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India's Pioneering FinTech Company | Kunal Varma @ Freo (Part 2)
141 Plays4 years ago
Innovation and disruption are the hallmarks of the technology world. Amidst the fintech revolution and the subsequent rise of digital banks in India, going to a bank branch is no longer in vogue.
And with neobanking, this metamorphosis has reached a new level with state-of-the-art technologies and providing customers with easy, quick, and efficient financial services.
The Founder Thesis podcast presents to you a two-part series where Akshay Datt speaks with Kunal Varma, Co-Founder, Freo. He is a serial entrepreneur who started his entrepreneurial journey back in 2008, while pursuing his MBA from the Indian School of Business, Hyderabad.
Kunal, a self-proclaimed dreamer, fondly recalls his earlier days and shares how he always wanted to start his venture. After successfully building two ventures, he collaborated with Bala Parthasarthy and Anuj Kackar and started MoneyTap, which in five years has become an RBI registered NBFC and is now transitioning to credit led neobank, Freo, which is the first of its kind in the country.
Tune in to this episode to hear Kunal speak about how Freo is disrupting the traditional banking system with its innovative digital banking experience.
What you must not miss!
- If you like something in your academics, you're not going to do it for the rest of your life.
- How interacting with people from different walks of life can help in developing your vision as an entrepreneur.
- The transition from HR and EdTech to FinTech
- The concept of neobanking
- Relation between consumer research and building a product
- Fundraising journey
Recommended
Transcript
Introduction and Early Entrepreneurship
00:00:24
Speaker
We're back with part 2 of our conversation with Kunal Varma, co-founder of Freo.
00:00:31
Speaker
In the first part, we discussed his personal and professional journey. Now, let's dive into Freo, the challenges of launching a new brand and Freo's long-term vision. That's when I got my co-founder on board and we created a product company, which was an analytics platform in this talent assessment and skill development place. And that became a slightly bigger plan that was maybe
00:00:57
Speaker
my first step towards a much more structured entrepreneurship, kind of going into becoming an actual entrepreneur and a business owner, kind of moving away from, you know, most like, you know, very small operator to start something that somebody more structured. Okay, so the skill was was what like online assessment
00:01:19
Speaker
Yeah. So since the skill ways was interesting, it was the way we envisioned it is that, you know, when my co-founder and we got together, we realized that, look, obviously there is a need for skill
Skill Development and Market Traction
00:01:33
Speaker
development. And India was going through this huge metamorphosis of skill development through different government programs, National Skill Development Corporation. The timing was right for us. A lot of upskilling across professional levels.
00:01:47
Speaker
So we decided to create a platform which would do two things. One is that it would allow people to look at different professional areas that they were working in and get very pointed skill development. For example, somebody working in digital marketing, somebody working in equity research, somebody working in trading, stock broking, somebody working in, let's say performance marketing, somebody working in operations research.
00:02:13
Speaker
So we picked all of these professional areas, which went away from the usual, you know, softer side of things and slightly more functional domains. And we then spent a lot of energy and collected high quality content for skill development. And this is all online. So people could actually come online.
00:02:33
Speaker
And the way they would assume this content is that they would have two parts. One is that they would go through a huge question, answer kind of a content format where they would quickly assess themselves. Not really psychometric, because psychometric is more towards personality. I would say in a large or very soft skill, but this was very hard skills, functional domains. Like, for example, I would have an assessment on equity research.
00:03:03
Speaker
or I would have an assessment on financial analysis, or I would have an assessment on business valuation, or I would have an assessment on digital marketing, or I would have an assessment on social media marketing. So, you know, very functional domains, hard skills. And this is tough to create in terms of the content, but once we created the content, it allowed people to quickly come on board and it was an adaptive assessment platform, just like, you know, kind of a cat or GMAT kind of a platform where
00:03:30
Speaker
if you answer a question correctly that then goes to the next level of complication. So we developed this adaptive assessment platform and that picked off, it really took off well. Companies started using it because they wanted to evaluate their internal employees for understanding where the employees were on the learning and development scale. They started using it for recruitment purposes when they actually did lateral hiring for different roles.
00:04:00
Speaker
And individuals started coming to our platform because they thought that it was a good way to evaluate themselves and then use the score and then go back to apply for jobs and understand where they are good, where they are bad, end of the skills. So it then became a technology platform, which was eventually a marketplace. So it was free for consumers and it was paid for by recruiters and corporates and the government of India, we were enrolled by the government of India National Development Corporation and they started using our platform.
