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Building The Lending Stack For Bharat | Anil K Pinapala @ Vivifi
353 Plays2 years ago
After a successful entrepreneurial stint in the US, Anil headed to India when he realized the bigger opportunity in digital lending lay here. Vivifi is built with the mission of offering formal credit to the millions of Indians outside the umbrella of institutionalized banking. He talks about his learnings, differences between Indian and American regulations. This conversation is a masterclass on building a lending business with a regulatory framework, something very few companies have managed to pull off.
Know about:-
- Rocking the American dream
- Synthetic fraud
- Building the flagship product
- Future expansion plans
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Transcript
Introduction to Anil Pinupala and VBFI India Finance
00:00:00
Speaker
Hello everybody, I'm Anil Pinupala, founder and CEO of VBFI India Finance Private Limited.
00:00:17
Speaker
One of my favorite movies is this charming movie called Outsource, which was released way back in 2006 and is the story of an American coming to India to run the call center that has got the Outsource to India. And what I really loved about that movie was seeing my country through the eyes of an outsider. This movie really made that possible.
Viewing India Through an Outsider's Lens
00:00:38
Speaker
And this is also what I love about this conversation, about seeing India from the eyes of somebody who is somewhat of an outsider.
Anil's Entrepreneurial Journey in the US
00:00:47
Speaker
Anil is a serial entrepreneur. He built two very successful businesses in the US before coming back to build a business in India. His first business in the US was a SaaS business for fintechs. He was building a loan management system for the payday lending industry.
00:01:04
Speaker
So payday lending is this unique American concept. In the US, you get your paycheck every week or every two weeks. And a payday lender is somebody you take a load from when you need money until you get your next check. And so as you can guess, these are low ticket-sized loans and typically given to non-prime customers. And this industry did go through a little bit of controversy before a regulatory crackdown. But Anil's SaaS product was really the dominant product for this niche.
Opportunities in India's Financial Landscape
00:01:33
Speaker
And
00:01:33
Speaker
Next, Anil started a digital lending business where they were acting as a digital lending partner to American NBFCs and helping them bridge the digital gap. Anil realized that the bigger opportunity in digital lending really was in India, which had a massive population with low credit penetration. And this is where the story gets interesting.
Building Businesses: US vs. India
00:01:56
Speaker
Anil talks about
00:01:57
Speaker
his learnings, the differences between building in India and building in the US, and the differences in Indian regulations and American regulations, both in good ways and not so good ways. And really, this conversation is a masterclass about building a lending business with a regulatory board, and especially for a non-prime audience.
VV5 Finance and the Launch of Flexpay
00:02:17
Speaker
There are very few companies which have managed to pull this off successfully.
00:02:21
Speaker
And I'm just waiting to hear the next big funding announcement for VV5 Finance, which is the startup that Anil built in India. And their flagship product is called Flexpay. You're listening to the Found a Thesis podcast and I'm your host Akshay Dutt. I started one business while I was in IIT. I was trying to do some
00:02:51
Speaker
early stage gaming application. This was web 1.0 and nothing was really working on the internet, but I still believe gaming will be big. So I tried to do something on gaming at that time. Obviously it was way ahead of its time. So I didn't succeed. And when through campus placements, I got into technology consulting main on strategic consulting for internet service providers, but the bug was still there. So.
00:03:17
Speaker
So instead of trying to do it myself, I joined a large team of founders back in 2001 or so, who were setting up a company called Virinci in Hyderabad. So I became a part of founding team there. I had a smaller stake. I was fresh out of college, parents not from a wealthy background. So I had to earn my way up. So most of the equity was given a sweat.
00:03:40
Speaker
But it was a great journey with Vinci. Initially, it was like any nice tech startup at that time. We had a great business plan, which we blew it up in six, six months and realized that it's not going to work. Wasn't it a service with us? No, we wanted to do B2B marketplaces. So the business was to build B2B marketplaces Alibaba, but the software of it.
00:04:03
Speaker
So there were two large companies at that time called Ariba and Commerce 1, which were building these B2B marketplaces. And each one in the US was listed and back in the day worth over a billion dollars each. And we were the only company in India at that time that was trying to do this. And the Indian market was not mature at all to build anything like that. So we tried to do it in Southeast Asian and European markets.
00:04:27
Speaker
But we realized to compete against big American well-funded companies worth over billion dollars each was not enough. You just don't have the wherewithal to do it. So we were mildly successful in Europe, somewhat successful in Southeast Asia, but the business wasn't going anywhere. Three years later, both of those companies exist in some form or the other, but they're not doing great on their original business model either. So we shifted tack to being a services company, doing IT services, but I realized that
00:04:57
Speaker
I do services was getting a crowded market so i was always searching for a niche i was spending a lot of time in europe and i got an opportunity through the bank i was working there to work on the short term a small dollar lending space in the u.s. where when i went to the u.s. i realize that the market was not mature in terms of software for that business.
00:05:18
Speaker
So I thought it was a worthwhile investment to make and convince the rest of the founding team that, Hey, this is where we should spend all our time effort and money so that we'll get a niche that we can own. So this you're talking about building a like a loan management software.
00:05:35
Speaker
Yeah, this was a loan management software specifically targeting the small dollar lending industry in the US. Which is also called payday lending. It is called payday lending, colloquially. And we built that software to be the largest in the space with over 40% market share when it was all said and done. And you're selling it out of India. We were building it out of India. I was part of the build process.
