spectrum. We also said that we keep it an open platform. That I think was an important decision for us because we said that any new payment method that comes in, be it like a wallet, be it like later on UPI, we will be accepting of that on a platform itself rather than becoming a closed garden.
00:09:06
Speaker
Because what was happening was all the extremely well-funded companies would tend to move towards the wallet direction, that we'll have a closed wallet of our own and we'll only want transactions and that. Our thesis at the time was that, see, then this becomes a winner-take-all market. I don't know if it'll ever become a winner-take-all market because usually it's never been across the world. Even in the world, MasterCard and Visa are two players and Amix is a third player. So we didn't believe in that setting that, okay, only one wallet will become the biggest one.
00:09:35
Speaker
But we were facing a lot of heat from merchants because what was happening was all these companies had so much money that even if we gave a POSS machine or like a payment system at a much lower cost than even what we are incurring, right?
00:09:54
Speaker
And it was weird to us. I was like, this is a service. And you, instead of paying for a service, we're anyway giving it to you at a discount. We're not even charging you fixed fees. But you're asking us to pay on every transaction, which doesn't sound... But I think that was a froth at the time as well. But we didn't believe it. Sorry, go ahead.
00:10:13
Speaker
This is, you're talking about PTM, Moby Quick, these were the wallet companies at that time who had like a closed garden approach that you need to have the PTM app and load the PTM app to pay via PTM to a merchant, similar for Moby Quick. So what you wanted was something which is bought through the existing credit card or debit cards that people are carrying, just give them a way to swipe that card. Yeah, we did PTM and Moby Quick and all these other wallets also in our system. Okay.
00:10:43
Speaker
And how did it work? Like how, if I have a debit card and I go to, let's say, a sardine shop and I buy a sardine and... So if the merchant accepted FT Cash, right? So they'd have the FT Cash registration already done. So we would have in the bank details, right? So whatever bank details that they would have, right? So if a customer now could either use a link or a QR or the FT Cash app itself, they could search merchant or they could just look through a QR scan of the merchant as well.
00:11:10
Speaker
Now, when they find the merchant, they can just put in either their credit card details, wallet details, made later on UPI details as well, just to make up, right? And the money would get credited into the bank account. So, you're not creating a new infrastructure to say that, okay, you have this hindrance that we've parked this money in our separate FT Cash wallet now. We're saying whatever your bank account is, we'll put the money in there. And merchants, we felt that they were far more comfortable with that.
00:11:35
Speaker
So this would still need a lot of things which may not have been in place at that time say reliable internet. The merchant would also need the internet to make sure that the payment has come in. Entering your Visa card into the app would have been a little painful and then two factor authentication. Ask a pay to a post which it's so much faster.
Revenue Streams and Risk Management
00:11:59
Speaker
Yeah, so all the issues you mentioned were absolutely the problems that we were trying to recover with as well. So one thing that we solved the problem for was the merchants actually having a smartphone and internet connection board, which is not prominent at the time. So we said a merchant can have a 2G phone also, all they will get is an SMS from FT Cash confirming that the payment has been done, because we already have the bank details, etc. So either the customer can use the app, they can use the QR or they can use the payment link, which is fine.
00:12:24
Speaker
So that actually worked fairly well because that didn't require a merchant to have anything. Usually the merchants were the ones who had a 2G phone, not the customers. But yes, one party didn't need to have a smartphone, which was the customers in this case.
00:12:37
Speaker
But I think, like you said, the entering of the card details was a hindrance. But there was no solution to that because NFC did not pick up that time and maybe it will still date as well. And that has been like the hindrance that we were backing on that maybe if NFC picks up at a time, we may be able to include that in our payment. What does NFC do? How does it enable this friction getting revoked?
00:13:03
Speaker
So what would happen is if it picks up, you could have two mobile apps, one with 50 cash apps included and the NFC is on. You can just punch in the amount and then tap the two phones or tap the QR codes and the payment is done. Okay. Okay. So then you didn't need to go through the entire spiel of like entering card details, et cetera, as well. We were quite excited about it as well. Unfortunately, that was not the case at the time. Your revenue would have been through the MDR, the merchant discount rate about one and a half to 2%.
00:13:31
Speaker
Correct. So that was what we were charging any merchant. So in this case, what happened was we realized that a lot of offline merchants were signing up, but they were not very consistent. They were only using it for deliveries, et cetera, as well. Like a grocery shop delivering it to a in-app building would typically make a payment through FT Cash, but it didn't have a very strong in-person resemblance to transactions. So what we started doing was we started focusing mostly on remote payments.
00:13:56
Speaker
So, for example, travel agents, car service centers, they became our go-to across India, like we were across all Mercedes showrooms. For example, we were there across so many Bombay showrooms that from a Maruti to a Ferrari showroom, we were there as well and as a payment method. So that really started putting us on the map because a lot of big players who had these cars, right, were also using this method and they're like, this is cool.
00:14:21
Speaker
So this required zero marketing, but then they found that at least there is some convenience there. A transaction numbers may have still been relatively low to what others were doing, but at least they were still at some point profitable. In some cases more, there was a product market fit in that case as well.
00:14:36
Speaker
And then obviously, we were the first players to include UBI in offline setup along with ICICI bank. So this was the launch of UBI. So we actually wrinkled out the entire system of UBI along with ICICI bank for their launch as well. And we launched together. So this was, I think, August to September 2016.
00:14:56
Speaker
And a couple of months later, like in November 8, suddenly we see that demonetization happens, right? And that was a massive hit because we were extremely happy about that as a payments company, because there was a huge uptick of merchants. Typically, sales would find too hard to find three or four merchants to sign up in a day. We're now able to sign up 20, 30 merchants in a day as well.
00:15:18
Speaker
And like the demand was used, the transactions were going through amazingly well. So much so that at some point we felt that the systems might break down just because the amount of transaction volume is so high. So that volume increased, we also were able to customize the product to whatever needs that were coming by. All of that was happening, but there were some... One or two quick questions here first.
00:15:41
Speaker
Your way of onboarding much is through Salesforce, like you would have. Yes, we had Frito Street. We had an auto sign up as well, which you can do on website. But typically that would require a lot of marketing on our behalf, which we didn't have that kind of money for. So we raised only a small round from Ivy Cap ventures at the time. We could not put like big billboards or TV ad reasons. So typically Frito Street was a way to go for us.
00:16:02
Speaker
And you had Feeder Street Pan India or did you have a geographical focus? We initially started from Pavai, we expanded to Kogli and then over a period of time we went through the entire country.