00:04:29
Speaker
for assessing their people across the country. So yeah, so I think that was interesting for us. We kind of, and that was the first time when we put it together, we raised angel funding from Mumbai Angels. And then, you know, that set us on a different path because now you had external stakeholders, you know, you had angel investors who were looking at the business.
00:04:54
Speaker
And who obviously were great individuals, they played a pivotal role in our lives as entrepreneurs. But at the same time, they forced us to be much more responsible in terms of how we thought about the company, how we thought about the business. And then I think along the way, we made a lot of decisions, we turned the company profitable, and a lot of good stuff happened.
00:05:20
Speaker
Essentially, was it a pure online play where you would advertise on Facebook and all and get users or was it more of a B2B play where you would have a like a connection happening and cold calling and so on and onboarding?
Transition to FinTech
00:05:36
Speaker
It was a totally. So I would say it was mostly, if not totally, mostly a B2B play and and then a B2B to C play.
00:05:45
Speaker
wherein I would reach out to institutions. And eventually, people who were using our platforms were colleges, institutions, companies, government of India. And then that allowed us to reach out to a large set of individuals. And then it allowed us to parallelly increase the services that we were offering. So while this platform was being used, for example, by colleges who wanted to get their students onto campus placement and find out what their students were good at and whatnot,
00:06:14
Speaker
The same colleges and institutions started reaching out to us to actually figure out if you could deliver, again, high quality training programs in those specific areas, wherein we had done assessments for them. So we then introduced a whole line of trainings that was again delivered in person. We delivered a network of people who would deliver this. And I think that's how things evolved. We had like two or three lines of businesses.
00:06:36
Speaker
And most of it and almost all of it was B2B. But again, I think the focus was on the individual whose lives you are impacting, who would actually end up using the platform, assess their skills or get a job. So that was the main focus and the channels ended up being B2B and B2B2C. Okay. So from HR tech, how did you get into FinTech? Yeah, I think that was an interesting transition.
00:07:05
Speaker
We had turned the company profitable at that point in time, and we were just in the process of planning for our next fundraise. And I was about to take a flight and go to one or two cities in India. We were Bangalore-based, of course. We were just about to fly out and got a whole bunch of meetings lined up for our series A raise. And we started getting some very good inbound, saying, OK, people are having conversations. Looks like you guys are doing something interesting. Why don't you come and talk?
00:07:33
Speaker
What kind of valuation were you seeking at that time? Like how big were you at that time? I mean, we were not really that big at all. We were just like, we were very small. It's just an angel funded company. We were just like, you know, at that time, at the series stage, we would just be like looking at a company with a valuation of like a few millions of dollars, very, very early stages. You know, because we returned the company profitable within 18 months of launch after raising angel funding.
00:07:59
Speaker
So the whole idea at that time, again, was for us to be as much in control of our destiny as possible. And our angel investors really supported that view, saying that, look, why don't you come on top of your entire business model, and then you think about what you want to do. And those were not the times when EdTech was as hot as it is today. That was like some eight years ago.
00:08:24
Speaker
So maybe it was a matter of timing, but when we were raising the funds, we realized that. And your complaint was like a couple of corrodes a month types, or like less than one type. Yeah, yeah, but pretty much, yeah, yeah, yeah, exactly. That was the range, that was the skill that we were operating in. Exactly, exactly. And I think, and obviously a small team, and lean operations, very nimble, completely tech people in the company, and only the founders were really doing all the business development.
00:08:53
Speaker
So it was a very lean and fast operation. And that's what helped us keep growing faster. Our product was getting used in across 400 cities in India and Southeast Asia and a lot of people. So we grew very fast. But I think right at that time, when we were about to raise Series A, we had a couple of conversations with some people. And we knew that, look, at that time when we were looking at the business, I mean, I was very clear that
00:09:23
Speaker
The way we were building it and the timing of it all, I did not see that company becoming touching $100 million in terms of enterprise value in the next few years back then. I knew it would grow and I knew that it would take its time and it would eventually become a good company generating good cash flows. So I was confident about that part.
00:09:46
Speaker
But I did not see this becoming like into a major hundred million dollar company and then growing from there to probably a much bigger than that. Right. And something that I would actually put my entire life behind. And it was not an easy decision because on one side I could actually grow. I mean, get a series eight done pretty much at that time. And we would have taken the next step, but had to, had to kind of think three steps, uh, you know, three steps ahead and say, okay, what if, what if I do this? Like, am I going to go deeper and deeper into this or do I need to
00:10:14
Speaker
uh, look at the larger picture and evaluate my own opportunity cost. So anyway, that happened. And then, um, what made you feel that it's not going to be big? Were there any external signs, you know, triggers? Yeah. So I think at that time, the market was not very, this is like 2013, you know, 14 timeframe. The market was not very receptive of a completely technology driven education system.
