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The BNPL Masterclass | Gaurav Hinduja @ axio
423 Plays2 years ago
Market leader and one of the most well-funded startups- Axio is creating ripples across the lending ecosystem. But the journey of reaching the top has been full of highs and lows, and Gaurav candidly shares his lessons from a decade of building and scaling India’s pioneering lending fintech.
Additional links:-
1.Decoding Fintech Startup axio’s Growth Playbook For Serving 6 Mn Users And Beyond
2.Meet Axio, The Fintech Now Helping 6 Million Indians To Access Credit
3.Sashank Rishyasringa and Gaurav Hinduja at axio on the credit fintech opportunity ahead
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Transcript
Introduction to Axio and Founding Journey
00:00:00
Speaker
I am Gaurav Induja, the co-founder of Axio. We were previously called Capital Flow and last few months and I'll be called Axio.
00:00:20
Speaker
Capital Float was one of the earliest lending fintech startups in India, starting out way back in 2013. And like any startup that has been around for a decade, they have gone through a fascinating journey that not only illustrates the evolution of the founders, but also the evolution of the tech ecosystem in India.
00:00:37
Speaker
In this episode of the Founder Thesis Podcast, your host Akshay Dutt talks to Gaurav Hinduja, the founder of Capital Float that has now been rebranded as Axio. Axio is one of the most well-funded startups in the lending space, having raised about $200 million till date and is a market leader in the BNPL space, lending to millions of consumers. But the journey of reaching here has been full of many highs and lows, and Gaurav candidly shares his lessons from a decade of building and scaling India's pioneering lending fintech.
00:01:07
Speaker
Stay tuned and subscribe to the Founder Thesis Podcast and any audio streaming app to learn business fundamentals directly from the veterans of the startup ecosystem.
From Idea to Fintech: The Axio Pivot
00:01:31
Speaker
And what's his background before you guys? Yeah, so before Stanford, he was at McKinsey in New York for about, I think, another six years or so, doing a lot of work in financial services and government, risk, et cetera. And so brought a lot of the global background, strategic background. I brought a lot of the India-centric supply chain operators back, though. And so it was the middle of second year of business school.
00:01:58
Speaker
We were pretty excited to come back to India. We said, hey, whenever we start a business, we didn't know what we were going to start. We just liked the fact that you are going to work with each other because we both brought different skills that's to the table. And so we said, let's go to our wizard venture and find a business to start. So with unconventional in that sense, compared to most entrepreneurs who actually face a problem at start, it started coming around that problem. We were two entrepreneurs at Hilo for a problem. It's been a year after business school.
00:02:26
Speaker
coming through about 20-30 years before we landed our base. So tell me that, you know, that decision-making framework you used to finalize. Yeah, that's an interesting one. So we have three points, and every business we validated had to have three points. You know, if your whole firm was making the consent and everything is very, very strategic, right?
00:02:47
Speaker
But we actually did a bunch of soul surgery, and the three things that we came up with were, one, it had to be in India, and it had to have some kind of impact in India. So that was where our hearts were. So anything like photo sharing, et cetera, was ruled out because we didn't be able to have it back. Second, it had to have technology at its core. It need not be a hardcore tech business, but should be able to kind of leverage technology. Having spent time in the valley, you've got access to a lot of those amazing companies that you understood.
00:03:17
Speaker
how tech companies can be built. And the third is it had to have scale, right? We were not looking to do a lifestyle business. Nothing wrong with lifestyle business. It's just that not what we wanted. And so we always had aspirations of at least serving millions of customers and getting to a billion dollar revenue or a billion dollar valuation. Everything that a typical entrepreneur, sort of entrepreneur thinks of you there. So these are the three kind of check boxes that every business idea we thought of had to fulfill.
00:03:44
Speaker
And now we looked at 20-30 ideas and we eliminated, actually we had to have a process of elimination with a business school professor of ours. There were some funny ones in there as well. We both love to eat. Like I said, we are South Indians. And so one of them was actually opening up a quick service if we go to a restaurant. We're a franchise model so you can go to the scale. But eliminated because we thought we'd be the only customers.
00:04:10
Speaker
Because we looked at preschools, we looked at a bad e-commerce, because that was a little bit of a bad job. Like Mintra Jabong. Yes, exactly. It was just maybe a year or two after Mintra Jabong. We looked at things like urban cameras today, which is home services, et cetera. And the natural services at FitTech was always one amongst them.
00:04:37
Speaker
because at that point of time in the rally, there were the lights of the lending clubs, the prospers, et cetera, all starting to do some amazing stuff that came to credit and lending. Both of us had no background in credit, but it was always one amount then. And we came here and we said, okay, we finally narrowed down on that idea in 2014.
00:04:57
Speaker
So you thought of this as a consumer play? No, actually, one of them solved credit. And that point we were taking consumer, SMA, etc. We just said, let's start that. And as it happened, while we were doing that, a friend of mine who was running a small damage shop was looking to borrow money.
Early Challenges and Growth Strategy
00:05:16
Speaker
And so he approached us and we gave him the passport and that's how we got into SME financing. Because it was a big buy chance.
00:05:25
Speaker
But then on, we spent a few years doing SMB, we did consumer, we became multi-product. Eventually, we decided to focus and double down just on the consumer space.
00:05:36
Speaker
So, you know, let's like zoom into that journey. So how did you, like, you know, from idea to execution, tell me that, like, did you, you wanted to do a tech first, right? So did you like build some sort of a online workflow for the loan process? And it was, for the first, was it like tie-ups? For the first year and a half, it was a vocal form.