00:05:56
Speaker
But I moved to US by then. This was right after 9-11. So this was early 2000 still. I moved to US. I had a beaten up Hyundai Elantra, which I used to drive all the way from Philadelphia to
00:06:13
Speaker
South Carolina and Tennessee, which is the birthplace of what is called the payday lending industry. So I had a great interactions with all the original founding fathers of that industry in the US. And I used to drive like 800 miles, 1,000 miles, maybe not 800, maybe 600 to 700 miles and trying to build that business. But it was all worth it. At the end of the day, we became the industry leader there and I developed
00:06:36
Speaker
great relationships with everyone in that space and to build something from scratch to be a leader, especially in the greatest geography in terms of business, which is in the US. It was a niche business. It was a niche business all said and done. If we'd built a similar software in insurance, maybe Infosys or everybody, or iFlex or iGate, everybody would have known our name.
00:06:58
Speaker
But we built it in a small space, but still it was worthwhile and that was a great journey all the way. And the product we built was called Q Fund. So why didn't you just continue in that business only? Like I can see from LinkedIn, you became the CEO of that business. So you could have diversified it.
00:07:16
Speaker
The payday lending business was very dynamic in those years. It went from being a 14-day, $400 product mainly focused on low-income Americans to, because of regulatory pressures as well as customer awareness and empowerment, the product needed to change nature and the product. So this was
00:07:35
Speaker
2004-2005 there was a lot of federal pressure on this industry and it became very highly regulated and I was helping that transition working with a lot of founders. So I had a great friend row seat to the way the industry was changing and I helped that transition to a very highly regulated space and then helped the transition post 2008 the subprime crisis. That was a huge moment in the world and
00:08:01
Speaker
I was helping the businesses transition through that. And then from 2010, more and more loans started getting written online than through a branch. And I helped them through that transition. And a lot of these companies became a lot valuable. And some of them got listed and are a billion dollar companies. And I was building the software. And I was like, I've built a lot of wealth for a lot of people. But we are just the software service provider. Maybe I should be a lender myself. So that's why I...
00:08:30
Speaker
So that's why I said, okay, I had enough of this. So let me try and become a lending company on my own. So that's how I said, and at that time, my main partner in that other business, he was trying to build a hospital and a biotech platform. And I was initially involved in that, but over a period of time, I said, it's not clearly what I do or enjoy. And I enjoyed what I was doing. So I said, okay, let me become a lender instead of being a software service provider to a lender.
00:08:59
Speaker
Okay, interesting. So when was this when you decided to change to pivot? This was 2012-2013 timeframe. This was a good 10-year journey. Living in the US at that time? I was living in the US. I was married to the person whom I now know for close to 28 years almost.
00:09:19
Speaker
So we met early in college. So it's almost right out of high school. So I got married and somewhere towards the end of that decade, I had my first and only kid, my daughter. So yeah, and she was two years old and we were in a great place. I was running the company. We were the leader in the space. And sometimes when you get to that place, you seem like there is not enough challenge, right? And you need to challenge yourself. What best time then to when you have a one year old or two year old kid,
00:09:48
Speaker
to stop doing what you have been doing till then and venture out on something new altogether. Freaking your wife out. She was super supportive. I think her parents and my parents were freaked out because
00:10:02
Speaker
You kind of saw progress, right? Like we came from pretty humble beginnings and we got to a nice place and it was like, why are you? You're no longer in that Hyundai Elantra. Yeah, definitely not. But why are you rocking the boat here? So you're living the American dream. You have the large house, the few cars and everything else. Yeah. And yeah, we were living in Philly and then I moved to Miami because
00:10:29
Speaker
our work allowed us to do and being in a much more prettier city appealed to us. So yeah, with it, I just took that step leap of faith. And the journey with my co-founders there was really great in Virinci.
00:10:44
Speaker
But it was just time I wanted to move on and try and do different things. So you wanted to become a lender in India in the US because that's the only jurisdiction I worked in and I knew that place. And yeah, so it was. So the business we started next was called Tech Friday. I had.
00:11:02
Speaker
One of the folks who used to work with me and when she come over and join me, he was a part of the founding team. And I roped in my wife to also be a part of the funding team. So at Tech Friday. And so we wanted to do digital lending in the US. And by then the world was shifting to mobile and I wanted to do a mobile first AI driven underwriting. Those were still not buzzwords back then.
00:11:27
Speaker
So we built one of the first mobile first lending platforms, which was completely a machine learning AI driven underwriting platform. And I wanted to do both consumer financing, like durables financing and unsecured lending the NPL.
00:11:43
Speaker
Yeah bnpl back in the day yes in the us market but the bnpl side of the business didn't take off as quickly as as the course unsecured lending business took off and we built it through partners we built it through we were responsible for the bottom line profitability customer acquisition everything.
00:12:00
Speaker
But for the licensing and others, we were more like a co-lending arrangements with a pure lender. Right. You didn't lend from your books. It was off-balance sheet. Right. What fintechs in India also do? Yeah, it was off-balance sheet lending. I have with an NBFC.
00:12:17
Speaker
Yeah, yeah, yeah. So something like that. So we were tied up with license holders. And so the unsecured lending side of the business grew much quicker than the B and PL side of the business. Obviously, why? And what was your go to market? Because the players that you were servicing all had branch network through which they would be sourcing loans. What was your go to market?
00:12:36
Speaker
see by that time it was slightly already shifting towards internet and they were all kind of the channel mix was not predominantly internet but it was like internet was like at least 20-30% of their market share
00:12:50
Speaker
So we used to go tell anyone who wanted to be in a lending partnership with us, hey, we see the world going this way. We know that a customer would be applying this loan on a mobile phone. And they were still, the smartphones were not as smart then as they are today. And told them that the customer would expect a loan decision to be like within seconds. And that's what we have built. And this is where if you need to grow, you need to come and be on this platform.