00:16:14
Speaker
What was your coverage? We were there in most of the metros but what happened was we also ended up having indirect coverage through connectors. So these connectors would basically do on a successful US model who would be able to sign up merchants for us across the country. What is a connector?
00:16:33
Speaker
So connectors are like channel partners who would say that okay for every successful sign up you give me like 50 rupees or 60 rupees and I'll get these merchant documents KYC whatever is required to sign up this merchant for you so that you can start accepting the payment system. This is a distributor who's connected to retailers.
00:16:51
Speaker
Correct. So they could say that, okay, I anyway have 1000 merchants working with me. I don't mind lying in like a 50,000 rupee commission if I sign up all these merchants. So they would do that. That was seamless for us as well, because we didn't need physical presence. And typically what happened is that if you get through that one channel, then what about all those spread and like more purchases will sign up in that space as well. You must have incurred some costs, payment gateway costs of your own. What was your net margin? Actually, the net margin at that time was very poor. We were actually in MDR negative at the time.
00:17:20
Speaker
So what was happening was because we were relatively small, right? So the cost to us that companies were giving was actually very high. Say for example, 1.7 or 1.8 for a credit card, right? But what the merchants would expect from us would be that, oh, somebody else itself is giving me 1.7, 1.8. So if you give me 1.5, I'll take it, right? So they will haggle for those 10 basis points or 20 points as well. And we felt that, okay, maybe we get started because we are not giving these nounsbacks and discounts that we wanted.
00:17:50
Speaker
So we can take the hit right now, but as we scale, once we have volumes, we'll be able to get these rates down and also increase it for these merchants when they actually realize the value of these services. So yeah, that was the model that you went with a like a standard flat pricing ticket or leave it or was there like some negotiation with each merchant?
00:18:10
Speaker
I think with larger merchants, there was some amount of negotiation, but with smaller merchants, there was some negotiation. We didn't have the time also. Like with larger merchants who committed to a certain amount of volumes, yes, if a big showroom or somebody saying that, yes, I'm going to give all car services to you and my volume would be like five pros a month, then yes, of course, we have that discussion. Okay.
00:18:31
Speaker
What did you think like eventually you would monetize as because this means essentially every transaction you are burning money. They were burning money at the time for every transaction. But the idea was that like these 1.7 or 1.8 rates will also come to 1.3, 1.4 which is what others will get. At scale, your costs would come down. Because if you're doing smaller numbers, obviously no one's going to give you the best rates as well. Because you have to become meaningful enough for a player to respect you.
00:19:01
Speaker
And at the same time, then when the customers are so hooked on to the system that they're deeply integrated with you, when you slowly and gradually increase the price also, then they'll not mind because then they'll see that I have to pay 20 basis points extra, but I know the value of the system and I'm okay to pay for it.
Merchant Behavior and Strategic Adjustments
00:19:17
Speaker
So this offering was a pure SME offering like a simple app where you know how much you received or you can generate a link with a prefixed amount. Describe the product to me. And this would be like a free and like there was no cost which a merchant had to bear to onboard. Unboarding would be free. So there was no fixed cost for it. You could send out links as well like you just said with a prefilled amount so that you can just click and then choose the payment method of your choice.
00:19:43
Speaker
were also just send an invoice to another merchant's or customer's app also, or their phone on WhatsApp or SMS also. So all the optionalities were there. So what we'd done was customers in such a way that whatever is convenient. So we had also given some of the car service centers as an entire SaaS system, where they could just type in the phone number and the amount and then send it as a link also.
00:20:06
Speaker
That customized link would go the same way for travel agents as well. That link would be triggered through you, like you were sending out these SMSes. We were sending out these SMSes for payment things, but the data would obviously be input by the respective merchant as well. We realized that getting customers to download an app was a much more expensive process even than that. And I think it's only gotten more expensive over the period of time.
00:20:29
Speaker
customers don't always want an app which they're not regularly using as well. So we realized links or QR codes was a much better and faster option to do it. So the link would open a web page with a checkout where they could feed in there. So customer could save his card or he had to punch in the card each time. They could save in the card. Once you enter your mobile number, you get the OTP to use the saved cards as well.
00:20:53
Speaker
We are PCI DS certified, so that was not an issue to save card details. What is this, a PCI DS certified? It basically is to say that, okay, you are certified by payments cooperation to say that you can store card details and you can run payment transactions and the entire process is secured. Okay. Okay. Got it. Okay. So now let's come back to deponentization. So do you want to do this and hit your sales team became super efficient? They were getting 10X.
00:21:23
Speaker
Yeah, but I think there was something more that was happening under the layers that we will be sorry to only over the period of time that was happening that these merchants, a lot of merchants signing voluntarily as well, and they were doing transactions, they were learning the entire process by themselves. But slowly and gradually, they started moving away. Like the moment Ash came back, their volumes dropped, some of them completely dropped away.
00:21:46
Speaker
That was a question for us that if there's a movement as big as this, which can't move these merchants completely to digital payments, is there a real product market fit? And that's why I said like this theme of product market fit kept coming back to me again and again. So we had to reassess ourselves and work also again that
00:22:06
Speaker
Is this a real merchant need? Your peak. Remarktization would have been the peak. So at that peak, what was the GTV, gross transaction value? We were doing roughly about upwards of 60 crores a month. 70 crores a month approximately. I think for a company that was one and a half years old, at the time it was fairly good volumes. But obviously that took a hit to post that. So what happened was slowly when these merchants started receding, not that the volumes dropped.
00:22:34
Speaker
But the rate of increase of these merchants dropped, the activity levels of these merchants dropped. And that was the number that we had to see that, okay.
00:22:43
Speaker
Are we solving the right problem? And then we had to go back to first principles to understand from these merchants that what is making you drop out? Why cash or why this? Did you not find this convenient or what is really going on? And I think we learned a few things from them that payments is a nice tool for merchants to have, but it's actually pushed by customers. It's not their choice. So if given a choice, they would actually choose cash.
00:23:10
Speaker
I would say that UPI has changed that a lot because of the ubiquity and the scale, but that was not the case at the time. But at the same time, they also felt that the transaction fee that they had to pay, etc, was not something that they were willing to pay and they wanted to negotiate, etc, as well. Now, then we started asking them questions that, okay, what are your problems? Now, this is where we also went and be understanding, okay, is lending, insurance, wealth management, all these questions, right?
00:23:38
Speaker
We asked them whether to give you laws, will you take it from us? They said no. But something told us that
00:23:51
Speaker
Actually loans may be required and they just don't know that they require loans. Maybe among the set of merchants that we're targeting, maybe that they don't require loans. So maybe we should widen our scope. Maybe we should launch a product around it. So I think that was a gut-based decision, partially not so backed by data, but we still had to take a call. So we took a call. We started working on various lending products at that time.