00:10:41
Speaker
whether it is upskilling or assessment, right? There were a lot of products out there and they were doing their job. But we didn't see that as like probably really catching fire. I think around this time metal aspiring minds, these would have been your peer group. Yes, that's correct. Absolutely. Absolutely. And I think while we were looking at those companies and all of them, I mean, kudos to them for building the companies in their own right.
00:11:10
Speaker
But as an entrepreneur, I personally had to evaluate my opportunity cost. And it is not easy to do because whether you pick a small problem to solve or you pick a big problem to solve, the pain that you will go through is the same. So if you are going to go through the same amount of pain and sleepless nights, then you'd rather pick a bigger problem. And this is something that I did not know on day one of starting my journey as an entrepreneur, but I knew a few years into my journey.
00:11:39
Speaker
So it's also a discovery process. So more than anything else, I realized that what had really changed for me is that I started taking better decisions.
Consumer Insights and MoneyTap
00:11:50
Speaker
My judgment improved significantly in terms of evaluating opportunity, evaluating cost of time and capital, and evaluating how to take an overall decision on a day-to-day basis. So with that, and if I saw that India was just about
00:12:07
Speaker
becoming a digital country, but very early days, e-commerce had not really taken off through the roof. It was becoming super popular, but not really as big as it was today. People are still questioning, will there be a massive digital market?
00:12:25
Speaker
Will the active internet users in the country be there or not? Will smartphones become the thing of the future or not? And how will the digital businesses be valued? And some things may not ever become properly digital and profitable, particularly things like education. So I was looking at all of these signs and I had to make a judgment call. I don't know, maybe if I stuck with that and if I figured it out and navigated my business differently, maybe it was a pandemic I would have done very differently, but you never know.
00:12:55
Speaker
But life cannot be lived on what ifs. So anyways, we had an opportunity and we decided that, look, let's see how we can build this out. And right at that point in time, we had the opportunity to, one of our clients who we actually worked for in Singapore, they were interested in buying the product and the IP that we had built.
00:13:22
Speaker
Um, and I had happened right about that time and just before using series A. So we went back and spoke to a couple of our board members and they were very supportive because, you know, we had told them that obviously companies profitable and as investors, none of you will, you know, none of you will ever need to take a haircut if you exit the company. You know, that's like, you know, our word as entrepreneurs and they were very supportive. They said, yeah, absolutely. Why not? So we ended up selling, uh, selling skillways.
00:13:47
Speaker
And then, you know, we said, okay, now, like, you know, onward and upwards, next thing. And right about the time when we were thinking about doing that is when the seeds were being sown for jumping into FinTech, which is what we're doing today. So when you sold it, the acquirer didn't want you to stick around, like sometimes the acquiring company. Yeah, that is true. But it was more of a product.
00:14:18
Speaker
Yes, the product acquisition. They bought the product. So that is how it was. And we were very clear that we wanted to move out of the space because investing two to three years more in the space would be high opportunity cost. So we did that. And honestly, it's one of the toughest decisions you take as an entrepreneur because you build something. And even though it's doing well and you have a great outcome, great learning, but still
00:14:42
Speaker
Letting go of something is not easy as an entrepreneur, given when you want to sell. You're always thinking, should I, should I not? But yeah, we took that decision. And in 2015, I think we were again putting our heads together as me and my co-founder.
00:14:58
Speaker
Um, and, uh, you know, today, who was a third co-founder at Freo. So we had all known each other from the past as well, but kind of, you know, meeting, but it was all serendipitous that we were thinking about how things are evolving. And we were talking about consumer problems. Did you have like enough money in the bank after the bio to like fund your next startup? Well, I think not like a long way down in terms of funding.
00:15:27
Speaker
But I think the whole thing... You have to not need an angel round. Yeah, I mean, that is there. But I think the path ended up being very different because we obviously started the company with a large seed fund itself. Right from day one, we had raised like a $3 million seed fund when we started MoneyTap and Freo. So this journey was at a completely different scale.
