Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
Building The Next-Gen POS Financing | Tushar Srivastava @ Skeps
170 Plays3 years ago
One of the biggest impediments of the Fintech industry has been the way consumer loans are handled by large institutions. In the process of getting a consumer loan approved, an application flows from one lender to another and faces rejections. This hugely affects the credit score, and the consumer might end up with sub-par offers.
In this edition of Founder Thesis, Akshay Datt speaks with Tushar Srivastava, Co-founder and CEO, Skeps. He is an alumnus of IIT Delhi and has extensive experience in the Banking and Financial Services sector.
Founded in 2018, Skeps aims to solve the problem of credit accessibility by using blockchain technology. It offers a cloud-based modular platform for both merchants and lenders to identify credit solutions with the highest chance of a conversion.
Tune in to this episode to hear Tushar speak about how Skeps is disrupting the traditional lending industry with new-age technologies.
What you must not miss!
- Difference between API and blockchain integration
- How to integrate lenders on the blockchain?
- Fundraising journey
- Merging BNPL with blockchain
Recommended
Transcript
Introduction to Founder Thesis Podcast
00:00:01
Speaker
Take a minute, I'm dead, you know what I'm talking about. This is Aurabh and you are listening to the Founder Thesis Podcast. We meet some of the most celebrated Shraddha founders in the country. And we want to learn how to build a unicorn.
Introducing Tushar Srivastava and Skeps
00:00:27
Speaker
Hi, this is Tushar Srivastava. I'm the co-founder and the CEO at Skips. Compared to India, the lending market in the US is very mature, not just in terms of traditional business infrastructure, but also in terms of fintech innovation. And this is what makes Tushar's achievements so impressive. Tushar is a silver medalist from IIT Delhi with extensive experience of scaling up businesses, both in India and the US.
00:00:54
Speaker
He started Skeps to solve the customer experience problem in the lending space in the US, and it is one of the most elegant use cases of blockchain technology that you would have ever heard of.
Challenges in US Lending Market vs. India
00:01:05
Speaker
And while the starting point of Skeps is solving the experience of the borrowers, but in the long term, Skeps is going to become like a Visa or a MasterCard, essentially a network of pipes connecting borrowers and lenders through merchants. Here's Tushar talking about his amazing journey of building Skeps.
00:01:26
Speaker
If you like to hear stories of founders, then we have tons of great stories from entrepreneurs who have built billion dollar businesses. Just search for the founder thesis podcast on any audio streaming app like Spotify, Ghana, Apple Podcasts, and subscribe to the show. So, what led to Scapes is very simple, is that at Lending Moon, we were talking to a lot of merchants, and these are the big players.
00:01:55
Speaker
And what we're trying to go to this much and not think about the likes of home depots or airline companies.
00:02:01
Speaker
So I was always part of this, I was consulting this credit card company. So I was part of these co-brand deals, like in American Airline and Citi had a co-branded relationship. Chase and United had a co-brand, you know, right? Yeah. So I was part of these co-brand relationships. And I know the challenges because I was at the table when merchants and Chase or Citi's or Amex or the world used to negotiate. And the merchant used to say, hey, you have to increase my approval rate. You are only serving my 50% of the customer because your customer is 700 FICO, but my customer is
00:02:30
Speaker
300 to a student, all the way to an elderly person, like everyone is my customer, right? I don't look from a credit list. And also bank cannot go beyond it. So right, so there's always a tussle around it. And then bank used to ask for data sharing. Hey, can you give me this data? Much as no, this is a confidential data, I cannot share with a consumer consent without you. A simple thing is that how many international flights nothing from a bank point of view.
00:02:52
Speaker
How valuable is that information that suppose if someone who is traveling from a South Asian country to US and travel multiple times, do I need to look at their credit history? I can probably give them a credit card easily just because of the business travel they do.
00:03:05
Speaker
But then it has come. So, so when I was at Lennyburn, I went to these merchants very candidly that look, we know where the bank stops and we know where we work. And because the product is created by the people who have worked in the banks, this product is very well aligned with the bank. We don't charge payday types of lending rates. It's not predatory lending. It's a very conscious
Improving Loan Approval and Avoiding Predatory Lending
00:03:25
Speaker
risk based pricing with a collection in house collection team. So we treat our customer with that most respect. So it's a very logical fit.
00:03:32
Speaker
that how I can supplement your approval rates. And we are not here to grab your co-brand exclusive contract. We are just asking where the bank is stopped, we can help you. Seems very natural fit to me. But Lending Point was not doing a credit card, right? Yeah, but we are saying that Lending solution, so credit card I always like as a lending solution like it's a product. If you want to book a journey or if you want to do a medical transaction, you can put it on credit card or you can do it.
00:04:00
Speaker
So that is where it was eye-opening that when Marchin we talked, Marchin said, Azulhar, look, I believe you that you may be a very good lender.
00:04:08
Speaker
and we have known but today we are not short of the lending solutions. Now I'm not saying that I'm comparing you with another but our problem is bigger than how to fit in that experience because today how the experience work is that Home Depot has eight to ten lenders and maybe more across that. So the problem is that when you come a customer comes and they have these and different lenders have a different platform so they come and apply. So now either a contractor or a head or a person who is sitting behind it
00:04:35
Speaker
They see you, okay, what kind of a profile, they make a judgment call around it. Then they say, okay, you apply with Citibank. Now, in that case, there are two scenarios can happen. If you're a bad credit customer, though you look, you're a very good home before customer, but when you apply, you get declined, very awkward position for a merchant, merchant hate. The second option is that they directly put you on a platform, which gives you a higher approval rate of integral, and you get a 15% interest rate product when you're an 855 customer, and that's also not a place.
00:05:05
Speaker
And there's only one way in the way in US the credit work is a waterfall approach. So they can only put you on one because the way underwriting happens is that even if you're applying on a website or anywhere, you have to enter your information and that information goes to the lender platform where they do all the magic around underwriting and everything and give the answer back. So because you have to send the information, you can send it one at a time.
Impact of Credit Inquiries on Consumer Scores
00:05:27
Speaker
We call it a waterfall approach. You send it to one. If it gets approved, offer. If it gets declined, then yeah. So now, in this case, what is I just talked about? What is the right way to structure it? And that is if you structure it with a bank, then FinTech and all, then this is the right way to structure it for 700 plus FICO, but it is absolutely the wrong way to structure it for a 650 FICO customer.
00:05:50
Speaker
period. Because you will always start with a decline first, you see. The second thing is the problem in the US industry is that when you get an inquiry on your file, your cycle drops.
00:06:01
Speaker
So if the file is getting four or five inquiries, then... By the time the consumer actually lands on their right product, they are exhausted. They're exhausted in their credit. And this is where I'm very passionate about it. Because now think about how flawed this structure is. So you are right. This is designed for a prime customer. But at 6.55, he gets declined. His credit score gets impacted. And by the time he comes to his own lender, where there was a fit,
00:06:23
Speaker
He's getting a product which is some part that he could have originally got. So suppose if he had directly applied, he would have applied as a 650 FICO. But now this lender is seeing him as a 600 FICO. So he's giving him an expensive product that he could have originally got. And for what? Because for no reason he was put through a process which was suboptimal for them.
00:06:42
Speaker
a no-fault office. So this process is just designed to give them a more expensive product around it. And spoil their credit scores. So that is where I am fundamentally passionate about this thing is that no fault of the consumer, you end up getting with a more expensive product and a very poor experience around it.
00:06:58
Speaker
And that was the problem of the merchant. And then we just took this problem. I said, this is a problem. So that is where we said that lending is not a problem. Of course, LendingPoint, I still believe, is one of the exceptional companies around it. And then there are more, there are 7,000 lending institutions in the US. But the problem is how to make them work for a consumer.
Blockchain's Role in Lending Efficiency
00:07:15
Speaker
So that is where the idea of this platform started, that how to solve this waterfall approach in one. And now we took a very hard step at the problem we set up.
00:07:25
Speaker
The only reason that this multiple inquiries happen because each time consumer has to go to the different platform to get under it. Everyone is using the same data. So we fundamentally said that is there a different way of doing it? We flipped the process. We said rather than taking consumer to different platforms, can we bring their underwriting models into one environment? So rather than I'm hopping customer from one platform to another, can I bring all the intelligence into one platform?
00:07:52
Speaker
and quickly run all of them simultaneously. So instead of taking one decline and all, can I directly connect you with the right partner right there? So we flipped the process. We said, don't take consumer to the issuer. Let which issuer intelligence to your consumer is because data can be bring in any platform. So once now start thinking about this way, then the biggest challenge is that
00:08:11
Speaker
Data will never be a challenge because data can be pulled in any because it's the third party bureau data so it can be pulled in any platform. The biggest challenge is how to move the underwriting intelligence into it because being part of the bank before I knew nobody will share their trade model with me.
00:08:26
Speaker
That is their bread and butter and that is their core differentiator. That is where our familiarity with blockchain as a technology came in. We said, this is where blockchain comes in very, very handy because now if using a technology, I can, without looking at their proprietary information, I can move their underwriting models into one environment. Then nobody, so nobody gets to see it when the issuer knows what is behind it.