00:24:16
Speaker
Now, we had to continue the payments business, but also go into lending, right? Now we did that with partners to begin with. So we launched multiple products of different ticket sizes, different tenors, interest rates, et cetera. So a product could be as small as $10,000 to $1,000 to $5,000 also. And tenor could be like one week to one month to six months to a 12 month period also.
00:24:38
Speaker
So we are figuring out what is meaningful for these merchants, what works, what doesn't work. At the same time, we also understand from the industry that in the current set of merchants or businesses that are already operating in this space, what is making them not so efficient that they would come to us. That actually did happen because we worked with a lot of partners at the time. We also understand the deficiencies that they had to be able to fill those.
00:25:03
Speaker
They allowed us to understand that, for example, post-dispersal risk management was a big gap. Most of the partners in this space, what they were doing was, their story was that we have the best credit algorithm to assess these merchants. We have these thousands of data points and we do the best credit assessment. Now what happens is, imagine a cycle of a loan. Imagine if I had to offer you a loan for 5 lakh rupees.
00:25:26
Speaker
You are worthy of it, right? And I'm able to assess that, great. But if you have, and that assessment is only as good as three months, going out three months later, if you end up having any emergency, or like you have an intent issue, or you just choose to run away, I can't do anything about it. That is not a part of the credit cycle I can work with.
00:25:50
Speaker
So we realized that post-dispersal risk assessment or management is one of the most important parts that a lot of these players were missing. We had to fix that and that was one very important piece that we started to work on as well and we were trying to figure out how can we create that differentiation as well. And why did that matter to you? So you would earn
00:26:11
Speaker
per loan sourced, right? I'm assuming that companies would pay you an origination fees. If you originate a loan, you get paid. We would do the credit assessment and collections as well. So we said that we want to take the risk on these loans because otherwise don't have skin on the game. There's no point. And then they'll only give us like a brokerage type model, which is not what you want. Like at scale, if you really want to excel at this game, right? You can't be doing like a channel partner type model.
00:26:42
Speaker
Yeah, like a DSA, that probably would not be the most effective way for us to scale. So we did these partnerships with the intent that, okay, we will do these things, what will be the legal process that will follow, that will be a learning for us as well. So in the first, we launched a lot of these products, like at different tenors and ticket sizes.
00:27:00
Speaker
At the end of one year, we started to realize what is more meaningful for the merchant? What are the gaps in this segment? And what can we do to uniquely fill this gap as well? How were you connecting? Was it because you are a payment gateway so you can deduct something every time they receive a payment? Was it like that? Correct. So that's exactly what we did. In fact, that was what I was come to as well.
00:27:22
Speaker
that we realized that with these merchants our unique proposition can be that instead of them having a monthly EMI, they're not salaried employees. They don't get salaried employees. They're getting payments on a daily basis. Why not collect on a daily basis itself? So our payment systems would be given with every loan and we tell that you repay these loans based on the payment system or daily basis from a payment system itself.
00:27:46
Speaker
The product that we eventually did launch and that's something that we've been scaling for the last five years, right?
Evolving into a Lending-First Company
00:27:52
Speaker
Is that these are loans in the ticket sizes of 1 to 25 lakhs, because we realize 25 lakhs is in the aberrations. Typically, most of these loans, I would say 80% of these loans would be in the ticket size of 1 to 10 lakhs, with an average size of 5.5 lakhs. That felt it is a meaningful amount, but you're not overexposing the merchant to credit also, because credit is also, debt trap is also a big thing. Like you can vary into that.
00:28:16
Speaker
At the same time, we kept the interest rates in the market rate itself. People were charging roughly anywhere from 28 to 30%, 32%. We were charging the same. And we felt that in terms of tenor, anywhere from 12 to 24 months with an average of 18 months is what was meaningful for them. So we kept that also as 18 months.
00:28:34
Speaker
Now, when we did the repayment also from the payment system, that has suddenly obviously helped with the post-disbustle risk management. But these three things also made sure that we got the right set of merchants that we wanted to work with. Then we started like this, it was a product itself, started scaling this.
00:28:54
Speaker
We got to some amount of volume, not enough. And then we started going out from the market to raise funds around that. Luckily, over the course of next one, one and a half years, we got three investors to back us. When did you go out to raise more funds?
00:29:10
Speaker
So we started, I think we've been raising points forever, but exclusively we started going out in 2018 when we completely pivoted from just being a PMS platform to say now we're a lending first company. And at the start of 2018, when we became a lending first company, that's when we said that now we will go out in the markets. So it took us about one and a half years at the time as well to show that when we are serious about it, we can do it well. And we have track record to show that we can do it well.
00:29:38
Speaker
So, in 2019 is when we got the funds from FMO, Axion and iRecap Ventures, which was a pre-zay at the time. This was about $7 million. Yes, this was $7 million. Okay. Okay. And like going back a little bit, what was your way to do underwriting? And you had, I mean, you did not have that in-house capability. How did you build that up? And were you doing collections through a deductions from transactions right from the beginning or did that evolve?
00:30:09
Speaker
So with the transaction deduction we were doing from the beginning in terms of collecting, that we said is a pretty straightforward model for us that will not take time because we already had a payment system in build. We built a collection team on top of that.
00:30:22
Speaker
Right. That started with that person and now today, like it's a much larger team. But yes, you need a collection same because you don't need to call and tell people to pay. Right. It just happens. What happens is you always have these merchants who either need a physical visitor after the point or require like a little bit of nudge because see, I'll
00:30:42
Speaker
A lot of these merchants, they have good intent to pay, they're probably not getting it. But there is always this 5% in the market that probably require that nudge and push. So you're working for those 5% not the 95%. No, but nuts to do what? Because you are... I think there's no manual input needed from the budget, right? Every time he gets paid, you take a cut. Yes, but what if they stopped using the payment system itself?
00:31:10
Speaker
Okay. Okay. Okay. So in that case, you would ask them to do a back transfer. We typically have nach and checks for these guys as well as a safety measure. We could put in the nach as well. But you still require a team member in collections to say that, okay, what if the nach doesn't work? And then you have to quickly visit because in some of these cases, because we have daily payments, we've also seen stories where typically what would happen is imagine you're due date first of November. So
00:31:39
Speaker
If your EMA fails on that day, then somebody would visit you only a week or 10 days later saying that, okay, why have you not paid? In our case, what happens is that the dispersal has happened in the first of October. First of October itself, we'll start having like deductions. If deductions don't happen, then we'll have calls, then physical visits as well. Imagine if somebody has not made a payment for seven straight days. So third day, a call will go, fifth day, we'll put nudge, seventh day, a physical visit will happen. So by seventh of October, we are actually at the door.