00:13:20
Speaker
And this was with revenue shares. This was with profitability. We were participating in the risk, not necessarily on the balance sheet, but we had bottom line responsibilities. And that was our reach. And we had built the platform before we had our first client. Everything was built out. So we were actually demonstrating. So the client is like channel partners who would source borrowers. So we're not client. We call them lending partners. We used to call them lending partners.
00:13:50
Speaker
And we had a few of them, but eventually two main relationships were the ones that really worked for us. And what kind of companies were these lending partners? These were previously what would be called as the payday lending companies, but they were changing nature. And because that high cost structure was also not something we believed was sustainable. And once customers came to our platforms,
00:14:18
Speaker
We cut down their APRs by more than or nearly half like the end customer cost of credit. What's APR? What is APR? Annual percentage rate. That's how interest rate is expressed. It is a way interest rate is expressed in the US. It
00:14:35
Speaker
includes all costs like you have interest rate you have processing fee documentation which you have to come and everything so that it is clear to the customer customer will see one number and see what is his true cost of credit
00:14:49
Speaker
As an IKEA, you have a small interest rate and then a large processing fee, which may look like you're getting a low interest loan. This is a good regulatory drama. India should also get something like this. Yeah. In fact, it's one of my pet projects, I would say. US has a very fantastic customer disclosure, which is documented in the Reg C called a Truth in Lending Act. It's called TILA for short. So it is designed to ensure
00:15:17
Speaker
The customers truly know what is the lending cost, the way the regulation is written, it tells you how to calculate and how to disclose. And the most important data has to be disclosed in really big font sizes so that customers know exactly what they are getting into. So yeah, it still has some catching up to do on that side, whereas India is much better in payments and ecosystem and infrastructure. Regulatory infrastructure is so much better than
00:15:43
Speaker
whatever the US has, and the banking infrastructure is tremendously excellent. But yeah, on the customer-raising side, the US is still a little better. And so we said, you will shift to a digital channel. You will cut your interest rates to your end customers by half, because we are using AI, ML. And we will try to get you into a product which is much more stickier. So everyone was doing a 15-day loan or an installment loan. We said, we should do a line of credit when a customer is coming online.
00:16:12
Speaker
you should be able to pay and redraw without having to redo a new loan and that's how we said okay so these were the three main value proportions a lot of people had interest but
00:16:25
Speaker
We developed two really good learning partnerships and over it. But why did you not just use performance marketing and acquire customers yourself? It was all digital. Then why did you need a partner? We did the partners mainly for licensing. We just didn't want to go through the entire licensing portion on our own.
00:16:45
Speaker
Oh, even to give a loan, you need, you of course need a partner for the balance sheet, but even from the customer acquisition side, you need a partner. You can't directly acquire customers. No, no, we can acquire customers, but eventually these partners were the one on their books with whom what we wrote the loan. Okay. Okay. Okay. Okay. I understand now. So you were basically like these partners were just the balance sheet partners. You were responsible for customer acquisition and onboarding and all of it. Got it.
00:17:14
Speaker
Yeah, and also the credit bureau data and all and in US there is a lot more still what is called as direct marketing is you actually still even today 2022 most number of loans in US be it credit cards or unsecured loans or personal loans as we call them here.
00:17:32
Speaker
they all are opened by someone actually getting an offer pre-approved offer in a mail when I say mail it's not email it's actually in a mailbox people open take it out and type their invitation code in so
00:17:47
Speaker
as amazing as it is, is still the most dominant channel for acquiring customers in financial services business in the US. To do a lot of that, you need bureau data, and bureau data has its own restrictions and its own licensing environment. So to comply with all of that, we needed these partners.
00:18:06
Speaker
And obviously the balance sheet and the license portion. And with those two large lending partners over a four year period, we did over a billion dollars in loans and a billion and a half. And obviously the big portion is to get back payments. So we got over a billion and a half in payments in those four years.
00:18:24
Speaker
And we set up a large offshore center as a part of that. Here in Hyderabad, the main office was in Miami. The back office was in Hyderabad, which we built a large data science team. We had transaction processing people, tech team. Everything was based out of Hyderabad, which grew to almost 250-300 people over those four years, five years.
00:18:44
Speaker
And I was traveling back and forth. My partner was based here in Shri Kompela. He was based in Hyderabad. Me and my wife were managing the US side. And we used to travel back and forth. And I saw the evolution of India during that time. Adar was becoming more. The credit bureaus were being set up. The same credit bureaus we had in the US.
00:19:05
Speaker
And I was seeing green shoots of an opportunity in India. And we really wanted to pursue it. And we were having a great success. And there was still a lot of growth to be had in the US business. But the Indian business opportunity seemed like present and now. And I was really trying to get to do something here. So we were trying to see if we can exit our US business. And fortunately, one of the lending partners came over, said they will acquire our business.
00:19:33
Speaker
And it was a great deal for us. So we sold that business for a combination of stock and cash. I am a part of that team there as a shareholder and as a board member now. And mainly we got out of the business to pursue the huge India opportunity, mainly for the underserved and unserved segments in India. And that's how VV5 was bought.
00:19:57
Speaker
So tell me about starting in India then. You wanted to do the same product, like unsecured loan, low ticket size unsecured loan? Yeah, we wanted to do the same product, low ticket size unsecured loan. What we saw in India as an opportunity is see the first 50 million, the first 100 million in India all have credit, no matter technology, non-technology. And when we are talking about applying a loan on a phone, it's very convenient.
00:20:22
Speaker
The alternative is inconvenient, which in the US was very inconvenient. But in India, you had the DSAs and the banks who will come to your home, whether it's bank account opening or loan. The person who is good credit score and has access to credit is
00:20:37
Speaker
signing in 20 places and someone else is filling their form for them almost. So we believe that solving for technology and solving for speed for the really people who are already served in India isn't as much of an opportunity for the first 50, for the first 100 million. We saw the opportunity as 300 million, 400 million Indians who just do not have access to formal institutional credit.