00:05:59
Speaker
That was an extreme contact we had. We would get the two of us and another friend of a friend who joined us as a product manager and it was a three of us and we literally started off as a Google form having a borrow of like 30, 40 fields and then we would go in the background and try to dig up as much information, read the balance sheets, read the P&Ls,
00:06:26
Speaker
and through some amount of guesswork, we would actually give the lower. So that learned from where? Like you were tied up with an NVRC? No. So what we did was we, early 2014, we raised our first seed round, which was a $2 million round. It wasn't easy to raise back then, especially. Yeah. And I went $2 million. It's like a pretty big number. Yeah. And also more than the big number, it was, you know, an industry that no one's really looking at lending credit
00:06:55
Speaker
We have met a lot of VCs. In fact, one of them even told us, you guys are from staff. We don't have the acumen and putting that lightly to be able to collect money in India.
00:07:12
Speaker
because it's a corrections game. And at first we thought he's a stocky nonsense, but you know, over time, we realized those were pearls of wisdom that he actually gave us on the ability to collect itself. But anyways, we met a lot of VCs finally convinced three asparagus, and aviation and family friends around as well. So we got the two million and started giving us a few notes. Most of that was on paper, there was no deck.
00:07:41
Speaker
It was us understanding the process and about six months later we actually bought our NDFC.
00:07:48
Speaker
Okay, so like you were scouting around for some NBFC which had the license already. Yes. May not have been active so that you can acquire it. Yeah, that's exactly what we did. Actually, we found one CA in some back lanes of Holgata who had 12 NBFCs with the license. Wow. I think we picked one of his cupboard.
00:08:12
Speaker
And I did as much good, as much diligence as we could on that to make sure everything was clean and everything was kosher and regulatory and then applied to the RBI for a change and stuff like that and so made it very clean and kosher.
00:08:25
Speaker
But you know, it wasn't easy, but then finding nbfc's and seems like life has come a full circle now because everyone at Fintech today wants an nbfc. Yeah, right, right, right. Like, what is the process you use to find the nbfc? Like, I'm sure they wouldn't have been like some online platforms where you can... But definitely not. You have, I mean...
00:08:48
Speaker
A lot of brokers, advisors, where some of these guts are built, somewhere is the big four, etc. Sometimes they are pure with this type of stuff. Okay, okay.
00:09:02
Speaker
Okay. So six months down, you got your NBSC license. So now you're in like a full e-cap line lending business. Yeah. And then we actually started to hire a few folks. We hired the first person we had properly hired was our head of credit. Because we didn't know how to give credit. We were just like shooting off our hip at that point. But then we got in somebody who has done credit, who has given out loans. And then the next person we got was a very junior sales guy.
00:09:29
Speaker
And so then on, we actually, I think in 2014, all in all, we must have gotten maybe six loans, which was nothing. But that's, that's, that's really how we actually started. Yeah, those are the rules we will see. Five of us by the end of 2014, only six customers. And I think maybe door door member, you know, one or two crores in terms of loans that we had given. Okay, okay, okay, okay.
00:09:57
Speaker
And so like you could just go year by year, so 15, 2015, what was the story like? Yeah, so 15, 16 was all about, you know, tying up with e-commerce players, because we didn't want to just source SMEs just to Google local brokers, etc. So we want to rest in Egypt, so we tied up with the Knights of Amazon, Flipkart, etc., because these platforms, your Mintra is a bomb, these platforms are really growing at that point in time.
00:10:22
Speaker
And we realized that as they grow, the sellers of these platforms would need working capital to keep up with the growth of the e-commerce platforms. And so we started working with them saying, hey, why don't we finance your sellers? And that's really how we actually kind of started the business financing a lot of the sellers of these e-commerce platforms.
00:10:39
Speaker
You don't remember the numbers we did back then, but we went from, I think, two evens from about one crew, and we've known to, I think, at least about 30, 40 crews. With also kind of bad deaths, very, very low at that.
00:10:55
Speaker
So these Amazon Flipkart sellers, you were like doing that build a scouting. Like if they have to receive, let's say one lakh from Amazon for product sold, you would give them. It was not exactly that. We were kind of giving longer term loans. We were assessing, you know, how active of these guys we do on Amazon Flipkart. What are the last six months saying that they sold? Let's say in six months they sold, let's say 20 lakhs.
00:11:23
Speaker
We felt that in the next six months with the season, etc. coming, these guys could sell another 50 lakhs. So, we would actually give them a loan of 50 and 20, 30 lakhs. And then, actually, it was pretty unique. We tied up with Amazon Flipkart to create an escrow mechanism where whatever money this person sold on their platform would be routed to us as a repayment. So, we would take out what the model road could pass the balance back.
00:11:47
Speaker
So whatever is the monthly installment, that would get paid off first and then the merchant gets or the seller gets amazing.
Navigating Financial Crises and Partnerships
00:11:58
Speaker
How did you crack these deals with Amazon and Flipboard? There's like a pretty major ad lock for you. In fact, that ad lock on Amazon has led to a lot of good things in our journey and I'll talk about that. Well, it was actually funny, it was a business school senior of ours who was running seller services at Amazon.
00:12:15
Speaker
That's how the conversation started. As luck would have it, sometimes you have a friend in the right places and they were also looking for something to supercharge their businesses and stuff. Once they started working with Amazon, they didn't know everybody wants to work with you.
00:12:34
Speaker
What did this lead to, this Amazon and look like you said? Yeah, so ultimately, you know, as we did, you know, spend maybe two or three years doing Amazon and all the others, but ultimately what happened, they grew a lot of this business, but then it was around, I would say 2019, where this business was growing, it was good, it was, it was an interesting business, but it was in 2019 that, you know, having worked four years with Amazon, they were like, hey, if you want to provide credit on the consumer side,
00:13:01
Speaker
And since you guys already know us, let us, you know, start a joint program on the consumer side where we will co-develop the product with you guys. It will be of massive scale. We will give you mutual exclusivity. So you work only with us on e-commerce and we work only with you on the lending side. And also we would take an equity stake in your company. And, uh, and you know, that really began in some ways, our evolution and journey into the consumer credit side of the world.
00:13:31
Speaker
Wow, okay, so like before this by 2019, what was your like? Yeah, yeah, you know, 2019 was a fun year. Well, it just for I think it was over 2020, when the ILFS crisis happened.