00:08:50
Speaker
I can underwrite the customer using their logic but not knowing what is inside the box but I can think the data and get yes and no answer and then I can present the option to the consumer and then we can make a connection and let the issuer complete the fulfillment part of it. So, we first use blockchain to hide that information from us or from merchant. So, nobody in the ecosystem can see that option. The second thing which we say that blockchain is because it's a real-time network
00:09:16
Speaker
lenders will have a complete control over their model because if they need to obey their credit policy, they can do it in real time. So first thing is that nobody sees their information. They can obey their credit policy in real time. And third is auditability. Why would they trust SCAPS or any other company that it has been executed? Their model has been executed as well. I don't trust us. Trust the technology. Everything is recorded on blockchain. So you can go work and pull the information and save.
00:09:42
Speaker
Like is my model run the right way? Absolutely. This is a documented evidence of it. You don't have to trust much and you don't have to trust steps.
Market Validation and Client Acquisition
00:09:50
Speaker
So the trust, the information protection and the real-time connection of the network, all three things of the blockchain played beautifully how to enable this model. This is the match. Like there is a good match between the technology and the problem. And then we started developing the platform around it.
00:10:04
Speaker
So did you go deep into the solution while working or did you quit and then start working on it? Tell me how it actually got launched. So I think when we were starting up from a startup point of view and we did it, we had a couple of products like this was my third journey. I would not say that we got funded in the first two, but we experimented with a lot of products before. So when we started this company, we were very clear that we have to
00:10:30
Speaker
Yes we have an idea so one is that first thing we did is that we tested the idea in the market that does this problem statement resonant list we had it so we resonated it with multiple merchants around it and everyone we talked to some of the very resident expert in the payment space like people who have done this in the last decade and all.
00:10:51
Speaker
And it resonated. So we don't have to explain to them. They said that yes, this is a problem. And if this system can work, if it is compliant, this is a good fit. We got a very, very strong validation about the problem statement that this is not the problem statement which we created. It exists. That was our first win around it.
00:11:08
Speaker
because I always say that with my consulting days, the hardest part to sell is to create a problem for a client. Your solution comes. First, I have to sit on the table and tell you you have a problem. And that's the biggest problem. Because if I can convince you you have a problem, then the solution can sell itself. So when I found that I don't have to convince you about the problem, then it's just the solution. And nobody else has a solution. The first principle is that the problem is very defined. And it's not that you are advocating the problem. It's in the street. Then the second is that you find your first client because
00:11:36
Speaker
you have to make sure that this solution works, somebody who trusts you. So this is where we were fortunate enough to find a client with like our first time was Renovate America and they were looking for a second look program which like they like the landing point product and they were doing the financing in the first look and they didn't want the second look program.
00:11:54
Speaker
And we told them about this platform and their eyes lit up. They said, yes, this kind of an experience that if you do one credit pool and you can directly give them an option, it's absolutely amazing. And then because of their belief in the product, they were willing to invest, not invest when I say they're willing to invest their effort around creating the solution because some clients can say, show me where it is working. So you have to find your partner who says that I believe the idea as strongly as you.
00:12:21
Speaker
So, I give a lot of respect to them that they believed in us, it created a platform for them and we made it live with them.
00:12:29
Speaker
And it was a success. It was a very good success. Everyone loved the experience. Their contractor loved the experience. And then the ball start rolling because now we have a working platform. So your first client is... And that is where I still have my affiliated with LendingPoint because it was helping LendingPoint. It was helping Renovator. We were the platform. We are not going to compete with them. And that was very clear. That as a platform, I will never compete with my clients. So I will never become a lender myself. All right. Right. Okay.
00:12:54
Speaker
I want to understand, you know, when you decided that, okay, Renuit America agreed to do a pilot review, even though you had blockchain as a solution to solve for privacy, but still, I'm sure banks are like, you know, slow decision makers, risk-overs. How did you get them on? Like, how did you navigate that?
00:13:13
Speaker
Very good point. When you're in an enterprise sales program and particularly when the industry which are very well established for the right reason and have a lot of guidelines so it's not easy to maneuver them right. Banks we all know right and for the right reason. So first thing is actually that as I said that
00:13:29
Speaker
I'm going back to my fundamental policy of respecting your field of play. Because if you come and believe that let me trash it and let me say that why people are not doing this, good luck with that. So fundamental question of, so I started with that respect. Look, bank has a process and there's reason why as an institution they exist. People can point a lot of shortcomings about it, but there are a lot of good things which also come out of bank.
00:13:56
Speaker
So when you have this fundamental respect, then you come to the next level that how to bring them on board of this thing. So first thing is that when we design this platform, our familiarity with the banking process was very immediate. We said, look, we will have a least set of disruption in their current process. So let's bring a technology which can sit, but they don't disrupt existing process. So what I said is to buy BlueBank.
00:14:18
Speaker
What we are doing is that suppose if you are in a Home Depot system, we are just, and you give your model. So one is that how your model, we are not seeing it. So we'll create a bulletproof system. We will go and showcase it that your model is not accessible. Everything. So the beauty of blockchain is that everything will be installed in their premises.
00:14:37
Speaker
Once we come and install Microsoft Word, our software is very similar to Microsoft Word and all. You install it on your server and you cordon it off. We don't have any ongoing access to it. So your model sits in your devices under your control. First thing, check off. No control to us. Second is we will showcase you that none of the information is flowing out of the network. We will demonstrate it, technology that nothing is, and your Infosec team. And we work on them to showcase it, not your application.
00:15:03
Speaker
So we have to give them a comfort. We have to make sure that we give them the right control. And the last thing which we did, look, we are just doing a pre-approval on behalf of you. So we are running your model, giving a customer an option. And once the customer selects the option, then your current process takes over as is because we will send the PII to you. You do your own data pull. The customer information, the application information will come to you because once the customer says, I want
00:15:27
Speaker
x product then that their name address information come to you and your current process will take over. So no change we're just creating a one more supplemental and extra step into the process to manage the consumer experience. So long story short we did at least disruption into their system so that they can relate to it. We just position it as an extra step which is a better consumer experience and last thing is giving you control throughout this process not us taking control off.
00:15:54
Speaker
So that is how you work through it. Of course, now there are still challenges around it. So being a one client, having an operational give you one thing.
00:16:03
Speaker
Then we were fortunate enough to work with like the bureaus and all they blessed the process. So they blessed the process. The third is that then we constantly trying with the banks. We work with some of the reputable like EXL and other agencies to say that yes this product work or putting their weight behind it. Having a logo of EXL bank company funded company also helps. So those little little things add credibility to those entire thing.
00:16:29
Speaker
to make people come. And once you win your first bank, then the life becomes much more easy.
Skeps' Seamless Integration Model
00:16:33
Speaker
Right. Here you could integrate both with banks as well as with NVFCs. Exactly. So and that's the last thing which we do that that was in our hand to design a solution in such a way that it becomes plug and play. So the complexity of the blockchain is never exposed to any of our partners, whether the merchant or these NVFCs or banks.
00:16:54
Speaker
We made it a plug and play deployment. You just give us a server space and we can install this in two hours. So when you did the pilot with Redovit, how many partners did you get on board for that pilot?
00:17:06
Speaker
So the Renovate is a very interesting example is that Renovate, so they do have a lot of contractors. So they were with 2000, like they have thousands of contractors on their platform. And their reason was they were looking for this kind of a solution because they were only approving 700 plus pipeline. Their contractor were only getting, so when a contractor walks in, so this is how the system works. So suppose Akshay, Tushar have a need to Renovate their kitchen.
00:17:31
Speaker
So they will call up a contractor. Contractor will show up. First they will do an estimation that, OK, it will cost you around $20,000. Fair enough. Then contractor will ask you a simple question. How would you want to pay for it? In most cases, this is a big amount. They will say, look, do you need a financing help? In most of the cases, people will say, yes, I would like to explore it.
00:17:49
Speaker
That is when they take out a platform like Renovate America to say, well, let's see what options you can get. So in that platform, customer applies on your kitchen top. And that is where the contractors were getting close to 45, 50% approval because in US 50% of the population is below 705. So by design, they were getting 50% approval.
00:18:10
Speaker
you would immediately get an additional approval product. So, if someone is not approved by your product, they will be approved by another person. And contractor will not change it. Once the customer product is there, then it's customer. Once the customer says, yes, I like this product and I want to complete the product, then they can work with their NBFCs over phone and all to get the lead.
00:18:26
Speaker
That is contractor is very happy because contractor job is to just give you an offer. How you complete the fulfillment, they are out of. But this was the biggest success that the moment they install our box, the next day, all the contractors were able to take advantage of the solution without going any underlying training and all because nothing changes on the front end. That was the key for them. So that was an immediate success and they received very, very positive feedback from the industry, from their clients.
00:18:53
Speaker
Their approval rate instead of 50% would have become 60% or 70%. 80%. It immediately went from 50% to 80%. So you see, without changing the experience in the entire network, they would have said, that was the huge thing. No change in consumer training, and you immediately got the benefit across it. So all the contractors love the product.
00:19:10
Speaker
Here, what was the deployment you did? With their existing product only, you essentially put in that intelligence so that it goes to the... or did you build those partnerships and bring that entire suite of partners to their platform? No, it was this because their partners were connected, their contractors were connected to their system. So we are not going to disrupt or we are not going to intervene. What we see is that main system which was giving the approval to those contractors.
00:19:35
Speaker
we set up another algorithm side by side. So instead of before sending a decline, we just used to check with another algorithm. And if the answer is yes, we used to send them the other answer. So it was as simple as you are visualizing it that in their current system, their connection with the partners remain as we never do. And that was the beautiful scalability of this product that you don't need to disrupt their current.