00:32:08
Speaker
So in this case, we were actually at somebody's door on 7th October in Hyderabad to see that they were winding their shop. And we figured that they were winding their shop and basically they were trying to gather money through multiple loans and ramana away. Actually, we were the first ones in the doors, so we were able to get a principal back. For any bank or NVXC which had lent and they went on first ever, they got nothing out of it.
00:32:36
Speaker
Because what we are seeing is that no merchant or no business goes down in one day. They take some time to go. You'll start seeing from the stock in the shop itself that yes, it's not deteriorating. So with this frequency of transaction, you're able to make out a lot more than a typical EMI product. Okay.
00:32:55
Speaker
So the way repayment happens is, ideally, through transactions, there is a daily reduction and that daily reduction is automatically adjusted so that it meets the EMI for that month. Like for example, if by the 20th, enough reductions have opportunity, EMI then 20th to 30th, there'll be no more reductions. So what we do is, I'll give you an example here. Imagine there's a one lakh to pay loan that is taken and the person has to pay one lakh 20,000 in the year.
00:33:25
Speaker
including the interest rate. Now the approximate EMF or EDI equated daily instalment comes to roughly about 368 in this case. So now what we will do is that in case if the customer is made a transaction of 1000 rupees, we could deduct the 368 rupees and transfer the remaining amount to their bank account. But we will not take an extra amount from that day just because we have that
00:33:47
Speaker
We'll say we've got only this much, but yes, in case if they've not done transactions or if they've only been 100 rupees transaction for three days, right? Then we'll say that DPD is one now because your 300 rupees is pending. So let's try and make a... Okay. What is DPD?
00:34:04
Speaker
DPT is days past you. Days past you. How many days are you past the last you? So it's basically on a daily basis and you would not tolerate more than seven days of non-payment. If for seven days, continuously you've not been getting that daily instalment, then you would escalate.
00:34:28
Speaker
But when would you use the NAT or the check? So third day is when the first call goes, we do consecutive calls on the third and fourth day. In case on the fifth day also they are not responding, then we do the NAT and check that day. NAT or check whichever one. And we get the result of the NAT or check the next day. On the seventh day, if the NAT or check is failed, then we actually go physically visit them on BPD 7 also.
00:34:52
Speaker
What if it's just because, let's say, he's gone to his village because it's a festival season. So as long as we've got a positive feedback saying that, okay, the merchant has just gone home or he's just facing some health crisis, etc, then we'll be understanding and then we'll say, okay, we'll come back a week later or whenever the merchant is back and we'll take the dues then. So just to understand whether the intent is there or not, the merchant is skipped or not, or if the business is going down or not.
00:35:19
Speaker
Got it. Okay. And what is your arrangement with NBFCs? Are you like co-rending where some of the loan is from your books and some is from their books or are they lending to you and then you're lending it further ahead? Like how is that structured? Help me understand that.
00:35:36
Speaker
Sure. Our NBFC licenses have recently come. In fact, it came in only April and we started using the license only since September. So it's only been a couple of months since lending on our books. We raised some capital on their NBFC as well as a debt. So there is some amount of loans that we're directly doing from our NBFC, but that is tough. But we've had five years of history before that as well. Then what we do is we work with partners on this model where we give them some security.
00:36:05
Speaker
saying that, okay, we'll take care of these loans. And typically they'd be okay to then say that, okay, we could decide on a policy. And between that policy, the cases and files should come. And then on those, the acquisition of the merchant, the credit assessment of those merchants and collections on those merchants is done by us.
00:36:27
Speaker
The first one is done by the partner. They do a credit analysis from their end as well to make sure that everything is kosher and like what we're saying is actually what we're doing. But apart from that, the process is being run by us. That allows us to have a lot better control of these merchants as well. We're able to make sure that they're a lot more secure as well. And that's something that has helped us scale as well a lot. So in fact,
00:36:48
Speaker
That is one reason why we've realized because of our post-dispersal risk management, our NPS in this space is actually one of the lowest in the industry. It's about 3.4, 3.5%, which is quite good for this segment. Essentially, you'd be giving them an FLDG, a first-loss default guarantee in exchange for a better take rate.
00:37:11
Speaker
Yes, I wouldn't call that anymore because I think there are some norms around it in the recent times. But I think there is some amount of comfort that is given to any of these partners as well that eventually gets there. But yes, earlier we used to give LGGs. Okay, okay. And what would be your take rate? 28 to 32% is what you were charging the customer.
00:37:30
Speaker
Yeah. So we earn about 8 to 9% on every loan effectively. Our acquisition cost would be somewhere about 4%. Even if I take a risk at a higher number of about 6%, which is the maximum, even during COVID, we only had a risk about 7.5%. So in extreme scenarios also, like in a regular business scenario, we resume 6%. Apart from credit, ops, everything included, and the cost of credit, we earn about 8 to 9% on every loan.
00:37:59
Speaker
Okay. Amazing. Okay. So the NBFC partner would be charging about 10%. Another 10% would be your cost of capital. The cost of capital research is anywhere from 13 to 15%. Okay. Okay.
00:38:13
Speaker
Yeah, got it. Okay. That is a broad benchmark here. Yeah, we've typically not started working with banks yet, because I think banks are still completely catering to the segment as much. You said your customer acquisition cost is 4%. Why do you have that cost? What is that? That cost is the cost of the burn you had done on the payment. The payment is a loss leader, right?
00:38:33
Speaker
No, so that is same now. So in fact, like I was coming up to it. So what has changed is that when we were, we pivoted to a lending first model. Now we said that our customers only who want to loan, we will not give our payments product this to anybody. We will not just get paid customers. If you want to loan, you work with us. And when we give you a loan, we give your product also.
00:38:55
Speaker
Now what happened was the cost of acquisition for payments became zero and in fact, when you're giving a loan, nobody handles on the pricing also for a payment. So now when we say, we're happy to take one point. Well, so in fact, payment has become a profit center for us now.
00:39:13
Speaker
This switch was one of the most important things and that's why having what the merchants want and listening to them was one of the most important buzzwords. But FBI would still be like zero earning. UPI doesn't have any FBI but at a blended level it's still positive.
00:39:33
Speaker
Essentially, now you're a lending business at the core and the payment is just something which helps you be more effective at lending, like in terms of high velocity collections and early warning signal. It gives you more data to give you a better portfolio, keep your NPS out.