00:13:51
Speaker
And at that point, our notebook was peaked. We had about 1,200 crores. So we had gone from like 50 crores in 2015 or 2016 to 1,200 crores in 2019. And I'll never forget that day, October 2nd, actually, I was upon a day when the I11 crisis happened. And it was then that I felt that our world became crashing.
00:14:13
Speaker
The girls happened in one crisis after another for the next three years because we had just come out of D-Morn and GSD, which had impacted us, but not that bad. So there was some default execution of the book. Nothing crazy, it was about 4-5%. But when the ILFS crisis happened and we were not a profitable company back then, there was a flight to quantity. And suddenly, overnight, on loan effort, deadlines got opened.
00:14:38
Speaker
Fun with world of our own, because there was fraud and eye elephants of the larger NVFC kind of macro. And that was a very interesting, you know, our 2019 was a very interesting challenging year for us. We had to really, we looked at the business, we had to take some hard decisions in terms of cutting costs, labor of people.
00:14:59
Speaker
We did all the hard work, brought the burn by almost 50% in the span of eight, nine months. And the business was starting to look good again. And beyond March 20, we entered into COVID.
00:15:16
Speaker
As you know, COVID was a one point common of yours for everyone, but particularly in lending, because in March, end of March, early April, the RBI governor actually said that, you know, if you're an NBFC, only the water was allowed to not repay you. But guess what? Yeah, you have to repay the banks. You have to repay the banks. Right. Yeah, yeah, yeah. And that note monitoring was only for. Yeah, it was one second. So we were stuck.
00:15:43
Speaker
If this continues for not three months, we're running cash. It doesn't make sense. But somehow, I literally by the grace of God enough, we survived the period. It was hard. It was tough. We had some management changes. People doubted us. There was a lot of bad PR about us. And all this while, just before COVID, during the ILS crisis also, there was a government that was about to acquire us that fell through at the last minute.
00:16:12
Speaker
And so all this happened, but finally we got out of it. And, you know, the reason we were able to get out was because our binopated a product, which had started with Amazon a couple of years ago, we haven't started to take off it as COVID hit. And so.
00:16:27
Speaker
As we entered COVID in March 2020, we had maybe about 300,000 customers. And as by the end of wave 2 of this COVID-19, you're talking of the B2C customers? It was both. It was SME, B2C, everything got together.
00:16:43
Speaker
But by the end of wave two, which was a giant affair of COVID, we were a three million customer, two and a half million customers, right? So that one year was all great. We were like, okay, it's time to change the business and time to double down and focus on this product that's really growing for us.
00:17:02
Speaker
Okay. So yeah, from Donut color, you went to 12 minute color. How are you funding this? Was it through debt? This was through a combination of equity and debt. We had raised money from Sequoia. We made creations, raised close to about 100 million dollars of equity, but also much more in terms of debt as well.
00:17:26
Speaker
And we started building the first few, first black hole with Skype called Coonending, where we actually wouldn't have other banks and then BFCs fall into law with us. This was maybe 2008. Okay. Okay. So your source of money was three, essentially. Then one is equity. Second is you borrow from a bank directly. So maybe you would borrow at 10%. Then you would lend out at 20%, something like that. I wish it was 10%. It was more like 30% was like 40%.
00:17:55
Speaker
But yeah, you've got the principal is correct. And then the third was the colony. And when you would then half of the amount and half of the amount would be another NBSC. We had a fourth source, which was we had actually developed a good base of about 200 family offices in H&H who would actually consistently give us that. And that source would be the most thickiest capital for us.
00:18:23
Speaker
During a lot of times, during COVID, they never let us down. And we are very proud of that base that even that base till today is really growing with us.
00:18:33
Speaker
Okay, so this would be like a traditional businessman who wants slightly better returns than market. But at the same time, not like they don't want to take crazy bets on like that. You know, in the, I was sitting there, like I said, in the same day, which is like the Maravani community, you have a lot of the Kambhulle offline mari levels.
00:18:56
Speaker
So a lot of them were looking to deploy capital as well. So we would, like you said, give them good returns with good yield without craziness. So we tapped a lot of those sources. You would pay them similar, like 14, 15%? Yeah, slightly, 15, 6. Oh, okay. Okay. And on an average, what was your interest that you were earning? We were lending at Rabne, about 21, 22.
Learning from Mistakes and Strategic Decisions
00:19:22
Speaker
which as we realized it took time to realize it was not enough, the spread was not enough according to cost, NPS, etc. Because I think you were not from the industry, and this sounds like Apple by a motherhood statement, it took us a while to really realize what the pro-unit economics of lending are. Because in lending, you realize only one and a half years later when decodes actually happens.
00:19:52
Speaker
What are the unit economics of lending? What should a healthy lending business have as its unit economics? At least you should be able to have a spread. That means your cost of borrowing minus your cost of capital should at least be 10 to 12. So your lending at 22.
00:20:11
Speaker
you should not be borrowing it more than 12, which is where we are today. So let's say you've got 10 there, right? You've got, let's say, an NBA of 2%. So you should, anything in the total three, you're okay. Beyond two to three, right? You're in trouble. So that 10 minus three, because that's a seven, seven, then your objects should probably be around three or four. It's that finally gives you a 4% kind of our way, right? You're not there yet as a guy. And that's typically where mature businesses operate there.
00:20:39
Speaker
Okay. Okay. Got it. Got it. Okay. So, why were you, like you said, by 2019, you were not profitable yet. Now, my understanding is, again, not as a lending industry insider, but typically reason why startups are not profitable is because they have to do cash to acquire customers. But in your case, you didn't really need to do that, right? We were doing it in a different manner, right? We were giving notes cheaper than it's taken to grow the hook.