00:19:55
Speaker
But that was just a test case. So that is not the fundamental business model. In your fundamental business model, you are bringing a suit of lenders to retailers where you have built those partnerships. But this Renovate model helped you validate the technology. Absolutely. You would not have said that. This was the first stepping stone to validate the fundamental aspect of the technology.
00:20:19
Speaker
A lender can underwrite a consumer without seeing them, without bringing them to that platform and that was a fundamental. Because once you are able to accomplish that, now you can think about the use cases are enormous because ultimately what we visualize in the system is as a consumer when you are going and going to a merchant. Now whether you use a credit card product, you use an installment lending, you need any other lending solution.
00:20:43
Speaker
if your bank can connect you at that point in time and raise their hand, there's no need for you to go and seek financing elsewhere. Right now, so that was our idea was that instead of, so very simply, because we have fundamentally changed how banks, instead of bank calling the customers.
00:21:00
Speaker
Suppose you are on a United Airlines and bank is saying, hey, come and apply with us, come and apply. I am saying why you are saying to the consumer, just raise your hand in that ecosystem that I got you covered. I have these three products for you ready whenever you want to use them.
00:21:15
Speaker
So this and then if Tushar has a relationship with bank A and actually the relationship with bank B, Tushar should be offered by bank A, actually should be offered served by bank B in the same ecosystem. The merchant doesn't care to be honest around that. So that is our visual about creating a network where
00:21:31
Speaker
We can connect lenders to these platforms where consumers are coming and they require financing and offer them at the point of need rather than building an expensive value proposition of first consumer going here, finding a product, then going to the lender, saying I want to apply, then coming back.
Blockchain vs. Traditional API Methods
00:21:50
Speaker
So I want to go into the nuts and bolts of this integration with lenders, which you did through blockchain. The way I understand it in India, it's mostly like an API integration where you can send the customer data, like say the pan, adhar, whatever details through an API integration to the lender, and then get back as a result, like approved, denied, or what percentage, or whatever those data points you will get back.
00:22:18
Speaker
How is your approach different from this API based approach? Very fair question and very direct question. So there are three things which are in the API based. Again, as I said, when you're sending an API, you have to decide how you're going to send it to multiple lenders. You can send it to all of them. You can send it one by one. And then you see every time you send an API, then this lender has to put their own data, whether that's stable data or bank data or whatever to underwrite. So now think about
00:22:42
Speaker
Now just imagine an ecosystem where you land on a merchant and as I said that multiple lenders is the need. There is no single bank in the world which can say I can write, underwrite every one of them. So now just think about the requirement. At some point just keep the API model. Now how much inefficient is the system? One is that you have to decide the order energy. You can send it one by one or you can send it to all.
00:23:01
Speaker
Why can't you just get the bureau report and also send that with the API to everybody? Because you're saying the problem is each bank asks for the bureau report and that hits the bureau report score because there are so many queries coming to the bureau for the score of that person.
00:23:16
Speaker
So this is one of the regulatory constraints which how bureau is saying because bureau is saying that I want to keep a track of the body who has requested for the report so that I know where the issuer is applying, who has access to it and how they are being evaluated. So intermediaries are not allowed to. So nobody even a bank cannot share the bureau report with another bank because other bank has to make an inquiry and make it transparent to the consumer also that I looked at your and then bureau says that if I have if a bank you have looked at a consumer report then you have only two options either give him a product him or her.
00:23:46
Speaker
or give them a decline and the reason for decline that why cannot underwrite it.
00:23:51
Speaker
So that's why the consumer always get a decline. A bank cannot hide a decline because they have to very transparent with the consumer. They cannot just sit back and say, I will not talk to you. And if they have a product, they have to present the product to the consumer. So there's a cost aspect to it that everybody has to pull the same data. Second is the experience aspect to it. So either it's a waterfall or you get all the product at once. Now think about on a merchant you are trying to buy a washing machine and now you have to choose between seven products. Are you shopping for washing machine or are you shopping for credit product?
00:24:20
Speaker
merchant don't want them. So this API based model has these and then the PII. Now what happens is how you're going to control that your PII. Personally identify their information. So your personal information, your name and address. So your personal information is not shared with NN. That's how banks can be respectful. Some people may not be as respectful as a merchant. Now, if you start receiving phone calls, what your experience would look like, you went to a very premium merchant.
00:24:47
Speaker
And now suddenly when you walk out, you are getting phone calls from XYZ company. Hey, do you want a loan? Are you getting emails? Very poor experience, right? Unless you need control. So, so now I'm telling you, these are the three fundamental. So in our case, we don't send the information to them through an API. Through a blockchain, we are bringing the underwriting model to here. So we are underwriting inside merchant environment.
00:25:08
Speaker
So what we're doing is that we are pulling the B-roll. Let me run your algorithm. Give me access to your algorithm without knowing what is inside it. And I will pull the data and run it one, two, three, four, five. Now I have an answer. Yes and no, yes and no, yes and no, yes and no. Now, if I share
00:25:25
Speaker
has a preference towards bank a because they are their client it's a better product or let me just present bank a product intellectual congratulations you are approved for bank a do you want to continue if I say yes great then you said click on it and now you're going to a bank you directly deal with the bank now it's an API based model takeover
00:25:43
Speaker
is just the first step. I just created a more efficient process as a preliminary step before taking over the API-based product. Because now, if you are declined by A, B, and C, I can directly connect you to the D. I never shared your information with A, B, C. So you never received a phone call from me. Before sharing your information with D, I asked for your explicit permission that you want to go to D. If you somehow don't like D, you can just kill it there and walk out.
00:26:10
Speaker
But I solve for the economics of this because the efficiency, I solve for the customer experience piece of it. I solve for the declines because if you go to the D, you never receive a decline from ABC because ABC never looked at you. They never evaluated you. I evaluated you on behalf of them.
00:26:25
Speaker
And because you got buy-in from the Bureau, so you were able to get the Bureau report also, therefore the customer doesn't get that negative marks of too many banks accessing the Bureau report. Yeah, so my purpose with the Bureau report, I told you, so this model exists even today in the industry. So what people do is that people give them their subset of underwriting criteria that, hey, as a bank, because there is an aggregator's channels like policy, like there are credit karma and lending tree of the world.
00:26:52
Speaker
So what those channels is that the lender gives them a high level criteria that hey if a customer file goes below 700, don't send me it. So today those criteria, so still these aggregators also pull the bureau report and they apply these high level criteria before pinging the API. So this is called a hybrid model. So we just dig in this model to a different level. We are saying instead of applying some criteria, flimsy criteria, let me run the full underwriting once.
00:27:16
Speaker
And they send you because now I have 100% confirmation around it. Because I am running exactly the same logic because when I send the customer, you will again run the logic. But because the logic is the same, the answer will be the same. Can you help me understand the blockchain technology and how it got used here? How did the algorithm come to you through blockchain?
00:27:37
Speaker
So basically, what we do is that first we go to the bank and we said, look, today you run decision engine instances. So you use, because most of the banks use third party decision, whether it's FICO Blaze, there's an experienced decision engine, there are Provenir and GDS of the world. What they do is that they come and install a piece of software. So it could be on-premise or off-premise. Big banks work in on-premise, they don't work off-premise. So they come, they said, look, this is my environment. I will install Provenir or FICO Blaze platform.
00:28:05
Speaker
and that is the decision engine which builds connectivity to the bureau, bank, partner and the writing criteria in this instance and then execute it. Okay, so this decision engine is like a SaaS product that banks use for running their underwriting function which comes with a built-in integration with the bureau and banks can tweak the parameters as per their requirement. Exactly and this is a very common practice most of the banks use SaaS. We are saying that look we are also like a decision engine so give us your platform.
00:28:35
Speaker
We will come and install this SaaS platform inside your server, our software, and you park your credit policy here, you can manage it. We will give you a dashboard, and you can manage your credit policy from there. But once I install your credit policy, so this is how it is happy to happen, how you're working with any third-party SaaS software, you can think about it as capsizing. Nothing changes. So that is the first hurdle that I tried to bring an Apple to Apple analogy around it so that they can understand that under which category they have to put us in. Once you do that,
00:29:05
Speaker
Then the second question, then I said how do I, so now this is where the blockchain, so this thing is connected over a blockchain network, it's a private blockchain, it's not a public blockchain. So all the connections are secured, so they are white listed IP based. So suppose, now let's just say that there's a merchant A on which I need to put. So I will go and ask bank that, can I have your permission to get your model executed in merchant A? So first bank says yes. That means now my blockchain network, so there's a bank instance and there's a merchant instance.
00:29:33
Speaker
I would whitelist this IP address so that they both instance can talk to each other because without whitelisting they will never talk to us. So it's not that you can add any other merchant and this will talk to them. So the first level of security. But once they start talking to each other, then what will happen that the whole model which is there, it will get converted into a smart contract and encrypted. So encrypted version of a model like a bytecode, 01 version of a model.