00:15:50
Speaker
But, but I think the biggest, but the biggest thing that we all brought to the table was our entire thinking about what problem to go after and what space to go after and how to approach this. And I think about those discussions, like how that idea became like, you know, from a vague idea to a clear vision. Yeah. So it's a lot of conversation around, you know, what was happening on the ground in the country and
00:16:19
Speaker
What we were interested on and what personally I was interested in a lot was the consumer space, consumer and technology. So what is happening in the consumer space out there? How is technology changing things? And what are some of the biggest factors which are affecting people's lives? And money, which is the way people live their lives by spending money, borrowing money, and technology, the confluence of these two
00:16:49
Speaker
obviously appealed to me the most like one of the most exciting things for me as an entrepreneur and as an engineer at heart right technology and money then confluence of these two i mean it doesn't get more exciting than this for me personally so so we were talking a lot about what is happening on the ground and we saw a lot of trends right we saw how people were looking at banking how people looking at financial services adhar had just come up
00:17:11
Speaker
and it was getting popular. We were talking about India stack and a whole bunch of new changes happening, a new breed of technology stack getting created in the country, completely new trends in terms of how we thought people would do a new transaction in the future. And at the same time, we were looking at what the banks were doing, which is trying to operate in their own ways, but not really embracing the change.
00:17:40
Speaker
the way consumers wanted it to back then, right? The bankers are not thinking outside it. They were very inside out thinking like, you know, I have a capability. So I will give consumers whatever I have as a capability rather than what do the consumers need and can I build that? So we spent a lot of time thinking about this and there was a clear opportunity to build something. And look, at some level, we knew that if we go down this path of creating a company or creating a business which
00:18:09
Speaker
builds products or delivers services for customers in the financial services space using technology, we will become a consumer-fin tech company. And if we do this right and build this right, this could actually be a big, very big, I would say a very, very big play eventually in the future with the potential to morph itself into some form or some avatar of a digital bank, small or big or some shape, but it was very vague back then.
00:18:38
Speaker
terms like neo-banks and all did not exist at that time. It was all about specific products and services. And today we have this term called neo-banks, but back then we thought that we will start by doing something and eventually build this into a larger business, which could start looking very similar to maybe a digital bank of the future, because that's eventually the climax of any big play in financial services. You need to resemble
00:19:06
Speaker
maybe some form of a bank or it could be technology driven or not. So we put our heads together and spent a good amount of time on the ground talking to customers, individuals. And that was an interesting phase. I remember my time when I was living in Bangalore, right? So standing outside in a state bank of India branch and HDFC branch and, you know, standing outside a mall randomly in the middle of the day,
00:19:33
Speaker
And people are walking by and I'm like, can I excuse me, ma'am? Can I ask you a question? And people are like, no, no, I don't want anything, please come. They obviously think that you're going to give them a free card or fill some loyalty program and say some things. A holiday package. Totally. Totally. So there was like these enough incidents where, you know, I spoke to people and some of them were entertained, I mean, because they looked like, okay, you know, looks like a decent chap.
00:19:58
Speaker
a nerdy guy, maybe like talk to him, say something. So when I was talking to people, once I remember I was standing outside an HDFC branch on, I think it was near Sajapur road, if I remember correctly. And I was talking to people and then the, you know, I think there was some junior guy from the bank branch of the security guard came out and say, Hey, why are you talking to my customers?
00:20:22
Speaker
So I was like, no, I mean, you know, I'm just doing a research based on some academics. I kind of cook up some stories. You can't even say this is my summer project. I mean, you probably didn't look young enough to. Absolutely. I was like too old to be in school by then. Um, but, uh, but I've obviously had to come up with some reasons that they don't get throw you out. And I was not going to say, obviously that you look, I know I'm going to build a product which will beat your product. So that's why I want to talk to your customers that wouldn't have flown either.
00:20:50
Speaker
So what was it that you were asking? What kind of information were you trying to get? We were just trying to ask people a lot about how do you find the experience of taking credit from a bank? If you need money, which is one of the biggest reasons why people interact with banks and financial institutions is because they need money. One is they need to park their money and make their money do well in terms of investment. The other is they need money.