00:21:12
Speaker
So if a borrower deserved a 22% for their risk, we were giving north at 18%. So it wasn't a cash back of sorts. It was, I would say, to some it had missed price because we thought that I'd already put certainly a minus to a 2% NPA, but it ended up being a whole 4% or 5% NPA. Which is not bad if you're in the industry, but I really think it doesn't work. So for 23 years, we built the book that way. And then obviously COVID and stuff like that.
00:21:41
Speaker
No, okay, okay, okay. And how did you fix NPS, which is also another way of asking how did you fix connections? Because you were not from the industry and you told me that VC gave you advice that you don't know how to connect. Yeah, that's an interesting story. And I can tell you that today we probably have the best connections at the house. So, you know, around the same time, 2019-20, we really started a deep dive into connections.
00:22:08
Speaker
while which is, you know, till 1990, how were you collecting? We had a kind of small connection, but we would outsource a lot of it, right? To be honest, we were not spending as founders and as my religion, we were not spending as much time on it as we should have spent. Your energies are more on growth and all that stuff. Typical mistakes that I have on the back.
00:22:32
Speaker
Post-COVID, since the start of COVID, I tell you today, I probably spent at least 40-50% of my time in collections, because what we've done is 50% of our fitness businesses, all the tech and the sexiness, 50% is collections. This is the only way of doing that. There's no other way of doing it. So what we've actually built over the last two or three years is two or three things of collections.
00:22:53
Speaker
One, a complete in-house tech stack that gets automated connections. It can monitor communications between a connector when a person is speaking on the phone or going to the street. An app that feeds on street connections is used to make sure that we know where exactly is the other way. There's a smart algorithm in the background that makes what is the right connection strategy for each ball. So, I'm going to require the phone call, I'm going to require the street visit. So, I'm going to require Jensen and Semis.
00:23:20
Speaker
right and that the port is it's linked into our non-management system in real-time so you can make a payment today UBI can't check etc it's an account in real-time and there's a firm dashboard that I look at on a daily basis that every manager connections manager also looks at right so it's like a one-click setup that has others in front of the background that has really helped kind of change who we are as a collections entity
00:23:45
Speaker
Over and above that, what we decided was, say it took everything in-house. Anything you also use is in-house. So we built it up as a core stem, as a core muscle, and actually took all the resources in-house. So we have collars, we have feed-off suite, and we don't shy away from collections.
00:24:04
Speaker
It is a connection business. You can do all the amazing stuff with risk and underwriting and evaluating borrowables. At the end of the day, you have to follow up on a call or supply the field of stream visit. And that's the only way. So it does a hard work to manage connections as we change the business from a semi to consumer as well. And since I would say maybe one of COVID or two of COVID, our NPS have been sub 2%.
00:24:36
Speaker
And so, tell me about that acquisition which was about to happen. Was it an e-commerce company wanting to go in or another FinTech company? It was a large payment company, payment vehicle company. And you can guess. Oh, okay, okay. Well, that night, right? That was recently, but it was for that day, we got another deal as well.
00:24:57
Speaker
Yeah. So yeah, they were a payment gateway. They wanted a lender who could obviously act well here. And by kind of lending to their customer that their watches. Well, yeah, it was a it was a large deal this and then honestly fell apart and never double as you were ready to sign the documents every day or so we're in prison a couple of hundred million dollars like the much sale price much north of it.
00:25:26
Speaker
Yeah, and then we had to rebuild. We had to rebuild. What happened? I still don't know when I found out back to work. Honestly, you know, I wish... I don't have a good enough answer that I can actually give you.
00:25:47
Speaker
Okay. But it caused like distraction. You would have like, you have taken your eye off. Yeah, it got more than distraction. It caused a lot of issues because this was the time of ILFS, right? Keep momentum in a deal like that. We actually screw the book during the worst macro for NBFC. So probably
00:26:07
Speaker
All the worst or most stupid decisions we should not have taken during a recession during macro for the NBFC1, we ended up taking to make sure the acquisition went too. And they all kept to bite us badly over the next two years.
00:26:22
Speaker
What were those stupid decisions and why weren't they stupid? Like, help me understand the why also. Yeah, sure. So the why, you know, when, when you're tired of CAPTK, because of the high-level crisis, the worst thing you do is you hunker down, you control NPS, you don't look at growth, you forget about growth. But when there is someone who is in the process of acquiring you, you cannot show it before it works.
00:26:44
Speaker
If you have money in the back there, why not lend it out? Like why keep the money out? No, we didn't have that much. A lot of our deadlines got coined. So normally we like to keep enough buffer stocks and all we started eating through our buffer stocks. And our deadlines were not keeping base because of the NFS crisis. So we came pretty close to the break to show growth, all for the sake of growth, which we needed to show just for the acquisition. Otherwise there was no good reason to show growth at that point in time.
00:27:14
Speaker
So for a lending company, it's not like they have money in the bank, but they have deadlines, which like, title them to money on the bank. You constantly need buffers. Yeah, we need to borrow so we can lend out, right? Right, right.
00:27:31
Speaker
And you also need enough excess money for like meeting day-to-day expenses, payroll, et cetera, in case you're not able to get enough collections in that month. Exactly. And so we got over all that the year of 2019 and started to turn around the business and March 20 was the COVID rate. So hunker down for another interesting one-year video.
00:27:56
Speaker
So once COVID hit, did you stop lending? So we stopped a bunch of the stuff, but we did not stop buying our payload in a product with Amazon. Because those were small ticket loans, and we felt that we got enough capital for that. Our buy now payload is off by 10,000 to pay loans. And we somehow was growing, and we needed to keep some green shoots going in the business. So we continued that while we've been in the stock for most of the things.
00:28:25
Speaker
And Bino Pay Lender gives you a better rate of interest, like your spread is metal with DMP. It is okay. But the main reason for doing Bino Pay Lender is because you acquire customers and then you ultimately cross sell them other financial products. So it's a car. It's a customer acquisition engine for us. And over the last year, year and a half, we started cross sending a lot of those customers personal loans and other types of loans, which are very, very broad.