00:29:58
Speaker
will travel over the blockchain and now can be executed here. So think about it as a compiled version of the policy. So even if Skips tries to look at it, they will just see an encrypted version of this and there's no head or tail you can make out of it. The only thing you can do is that if you ping the data to it, it will give you the yes and no and the product answer to it. So the model remains inside
00:30:21
Speaker
bank like any other decision platform permission based access to so then encrypted version of the model and travel to the other side of it here you can locally execute it and if anything changes here the new version will get reflected immediately here in the next transaction so if a bank changes no one will know so if banks shut down their model if the bank changes their FICO score the next transaction which will happen here that is the beauty of the blockchain because it's in real time sync
00:30:47
Speaker
that is how the blockchain is coming into the play just to make sure this system was nothing else. Okay, can you simplify this further? Like, what is a private blockchain? And you know, what you're talking about, again, it sounds like cloud technology to me, you know, I mean, cloud is also like real time saying, what is the blockchain element here is, how is that different from cloud API and all of these? That's what I'm trying to understand.
00:31:11
Speaker
The biggest way to execute is around a black box kind of a technology where you put your black box in a cloud and all. So bank can put their black box in a cloud the entire thing. And you can ping the black box and you can get the answer. So one thing is I cannot ping bank because I cannot send the bureau data to the bank. But you are right. Can I park it in a cloud where bank doesn't end and we can ping.
00:31:32
Speaker
Absolutely. Now, when you park like a black box in a cloud, now there are companies and certain things. One is the black box now move out of the purview of the bank because now it is no longer in the bank firewall, the black box. One set of exposure that somebody can tweak with the black box and all, but can be managed, not weak.
00:31:53
Speaker
You can still have an encrypted policy around there, so that can be managed. The third thing is, if you update to the BlackBox, now there are multiple systems who are connected to the BlackBox. Now, in blockchain, there's a concept of the, I will call it like double payments and double college, but I will come to that later and I will delay this. So now think about there's a central system, and this is the problem with the central system. You have a central system, there's a body who is maintaining the central system, and there's a body who is using this central system.
00:32:20
Speaker
Now you are constantly pinging the central system and you're maintaining it. How that thing is working is always a problem because who is upgrading first and who is using first? Now think about it. So I changed at 7.23 p.m. I changed my credit policy. If 7.24 transaction happened with my old credit policy or with a new credit policy, I don't know who can control this ping because it could be speed dependent now. Now think about it in blockchain. Blockchain, every transaction is a sequential transaction block by block, anything which happens on a network.
00:32:47
Speaker
Can you also define blockchain? Yeah. So blockchain is a very simple thing. Like it's a connection between two, like two or multiple bodies around it. And they are trying to, and they are executing the transactions simultaneously and everyone is in consensus that this is a transaction happened recorded. Then move on to the next one, next one, next one.
00:33:07
Speaker
There's a concept called gossip protocol, which is like every node talk to each other and that's how they remain in sync. So there's a constant gossiping happening between every entity of the node. And that's why all the nodes keep themselves updated that what is happening in each node, everyone is aware of it.
00:33:24
Speaker
A blockchain is basically like a distributed ledger, right? Like there's a ledger of records which 100 or 1000 different entities are storing and they're constantly comparing and making sure that it matches across all 100 or 1000 entities. Exactly. And then only when it matches, then the next transaction will come. Only when that is populated, then the next transaction will come. So it's a very sequential process, but you're right.
00:33:49
Speaker
traditional problem with adoption is that when you say thousands it becomes slow because thousand or ten thousand or million hours is a private so we are not talking about thousand we are talking about ten fifteen twenty or maybe two thousand at max like in future if you go
00:34:05
Speaker
So there's no problem of the speed around it because it's good. Also our use case of what leisureing we are maintaining is very well defined so you can further concentrate. But this is exactly how we define that they're constantly comparing nodes. So now think about there are now everything in a blockchain is a transaction. But what I say that suppose if if I am evaluating a credit profile so I bring a data,
00:34:25
Speaker
That's a transaction in a blockchain. If someone updated their credit policy, it's a transaction, not different people, different nodes are handling different things, but it's a transaction in a blockchain. Every can get recorded in a blocks over a period of time, but every transaction in itself and it gets recorded in this. So now what is happening is that the same system which we defined, now merchant is pinging that system to, as the consumer are coming, they are getting the, whether this customer has a product or not, they are pinging a transaction.
00:34:53
Speaker
and issuer are updating that they may or may not be updating their credit policy, that's another transition. Well, because in the network, everything is sequential. So at any point of time, if an issuer says that, look, I'm expiring my previous credit policy, and this is my new credit policy. So first, the credit policy needs to get updated because it's a sequential. So even if you're trying to ping a system, you have to stop pinging the system. First, you have to restart this transaction, then you have to do that.
00:35:18
Speaker
So it becomes a very, very clean. There's never an ambiguity in the system that if you change your credit policy at 7.23 PM, irrespective of how large the network is, the next evaluation will happen only with the updated credit policy. The second thing comes is, how is there's no one tweaking around it? Who will keep track of it? That is because everything gets recorded in a system. It's a system of records from a ledger point of view. And it's a trusted system of record. Nobody can go and menu.
00:35:48
Speaker
Any bank can go and say, because my compliance team changed my credit policy at 7.23 pm, I want to look at a transaction of 8 pm to 9 pm and see everything is perfect. So you just trust the technology that look, this is where 7.23, this is 7.24 policy gets updated, this is the rest of the transaction. And no single transaction got up evaluated with the prior program.
00:36:07
Speaker
So this is this is the kind of now, can it be handled in a cloud based environment? Maybe yes, but it will be very, very expensive to manage that which is very natural to blockchain and very less expensive because of it is designed. You can handle it in a third party API based model, but it will become very expensive. Now, the other thing is
00:36:27
Speaker
Because it's a distributed system, it's a distributed leisure, your computing powers are also very distributed. Now think about a central system which is supporting the entire US population 300 million because now you're having much investment. Now think about the amount of bandwidth you require from a central system to one. Here what we are saying is that a very small, small server in each of these organizations because you can run it and the load is distributed. It's a beautiful structure. So those are the couple of advantages which
00:36:52
Speaker
And that's what blockchain in general believe is designed to solve this centralization problem and move it to decentralize. But things with centralization trust is trust.
00:37:03
Speaker
By doing decentralization, the technology is taking over the trust of it. And then the bandwidth also, like who is the system of record? They are saying everyone is a system of record. Okay. And these nodes of this blockchain, these nodes are essentially the banks where you are installing it. Each bank becomes a node, the bank or the NVFC? Exactly. Each bank become a node, each merchant become a node.
00:37:28
Speaker
And there is no standard system, so there is no escapes in between. Bank is directly talking to the merchant. That's the beauty of it. So it's a completely distributed network. You can think about it. And everyone is talking to everyone.
00:37:38
Speaker
permission-based. If a bank says, I don't want to talk too much at ABC, they can switch it off. That, I have no issues. Okay. So which is why the algorithm of decision-making is not shared anywhere because the bank's node only has the algorithm of that bank, but the decision of that algorithm is recorded as a transaction or a block. Very well said. That is the other key thing is that this is the advantage of the blockchain. And then a lot of engineering goes there.
00:38:08
Speaker
We don't want to share every piece of information from a leisureing point of view to every node. So the information that this is the policy cannot be shared anywhere in the world. But the answer of policy, yes and no, can be shared with that merchant node whereas there are three around.
00:38:23
Speaker
So we always record that information that the credit policy has been updated, that every node knows that our bank has updated their credit policy. So that every node can work with a new policy. But what is the change in the policy? Only the bank node will know. No other node can. This is a slight nuances on how we managing the information. The same with the bureau data. So the merchant node knows what the customer bureau is.
00:38:45
Speaker
But that data is not shared in the anyone. The only thing which is shared is that the customer comes for evaluation. That's all. Okay. Got it. However, each merchant or bank would be able to see that distributed ledger of, but then that ledger will not have any personally identifiable information. They cannot, for example, see that this customer went through 10 different nodes before getting a yes. They will not, because those 10 different nodes will not have any personally identifiable information.
00:39:12
Speaker
that is the most critical and that is the answer is yes and that is how this network is supposed to operate because otherwise it will dissolve it will it will just subvert the purpose of why the network is created because a bank should not know unless the customer says a bank i want to work with you bank has no right to know the customer and same with the merchant merchant has no right to know what the bank credit policy is right right very elegant i always feel that blockchain is like a
Blockchain Applications in Finance
00:39:37
Speaker
speculative technology. You can bet on it as a speculation that this will make me money in future. But this is the first time I'm hearing of a real world, here and now kind of a use case of blockchain. Very interesting. Thank you for saying that. And this is something which our investors also said the same thing. This is one of the things that we keep exactly the same words which you've used. And this is what we've used. And that is now the challenge. We are also because of the blockchain's negative connotation with that speculative technology. So by re-pivoting that, look, there's an enterprise use case.
00:40:06
Speaker
And that is where we feel proud about it. And we found our understanding of the technology, we found a use case, which is rather, we're not trying to force marriage and just for the sake of using blockchain. I actually put an extent to your point, because there's a negative connotation with a lot of time, all the complexity of the blockchain, we have to hide blockchain as a technology to our end customers. Because again, we are trying to just solve problems. If there's a better way, actually, I am not honest, we tried hard that because I knew everyone will ask the same question what you are.
00:40:30
Speaker
Why not a centralized cloud system can solve? And we found hard and we are always open. Is there a better technology? There's no reason why. Because we are solving a use case. We are not married to a technology. Our whole goal is to escape. There's a better way, more elegant way to solve. But so far, it fits so beautifully around it that we can't find a better elegant way. But at any point of time, we are open to migrating if required.