00:21:04
Speaker
So, and that's what we saw as an opportunity. In some sense, we were working with the same group in the US. There are a set of people in US who cannot come up with $400 when they need it. And that's about 30 million, 40 million in the US.
00:21:19
Speaker
The same underserved and unserved segment in India is much larger, which is a 300 million people. And the premise was similar. People today go to their friends, their family to get those 5,000 rupees, 10,000 rupees when in need. Or they go to the local money lender who will charge an exorbitant some or something. Or they could, there are other ways because the banks are not interested to do a 20,000 rupee loan for 10 days. That's the truth of the matter.
00:21:46
Speaker
So we just wanted to stick to the basics. What we did for the last 10 years, almost 20 years, the first 10 years was just purely selling technology and product consulting. But the next five, six years was mainly doing the business itself. So we stuck to the basics and we said similar customer, similar market opportunity.
00:22:04
Speaker
Obviously, learnings have to be different. The market is different, but the principles are the same. And we had pretty evolved algorithms and everything in terms of underwriting. But obviously, you can't take the same thing and plug here and expect it to work. The good thing for us was the bureaus were the same. Transunion, Experian, and Equifax were the same three bureaus we work in the US.
00:22:26
Speaker
Here we also have high mark apart from that. So the models were pretty much replicable. So as in your algorithms, you didn't need to like work on the algorithms from scratch. The same algorithms that you use for underwriting in the US could work here.
00:22:40
Speaker
Yeah, similarly can work here. But the things that we had to do in India was make use of the great ecosystem, the Indian government regulators, everybody provided, be it other, be it UPI, be it NSDL and all the other innovations. Obviously, we want to leverage them and kind of so we built all of that. But we were not cocky. So to say, we didn't say, hey, we already have done this in a different geography and
00:23:04
Speaker
Let's get started and start dispersing tons of crores or hundreds of crores from month one. We said, we recognize there's a new market we need to learn. So we spent some time learning and letting the algorithms and our platform localize. And we made a lot of progress. But in India, what happened is we wanted to do the same thing we did in the US. The one thing that didn't clearly click for in India is they didn't understand the way we structured the product. The existing lending partners didn't have exposure to the way we structured the product.
00:23:33
Speaker
And we're not willing to be the first one. So kind of out of necessity, we actually applied for the RBI license and got our license so that we would do the lending on our own balance sheet. And that's how we became the first fintech in India to get an NBFC license. And I'm saying it on record now. I'm assuming it is mostly true.
00:23:54
Speaker
Okay, so but I believe like we were ahead of time in getting the license as an NBSC and we were one of the first fintechs to do lending completely on our balance sheet and and the way that space has evolved.
00:24:08
Speaker
and the way RBS digital working, digital lending working groups recommendations are aligned, we are eventually aligning in that direction. So in some ways, maybe out of necessity, but we were a bit ahead of time and it worked out to our advantage on that. Yeah, your Hyderabad Offshore Development Centre was not part of the sale transaction.
00:24:28
Speaker
It was part of the sale transaction. It was acquired as a part of the sale transaction. As we were exiting that business, we already set up a separate operation and started to build up everything that we required it to do in the US. The one advantage we had
00:24:44
Speaker
But because you already had done it, so you could do it pretty fast, like it wouldn't take you years to build up the product to the same level. And we are technologists at heart. And we built back in 2000, we built the first web-based point of sale loan management system. Before that, there was no web-based point of sale loan management system. And we were the first ones to do it. We grew it to be a leader. We were the first ones to do a mobile first AI, ML driven underwriting platform, mobile first origination platform.
00:25:14
Speaker
So technology never scared us. We always took that challenge and were inspired to do the next version of it. When we did it for India, and I keep saying this again and again, the Indian ecosystem provided us so many tools that were never available in any other geography. So it was so much more rewarding to kind of leverage
00:25:34
Speaker
the India stack to build this platform. So something like say a KYC in the US would have probably needed the person to click a photo or upload some document which in India could be done just through a OTP based. And especially when we started we could use other completely for KYC through the eKYC process.
00:25:53
Speaker
later on obviously with the supreme court judgment some of that changed and but the rv i quickly came up with video kyc regulations and others which helps more than the process but yeah kyc is so much better and so much more reliable in india than in the us fraud happens everywhere but the level of synthetic fraud in the us
00:26:11
Speaker
is many folds more synthetic fraud. What does that word mean? Synthetic fraud is a fraud that people do by using data, some of which is publicly available and
00:26:25
Speaker
create alternate identities and then start to apply through because some of the logic of getting the identification numbers is kind of very well known, especially in the earlier days. So you could create multiple identities and then use that to spread fraud. But India, because of the regulatory infrastructure we have, it's still very difficult. I'm not saying there is no fraud in India, but it's a much higher threshold. It's a much higher threshold to cross. Got it.
00:26:55
Speaker
So yeah, how did you do your go to market in India? The segment that you wanted, were they the kind of people that you could target through Facebook ads and Google ads and that performance marketing approach or like, how did you target them? And you had that same approach of online only.
00:27:10
Speaker
Yeah, we once again took the same approach of online only. And the main reason was if you took a feet on street or a branch driven approach, we wanted to do really small loans. We were truly when we say our our vision and mission is to provide access to credit. We actually take it to heart. And we said it is more important to give a loan to the consumer and make sure that they can build a credit history than to give them a large loan. And when we started with a 4000 rupee loan as our smallest ticket.