00:39:51
Speaker
Business we realize is also a collections business. It's not just a credit assessment business. It's not only like a distribution business because distribution in my opinion is not even a problem. There are enough customers out there who want loans. It's actually a problem. How do you collect the money back from these guys? So if you're able to divide it around that, that solves your problem. How do you do at the writing at the time of giving the loan? Is it based on the credit bureau score?
00:40:17
Speaker
So Bureau is one part of it. But apart from that, there's a host of data points that we look at as well, from their banking to their transaction data, a little bit of mobile data that is permissible as well. All that combined goes into an algorithm that throws up a number as to how much loan the merchant is eligible for, how long. And then there is a manual overlay also on top of that. So we don't only do entirely digitally. We do manual because we feel that the tickets are large enough that it was some physical intervention. And that also helps make sure that
00:40:47
Speaker
The merchant is not cooked up. Like in India, you'll find all sorts of jaguars to figure out. Like people are made like a business out of it. So we want to make sure that we're able to catch these guys. So for example, we have an FC, which is a third party check. What is that? FC. What is FC? US Fraud Control Unit. Which is the third party check, which enables people to go and check whether the customer actually exists or not. Their shop is real or not. Their house is real or not, except.
00:41:15
Speaker
Can you help me understand what is the link for someone who doesn't know what is credit underwriting? How do you do credit underwriting? The simplistic way is to say, okay, if the score credit bureau score is more than 650, then we will give a loan. But you're not doing that. You're doing a lot of other analysis to form the decision. What is the way to think about how to do credit underwriting? What are some of those insights over there?
00:41:40
Speaker
I think that's a great question to say that what are the ways to think about it, to say that, okay, how do you decide that number? Because you will give a loan about a certain number. That is fine. But I think the art is to figure out how much amount for how long. The art lies in the fact that you can't have the person being given more money than they're actually able to earn to be able to repay the loans.
00:42:06
Speaker
So if their income just keep making a number here, but it's 50,000, that's say profit per month. Now you can't give a loan that in heating month period without 20,000 rupees EMA also they're not able to pay away. Because if you give them an EMA which is 1 lakh rupees, 12 lakh rupees long, they'll never be able to pay that back.
00:42:26
Speaker
That is a number that you have to figure out. Obviously, you have to then be able to check whether their business volumes have been increasing over a period of time or not. What is the advantage of their business? Apart from that, you end up checking how long have they been around in their house, their area, etc. What the business line they are in right now is at risk at any given moment right now. For example, in post-COVID, restaurants were a big risk as a business. At that moment, we were not doing restaurants.
00:42:54
Speaker
But now again, so now we can do it. So I think those signals, also you have to check and keep evaluating that on an ongoing basis. You'll also realize that in certain cities,
00:43:04
Speaker
There are certain areas that have high risk compared to some other areas. Or there could be certain patterns that you start to observe between people itself. That's the kind of fraud they're doing. So how do you catch those frauds? At what point do you start thinking somebody might be going to a debt trap? Like one insight I can tell you that we realize from a data science team that if you've given somebody three top ups, right? So first, second loan and the third loan or top of that.
00:43:32
Speaker
After the third top up, which is all the heating much east, the risk on the merchant and the fourth top up actually increases substantially. You would have thought that if somebody has taken three consecutive loans from you, paid them back, they were actually able to do it. But what happens is everyone thinks that and then they start over leveraging the merchant also.
00:43:54
Speaker
they start giving them more amount than they actually need and when merchant is indebted more than they can pay back they only keep paying you interest but they can't pay you the principal back and that's when some of these go down as well so you have to then add the points check whether the merchant is over leveraged whether they're in falling in a debt trap or not okay okay
00:44:13
Speaker
How do you calculate earning potential? That seems like the key to decide, right? Like how much money to give for duration? What duration? It depends on the earning potential. Each industry has a certain benchmark margins that are there. We are able to then ask from the revenues that they are earning as well, like what is that earning potential that is coming in? So that is one indicator into the entire business. Obviously, you will also consider that fact that if you say if there's a grocery shop,
00:44:42
Speaker
Their sales are maybe say about 5 lakh rupees a month and 50,000 is the margin because it's a 10% margin. Now if you give them 2 additional lakhs then they will be able to make on those 2 lakhs maybe 10% additional every month.
00:44:57
Speaker
because you're adding to the working capital as well. So with that, how are they able to pay you back the money? So then you can add those things as well. Okay, got it. So we crossed demonetization. We crossed your first fundraise of $7 million. So we are pretty much at where the pandemic would have hit.
Pandemic Adaptation and New Services
00:45:16
Speaker
Tell me that part of the journey.
00:45:18
Speaker
So I think when the pandemic hit, thankfully we were just raised once a year before that. We were growing exceptionally at the time actually. We had grown 9x in that period in those nine months and we were actually on the top of the world and that suddenly put brakes on our
00:45:36
Speaker
growth at that moment because one, lending obviously became a risky business at that time because you should give out loans but you don't know how the pandemic is going to last, how long, what business is going to be impacted the most, how long the lockdown was going to last. With cities, the lockdown is going to be lasting because we were also a lot more focused on Bombay at the time and Bombay also had the longest and that happened. So Bombay opened 4th of November 2020 compared to some other cities that opened in May or June itself.
00:46:03
Speaker
So I think those existed. So we had that as an impact. So for a couple of months, our lending always came down to literally zero. There were some amounts we had done, but not so much. And then from June 2020, we started dispersing again. We went into new cities, then we started dispersing there. And then we started picking up. So we had to almost start from ground zero and then pick it up to the numbers we had there. Since then, I think even in wave two of lockdown, we didn't stop.
00:46:30
Speaker
because we have to also happen in different cities at different times. So obviously we were able to manage that. And we had also learned a lot from feedback once. So we were able to make sure that our business doesn't get impacted. So we have contingencies in place at the time. We had one of the decisions I think at the hardest at the time that we came across during COVID was a lot of companies were cutting salaries. And that was a no. You either letting go of people or cutting salaries. We felt very strongly that one
00:47:00
Speaker
Our employees have done nothing wrong. They don't deserve to cut their salaries because it's not that they would not referring to work. So at that time actually we never let salaries, we never delayed salaries at the time. That is one important decision that we do. And second thing that we also continue at the time was that apart from the low performing folks which are continuing to be the which is always the case, we never let any employees go as well. There was zero attrition which was sourced from our end at that time. And third, I think
00:47:28
Speaker
has also stayed as an ethos for the company as well across employees that we want to treat people fairly and I think that is something that we continue to maintain today.