00:40:52
Speaker
Are you like a crypto or a blockchain enthusiast? How did this idea come to your mind that blockchain is the solution and you know because blockchain is not something with it's not a mainstream technology like say cloud computing is mainstream and that would be the first way a person would think of solving a problem. So how did this come to your mind? So actually this happened around like 2016 so our company got away and we started working on the platform and
00:41:16
Speaker
close to end of 2017. But somewhere in 2017, start and end of 2016, we were going with the idea of the two technologies we wanted, like we just decided like me and my other co-founder. So we started talking about these two things like artificial intelligence or blockchain, because again, in the financial world, I saw that these technologies have arrived. And big enterprises have started exploring very, very strong use cases around it.
00:41:43
Speaker
But we were also very clear that there's no designed use case so far, like nobody has cracked the use case. But the general acceptance of the technology is there.
00:41:53
Speaker
Bitcoin was always there, but there was a cryptocurrency use this, but in general, where supply chain, even this now the NFT, like the signatures and also we always like, we were very familiar with the music industry at that point. It wasn't an infancy, but we were very... So we said, let's pick up a technology and we invest in it. When I say invest in it, we will train certain resources, we will build some knowledge around it. And another idea was that
00:42:17
Speaker
Either we will come up with a use case or mostly if an enterprise commit, then we may have our resources to support them. That was a very, very, very basic idea around it. So we went and become a certified Ethereum developer. So he did a course and all, he became a certified Ethereum developer. We started doing a couple of projects also like the crypto exchange project that was very popular at that time. You can easily get 20-30 grand with one day of work.
00:42:41
Speaker
We did for one company but then we saw how people were using it and how people were taking it to the market and we didn't feel comfortable around it. So we immediately said that we got the learning, we don't need to do it more around it. We started toying with the idea of micro payments. So suppose in an influencer business, you're promoting a post on a Facebook and all. So instead of paying an alarm sum, can I do in a micro payment like a visit oriented? If you got so many likes, can I pay you for those likes?
00:43:09
Speaker
And you can think of moving 2 cents or 15 cents on any existing trade card rails. Good luck with that because the cost of moving the money will be.
00:43:17
Speaker
So payments fit that, okay, we can remove micropayments around it because that is where the blockchain wall again efficient. So we started playing with a couple of ideas because we were going with the technology very, very closely and at a very deep level trying to create a use case. So we have a very strong familiarity. And then, and the second, and as you see that I was talking to the lenders and much, and then we're trying to solve a problem. So it just by design happened that because of, because we tried hard to understand the technology and we found a business use case, that's how we married that.
00:43:45
Speaker
And Preeti is also doing this on the side with his existing job. At the time when we were playing with the blockchain, he did it with our side, but then when we started focusing on the micro payments and all we need to go dive, that is when he decided to put the job and focus on the use case to hire a team of small developers so he can train them. So that is somewhere in 2017, they decided to make it a full-time Preeti.
00:44:10
Speaker
For those first two years, it was largely like a service business, like you were providing services to companies which wanted something built. Actually, I would not say that it was almost six months before we were doing it, but at six months, it was more like a service business, but it was mostly self-funded. We were not looking for money from that point of understanding. It was mostly looking at technology and building a product. It becomes a viable product to take it to the industry and see if we can get funded for that idea.
00:44:36
Speaker
So it was not generating business or services based model, it was just building a product. We happened to get some money just by doing one or two small projects, but we never focused on that. And did you actually launch that micropayments product or it remained like a beta thing? It remained like a beta version of it. Okay, because this was obviously more compelling because there's a immediate, I mean, adoption is kind of going to be much faster.
00:45:00
Speaker
Yeah, basically in a B2B, you can get your first line, you can see the money around it. In micro payments, you are thinking about building the whole network, hard sets, and that you can think about running a consumer brand or talking to Facebook itself.
00:45:11
Speaker
Yeah, that was like a moonshot. When did this pilot happen with Renovate? Yeah, so first thing happened is, and that is that I want to pitch in the story of our like funding and also we were very clear that, look, we need to get funded because these things required money. And to support a B2B client is, it's not a small, like somebody is trusting or trust on their entire business, and you have to be capable enough to report, right? You got lucky, but again, the respect portion comes back again.
00:45:37
Speaker
So, we were very clear that before launching a pilot or anything, we will need to talk to them, like get funded and we need to have a muscle to support it.
00:45:45
Speaker
That is where Axel came. Because of our prior experience of talking to VCs, so at least we knew how to get to that table around it. So we didn't have a long limit of finding who. So we did send a couple of mails to people whom we talked in our prior lives. We just sent them a note and we said, look, let's just connect. And generally, VC community, at least they're always here to listen that I found them good about it. It's good.
00:46:10
Speaker
So when we started discussing around it, it clicked with the axel, the idea clicked. And again, I think the thing which worked most in our favor of that anybody who goes and said, let me do a small due diligence, because as I said, the problem was so well established about this multi-lander and how this waterfall approach was set. When you go and talk to the people, it is a very real problem. No merchant will say that this is not a problem or this is not an issue. That customer getting declined is not an issue.
00:46:37
Speaker
They were immediately, so they found the same credibility on the street that the problem is real. So if these guys are have a solution, and then we say that, look, this is a blockchain solution, so it makes sense conceptually. And that is where Axel said that, yes, you guys are the right, you know the industry well, you have the technology prowess to make it happen.
00:46:56
Speaker
Let's just try it out. So the seed funded us. And then in 2018, in January, we got that money. And then in August 2018, we launched the product with the client.
00:47:07
Speaker
Okay. So how much did you raise in seed fund? A seed fund we raised a million dollars. Got it. Okay. Tell me the journey from seed fund to where you are today. So you raised that seed fund a million dollars, then you built the private blockchain and you did the pilot. So when you did the pilot, how many nodes was it? Obviously merchant node is only one, which is Renovate. How many lender nodes did you have by then?
00:47:31
Speaker
So we had a couple of non-revenue generating lenders again, because for the reason we wanted to adopt them. So at that time, we have three lender notes on that time.
Growth through Large Clients and Partnerships
00:47:43
Speaker
But Renovate was our first revenue generating use case as a merchant point of view. So at that time, we have four lender notes around it. And everything was functioning. After launching Renovate, we got another success. It's one of our very, very big accounts called Service Finance.
00:48:00
Speaker
So they were in the same space as Renovate, but they are one of the largest home improvement contractors. So Renovate is a small, comparatively smaller company, but service finance is a very, very big. So that was our second biggest win that we were able to convince. And again, it goes from one, because now we have a proven model, and here's a much bigger problem to solve. So the owner of service finance, the CEO of the service finance, we talked to him. He himself talked to us as, let me understand the blockchain, why we are doing it.
00:48:26
Speaker
And that is when he blessed the project. So that is what our second major win was there. It was a huge account for us. So that is why we got. And then the other thing is that in our product, the advantage of our product is that it's a concept of network effect.
00:48:42
Speaker
The thing is that if you work for one lender within one merchant partner, and if that process works, then our lender partner says, hey, can you work with our other merchant using the same technology? And the same merchant, if a merchant is working with different lending partners, then they can say, hey, can you plug into the same technology around?
00:49:00
Speaker
So we call it a double flywheel effect. Again, we are still at the cusp. We have not gone to the nation where there's good hyper growth. But at some point of this, this two-sided network takes time to create. But our advantage of two-sided network is that at some point when you have enough scale, then both sides will start promoting you for the right reason, because once you have enough
00:49:19
Speaker
enough weight on both sides and they will say, hey, why not I have these, you have four of my lenders, can you plug in my two more lenders into this platform? And the lender will say, you have actually my four, my merchants, can you plug in this seven more merchants around this side? So it becomes a very quickly at risk-cross. So with service finance, that was one of the things that service finance is such a huge
00:49:39
Speaker
contractor network that a lot of lenders wanted to work with him. And service finance says that this is the only platform through which we can work together. And that is where we got another flywheel effect. And now I started adding more notes from that service finance. And then we started, we got some merchant in the medical space because home improvement was first. Then we start working in the medical space as the same issue that these are $5,400 dentist treatment or surgeries dental implants.
00:50:08
Speaker
and people were looking for financing solutions so those high ticket items becomes a very good thing and then yeah and that is how we started so we first we penetrated the vertical home improvement medical we signed one month clients we went to do small business financing so we we got a client like ebay where we got a small business financing multi-letter small business financing
00:50:30
Speaker
And then finally we got into a retail segment with one of our like our recent in August. In this year we launched with First National Bank of Mahab, which was a bank. So far we were working with the fintech lenders. Now we actually got a launch with a bank where we do the retail transactions. So now we are coming into the buy now pay later. So starting from high value transaction of point of sale more traditional financing.
00:50:50
Speaker
We came to the almost intersection of the BMP and we are not doing pain or pain, five kinds of transaction at a $200. So it was a good journey and we are developing more and more tools to support that. So this First National Bank partnership, just tell me a bit more about it. First National Bank will now allow all of the merchant nodes to send their data to First National Bank.
00:51:14
Speaker
So the first national bank is, so nothing, I don't know, I've been familiar with a company like Affirm or Clarnas of the world where Affirm and Clarnas, they are launching embedded finance where you are on a website and you are trying to buy a product and you can just apply very seamlessly that financing on the product and check out. You don't have to go, leave the merchant website, everything is very seamless.