00:28:55
Speaker
And in fact, honestly, this is what Bajaj Finance has done for the last 20 years, where they came to check out finance at a store, when you go to Krova, and then they cross into your personal note, they'll execute it wonderfully over two decades. In some ways, we are the online version of that model. Okay, interesting.
00:29:13
Speaker
So, in BNPL, typically, the consumer doesn't bear the interest cost, right? The seller is... You see the wording there. It's most of the wording that matters. It's interest week, which is called subvention in the insider language. You know a lot of the insider language.
00:29:28
Speaker
Okay, got it. Give me an example of what a typical BNPL customer would give to you as a lifetime value, like how many transactions would you do? Yeah, so it's going to be hard once first. So when you're shopping, let's say, when I was checking out, you're buying, let's say, I don't know, headphones or something like that for 5000 rupees.
00:29:52
Speaker
You typically are a customer who we target, they don't have credit cards. So your only option is to pay via debit card. But at that point, while you're shopping, we actually give you the option to get credit. And in real time, within three seconds, we actually have the right queue. So we pull out whatever data that we can get.
00:30:12
Speaker
from our borders, from the bureau, etc, etc. And in under three seconds, we do your KYC, so we're a very, very negative supplier.
Expanding Product Offerings and Customer Base
00:30:21
Speaker
And we tell you, hey, okay, you've got a note of one over 10,000, please, how you can continue your shopping there. That's really, so what the tech that we've been able to build, the utterating muscle and then ultimately the collection strength is really worth the USB of the business that you actually put. Yeah, so the customers today are using us almost five to six times a month.
00:30:42
Speaker
the average customer cohorts, but let's say 100 transactions in about 20 to 18 months, and they're still going, they're still going, right? So finally figuring out how to make sure that knitting is not a terrible business, you don't always have to keep negotiating new laws. Then like I said, we take a small cohort of those customers, about five to eight percent of them, and we cross out the larger ticket personal law, which is where we end up making a lot of money.
00:31:09
Speaker
Okay, so most of your customers will be using like 5-10,000 rupees or something like sub 20,000 rupees, multiple times in a money. And the reason we've chosen that path, you know, that smaller ticket size is actually a very conscious strategy of know and grow. Because we are actually targeting customers who don't have credit cards. 70% of our customers don't have credit cards today. As you know, there are about 120-130 million alternate shoppers, then only 30 billion unique credit cards in the country.
00:31:39
Speaker
So we are really going up with 100 million, we don't have those cards. That's when we're starting them offered by 10,000 rupees and then three months later we give them slightly higher, six months later slightly higher as we see their performance. Okay. And is this like a, that word to EMI or is it like paying 14 days, like many types of EMI? No, we don't do any 14 days stuff. The minimum is one month, maximum can be in solvents or going up for 12 months.
00:32:06
Speaker
And the entire amount is borne by the merchant. Someone is doing 12 months. Yeah, the interest is borne by the merchant. In about 80-90% of the cases, then 20% of the cases, the customer buys the interest. Depending on the duration, I guess, like for short term. Yeah, exactly. Depending on duration, depending on one product also, right?
00:32:27
Speaker
For example, one of our largest merchants today is Policy Bazaar, where we finance the premiums for health insurance. In that case, it's a longer 10-year loan, 9-12 marks, and the entire insurance, or rather the sub-engine, is borne by the merchant. Whereas in the case of, let's say, an airline ticket, or make my trip, OTAs don't have that kind of margin, so there's customer pay. Where is my tenure by product?
00:32:56
Speaker
Okay, okay, okay. So like you started with Amazon. So you like built up this three second approval mechanism and all that. What is the underwriting strategy that you follow? Like is it based on the Sybil score? So that's one part of it.
00:33:15
Speaker
But even on the civil school, we look at the data, not just the score and we build our own score based on the data we see in the Bureau. The second is we have our own app that kind of has looked at a lot of personal finance management apps. So we help kind of people track budget, make expenses, etc, based on the SMSes that we see with consent, obviously.
00:33:35
Speaker
And then through that we built a predictor of income. So, they're able to predict to a pretty high degree what your income is. Yeah, because every time money hits your account, you'll get an SMS alert. Exactly. Right? And third is in some cases, with some merchants, you also better get to understand or be pre-filter with them, you know, what is the behavior on the e-commerce platform. So, for example, if you just signed up on Amazon, I'll make my deal yesterday.
00:34:03
Speaker
most likely not see this offering. We like to make sure customers have had some vintage of the platform. They have not displayed any fraud tendencies. So there's little qualification criteria there as well. Like somebody who is frequently returning products that might be indicator of fraud. So they would not see that option.
00:34:26
Speaker
So your old app, you may not be getting data for that from somebody who's buying an Amazon. It's a local ed model, right? So we've had 10-12 million downloads. You're right. It's not the same people who are coming on Amazon or make multiple, by the way. But based on the data that we have,
00:34:43
Speaker
And based on the incoming customer, Netsever, any of these platforms, and looking at the behind-the-scenes bureau scores of both these segments of customers, we're able to build a localized model that has high predictive power. So it's not the exact person, not exact income, but it's a localized model.
00:35:00
Speaker
Can you play this through some example, like say someone from Bangalore with a credit score of 750, so you would build a... Yeah, so let's say someone from Bangalore who has, let's say, we have seen 20 SMSes, but we also know their shop, but Amazon has a score of 750, has a credit, and let's say has a two-wheeler loan. We are able to, or let's say, has a housing loan, we are able to bankulate that, then what they come in, let's say 30,000, 40,000 rupees.
00:35:28
Speaker
We also know what their debt obligations are because they have a year of the housing loan. So then we come up with what is their net disposable income. So we know that this person after all their salary and obligations has a free cash flow of about 20,000. So our line should typically not be more than 25% of their free cash. So for that person, give a 5,000 degree line. It's a much more certified version than what actually happens. That's how we work with it.
00:35:57
Speaker
But how does this convert into lookalike?