00:21:19
Speaker
And by far in India as a society, the need for money is way larger than the need for investing your own money because we are a saving society. So credit was obviously at the heart of what we were thinking about the problem. And our questions and customer and consumer research was all centered on credit. So we spent a lot of time talking to people. I would ask people questions like, hey, have you taken a personal loan from this bank? And if yes, then
00:21:49
Speaker
Now, how was your experience being? How much time did it take? What are your interest rates? Would you actually go back to the same bank and, you know, get another personal loan? And is your need, you know, like three lakh personal loan or do you need 25,000 rupees? Like what do you really need? And what are your choices? If you did not go to a bank, what would you have done otherwise? So people obviously gave very interesting answers, you know, right from telling us that, look, you know, they have no choice but to go to a bank and take this because
00:22:18
Speaker
They can't really, it's too embarrassing for them to talk to their family or their family doesn't have money in the first place. And giving us proper answers right down to saying that, look, this is what I don't like in the process and the service and this is bad. And that is where people give us very good, interesting feedback. And at the same time, I also got feedback like, you know, when they don't talk to me, you know, like some, I remember one woman customer standing outside a big bazaar and she was like, no, I don't talk to me. I don't want to share my personal financial information. My husband is just coming. So go away.
00:22:46
Speaker
I'm like, okay, fine. So probably she felt a little offended that I was asking financial questions. But I think a lot of people engaged and we would have ended up through our way of reaching out to consumers, both in person and online, all put together, we would have touched almost 1000 customers, potential individuals. And we got a lot of information and that was the genesis of us starting our business. And we launched
00:23:15
Speaker
our first product back then, which was the whole objective of providing unsecured credit to individuals in the country, but completely digital on a smartphone and not offer it like a traditional loan, but actually a line of credit. So we became India's first app-based credit line product. This product did not exist in the country at that point in time.
00:23:42
Speaker
Now, overdraft facilities were there. Banks would offer overdraft facilities and credit lines to businesses. But individuals like you and I were not really going to banks and asking for a line of credit. We were just taking loans and stuff. So we created this category back then. A lot of people that we spoke to told us that, well, not sure this will work, because nobody's asking for this. So it was not very obvious. It was quite counterintuitive for us to come up
00:24:10
Speaker
This is exactly what we will build. And we had spoken to the CXOs, the CEOs of a lot of banks in the country, top private sector banks, top public sector banks. We sat in the offices of their CXO teams, CEOs, CEOs. And we spoke to them about this product. And a lot of them said, you know, you're just smoking something. This is not going to fly. This is not how banking is done in India. This is not what people really want. People want what I'm offering.
00:24:40
Speaker
And this won't work. So almost everybody, maybe barring one or two people, almost everybody told us that this is a bad idea. This will not work. This will fail absolutely. But by that time, all of us, all three of founders, we were all serial entrepreneurs by that time. And we had our own conviction in terms of how we looked at the world. And we were approaching it from first principles.
00:25:05
Speaker
saying that, look, this is what I think is missing, and this is what I think I can build, and this is how I will make money. And it has not been done before, but that exactly is the opportunity. And that's what makes you stand out. And that's how we launched the product, and we called the product MoneyTap. So this was an alternative for people seeking personal loans. Absolutely.
00:25:28
Speaker
So anybody who was basically going to go to a bank and borrow money or going to go and talk to their uncles and aunts and cousins and friends to borrow money could actually download the MoneyTap app and they could apply for a line of credit. And once they got access to the line of credit, they could from that line of credit, they could borrow smaller, big amounts as per their needs whenever they wanted.
00:25:55
Speaker
And they could then decide their EMI tenor saying, okay, I have a four lakh line of credit, but I just need to pay a rental deposit for this new flat that I have moved into and I'm running short of cash by 40,000 rupees. Let me just take out 40,000 from this line of credit. But I'm comfortable in paying it back in six months. So I will choose my EMI tenor to be six months. And then maybe 20 days, 25 days, six months, one year down the line, I decided that I need some more money because I have a medical emergency in the family.
00:26:25
Speaker
I need, suddenly I need, let's say, 27,000 rupees. And I cannot go to a bank and ask for a loan for 27,000 rupees. And even if I did, and even if they were to entertain me, it would take me two weeks to get it. But the bank would give me a personal loan of 4 lakh rupees, and then I would have to pay interest on the entire amount on day one.
00:26:47
Speaker
So instead of that, I mean, people realize that this flexible product where they could just keep the line of credit with themselves, but start borrowing from it only when they really needed the cash. So that proposition really stuck with customers. So I think one step at a time is how we approached it, focused obsessively on customer experience and focused a lot on what the customer wanted and the economics behind the business.
00:27:17
Speaker
And then that's how we created the company. I think one thing led to the other. And today, we are the largest credit line product in the country. By far, a lot of people have tried to do it, probably a fraction of our size. But this product continues to be one of our flagship products today. And it's part of the larger Freo Neobank that we have built today. OK. So essentially, your consumer research told you that people need speed and flexibility.