00:47:38
Speaker
Okay. Okay. So you said June 2020, you went into new cities. Does that mean you hired Feed-On Street in those cities? Like that's your way to acquire merchants, right? Like through Feed-On Street. Yep. What is in lending that we are used to acquire merchants? One model is that you use Feed-On Street, which is like approximately 30% of our business now. 40% of our business comes from connectors.
00:48:01
Speaker
These are individuals who are like certain leads that they can pass it on, such as TV based model, and they're able to get a commission on top of that. And the third model that we just started in the last one and a half years, but that scale significantly, which has become pretty percent of our business now, is digital marketing, where it's not like Google and Facebook ads, but through digital channels, we're able to understand who are these merchants who probably require loan. And then we have a tele calling setup who calls from like our office in Bombay or an office in Chennai to be able to acquire these merchants.
00:48:31
Speaker
There we have seen significant growth because one, the monitoring of efficiency in some of these cities is a lot better than like a Freeton Street or Channel Park list. The efficiency is also better and also you know that the quality of the merchant should be there because you can focus on particular categories, you can focus on certain areas that have been doing much better than others. Okay, okay, okay.
00:48:57
Speaker
Okay. How do you generate this data, which is used for telecalling? I think a lot of tools that are there as Chrome extensions, etc. to be able to figure out like, say, pharmacy in God Copa East. So then it'll give me like an entire dump of all the pharmacies in God Copa East. But I know that pharmacies do really well in Bombay and that they have decent margins. So we are able to then call off all these pharmacies and be able to generate leads from there.
00:49:26
Speaker
Okay, so it's like narrowing down on industries, which you don't have a good margin and then finding. So we end up putting, but primarily it's based on saying that, okay, we already have this data, which we know works well. Why don't we work with that itself? And then it also went to cities where we have maybe limited presence.
00:49:50
Speaker
Like you can see your existing cohort of borrowers and draw some trends on it that these kinds of customers are coming to us for loan. So let's target more such customers. For example, in COVID, it was way easier to call all the grocery shops and pharmacies because those were the businesses that are booming. Okay. So what is the adoption? What kind of adoption do you see of the payment product by a merchant who takes a loan?
00:50:18
Speaker
Do they generally switch to it or do they continue to take payments through the existing methods which they have? I would say that 40-50% of them continue to work with us. There are others who have multiple cost machines or payment products, which we do not know. I think they can continue to work with their current payment systems as well, as long as they're able to make daily transaction enough amount that pays our EMI or EDI. That is a qualifier for us.
00:50:49
Speaker
But we don't deny that fact that yes, there might be somebody who is getting way lower interest rate or MDR from a bank because bank is able to give a subvention on their MDR also because of other products that they need to service them or current account exists with them. So all that we are okay with, there are certain businesses where also they might not be a daily transaction also. So there we are okay to just give a QR code and not a pass machine. For example, there could be a mattress shop.
00:51:15
Speaker
They might not really transaction. It's not a high frequency business. So over there we can give a code and maybe not a POSS machine. Like you give POSS machines through banks and no, we have a POSS machine. Okay. Okay. When did you launch that? This was again around 2018.
00:51:35
Speaker
Okay, because you needed to have that strong control on payment inflows to collect, so it may have to give a cost. And so for this, you charge them like the rectum, which typically most... So you have a fixed cost, we charge them one time, which is the cost of product plus a little bit of margin there.
00:51:57
Speaker
but there's no monthly rental there because we realized from our first experience that monthly rental is where it's one hardest to collect and then merchants end up throwing the post machine a lot faster but if you haven't like for 18 months of alone and you know now it's free for you then you'll continue to use it even if you're not taking a top up but next time when you're new to top up right you will be the first people you'll contact us as well
00:52:20
Speaker
Okay, your pass machine is your physical in road into the merchant's shop. Because now the merchant already has a physical pass which is free, because they've already paid money for it. How much does the machine cost for a merchant? It's roughly about 7000 rupees all inclusive, which is a what can cost. Okay, and this is like the touchscreen kind of machine, or is it like the old one?
00:52:46
Speaker
It has a digit system. So touchscreen is like Android based, which is far more expensive. So that would cost anywhere between 12 to 13,000 rupees. But we realized in our segment of merchants, that is not a high demand product. They want it to be cost effective and we're okay with that. Okay. Okay. Okay. Okay. Got it. You said banks give you a subvention on MDR. What does that mean? Can you break that down?
00:53:07
Speaker
What that means is typically if I'm a MSME and I have a current account with the bank, now the bank is earning interest on that by giving loans for them but they're not giving me any interest. If I have 10 lakh rupees in the bank account, the bank will be earning on that 10 lakh rupees but they're not giving me anything. So I can tell the bank that I'll
00:53:27
Speaker
If you don't, give me free services. So then what happens is they can give you a POSS machine which does not have any MDR, maybe it doesn't have a monthly rental, things like that. Or it has a reduced MDR instead of 1.8% they could charge 1.5% as well.
00:53:42
Speaker
Okay, okay. And how does this tie into your merchants, this MDR? I'm just saying not with our merchants. It's just that merchants may have existing POSS machines, which are given by banks, which have used rates because they have some mention for the bank. So my rate was to be 1.8. But if a bank has given them a machine at 1.5, most likely the merchant will try to use that. Okay, got it. Okay. And what percentage of your merchants take physical POSS versus what percentage take a QR code solution?
00:54:11
Speaker
I think about 50-60% merchants take the boss and about remaining 40-45% end up taking the QR only as an option.
00:54:20
Speaker
That QR would be like, say, the Bharatpe QR, where you scan with the UPI QR. Yeah, it is the UPI QR itself, which is accepted across all payment options. So it's a ubiquitous QR. Instead of, we are able to then deduct the loan repayment from there and then transfer the money to the bank. So you're primarily competing with Bharatpe because they also do the same thing, like targeting merchants, giving loans, and using most payment as a method.
00:54:47
Speaker
I think there are two substantial differences there. One, I think Bharat, one obviously being a payments first company, right? They acquire millions of merchants for payments. And then they figure out based on that, which are these merchants which are lendable.
00:55:02
Speaker
So usually what ends up happening is they might be slightly lower domain of merchants than the ones that we give. So that's why the ticket sizes could be sub Rs. 30-40,000. Typically, maybe an app to 25,000. In our case, the average ticket size, like I said, is between 1 to 10 lakhs and average is 5.5 lakhs. So it's not always applet to Apple in terms of merchants. They might do a street vendor as well. We probably won't work with the street vendor because we don't know the whereabouts on a given day.