00:36:01
Speaker
So this is for somebody who has the app, but for somebody who's not on the app and coming to AppData. Not a prefabric exercise. So we've developed joint scores and stuff like that with the e-commerce part. So the AppData is essentially training your algorithms to make better decisions. And those algorithms are then applied to e-commerce customers whose data you may not have because of the training. But there's a score there.
00:36:30
Speaker
And so there would be like multiple scores we should get. Yeah. Like e-commerce score, like on Amazon, how is, e-commerce score, there's a bureau score, there's an income score, there's a fraud score. So all these phone come together and then we kind of give the person. And all this happens in seconds.
00:36:51
Speaker
How do you generate an income score in three seconds? Like, wouldn't you typically ask for bank statement or something like that? No, because you're giving 50000 rupees, right? So, why check out on e-commerce? So, you can't really ask the person for a bank statement, etc. There's too much friction in that. When we give the person the longer ticket personal loan, at that point, we ask for a bank statement for people who fake it. Here, business, like I said, this is based on this interior, inside models with the high degree of confidence.
00:37:17
Speaker
Okay. Okay. Okay. Okay. Okay. Amazing. Okay. Got it. Okay.
00:37:23
Speaker
And so this must have evolved significantly from your original credit model, right? When you were lending to merchants, what was the model at that time? Yeah, that actually they were lending to merchants. You have a decent amount of manual intervention also, right? So we would collect the data and the pipes were digital, now we would get the data. But there was manual intervention in where there would be a credit manager who would look at the case in detail, because then on the merchant side, the loans were like 15 lakhs, 20 lakhs, right? So you couldn't
00:37:53
Speaker
give it so fast, and there was no need to give it so fast. You want to do a little more diligence. And so there, it was a little more valuable than we had. There were models, but it was always verified by a human being. And so the problem there was you didn't have enough loads to create your models, right? Whereas now on the consumer side, on the consumer side, in the last three years, we've done, I think, close to 30 million, 40 million loads. So in every level, there's repayment data, and that kind of really helped you build the model.
00:38:23
Speaker
Okay, so that lending to e-commerce merchants is like easy to get in business but hard to scale.
Competitive Edge and Technological Integration
00:38:33
Speaker
It's easy to start doing it because they want money, they want to get a lot of business but it's hard to scale it up.
00:38:43
Speaker
At one point of time, there were a lot of companies which were operating in this space. I think it also became pretty competitive, especially when discounting for ePowers. Because of the debt cost, because of the larger ticket sizes, the banks got it. You can't put the banks cost at the appropriate.
00:39:03
Speaker
No matter how efficient you are in terms of customer experience, a lower price is always the best customer experience. Even though they would take like two weeks to give an SME alone, whereas we would take two days. SME would win. Like 400 goods, 500 goods lower.
00:39:25
Speaker
And that's the reason why you were not profitable also because that space was very competitive. You didn't have a moat over their assets. The moat is very cleanly cleanly.
00:39:39
Speaker
One is the acquisition channels that we have. Deeppipes take into a lot of the large e-commerce players, which I don't think any bank can build. Maybe they can, I don't want to say they can't, but it's pretty hard, right? Because folks like Amazon are voting to very high service level agreements. So 99% success rates during this Diwali, we were seeing 400 transactions a second. And if you don't meet those standards, then you're going to upset me quite a bit.
00:40:07
Speaker
The second mode is how we got connections and NPS, which I think that's obviously a whole area. But they may not be necessarily good at the smaller picket-style stuff. You know, managing connections. You said three modes, second is connections. The third is kind of just, you know, customer experience, making sure that there's a good kind of CX that you can learn.
00:40:31
Speaker
The app is a part of customer experience. Once someone takes a loan, then they download the app to see what is the payment data. They can, but they can also see it on the back of dashboard. They can see it on the back of dashboard, on the back of dashboard. But about 30%, 40% typically are downloaded in the app. They can also see all the loan details, but they can also see personal finance management. They can kind of use it for managing budgeting, etc.
00:40:58
Speaker
Like the app downloads have been driven by which factor? Like is it people like you spent money to market the app as a personal finance app and hence? Yeah, it's mostly personal finance management. And just recently we've added the whole credit piece into there. And so that's a big area of focus for us this year. We'll probably be the only app that gives you personal finance management but also gives you credit. And what is the app called? It's called Axio now. It used to be called One. Okay. But now it's called Axio.
00:41:27
Speaker
Okay. And essentially if you use it for budgeting, for figuring out your expenses, break up of expenses. Exactly. And do you also have like investing and savings? Not yet, but that's coming soon. Okay.
00:41:45
Speaker
Like you build that in-house or you'll collaborate with Fintech? I think we'll build the UX layers and stuff like that, but the underlying manufacturing of the products will work with somebody else. Yeah, because they are already very large investments. We don't need to build the entire thing.
00:42:04
Speaker
For us, credit is always going to be our core product. And then everything else we offer is just around making sure we engage the customers that can obviously make money. But credit is always going to be our entry point. So what are the players you integrated with? You said that's one of your most common integrations. We've got about 3,000 more merchants. But some of the larger ones, obviously Amazon, Walmart, Policy Bazaar, a big one with Isabel Peier, all their merchants.
00:42:33
Speaker
A lot of people see brands, healthcare, latex, 7-8 categories, 3000 merchants and obviously that keeps going. So for a payment gateway, it makes sense to have a lending play because checkout finance is seamless on them. They see higher AOVs, they see better margins.
00:42:57
Speaker
Your average order value is KOV. And what do you mean by that? Let's say a person is checking out on a B2C brand and they're buying it for 2000 rupees without credit. But there is a credit option. They were typically by something slightly higher for 3000-4000 rupees.