00:27:38
Speaker
Today we do a small ticket loan of 500 rupees and when you have to do that kind of a small loan it is almost impossible to administer it through a large branch network or a lot of people working feet on street because the economics will simply not work.
00:27:54
Speaker
So that's why we took a digital first and a digital only approach by and large. Yeah, but the customers are available the same. When you're talking about an underserved customer in India, this is not someone whom you don't see. They're all around us. They're continuously around us. When we are talking about underserved customer in India, we are talking about a customer with less than 30,000 rupee income, less than 20,000 rupee income.
00:28:15
Speaker
because most banks have that threshold or even nbfc's like below 30,000 income cut below 20,000 income you're not and these people are all around you they all have phones they're all going to youtube they're all still posting on insta or facebook they're doing their mouse videos or chingari videos so they're the same people who are all around you and doing almost similar things as most of us do it's just that they just don't have access to credit
00:28:42
Speaker
And that's our almost clear focus. We are not saying we do only new to credit. We are not saying we'll do only people with bad credit history. We do both of those segments. But we just say we do customers who just are stressed because their history is bad or they're new or they just have such low incomes, especially
00:29:01
Speaker
When you are beginning your career, you all start to stand somewhere small and then grow to bigger. And during that period is when they need most credit and the credit is not available. So that's and the performance marketing approach work really worked well. And most of which was organic to begin with. We had very little paid initially. And that was the time we were also controlling to make sure we learn.
00:29:25
Speaker
organic as in you are just posting on Facebook pages and so on about get a loan. Yeah. Or do search engine optimization and stuff or app store optimizations and let people find us. And later on we did more actual paid performance marketing.
00:29:41
Speaker
But yeah, that was the approach and that still works well. But however, I think we are at a stage now where we are now trying to expand more. We want to reach a much larger canvas where we really want to overcome the limitations of literacy, be digital literacy or just
00:29:59
Speaker
plain literacy, that we don't make it a barrier to entry. And that's where we are updating our app to completely have video onboarding, a voice based onboarding. And we want to overcome the limitations of location, legacy, livelihood, none of those things should matter.
00:30:16
Speaker
And to reach to that customer, we are slowly now transitioning to a phase which will be not purely digital for customer acquisition and brand building. It will be both offline, online partnerships. And soon you will see FlexPay, which is our flagship brand now, be a lot more prominent across India. So you launched with FlexPay only, FlexPay as the brand? We initially launched with a brand called Flex salary. That was the initial brand name under which we, because we were trying to see, call it a salary advanced product.
00:30:46
Speaker
So you are getting your money ahead of time kind of a thing. But see, these are the learnings you have from market to market. Right. When we say salary in India, the definition is organized. Yes. Yes. You have everything. Bank account set up everything and money is coming. Only then it's called salary. But.
00:31:06
Speaker
there are a lot of people who are getting salary but it's not because they will not have a pf account but every month they're getting 20 000 rupees and they're no different than the guy who is working in the bpo they could be a driver they could be a domestic help they are all still getting salary so that's where we said this should not be the name should not limit the product because once you say salary even the people don't think they are getting they're in the same salaried class because
00:31:32
Speaker
Salaried class means something else in India. So that's where we kind of expanded the definition and made the primary brand flex pay. But it also has several features which are using the sophisticated payment system available in India to help customers to scan or pay later, buy no pay later kind of functionality. So we expanded on the functionality and that was the other reason. But also the main reason was not to limit the product to only salaried people.
00:32:01
Speaker
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00:32:22
Speaker
Tell me about the customer journey, like when somebody like they would download the app. That's where the journey will start. Yeah. Yeah. The customers can download the app or come onto our website, hit the apply no button and then go through a process which takes depending on how much information I've already made. Could be as less as three to four minutes to as much as 15 minutes to complete the loan application.
00:32:43
Speaker
And we give a real-time decision, right? If the customer has given all the information within seconds, you will get a real-time decision. What information do you need? Like PAN, ADHAL? PAN, ADHAR is optional now. PAN, compulsory. Give their income details, employment details, if whatever kind of employment they may have. Self-employed is also fine. And then give bank details.
00:33:04
Speaker
to see bank transaction data. And that's it. Once you have, we will check the credit bureau. If you have a bureau file, great. If you don't have a bureau file, we still process the application. And then within seconds, we give a yes, no. And also, if yes, how much loan amount decision. And then the customer has to go through a VKYC e-sign process. But at the same time, we still, the customer can still print out a loan agreement and then we can have someone go pick it up as well.
00:33:32
Speaker
How does the algorithm decide yes or no? What is the broad stroke criteria you're looking for? The broad stroke data, obviously we look at an identity pool and then in income and bank transaction data, we layer in the bureau data to do mainly the first layer we look at is eliminate fraud.
00:33:51
Speaker
The second layer we look at is what is called the intent to repay portion of our algorithm, which is trying to assess the intent to repay. And then we assess what is called as the ability to repay if the customer, the funds that cross the threshold of intent, which is making sure the customer actually has the intent to pay back irrespective of whether they have money or not. The second, the third threshold, as I said, is the ability to repay.
00:34:13
Speaker
which takes into complex payment burden related analysis, cash flow analysis. And then we look at access and everything else as the fourth layer to come up with a decision. And all of this happens within seconds. And we go through maybe a few thousand data points.
00:34:29
Speaker
to make that decision on any loan application, obviously depending on the extent of data available. As I said, we eliminate fraud, then we go through the intent layer of our algorithm, just trying to determine if the customer actually has an intent to repair or not. And then we determine that we pay, which will include cash flow analysis and payment burden analysis, pretty complex. And then we talk about access that the customers will provide. And
00:34:53
Speaker
And this includes all the data ID data, phone data, but some phone data and bank data, income data, transactional data, all of that is combined. And we look at a few thousand data points to make a loan decision. It's done in seconds. So access you mean in terms of what permissions he gives on the phone when the app is asking for permission? That's what you mean when you say access.