00:55:31
Speaker
Okay. Okay. Got it. Then that is the primary difference. Like they would be lending to, let's say five, 10% of their budget base and the ticket size would be much lower. I think this approach or strategy makes a substantial difference because to acquire that million versions, you'll have to spend a lot of money as well. And I don't know if you get enough substantial data that I cannot gather today or I cannot check. Because if there are the UPI QR transactions that have happened, I can also see that in the bank accounts.
00:56:00
Speaker
and especially with the account aggregator framework coming in. Yes, correct. So, it's not an advantage in a way because the data is anyway transparent. If I use a bank, I'll be able to analyze that anyhow. Okay. So, the payment data is not such a big advantage and acquisition cost continues to be the same for both of you. You are spending only on merchants you are tending to. They are spending on a lot more merchants and converting some of them through a cross-sell.
00:56:28
Speaker
cost of acquisition per merchant would be roughly similar. I would much higher for them, if I had to guess maybe, because when you acquire a million merchants, a large portion and we had done this as an I can tell you from our personal experience, when we looked at the 50, 60,000 merchants we had in our platform, very few were actually lendable, firstly, because say a travel agent is maybe not be lendable, because they are a services business, they don't have physical asset to
00:56:55
Speaker
Second is that when you want to give them a loan, whether they actually want a loan or not, we don't know.
00:57:02
Speaker
So either way, there's a conflict. So then the challenge is, out of that 50,000 in every given month, if you were able to give a loan only to 50 or 60 or maybe 100, that's too low a number. Okay. Interesting. So you are like the anti-barretté in the budget lending space. So I think there are three types of players that are actually, you would avoid a lot of noise in the segment. And I think what I've seen is that there is a lot more noise than actual change on the drought.
00:57:33
Speaker
So there are three types of systems that we are talking about. The one is people who are playing on surrogate data. So anybody in those sites, they're saying that, okay, we have this other data of these merchants. We want to play on this data to be able to lend these merchants. That obviously there are payments companies that are working on this as well, which want to lend as well.
00:57:54
Speaker
And the other is pure play lending companies. Now when I talk about pure play lending companies, one of the important factors to remember is that lending globally and historically has never been a winner-take-all market. So unlike Amazon, it will not become ubiquitous until we have e-commerce issues. Like in the lending, it doesn't exist. The second is so these players will continue to exist. They in fact will continue to cooperate with each other through lend as well.
00:58:19
Speaker
We have a lot of partners who are competitors also in a way. But that came this segment because nobody can in all demands. I might work in the West and South. Somebody might just work in the North as well. Now, when we come to payment and data companies, right? Now, Saroket data companies, they have had this issue that one, their data, irrespective, is reflected somewhere or the other in the bank statements.
00:58:45
Speaker
If you're applying, if you're selling, if you're transferring money, it's visible in bank statements somehow that I can identify. And what happens is there is no, that data can also be fabricated to get a loan. And it isn't a lot meaningful enough a lot of times because if you're a distributor, for example, of goods, right, you might be one tenth of the distributor. There could be other nine distributors as well. When I'm fetching a merchant, I might be able to assess it on all 10 distributors and then give them a meaningful loan versus giving them the only 10th of the loan.
00:59:13
Speaker
So that's why you would see players like Khattap who have moved into a SaaS model and things like that, didn't end up going into a lending model only. There is also the other side where payment companies have this thing that when they acquire a lot of merchants, there's an upfront cost to that. To bear that upfront cost, then you have a legacy issue that now we acquired these merchants, now I need to give loans also. Because I need to store that I'm able to justify that cost.
00:59:41
Speaker
At that time, you're not always the most credit conscious, sometimes to break the barrier there as well. We have seen that since the time we started there, several companies that have not given enough due importance to credit, right, that have also let go from this entire business itself. They don't exist anymore. So like an example of Capital Float used to do business space and I see my landing earlier. It's now a B and PL player.
01:00:12
Speaker
I think there are a few others as well, which have gone through that cycle now. So I think if you're not credit conscious, then there is a very high risk of being an issue. Okay. What about the BNPL companies which are targeting merchants, like say, Rupify, E-pay later, which are targeting that same category of merchants, which you are targeting, which category do they commit?
01:00:34
Speaker
they would be lending a merchant typically they're just saying that okay we'll help your customers like a play at paying you later so we'll increase your revenue there so they're not taking a punt to the merchant but the customers were coming to these merchants okay
01:00:48
Speaker
No, say, Rupify works with Uran and with Duvato's restaurant procurement business, like Duvato has one vertical which helps restaurants to procure and they give those two restaurants or those two merchants buying from Uran. But again, it's only a segment, right? So now if you're buying from Uran, you might be one of the distributors of Uran. So you may have one 10th, one 20th, one 5th of the business.
01:01:11
Speaker
But if you want to have the overall view of the business to be able to give a meaningful loan, that is where it becomes a difference. Otherwise, you could be in an inverse discounting, supply chain finance kind of a loan. You're giving it $8.30, $40,000 loan. But I won't directly call it a competition to what we're talking about. Because we are trying to give a loan which can help them from their business to a bigger scale, rather than it's an intermediate working capital or program only.
01:01:35
Speaker
Your loan is like a no strings attached to a loan. They can use it for building another outlet or they can use it for inventory or whatever they want to use it for. So we've seen some of the retail shops actually transform from like the typical moment of store, which have all these packets lying around to the modern real store format as well. And suddenly they would have seen a big shot in the increase in the business, 50-60% because now when they're able to, customers are able to move around, they actually end up buying more.
01:02:03
Speaker
So, those sort of changes can only happen when you're giving them a ticket, so that is meaningful. Okay, okay. What's on the roadmap now?
01:02:12
Speaker
So I think as we grow, we have a couple of things that we're adding on as well. So we already added insurance recently. So we're scaling that now. What kind of insurance? Correct. So there are three products that we are currently in box with. So one is credit life, where you have a life insurance along with your credit product itself. So there are two types of life insurance. One is obviously that your loan will be repaid in case if there's an emergency.
01:02:36
Speaker
But second is that your family will get a life insurance in case there's an emergency as well, which is a typical government insurance. The second is theft, fire, any accidents, etc. In the shop itself, there is an insurance for that.
Vision for the Future: Becoming a Neobank
01:02:49
Speaker
Third one is health. I think we've realized that post-COVID, merchants have also become equally conscious of their health and the impact it has on their business as well. So these three segments in insurance is something that we're playing with. We might add more later, but for now, this is the one that we're working on.
01:03:06
Speaker
How are you making health insurance accessible? Most people get health insurance through corporate employment where it becomes affordable for them. Are you doing some stuff to make it affordable for people who are not getting insurance through employment? At the first step, we will work with either brokerage firms or insurance companies to be able to provide these insurance itself. The only thing is it will not become affordable, I would say, but it will become more accessible.