00:43:16
Speaker
Okay, okay, okay, okay, okay. So, the payment to get to a company is earned by the size of transaction percentage. So, it makes sense for them. Okay, okay, amazing. And your connection strategy also must have changed when you pivoted from SME to consumer. Do you still use Feed-On Street? Because for consumer, Feed-On Street is not scalable, right? No, we use it very sparingly for later buckets. So, let me give you an example.
00:43:45
Speaker
All our robes are due on the 5th of the month, right? That's called the due date. So, typically about on the due date, 50% of the people don't pay. That's about. And then the next 30 days, about 91 to 92% of those 50 people end up paid through telecollections, right?
00:44:07
Speaker
That is the first bucket. Any connection, SMS, email. All the digital, tele, all of that stuff, right? That is the first bucket, as we kind of call it with collections. That's where the battle is what I lost.
00:44:20
Speaker
So now only 10% or 15%, so 1.5% are done. They go on to the subsequent buckets. Now, for some of both people, if it is a larger ticket size, if they are in a larger city, you'll use feed-off sheet. Otherwise, there's about 50-60% daily quality. So, you're right. The feed-off sheet is much less, but we still think it's an important component.
00:44:42
Speaker
Okay. What is the impact for a consumer when they miss paying on due debt? Do they, does the credit score go down immediately or is it a grace period? Yeah, so they pick me up in 30 days, the credit score really starts to go down. If they're not going back for 30 days. But we allow, we obviously allow customer the grace period of three years. We don't charge them a late fee and all of that stuff if they, if they are within the grace period. But beyond that, there is an 8 fee, the euro score does get impacted.
00:45:08
Speaker
But then we don't follow up with the customer. We've taken credit, now you have to pay it back. There are no free lunches. So like if 5th of April is due date, by 8th you pay, it's okay. You don't lose your credit rating and all. But beyond that, then you get charged late fees, your credit rating goes down and so on. Okay, got it.
00:45:30
Speaker
And this, like the connection mechanism must be on online, like they could just do a UPI or whatever. It's mostly 95% is all digital, so UPI, any of the stuff like that. I think less than 5% some people want to pay cash or something, but we don't say them. Okay.
00:45:51
Speaker
Are you also exploring embedded finance, like, you know, say there is an investment app and you, like, for example, Grid has some peer-to-peer lending collaboration with, I think, Lending Club or some such. So, you know, like that, like, say, ET Money could be an app where you could plug in lending for that app, like that kind of, you know,
00:46:16
Speaker
Yeah, you know, that's, in some ways, BNBL is the father of Embedded Finance, right? I think for now, we're going to stay focused on the BNBL side and build a customer journey, but that's something we could definitely look at because it's a similar scheme set that we've actually developed.
00:46:36
Speaker
Okay, let's talk about the organization.
Future Plans and Growth Ambitions
00:46:40
Speaker
So what is your headcount now? And you know, what did you learn about org building, culture building? Can you share some of your lessons over there? Yeah, and so the org is probably about 500 600 people today.
00:46:53
Speaker
In terms of, you know, there are two things that we learned. One is, in this type of business, you want both types of people, finance background as well as your tech background, right? Because you need the tech folks, the product folks to keep pushing you forward with all the customer experience we obsessed about that. But you want the traditional thin folks because this is lightning and you will lose your show very quickly, right?
00:47:16
Speaker
try to maintain that balance at all levels within the oil, so that little bit of that creative tension does exist always between the fill and the tech beams. The second thing is, we believe one way is a kind of home-grower in-house talent. I would say about almost 50 to 60% of our top 80 people in the company have crossed five years. In our senior team, again, which is about 10 people
00:47:46
Speaker
barring one or two, almost everyone's been around for six, seven years. And CFO and a chief product officer joined us seven years ago as junior folks that have risen to the ranks and now a part of the management team, right? So we love and like to encourage folks who kind of been with us through the campaign have obviously kind of explained the fact that they can do it. And ultimately, we just like kind of a no-nonsense kind of idea.
00:48:14
Speaker
I mean, I've made mistakes, obviously, when it comes to the people's side. You know, sometimes you like to make people from large, well-established organizations who are rock stars there. But you end up typically realizing that they were rock stars because of the processes set that those organizations are not necessary because of the vulnerability. So once you bring them to a younger, more agile startup,
00:48:37
Speaker
They've been like a fish out of water, right? So I think, you know, we've made a bunch of those mistakes and I think we are better for it, right? We've learned those. And so I think the one thing now is, between Shashank and me, we obviously kind of divide the way of what we both are good at. But we want a core team that hopefully kind of has been around for long, has been around through the tough times, and it's only onwards and upwards from here. Okay.
00:49:02
Speaker
500 is a pretty lean size. What's your loan book at today? My clock was now back to 1200 growth. So we had bought down to about 1200 back to about 200 and built it back up.
00:49:15
Speaker
Okay, and I guess five that will be pretty lean by industry standards, right? For a 200 karat loan book? Yes, I know. Because we do have a lot of folks. We don't have very few sales folks. We have a decent number of collections. We have a decent number of tech and product who, as you know, are probably the cheapest businesses in the country today. So there's super great talented people. But obviously,
00:49:44
Speaker
covered good prices, right? So, yeah, they did have a few of those open web, from like, corners of customer services and stuff, over another web. Okay.
00:49:55
Speaker
So who are your competitors in this space? Like others? You would be seeing P&L companies as your competitors. Obviously, you've got a lot of competitors who we respect in this space. They've got Bokeh, Resest Money, Lazy Pay, Early Salary, etc. Again, well established, well-ignited companies. As we venture into the offline world, which we will do so when we start to experience, you will come across the big giants of the bajajas that we work.
00:50:26
Speaker
How you were seeing into offline, what's the plan then? Through partnerships with gatemills, pause players, etc. So, we will never put a cursor in the store. We will work with every gate, like a code player, pipe labs, a razor plate, etc.