00:35:17
Speaker
No, no, access when I'm talking about not permission. I meant was mainly related to what kind of bank accounts that the customer has. It is access to credit. Where in the financial inclusion lifecycle are they? So that's more of the access I was talking about. We use a bit of a device data, but we are not heavily dependent on it. It's more related to we place a lot of emphasis on understanding the customer's cash flows more than anything else.
00:35:45
Speaker
see the bank transaction or the bank statement? Is there an API integration directly from the backend you can get? Yeah, the customers can do both. A lot of our customers just upload their bank statement and we have the OCR technology and everything to strip that data and put it into the... But we also have account aggregator integrations, thereby under the Sahamati consent driven platform.
00:36:12
Speaker
we get access to the bank transactional data. Both of those are available. We look forward for a lot of fraud indicators mainly to see the velocity of applications. If you see it from a given same IP or a same device, multiple loan applications are getting generated. That's probably fraud, right? So those kinds of analysis. So that is more of what we, we look at phone data. If the customers do give us access to SMS transactions, we try to validate it with the bank data, some of which we can do. Yeah.
00:36:42
Speaker
So those kinds of things, but yeah, we use phone data more mainly as a layer to eliminate fraud, not necessarily to underwrite and deliver credit. Even there have been people, there are a lot of people are trying to evaluate social media and device as means of underwriting. And we always dabble with it, but those models are still not mature, nowhere near mature in terms of.
00:37:06
Speaker
predicting or splitting risk, as we call it in credit and are not reliable underwriting. In fact, in once more India's on those consumer transparency and consumer credit kind of things is a little behind. And in us, there are certain ways you can only underwrite a customer. It's called fair credit. It's all covered under the fair credit reporting act. So you can't use what are not credit reporting variables to make credit decisions. So you just can't say.
00:37:34
Speaker
a phone is if it's an iPhone customer then I would do a loan with him because what and this is another area like the truth in lending I try to refer to earlier this is another pet project I have somewhere along the way I hope I can really help implement this in India it's called disparate impact or discriminative practices in lending so if you are trying to say if I use
00:37:59
Speaker
phone as a or some sort of a determiner which is not a credit determiner in making a loan decision. It might cause a disparate impact on a certain segment of the population. In the US obviously it is raised in India it could be just religion or caste or something which could even though you don't directly get that data just because you took some other way it might cause a customer who is from a certain segment or a certain area to be unfavorably decision. So
00:38:30
Speaker
We take that to heart and even though there are no compliance requirements in India, we kind of base a lot of our decisioning on the freight credit reporting principles. So that's another thing I think we can bring into India to ensure that, see access to credit is just not about doing a loan for 20,000 rupee income customer or a 10,000 rupee income customer. It's also to ensure that two 10,000 rupee income customers will get the same loan decision if everything remains same, that people are not bringing
00:38:59
Speaker
their age, their religion or the place they live in or things like that or caste and stuff like that into the mix. So we strongly believe as a company in those principles. So, and once a person is approved, then how is it a line of credit? Is it a prepaid card or is it just money transferred to his account? What happens there? It's a line of credit of which the customers have an instant access to. And the access is available in a format that they can get it into their bank accounts, but they also
00:39:29
Speaker
can pay merchants and others as well. So once more, like if the app has a QR code reader, so they can like, yeah, they can do all of that. Wherever there's like a PTM or like a scan and pay option. So they can, yeah, we do support it. But once more, I see those are all innovations, which are just allowing a customer to access credit wherever they need it. The bigger, and there are so many people doing all the same thing on that front.
00:39:59
Speaker
For us, the biggest differentiator for us is the customers we are able to bring access to credit to. That is the biggest difference and that's where the 300 million people we talk about and we are barely scratching the surface or to use another, the tip of the iceberg. It's not even the tip of the iceberg. There are very few fintech companies like ours. There are a few of our peers who do it.
00:40:20
Speaker
But the large market has still not tapped into these consumers. And that's what excites me. That's what is exciting. Not just I'm not seeing this as a zero-sum game that vivifier flex pay has to win. If there are more people, there is a collaborative competition that we bring. And mostly lending is never a zero-sum game.
00:40:39
Speaker
that there is only one winner like search or social media. So there is always room for a lot of people. I always say to my fellow peers in the industry, you should look at this segment because when more people come and more people offer credit, it provides a richness of that data that will improve the access to those consumers. So yeah, that's what excites us a lot.
00:41:02
Speaker
And yeah, we tried to provide like a digital credit card kind of going back to your earlier question. We tried hard to make it like a digital credit card experience for the consumer. Because one of the things we also believe credit should be sachetized and easily usable in every place. And if you look at the US, post Vietnam War, the US economy's boom was built on the back of open ended credit card, open ended credit cards, like revolving lines of credit, which were used
00:41:32
Speaker
built on credit cards. In India, credit card penetration is 55. There are 55 million people with a credit card in India, in a country of a billion people. Even today, credit card has over a trillion dollars outstanding in the US. In India, when you compare it to the personal loans, it's a small fraction.
00:41:49
Speaker
So if India has to grow and we become a $5 trillion economy, it will be done on the basis of the large untapped middle class of India, which is a 300 million people get credit card like access so that you are expanding their wallet. There is more for that that people can consume only when people are able to consume that the economy is grow. And that's what we think we are doing. And that's where I say,
00:42:17
Speaker
I keep telling everybody that this is a segment everyone should look, explore and expand. Okay. Fascinating. So when did you get your NBFC license? This was like almost four or five years ago. It's been a long while. I'll have to go back and look at the dates. You started lending only after you got a license or did you initially use a partner? We didn't use a partner for the reasons I told you earlier. But yeah, we did it.