00:51:37
Speaker
If you look at Affirm, they are two-parted. Affirm is a technology that how to do the merchant integration, how to take consumer application, how to settle the funds with the merchant. There is a lot of technology integration work done. And then Affirm as a lender because they are a balance sheet lender for their money money, but they are extending capital. So what we did as a company that we said,
00:52:00
Speaker
we can do underwriting. We created UI UX. So we took up another tech. That is the tech stack we created in the last three years, complete tech stack. So anything related to the BNPL or point of sale financing. And we are very further. You want to do point of sale financing on a merchant website? We have a tech stack.
00:52:19
Speaker
You want to do a point of sale financing when the merchant consumer walks into any store. Like as they are roaming around the store, they can point out to the QR code, complete the entire application right there. Like checkout. You want to do financing through affiliate channels like a contract and all where you are not directly talking to a consumer.
00:52:38
Speaker
either a medical representative or a contractor is talking to them we have a platform for that so we created an entire tech stack of bnpl point of sale financing and now we are talking to the bank for speed to market we have the entire tech stack so you plug it into our tech stack it's a white label tech stack and we can so we are saying that look you have these co-brand relationships so bank already has their religion
00:53:02
Speaker
We said we have a tech stack, so you can connect to your month. So within three months, we are able to make them live right from the zero where they start. We created an experience which is completely at par with the most advanced system out there. And that is our whole offering, which is somewhat when we're starting the discussion, you were telling me about the companies which are doing the same thing. So think about as a BNPL slash point of sale financing tech stack.
00:53:26
Speaker
which is completely customizable and designed to handle much broader set of products. It could be credit card, it could be $10,000 10-year loan and it could be $200 paying for transaction and you can walk out of it. So, first national bank when it came, then first national bank asked all their merchant partners to whom they were providing the service to also come on to Hype to adopt skips and therefore that could have given you a big boost.
00:53:54
Speaker
or did First National Bank just use it to plug into the already existing versions of skips.
00:53:59
Speaker
Right now they are using a text tag to enable this BNB along every merchant. So we are starting one by one. So this is not happening in one motion. So we just enabled it with their largest co-brand partner this year. Now they are talking to each other and saying, look, I have another platform which can enable buy now, pay later, or any point of sale financing on your platform, whether it is true or not. And then now merchant is signing for that product one on one with a bank. So bank sale team is doing the thing.
00:54:25
Speaker
We have a plug-and-play solution which they can just give it to the merchant and say, this is how you can get it out. So it's our tech stack which is connected. The advantage of the network is that at some point of time, if a first national bank has an approval rate challenge, we can bring another NBFC into this mix with their approval because they are connected. It's just switching it on. So if they need, I can connect that. But that is the discussion we will have happen over the journey around it.
00:54:52
Speaker
Okay. Currently, it is not like if you become a part of the private blockchain of Scapes, then you have access to all merchants. That will be configured that for this lending partner, the configuration allows him access to these merchants and vice versa. For this merchant, the configuration allows access to these lending partners. So it's like a configured thing right now.
00:55:16
Speaker
Right, actually, so you think about like building a network is a very expensive proposition, right? And then in that expensive position, merchant acquisition is the hardest part. Everyone is competing to create a merchant relationship, because now you're you're competing with not only the people who have the same product, but you're competing with co branded deals, people have covered, you're competing with Shopify, Google commerce of the world that they're enabling the merchants around it. Salesforce. So there are a lot of platforms who will merchant in right and also there's a lot of competition around the merchant.
00:55:44
Speaker
So, the way we are thinking about this journey is an ecosystem that today we have taken approach that let's start with a bank because bank already have a relationship with their own merchants. And it's not easy to disrupt those relationships on their own. If you ask to American Airlines and say that leave city and mark with another lender.
00:56:01
Speaker
Those are exclusive contracts you cannot just get. So, that is one extreme format. Then there are other integrated solutions already there, right? May not be the most optimal, but they have an integrated. So, how we are approaching that first we are going with the banks because they become our distributed channels to bring the merchants around. So, that is how we are approaching the net five problem because for bank our value proposition is very clear.
00:56:22
Speaker
Again, I only go with the problem statement. Banks' problem statement is simple. Their merchants are asking, can you enable buy now, pay later, or point of sale financing for us? Bank is saying, I have the products. I don't have the platform. It will take me 24 months to build a platform. We are coming with a solution. Bank, we could be your stopgap solution to stand it up in a very, very short period of time. So you can own it. Over a period of time, we are a completely modular. If you want to bring certain things in-house, you can do it.
00:56:51
Speaker
So that's how our first network is building. So we've got one bank, we are talking to more banks around it, but all are white. Then over a period of time, we will have a network of banks and merchants. Of course, it is still one-on-one, but then we can go to the merchant and say, is there an opportunity to bring another lender into the network? Maybe two banks into the same merchant. Why not? If they have a complimentary product, because one bank is doing power export financing, and another bank is doing only the home appliances.
00:57:22
Speaker
Can they both work? Why not? So that network will take time. Right now, we're just approaching from the bank rather than going to a direct merchant acquisition.
00:57:33
Speaker
How do you monetize it? Do you charge like a one-time installation or is it a per transaction or is it a per lead or I mean what's the model? Yeah so we are on the success based model so it is like it is a tool based collection so every time so think about any network like a Visa or MasterCard so every time a successful transactions happen.
00:57:52
Speaker
we collect our fees for that transaction. Right now, that is our go-to market. What do you define as a successful transaction? When the customer gets the financing from the bank, that is what we designed as a successful transaction. Okay, so bank shares that information with you that he has been granted financing. Right. So, basically, banks share that information back to us. When we share the lead, of course, some part of the information is already in our funnel. The last piece of it that is getting approved, that is shared in our network.
00:58:20
Speaker
and then when we charge it. Now, are we open to other licensing models and all? Yes, we can, particularly in certain scenarios. But our go-to is, and so far, all of our transition model is a toll-based collection model on a success. Which is how the industry works? So again, it's easier for them to adopt it. That's why I'm saying that because it's such a new space from B and PL and point of sale financing that no one has a defined P and L and what the cost would look like and all. So having a unit cost associated with that transaction, because when a bank book alone, they know how much money they are going to make that move.
00:58:50
Speaker
So, then it becomes very clear that we are only at this fraction of our cost of that transaction and does we fit into their unit economics or not. So, it becomes a very, right now it's a very clean and that is something which banks are also asking us to keep that
Future of BNPL and Global Platform
00:59:04
Speaker
monologue. If someone in future car will change, we can think about it. Now, you'll earn only if the bank is earning. So, your interests are aligned.
00:59:12
Speaker
No, I think that is one of the other fundamental thing that I want my interest to be aligned with the client interest and vice versa. So that we both invest together in optimizing this solution. Because again, there's no blueprint out there. What is work? And that is the problem I'm solving. So tech problem in a point of sale financing is the first problem I'm solving to enable multiple financial institutions to do point of sale financing. Because right now it's only a handful of companies which are doing it. So we are trying to stand up this ecosystem. So there are many companies that are doing it.
00:59:42
Speaker
Once many banks are doing it, then you go to the second level. So first, I look at tech as just a first level of solutioning around it to enable that transaction. But our goal is a conversion that if Akshay went to a website or Tushar went to a website and click on apply financing, 80% of the time, they should check out with that financing option. Today, that number stands somewhere in 20 to 25% range. And the reason would be many fold. You may not get the right product.
01:00:12
Speaker
You may got higher product, higher APR or not. You may not have the brand affinity with the lender. So it could not be the right financing product with the type of equipment or appliance you are trying to buy. So over a period of time, I want to have the data to tell me that if Tushar is coming and they're trying to buy a washing machine, I should be able to present this type of a product. And if Tushar never select that product, something in the platform didn't work right.
01:00:40
Speaker
So that is the next level of problem. Tech is the starting point, but once we have this, this is the problem, we have an eye on it that this is what our problem would have. So what is the percentage that you charged?
01:00:51
Speaker
So it can go from 30 basis point to all the way to 1.5% depending upon different measure, but it is somewhere like 30 basis point to 1% on an average. What is the denominator here? Of the funding amount. So suppose if you complete a $200 transaction, like say $5,000 or $5,000 of transaction, then our fees will be 50 basis point around it. So $5 around it.
01:01:13
Speaker
There would be a principle in the mind of lenders that these smaller merchants that they have acquired and then plugged into Skeps could tomorrow be directed by Skeps to other lenders thereby reducing their power because now a merchant is not dependent on that lender to provide the BNPL to their customers. That is one angle to think about it but let me just present a picture around it and then see if there are argumentistic votes around it.
01:01:43
Speaker
One is that we are very clear right from the start that as I said, my goal is a conversion goal. My goal is not to create a marketplace or because and that's why I'm not a lead based model. Because I'm not saying that I can generate leads for you and let me charge lead because that will put into the category of like how many leads I can distribute in the ecosystem. So when you're focused on a conversion based model, there are something fundamentally which aligns. One is that if a lender is doing a good job on a merchant currently,
01:02:09
Speaker
I have no incentive to move them out or put that lead to something like so. Hours and their incentives are aligned. Second thing is that generally like marketplace approach, now you have to think about how many UX experiences, different fulfillment experiences you have to align if I plug in four or five vendors. So the most, the very logical thing for us also is to do is to bring a complimentary product set in a merchant.