00:50:43
Speaker
Okay, so like at the time the shopkeeper is swiping the shopkeeper will get that option and he can offer it to his country one increases it average auto-value version Okay, okay, okay got it. Okay, and What about getting into credit cards? Because you are in the way doing that right like when you give someone a five thousand
00:51:06
Speaker
approval limit. Yeah, so that's on the cards. We were always apprehensive because of the regulatory structures of NBFCs doing credit cards. Some people took options that obviously now the RBI has said it's not kosher. So we are working through the right regulatory structures and that's definitely something on the card.
00:51:28
Speaker
Okay, like only a bank can issue credit card as per. Yeah, so the only way to do it now is through a co-branding with the bank, etc. So those are optional people.
00:51:40
Speaker
And there was some major change in regulations because of which a lot of it takes guard effect. What was that like when you could not offer a credit card? A lot of it that's using a PBL guard which is a PBL instrument and mimicking it to be a credit card, which obviously the RBI didn't like. Some could say it's a grey area, some could say it's illegal, I won't apply it, but RBI clearly didn't like it and so they've shut that down.
00:52:06
Speaker
So a prepaid instrument is like a debit card, like something which reflects your actual balance in some sort of a credit. No, I was funding that prepaid instrument at the back out to credit. So like, as soon as you want to spend, you can load it up with the money, which is a loan. Yeah. So not the insurance that you was at the RBA had come up with prepaid card. So it's sort of a shut down, but I'm sure people will evolve it quite importance.
00:52:33
Speaker
What about the UPI apps? Do you see them as competition like PTM? Yeah, I think PTM definitely is competition. I think as much as we respect them, I think PTM is always going to be in some ways closed loop. They will serve within their ecosystem.
00:52:50
Speaker
Typically, players outside the PADIO ecosystem will not want to work with PADIO, right? So, which is why we are a bit kind of more open stack in that sense. We will work with all the players, right? And so, in that sense, hopefully, we'll become the arms dealer to a bunch of those large-scale folks.
00:53:09
Speaker
Amazing. Okay. And where do you see yourself like five years down the line? Well, we have today had 6 million customers. We are hoping to close this financial year closer to 10 million. We're adding almost 400,000 customers a month. I think in the next, I would say three to four years, the goal is to get to about 25 million customers.
00:53:36
Speaker
We are now financing almost about 450 crores a month. Again, always by March to get that to about 600 in the next three years, get that to about 2,000 or 3,000. Finally, I think, you know, get a good profitable business and in about three years, go public. Because, I mean, the markets for financial service in India have always been good. If you can build a good crack, report a good business, there's always a good opportunity to kind of hit the public markets and control their own best.
00:54:05
Speaker
And you want to be pure consumer play, like that SME lending is something you've completely solved. Yeah, I think we'll be, you know, we've gone from being a multi-product company to a single product, but with the focus on the consumer journey and how they start with us and how they kind of, how we build it through their lives. Right now, as the customer they want with us, you may add in more products, but the focus is always going to be on serving those customers as 2013 million customers that we would always have.
00:54:32
Speaker
You had all of those near-death experiences of island affairs and COVID. How did you feel during those times when it looked like it was the darkest? There are a few things that you rely on. Obviously, the good stuff is family, your co-founder, your colleagues at work, etc.
00:54:52
Speaker
make you go through those phases. But I always felt that I needed something outside, and I've always been a very competitive person who loves sports a lot. So the early days of COVID is when I started picking up triathlons. So I don't do Ironman triathlons a year. And I trained a lot for that. So I trained about 12 hours a week. And being able to do an Ironman triathlon and be disciplined,
00:55:20
Speaker
Make sure you finish that race, which is a very, very hard race to do. And Chennai has helped me focus on work. But in work, obviously, it's always ups and downs. Even today, we have a lot of downs. We have a lot of ups. But it kind of makes you show up at offers every day. That discipline makes you kind of make sure you never give up because you can't give up in the middle of a race.
00:55:40
Speaker
So in some ways, you know, you've learned to better equate the race of the Iron Man journey to the race of running a startup. But that's actually helps a lot. The only advice if I could give Palo Alto brothers is find that something outside work with kind of future juices boy. Amazing. Amazing. Like you have raised almost, I think $200 million. Okay.
00:56:03
Speaker
And so, you know, like, what are your lessons on fundraising that you'd like to advise to young aspiring entrepreneurs? Take less early on. We made a mistake of our series A, taking too much. How is it you take it?
00:56:19
Speaker
I think we had taken about 13 million, which was under 25 or 13 million pre-mites, so it was almost like a 30% dilution, which there was no 28. You can never recover from that in later rounds, no matter how low you keep your dilution. I think that was a mistake we should have. I think in your zeal of Pandof, you're not trying to
00:56:40
Speaker
go one upmanship on other startups and take more money and get into the headlines. You end up creating that you shouldn't do it. But only for just take the hour to buy that evening. Not more. And then pretty delicious accordingly. Again, Apple buy a motherhood statement, but the brand out of excitement, people tend to really forget that. I mean, and the second thing is, you know, you are going to hear a lot of noise. So be ready for that and just have conviction on yourself.
00:57:12
Speaker
What's the no to 1 ratio at seed stage? That's the toughest, right? Actually, that was not the toughest for us. The toughest one was for us that we did last year. We're just coming out of COVID, coming out of our problems, coming out of the that we had done. I think there that was maybe of 50 to 1, 50 lows to 1, yes.
00:57:33
Speaker
And this is like a market where the universe itself would be like maybe 100 200. Yeah, 2021 was like a great year for more startups. But we had a challenge is that we have got faster and now we're a couple yet.
00:57:49
Speaker
And I think you raised about 50 million dollars. Wow, that's amazing. Cool. And that brings us to the end of this conversation.
00:58:04
Speaker
I want to ask you for a favor now. Did you like listening to the show? I'd love to hear your feedback about it. Do you have your own startup ideas? I'd love to hear them. Do you have questions for any of the guests that you heard about in the show? I'd love to get your questions and pass them on to the guests. Write to me at ad at the podium dot in. That's ad at t h e p o d i u m dot in.