01:03:31
Speaker
So the roadblocks that are there in the process, because now this is a portfolio of merchants in a certain daily segment, certain working conditions, certain inner city. So insurance companies are also willing to take that as a portfolio and say that, okay, we can remove some of these pre-conditions of tests, et cetera, and then give them an insurance product. If somebody individually goes, they're like, okay, first you have to take these five desks, and then you have to come, and then you have to give these conditions, these many questionnaires to be able to give. I think that process is what we are streamlining right now.
01:04:00
Speaker
Okay, onboarding is becoming easier. As an individual buying health insurance, you need to undergo some amount of qualifying tests and so on. As a group, you don't need to because companies assume that in this group, there'll be some healthy, some unhealthy. So you are able to present this as a group to companies to get them to eliminate the pre-qualifying tests. Absolutely.
01:04:23
Speaker
Okay, interesting. Okay, what else in the roadmap besides this? I think for now, this is what we're looking at. We have a couple of products that we look at, but that probably will be once at least one or one and a half is down the line, not right. But just to understand what you're thinking. One could be more like a current account type product, a merchants who have excess capital can park their money in that account. And then earn their trust.
01:04:52
Speaker
Yes, then more than what they're getting in a bag today. And will this be through like a peer-to-peer lending model? Like that could be an interesting play here. Like merchants who have extra money can lend to merchants who need money. It could be through a P2P model. It could be in conjunction working with a bank also. So even back when working on something like this, because if you're able to give them a pool of money and guarantee that approximately around this money will always be there and they don't mind that. Okay, interesting.
01:05:20
Speaker
So essentially you're moving towards being a new bank for merchants. Yes, that's correct. So new banking is the case. I think what we've always kept is like how do we help merchants have a vision and we haven't married ourselves to the idea that we started out with but like how do we ensure that we're able to help them the most. What about stuff like say helping them manage payroll and payouts and stuff like that. At least in our analysis so far that has not come out as a
01:05:47
Speaker
need because most merchants that we work with have only maybe one, two people working with them. So it's not like as much of a need yet for us to help them with. So we've not put that on our roadmap yet. Okay. Got it. Okay. Is your age for a bank satisfied at FTGAS? I think like financial inclusion in this space,
01:06:08
Speaker
It's been immense actually, the amount of changes that you're able to see, right, on merchants. I'll give you one example. One change that we've seen is back in 2019, we had gone with one of our investors on a due diligence to one of the merchants in Bombay itself, who's a small repair shop, right? It was in a very dingy corner, like nothing fancy about it. Very run of the mill, but the merchant had been a payment merchant and also just taken the first loan from us.
01:06:38
Speaker
at that point since the time we have given them the merger 3 loans and we have also seen the merchant over the period now having a proper establishment.
01:06:48
Speaker
having bought an apartment now drives a car. And I think that journey of the merchant that we're able to see over the four or five year period, right? If I don't call that conventional inclusion, what would be 40% of our merchants are new to credit, 44% of our merchants are women. So that also gets players into play.
01:07:08
Speaker
Don't have access to capital before. Amazing. What is your monthly disbursement rate now? How much do you disburse? Currently, we're disbursing about 30 crores a month. And what's your book? About 300 crores right now. And how much from your own NBFC? Our own NBFC just started. So roughly about 15, 20 crores would be the number from our NBFC. So what is your plan? What percentage do you want on your own NBFC?
01:07:36
Speaker
Our own MBSC will continue to be like as much as equity we can do and like the amount of money that will be there on our MBSC, right? We continue to keep that. So that will always remain 20% of our overall book, but we will continue to work with partners to be able to load further. But why not scale that up? Because you can take debt on the books of the MBSC instead of coal and nee.
01:07:59
Speaker
I think because you anyway own the whole stack from acquisition to collection, then why not just do it on your books? I can leverage my book at maybe 4-5x of equity, wherein the same equity with a partner I can leverage up to 20x.
01:08:14
Speaker
Okay, so you need to raise a lot of money if you want more on your own books, then why not do that? Like why not raise more money? And we get the same upside either ways. Okay, like when we're using capital also from outside in our NBSC with at the same cost, if you're working with a partner, so to get the same cost. Okay, okay, okay. So here is just is just for vanity that you would raise money, it's not going to impact your unit economics.
01:08:39
Speaker
Yeah. And then we'll end up digesting also. Okay. Interesting. Very interesting. Okay. What is the value of a budget? How much like, what is the repeat rate and how much money do they take as low as total or give me some of those numbers?
01:08:55
Speaker
I think that is the number that I might not have today because we have not been able to evaluate that enough. Because a lot of our merchants we work, they might want to take a loan, maybe they're not eligible the second time as well. So we don't necessarily look at as from a lifetime acquisition of a merchant itself, because get them a loan the second time also, you have to do a complete evaluation. Okay. But a business moment. Apparently, what is your number of people who've taken a second loan?
01:09:20
Speaker
This would be about 50% of our existing merchants don't take loans. 30%. So you've raised close to $15 million so far. Yes. And what are your lessons on fundraise? So we've always had interesting journeys in fundraise. So when we just started out, I think this was right around 2015-16 when the frenzy of fundraise in 2014-15 was just ending.
01:09:49
Speaker
So at that time also like raising money was a bit of a challenge because there was almost a funding winter at the time as well. Easy money was gone and heading into a business where we had to show profitability, part of profitability, the unit economics to be able to raise money. So I think.
01:10:05
Speaker
It's not that we got an easy money at the time as well, but whatever little we did, we tried to work with that for the longest time. In fact, before our series, I think we got into a point where we'd almost run out of money and we had no money to pay salaries or vendors, et cetera. And it just so happened that we'd gone to MIT in 2019.
01:10:26
Speaker
November 2018 and we won an award by them for the most innovative project in the world and they give us 250,000 dollars. That at the time to survive for the next three months we actually got them.
01:10:41
Speaker
But if we still don't know what we would have done without that. So those are the times there have been times like obviously we suddenly have to calibrate ourselves in terms of making sure that we stem our growth a little bit just in case like to make sure that our runway is elongated. So I think that is an ongoing journey that every founder has to go through. And that brings us to the end of this conversation.
01:11:01
Speaker
I want to ask you for a favor now. Did you like listening to the show? I'd love to hear your feedback about it. Do you have your own startup ideas? I'd love to hear them. Do you have questions for any of the guests that you heard about in the show? I'd love to get your questions and pass them on to the guests. Write to me at ad at the podium dot in. That's ad at t h e p o d i u m dot in.