01:02:30
Speaker
and in a very very small amount because fundamentally I would like to keep the lenders as small as possible and try to bring as many complementary product as to the mix now. If the same lender can offer it, I think it will work best for all the four parties, lender, merchant, consumer and steps in general.
01:02:51
Speaker
So at least I don't foresee a challenge where I will purposefully try to harm the interest of the lender when my revenue model is tried to that lender very, very closely around that. And if I perfected something with a lender, why to disrupt that? It will be not harm. So yes, you can think about control, but I think.
01:03:06
Speaker
Second is same as merchant also stand that way. If something is working and good and with one, it's a hassle to deal with seven parties or eight parties just for the sake of it. But through Skeps it will not be a hassle, right? Skeps comes in the part of finding a loan for the customer and completing their flow. But now on the servicing side, if you have four lenders servicing your consumer, that may create a hassle for a merchant because consumer may call up a hit
01:03:29
Speaker
this merchant, this lender is doing X, Y, Z things. So there are, it's not a very, like still there are some in bed challenges around parking with multiple lenders. But at the same time, that should not stop from an ability to work with multiple lenders particularly. So from a small merchant point of view, I don't see, I don't see there will be too much network that everyone on the big merchants, they have a need to work with like even Chase cannot say that if on United Realize there are 60 million consumers are coming.
01:03:58
Speaker
Can you say that one credit card can fulfill all the 60 million consumers? They don't even have a balance sheet to have that. So in that, the problem becomes very different. In that case, when a consumer is coming, you have an Amex card, Tushar have a Chase card, somebody else has a Citibank card. When you're coming to a merchant, you take out your credit card, which bank credit card you have. Do you say that, no, because I'm United, I will always do with Chase? No, that is not the expectation.
01:04:27
Speaker
And the same thing, I'm saying that that is the same thing which will BNPL will go over a period of time. There will be a standardization of the use of the product. So every bank has to have a product for their customer, but how the customer is going to use will be.
01:04:40
Speaker
is standard. Otherwise, the adoption will be different because if every time you have to go and educate customers on how to use my product, good luck with that education. So that is why I'm saying that. And the last thing I would say, again, I'm mixing two things, but a very close example is that Visa. Does Visa provide a network between the merchant and the acquirer bank? Absolutely, Visa server.
01:05:00
Speaker
Because we have own relationships and disrupt relationship between them. No, they don't disrupt any of the relationships between the acquiring bank and all. But do they still provide a value to the system? Yes. And that's how we see us in enabling that thing. But we are not going to disrupt the contractual relationship. So I guess your primary incentive would be that if, for example, you see that
01:05:23
Speaker
there is a 40% rejection ratio, then can you bring in a new partner so that 40% ratio comes down to 20%? And then for that 20% which is still getting rejected, can you bring in a third partner? Essentially like bringing that number as high as possible and only to do that is where you would introduce a new lending partner.
01:05:44
Speaker
That is exactly correct. I'm just going to tell you an example. Let me show you the example. The BNP or Point of Sale financing is so unique because when you have a credit card product, you just think about how much open to buy line app, whether you buy a meal for your family, you buy an exercise bag or you make a down payment of the card. It's the same way you swipe the card and you can download it.
01:06:03
Speaker
Now I'll give you an example of B&B Royal. Now think about one of the famous, one of the most successful financing platform is what is the iPhone financing. I think every customer has a phone financing in some form or shape, right? Because we get it from our carrier. If you ask someone how much they pay for their phone, you may have a roughly an ID around like 60 bucks, 70 bucks, 65 bucks. No one will be able to tell you exactly. Think about they have a financing, but they don't know what they pay for it.
01:06:32
Speaker
But if you ask anyone, what is the term of this phone? Everyone tells you it's a two year term. Then what it tells you that not think about a customer who's going to buy an iPhone and you present them a 36 month product. You will have a close to zero conversion of them because the reason is that customers will pull the full money because they have to upgrade their device. They cannot log themselves into a three year financing.
01:06:55
Speaker
So you see how conversions are related to, so it's nothing matters. So now you, you can think about it all day long as a lender. I was giving a better financing. I was lowering their monthly payments, but why in a customer is not taking my profit because there's just something fundamental about the thing which they are trying to buy and that you are able to. And that is where in future, this data gap will come. So that is my point is that at some point I will tell that, okay, for phone, you have to have a 24 month financing.
01:07:23
Speaker
I will tell you one more example. Paraton is one of the very successful financing program for a firm. And there that term is 39 months. Now think about a consumer doing that mental calculation of 39 months. Three year makes sense. Yeah, like when will my financing end? July or September 23rd or something?
01:07:45
Speaker
But consumer is not bothered by it because what they've done is that they make it $49 a month. What this means is the consumer is saying, hey, I cancelled my gym membership and I put that money in $49. That's all I need to make. Now think about it. They don't even care how expensive. I know it's a zero percent, but even if you charge the EPR, that's why we're not because they are re-pivoting money. They are spending their $50 to their gym. They are saying that, let me put how long it goes in terms of bracket to me because it's not going for my pocket. I'm just repurposing.
01:08:12
Speaker
Now, in a paradigm bike, you do it at $55 a month financing with three years, two years, and you will convergent with it all. So at some point of time, so my goal will be to work with the merchant and all. And then there will be a different type of consumer. Some consumers like 0% because they sit high in the credit spectrum, and some customers will have an affordability that they need to have a $24 per month thing because they are living from paycheck to paycheck. So my goal is
01:08:39
Speaker
work with the merchant and say that look those many customers in these cohorts select the product and we have only 20% conversion here but 80% so here you are all good here 20% maybe there's a need for another product let us talk to the lender lender says i can create a product let's try that product lender says because of xyz reason i cannot create a product i cannot go more than two year can we find a lender who can go to three year and bring them up
01:09:05
Speaker
So it's a single focus of solving the conversion around it, because how the convergence is a secondary thing, whether it's through more product, through more lander, we can do more. You are focused primarily in the US, like do you plan to come to India also? No, we are, we are absolutely. So our is a global, as you said, right, the first thing from a principle model, you see, you saw it in our conversation, you saw it as a product agnostic, where I talk like, I can do painful, I can do 10 year, I can do medical, I can do home improvement, I can do retail.
01:09:33
Speaker
The same is we are also geography-economistic because the platform is designed that way. So, but today our sales is focused in US because that is where we are growing and we are focusing not to, we cannot spread too thin. But today we have inbound interest from couple of, so there are discussions going in APAC region with one of the lenders, but those are inbound. I am talking to South African bank also.
01:09:54
Speaker
There's some discussion in Europe going on, in Canada going on. But those are all in bound. And again, wherever this can come, we will go there.
01:10:05
Speaker
So platform is truly global in nature. We have no restrictions or no constraint around it. But your sales would be fairly intensive because there is a configuration element to it. Like you need to configure it. It's not like self-service where someone can just put an email ID, enter the OTP and they're ready to go, right? Like it's not like that. Right. So yes, our sales for a bank partner is like that. But once the bank partner is enabled,
01:10:33
Speaker
then their product can be distributed very seamlessly. So today merchant integration could be self-service integration around it. So think about, again, today we are going to one bank, but suppose today our first national bank of Omaha, they want to say that I want to create a page where merchant can come and register and this is my standard contract and this is my standard products. So they can go and get the ABI documentation from the website directly and implement it.
01:10:59
Speaker
Merchant integration is self-service and it's almost like a stack which has become a table stake. I'm not going to say that we are, but we are almost at the verge of that like we are like last merchant we did it at our integration is over a phone because they were a standard WooCommerce merchant. So actually our plugin that over a phone a non-technical person in five minutes actually installed the product in front of us like a conference call first name.
01:11:21
Speaker
So merchant integrations are very standard because once the tech stack is built for a lender, it can be. So short answer is that if our lenders are okay, then we can distribute it to the two different channels very easily. Okay. Okay. So I guess for merchants, you would have got standard approaches for like you said WooCommerce or Shopify or whatever platform they're using. It would be like a, just like putting a plugin basically.
01:11:47
Speaker
It has to be a plugin. It has to be a plugin. So right now we have a couple of plugins already created. We are working on it. If you're on a standard website, it's two line of Java code, which you can put it into the website. So merchant integration is, you know, most of the merchant doesn't even have our tech resources or they don't even have a bandwidth around it. So that's what I'm saying is scalability will come from a merchant side, not from an issuer. Issuer will always be a two, three months cycle around it and a longer cycle around it.
01:12:12
Speaker
And you've raised another round of funding also, right, after that initial seed round from Axel. Yes, yes. So last year in, actually this year, this year in June, July, we closed with Buttersmith. Of course, Axel also participated in it, and then we also involved a couple of strategic investors. So there are a couple of strategic relationships also coming in, which want to use our platform.
01:12:35
Speaker
in certain verticals. So yeah, we raise nine. What is the plan in terms of fundraise? Like when you see your next fundraiser happening and what do you want to use funds for?
Funding and Expansion Strategy
01:12:43
Speaker
I guess funds would be primarily for sales, like because your sales is especially the sales to lenders, that would be like an upfront investment. Yeah. So as you can see, our tech platform, it will be your right. There are two major categories. One is product development and platform development around it.
01:13:00
Speaker
and then the sales so product as i said and we are continuously building so we are already ahead of the industry in terms of how are capabilities or tech stack also you so let me just give you the today we have the tech stack of the integration which are almost at par or even better than the current competition so
01:13:17
Speaker
But now I have to focus on what we just described, building an AI or a data-driven tool which can focus on the conversion. So build all the tools which banks and merchants can leverage to accelerate that. And then expanding it, making it omni-channel. So right now I just talked about online and offline.