00:42:42
Speaker
Every loan has always been written on our balance sheet. In some ways, it is limiting. How did you send it? I mean, through equity. From the sale of Tech Friday, you got enough cash too.
00:42:52
Speaker
Yeah, obviously me and my co-founder, we obviously had some funds to invest into the company. But subsequently we did a couple rounds of small rounds of equity funding, but credit businesses are all leverage-driven businesses. You grow credit based on debt. So we have a few debt partners, but we also have now getting debt through FPI's foreign portfolio investors that provide us with debt.
00:43:19
Speaker
So yeah, we have a combination of equity and debt to leverage and do all these customer loans. But what are you planning to do this round? Like 10 million plus? 15 million plus kind of. 15 million plus. Okay. Got it. And how much debt have you raised so far? Few hundred crores and growing. Got it. But in your case, you give short term loans. So you would not need to raise a lot of debt, right? Because the money gets recycled fast.
00:43:46
Speaker
See, that's where we are not exactly like a lot of our competition because our customers while can repay in a short term, don't have to necessarily do our actual loan term.
00:43:58
Speaker
is three years. The customers can choose to pay us back over three years. So they have a line of credit for three years. If they approve for, let's say, 40,000, then for next three years, anytime they need up to 40,000. So it's like a credit card only, basically. But it's through a mobile app. As I keep saying, we try to mirror a digital credit card-like experience. So it's not truly a short-term product. And that's where some of our complex analysis on cash flow requirements is also done.
00:44:24
Speaker
See, that's where our customers use us in many ways. And the reason we call our products flex is we give the customer the flexibility to withdraw at any time whenever there is a need and repay at any time without asking questions. So there are no prepay management penalties, nothing in our world. We just, the customer can choose to repay back in two days and just pay two days worth of interest or repay us back over a three year period.
00:44:52
Speaker
It's completely left to the customer. And when you're talking about giving customers with 8,000 rupees, 10,000 rupees income, they'll get that income every month, but some months they will have a little more cash, more needs for that money and some months they would not. And the customers pay as bare minimum some months and pay off in other months. And so.
00:45:14
Speaker
That's what we want to give the customers the flexibility to repay and withdraw it well. So you have that same period of zero interest usage. If customer pays within that cycle, like credit card have the cycle that your bill is generated on. No, we have a similar cycle based approach, but the free credit period is something that's in the works right now fully not available to everybody.
00:45:36
Speaker
But eventually at scale, we expect it to be available. Why will it be available at scale and not now? Like what will change? Our understanding to understand the economics of a life cycle of this. Once you go through a cycle or two of these, you will know how many people use for how long and things like that helps us determine the true cost of credit for us. And then we can determine what's the revenue you can earn. And that's where. But that's where that's why it's not truly available right now. It's more about an understanding.
00:46:06
Speaker
And the other way, the other reason it will also be available is also once we start to do actual plastic or something, then there could be merchant discounts that could be had which are not available today.
00:46:19
Speaker
So, but that's an evolution process. So are you planning to do that? Like issue a, like a virtual credit card or a physical credit card? Yeah, it's in, it's in the works. Yeah, it's in the works. RBI has come up with a set of guidelines and regulations on it. So, I mean, it's under the new circle, it's a little more, more, more regulated and we need to make sure that we are fully compliant to offer that, but yeah, it is in the works.
00:46:44
Speaker
RBI has allowed any NBFC to now issue a credit card. You don't have to be a bank or do you need to have a bank partner? Yeah, there are partnership requirements and there are different sets of requirements. And see once more, it's a fresh regulation. We are getting all kinds of advice on it to make sure that we have a proper structure to offer this.
00:47:04
Speaker
So tell me about getting the money back in. What is your collections mechanism? Collections are mainly through our customer-initiated, mostly voluntary collect payments. We believe in educating our customers. We believe that the customers need to know.
00:47:20
Speaker
When the due date is how much they need to pay and we help them through messaging, emails and sometimes phone calls. But most of our customers are making voluntary loan payments on or before. Tell me something. Why do you need to have a due date? Why can't it just be pay whenever you want? Every day that you have that loan, there is a certain interest which is getting added on to your interest payable.
00:47:45
Speaker
Whenever you pay something that amount changes dynamically, like why the need for a specific day? See, our customers can do that now. They can come and pay as and when there is, they don't have to wait till due date and a lot of our customers, that's why I keep saying on or before due date. A lot of our customers come and pay us before due date, sometimes pay off the whole entire loan as well.
00:48:07
Speaker
But the reason you have due date is a lot of customers, especially in India, work on EMI, right? Or a credit card where they're all used to having loan payments scheduled on a day. And the second thing is more behavioral. If you leave something open-ended, a set of customers will take advantage and use it exactly. It's about knowing that, hey, this is due on this day. Because when you don't make a payment, it is not good for you, right?
00:48:33
Speaker
it gets negatively reported to the bureaus. And so we need to make sure that the due date has that requirement also in which we need to track a customer's loan payment behavior and report it to the bureaus. And also a lot of our customers have sometimes a bad credit or sometimes are new to credit and they're all trying to build their credit history. And that's a big value we provide. If you're doing a 2000 rupee loan, the greatest value other than the access to the 2000 rupee, which may seem small,
00:49:02
Speaker
but is significant for a lot of our customers is or even a 5000 or a 10000 rupee loan is the fact that they can actually build their credit history and credit profile based on that first loan. The new debt is it comes with a fixed amount that has to be paid or it comes with a minimum amount that needs to be paid. Say in a credit card you can pay whenever you want and roll over the next
00:49:23
Speaker
Yeah, we get them a minimum amount. They also can have the ability to have a fixed amount and pay it off quickly. But we keep the customer in charge. They choose how to pay. And a large, very good portion of our customers who just pay it off in full as well. So.
00:49:39
Speaker
Yeah, but once more, we try to give them a credit card experience as much as we can. So tell me about the growth. So 2018, how much did you disburse that year and how has it been growing? Like this financial year, which ended in the 31st March, 2022, how much did you disburse in this year or whatever numbers you track and how they've grown over the last three, four years?
00:50:02
Speaker
Okay. I'll try and answer this question vaguely without giving any specifics, but giving you an idea of how the growth has been. We have grown tremendously over the last few years. Our customer growth at three years ago to this now is about a 30-fold increase on a month-on-month basis. Are we today get almost nearly? How do you measure this? You're saying customer growth. How do you measure a customer? Is it basically someone who's taken a loan? That's a customer.
00:50:29
Speaker
Yeah. Who has taken a loan for the first time with us. So that's a customer. Okay. So that new onboarding. So that number is new onboarding. How much do you do monthly? Like how many customers you add every month? So yeah, so that's what we get over almost half a million applications. We are dispersing quite a few of those customers. We are at a near a hundred growth plus disbursements per month. So, and those numbers are all 30 times, 40 times growth in the last 24, 36 months.
00:50:58
Speaker
See, the one of the challenges for is two years of our growth have been lost to COVID in some way or the other, right? So because of the first six months, we had a loan moratorium right after that. And then we had a pretty bad, the Delta wave was pretty bad. Everyone was affected. A lot of our customers used the access that we provided kind of through those tough times. But at the same time, when it was a normal business and
00:51:24
Speaker
normal business growth that we anticipate. Why was COVID tough? Was it that you were not comfortable, you saw it risky and therefore you were not giving out loans or was it that people were not applying for loans? The initial phase, if you remember, RB actually set up a loan moratorium. The customer had the right to not repay loans. In that environment, if you can't take back loan payments,
00:51:47
Speaker
to lend into it is not the smartest idea so we kind of took a cautious approach at that time but subsequently going through the waves itself was the tougher we saw in the middle of waves some reduction in demand and stuff like that but we were catching up and growing and then the omicron wave happened.
00:52:05
Speaker
And what we have seen is people, when there was a wave, they're just trying to make sure they're making smart decisions and not necessarily trying to take more loans unless they have a need for it. And you never know what's coming out of it.
00:52:19
Speaker
So yeah, it was a combination of the factors that kind of I conducive, but at the same time, everybody got more comfortable to apply for loans online. The process has become completely digital and no one's freaked out anymore about giving everything that you ask for. So there are positives and.
00:52:40
Speaker
Those are helping us now as we have hyper growth. So the general way in which VC looks at any businesses that CAC versus LTV kind of a metric. So what is that metric like for you? What is your customer acquisition costs and what is the lifetime value of a customer for you?
00:52:59
Speaker
our CAC to LTV. I'll give you the ratios. Our CAC to LTV is almost 4x to 5x. So we are building fundamentally. So that's because you have a lot of organic acquisition. That's the reason. It is one, we have an organic acquisition. Two, mainly because we are offering the product to a consumer group that doesn't have too many options. So once the customers come with us, they stick with us. So there we have some of our customers, not that their first initial financial need is met,
00:53:29
Speaker
But their subsequent needs are also they are looking at us as an option. So that's a great testament. So we have high customer retention rates, high customer reactivation rates, and all of that kind of add to that lifetime value. When you don't have to, once you get a customer, when you don't have to go back to get that customer again, it kind of makes it that much more valuable, right? So that's one of the main reasons and a lot of it has to do with the targeting. And it's just, it's not just about what we do.
00:53:59
Speaker
but it also is about the larger economic issue a lot of our customers have.
00:54:04
Speaker
in getting access and solving access seems like a great way to acquire these customers and keep these customers. So what do you think is going to be your path to becoming a unicorn? What are those things that you need to solve in the puzzle? Do you need to solve for supply of funds or do you need to solve for customer acquisition or do you need to solve for risk algorithms? What are those things in your radar that these are your priorities for the next two, three years?
00:54:34
Speaker
Yeah, I think we are focused on execution and we are at a stage. Capital is very important to grow businesses and more importantly, lending businesses because it requires not just equity, but also debt. And lending businesses are judged on being prudent and profitable. You can't have large delinquencies. So risk is a very important factor as well.
00:54:54
Speaker
But as I said, we are one of the first fintech NBFCs which was licensed in India. You're also one of the few fintechs and a startup which has been profitable since inception. So and we take it, we take this with pride. And as we go into this hyper growth phase, we believe that we will get to unicorn or any other kind of mythical animal status that people won't record as in due code as long as we execute
00:55:21
Speaker
and stay true to our mission. Our mission is we are talking about these 300-400 million Indians. If we get 1-2% market share, 5% market share, as I said, more mythical animals, maybe pegasus, pegasai or something. We are right now at a place where we are taking flight. We got our wings taking flight and I think all those will come in due course. I personally would be more excited about having a billion dollar book than a billion dollar valuation.
00:55:50
Speaker
And we test ourselves on all those metrics. And because the difficult thing to do in my mind is to have a loan book which is 7,000 crores or 10,000 crores. Not that to become having a billion dollar valuation is any easy and a lot of kudos to a lot of people who have been able to achieve it. But my point is if we get to that somewhere along the way, much ahead of we having a billion dollar book, the other thing will happen.
00:56:19
Speaker
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