01:13:35
Speaker
I am saying, suppose someone abandoned your cart, so someone comes to your shopping, they abandoned your cart, can I send them an email with a pre-approved message? Akshay, you never apply for financing, you never check for financing, but you just abandon your cart with a $300 offer. I'm saying, Akshay, today merchant send an abandonment cart mail that, hey, your item is still waiting for you to check out. But let's just arrange financing to it and you can check out this at $42 a month.
01:14:02
Speaker
Now that is happening on the website. Can I include that message or not even? Not a big ask, but you have to build that seamless thing around it so that it becomes truly omnichannel. Suppose in a B2B sales, a lot of people take orders over a phone because you need a customization. I need to order 10 laptops, two printers in a business to business. Can we integrate financing over our phone channel that someone who's taking an order can offer you? Hey, by the way, you are approved for financing around it. So we are trying to make this financing much more omnichannel in that.
01:14:30
Speaker
Which industry is right now not there? And I'm not saying I have the huge link. People have a need, but is this the most pressing? Not now. First, they want to enable it on their website. But our vision is clear. So that is where the brand memory is going. Again, creating that product stack and showing that our lenders currently can scale up. So we create enough plugins so that they can distribute into the ecosystem.
01:14:53
Speaker
Okay, got it. So, you know, there's this famous saying, software is eating the world, right? I think for this decade, probably a better saying is, lending is eating software in the sense that lending companies are values being created, which are
01:15:10
Speaker
you know, kind of disrupting traditional software companies. Why do you think that is happening? Why is lending so powerful? And, you know, I mean, that's what all the VCs are betting on. Why do you think that is? Let me say that a different way. So you are right.
01:15:26
Speaker
that FinTech or this APIs and all, they were the last decade was all about it. Like there were companies who can say that if you are a lender and you want to issue a credit card, we have a credit card as a service. So there was a lot of deep bundling. So all the functions with your banks used to do so for creating a saving account, checking account, getting a credit card, making a payment. There was a lot of deep bundling happened in the last decade about it where these people taken these individual services and say there's a better way to do it back.
01:15:56
Speaker
There's a better way to reach out to the customer. There's a better way to adoption. And there's a better way to bring efficiency to the whole process. So tech played a huge role.
Fintechs vs. Banks: Competitive Dynamics
01:16:04
Speaker
Now, where we are coming in this, what you are seeing is a cusp of transition, where they are saying that it is now the deep bundling has buttoned. Everyone accepted. Knowledge is a deep bundling. Because what false index are getting stuck is that they have shown that there's a great way to make this individual process work. But the reason banks exist is that banks have a deep relationship with the consumer. Because on a single transaction,
01:16:24
Speaker
you cannot make money because that's how the thing is that because if banks just give you a saving account, you know, right? Yeah, you know, economics doesn't work, bank gives you actually pay you interest rate on that. So just giving you a saving account won't work unless until I can put your mortgage, I can give you mortgage, I can give you auto loan. So now each fintech cannot have the depth of the product which banks have because it's very difficult to create this part. So now people are hitting that profitability mark around these things that
01:16:49
Speaker
I need help more person or some people are trying to say I'm doing this is where a firm and all. Again, I'm not taking a call on that, but this is where some people have to go because these binocular in a transaction value their negative transaction. But from a customer acquisition point of view, they are huge value around.
01:17:04
Speaker
So now this is where banks, so this new decade you will see is a rebundling of this thing banking. So that's why you're seeing the focus is on the banks. I would not say lending SL because lending as a business will always remain a low margin business. You create, you cannot expand the profitability into the lending business. Why is lending a low margin business? I mean, because I, so, you know, what I'm based on what I'm reading, like say, for example, credit, the reason why it's a unicorn is because of its lending play.
01:17:30
Speaker
or PTIM, Moby Quick, all of these fintechs deserve the valuation that they do because of lending. I would say a different one of you because lending is very simple. You have a cost of capital, so I give you money. You have to pay interest on the money as a bank or lender or anyone.
01:17:52
Speaker
then you lend to the borrower and they pay interest rate and sometimes that interest rate can be subsidized in merchant and all those things but this is very simple and then you have the losses and everything and you have the underwriting model.
01:18:05
Speaker
Now, just break these components into it. Cost of capital, for credit and payment, the cost of capital will always be high than SPIs or any bank around it, because they are getting the capital from the deposit accounts and all. Credit is going to borrow it from the bank, so their cost of capital can never be. So they already are starting behind the bank from just cost of. So if you think about this margin, they're already starting at this one. So they're already pushed from there.
01:18:32
Speaker
Underwriting model. Everyone claimed that they were more sophisticated underwriting, as I said. Yes, you may have some advantage around it, but the data you are using is available. It's already the publicly available data on third party. It's not that anything new you are getting used to using your data now. Then it's just a catch up date. I cannot say that you sitting in X company can have more intelligent people than bank. It doesn't percolate that way. I don't see that model in the long run can create a differentiator around.
01:19:00
Speaker
So, losses will also become same around it. And then if you're charging more margin, suppose if you're charging higher interest and then there'll always be a company which can give you a little lower interest because they just need 4% yield in the paper. So, ecosystem is designed to allow. So, if a man need a 4% yield on the paper or 5% yield, whatever that threshold, the ecosystem will already compress into that yield number because
01:19:23
Speaker
If you're generating more yield, people are going to give you more money into that. So your cost, you see that everything, or you need to expand more. People will say that, hey, you're getting 10% deal. Why don't you increase your losses? Because I can work with 4% yield.
01:19:38
Speaker
So these numbers are so well-defined in the industry that it's very difficult to think. You can have a short-term demand. Why Paytm or Cred or any new-age company or firm is that what they are showing you that they can acquire a customer at a much cheaper rate than a traditional bank is there. That's the advantage they are getting. They are saying that, am I customizing my ecosystem or the customer? So my customer can take a product much more easily and quicker than a bank, as we are using the customer. That's the play they are putting. And that's why they're getting huge valuation because they are saying, I can distribute that. And that's why my higher cost of fund justifies that.
01:20:05
Speaker
Now, think about if a bank can enable this ecosystem, then there is no way they can compete because the cost of funds alone is such a huge differentiator between this and then there's a regulatory oversight and all. You just recently, CFPB just launched a regulatory inquiry into a firm and partners of the world right now. So, they will have to create those ecosystems what banks has created if you have to play mainstream.
01:20:28
Speaker
So long story short, I'm just telling you, banks, the only disadvantage bank is one is a more relative oversight, which if you're becoming a mainstream payment system, you will also come under the purview of that. So that advantage will go away. The second thing will be a technology. And that's what I'm just saying that this is a rebundling, you will see a lot of sales companies getting traction. And that's why you're seeing that other API based model because
01:20:49
Speaker
They are saying, if I can model this all through, and if I can just enable bank to play in the same, compete in the same space, then bank will be a winner from a product point of view. Okay, got it. Yeah, so for a standalone lending fintech company, in the long term, a bank will always be able to lend at better rates. And if the bank has access to that kind of tech stack, then they are at the same playing field in a way.
01:21:13
Speaker
Yeah, because now if a bank has the same access to a tech stack, then right now merchant is working with an ex company because they are saying you are easier to integrate. A bank is horrible for me to integrate around it. So that's why they're saying I'm willing to pay you margin. But if a bank tech stack is the same as the lending company, that's what we are trying to do. We are reducing that.
01:21:30
Speaker
We are bridging that gap. Now, much of the same, my customer will get a 4% APR product, then a 10% to 12% APR product on the size. And the only difference between 4% and 10% is the cost of TAPTA. So what is APR? Interested, annual percentage. APR is equivalent to interest rate in US. APR includes interest rate plus any hidden fees. So there's an equivalent in interest rate.
01:21:57
Speaker
No, equivalent. So basically, sometimes people do charge origination fees, or late payment fees, or servicing fees. So they said it's a 10% interest rate. So US regulation says that we don't care about the interest rate, you just account for each and every fees and tell the equivalent interest rate. So APR is an equivalent interest rate, which includes all fees. So you are essentially arming the banks to bring them on a level playing field with FedEx.
Final Thoughts on Problem Solving and Enjoyment
01:22:20
Speaker
That's the play. That's the play on that arming the banks because ultimately we believe that if this if this binomial at all points of sale ecosystem has to flourish, banks have come to the party. Banks cannot stay on the sidelines and only Fintech can drive because Fintech are good at showing what works, what are the banks have to play the role.
01:22:38
Speaker
Amazing, I see the potentials. How soon do you think you'll do your unicorn funding round? That is one thing which again, as I said, I always read that I am more of a person who enjoys the journey. And that's why I'm enjoying that solving the problem, being in this ecosystem.
01:22:53
Speaker
If I solve a problem, someone else solve the problem, we'll see the result. But when you see the result, results are results. The fun ends there. Fun ends either way. Even if you are the one who are sitting at the pole position, the fun ends. You have to do something else. So I keep my focus on our day-to-day thing and this just solving the problem at that spot.
01:23:14
Speaker
If you like the Found a Thesis podcast, then do check out our other shows on subjects like Marketing, Technology, Career Advice, Books and Drama. Visit the podium.in for a complete list of all our shows.