00:27:45
Speaker
how the product got built up? Yeah, I mean, you know, the Indian consumer is very demanding, right? They're like hard bargain seekers. So people absolutely wanted speed and flexibility, like you said. But they also wanted it to be convenient and affordable at the same time. So convenient because, you know, I don't want to leave my house. Right. OK. OK. Convenience, I understand. But how could you be affordable compared to banks?
00:28:10
Speaker
Yeah. So I think that was one of the other tough problems, right? So it's like a, you know, it's like a Rubik cube because, you know, you move one piece here and then suddenly some other side is broken because, you know, you are solving for red color and now yellow color is disturbed because you solve for red color. So you're absolutely right. It was not easy. But when we, when we architected the product, you know, we worked closely with one or two banking partners because we were going to use their balance sheet at the backend.
00:28:38
Speaker
but the product construct would be completely ours. The platform, the technology, the entire end-to-end process would be ours. So when we are putting it together, when we architect it, we cut out a lot of, I would say, flab from the entire credit product. Okay. Like typically what a bank pays to the DSA is for sourcing the loans and so that part you cut.
00:29:03
Speaker
Yeah, I mean, not just that. I mean, think about it like this, right? So for a bank to be able, for a traditional bank with a traditional operating model to be able to serve as a home loan, you need to be paying for the branch office where the customer walks in. So the retail cost, the brick and mortar cost, a fat operating cost is not something that justifies a 25,000 rupee loan. Unless you have a clear path to making a lot more from that same customer.
00:29:32
Speaker
But when you take out the entire bloated cost structure out of the picture and you introduce a slick technology platform that the customer finds it intuitive to use, it changes the game in terms of how much money and manpower you need to throw at that process. And obviously the speed, in which case the customer touch points go down, the time you spend internally goes down, and then you can scale it.
00:29:59
Speaker
Your same team can now process 100,000 customers instead of processing only 1,000 customers because it's a technology process. So that allowed us to really create a very fast and scalable system. And when we did that, we realized that the credit line product was something that customers loved and they got it and then it started borrowing a lot. So the unit economics started working out really well. And that's how the product at a customer level started getting very profitable.
00:30:28
Speaker
And then one step in front of another, like I said, eventually we start with one partner and then the world spread very quickly. A couple of years people knew us that these guys are actually probably the best credit line product in the country. The only guys would be able to pull it off with such sophistication. And thanks to our team and mostly to our customers.
00:30:51
Speaker
We had a, we had a really, I would say a smooth product, you know, a completely chat-based experience as if it's like chatting with like a WhatsApp with your friend, a portrait in seven, seven vernacular Indian languages from Marathi to Bengali to Tamil to Telugu to Hindi or English. And that really, that really changed the game for us.
00:31:15
Speaker
And did you need an NBFC license for this or like because you had a bank partner, so that was not needed? Like because the loan is not on your book? Yeah, that's correct. So initially we did not need it. We did not need an NBFC license, but we needed to create a structure wherein because we wanted to control the entire product journey and the customer journey, we had to make sure that we control pricing, we control experience.
00:31:42
Speaker
And we created more bank partnerships wherein we didn't need to bring in our own NBFC model, but we still had a large say in how the revenue would be structured. So we started creating business and commercial models with our banking partners, which is all about revenue sharing and risk sharing. And along the way, so when we actually then thought about what next, like what's the larger vision for this business? Where will it go? We knew that getting our own NBFC license in the mix
00:32:12
Speaker
was going to be an important piece of the larger puzzle. So we applied to the RBI and we got our own NVFC license, I think sometime in 2019. And today, although it's a smaller portion, but our NVFC is operational and we lend on our own books in addition to lending overall as a platform in partnership with a large number of banking players.
00:32:44
Speaker
Now we ask you all to check out Freosave, India's first credit building savings account. For more information, sign up for free by visiting www.freosave.com and get exclusive access to the Freosave app.
Freo's Strategic Partnerships and Brand Expansion
00:33:04
Speaker
What was your customer acquisition strategy, like the people who were taking loans or taking the line of credit? How did you get them on? Yeah.
00:33:15
Speaker
The two things, one is the story that you say and the second obviously the channel that you use to put the story out. The story was not too complex. The story is very simple and if you have a product that is really superior to what anybody else is offering, then it comes down to your ability to explain that product in a very simple form. And thanks to the team that we have, the entire marketing and product team and thinking
00:33:40
Speaker
that the team was able to put together a clear explanation that this is how your money problems in life can get addressed. And as this message started going out to consumers, the channels that we used were initially mostly digital, which is, I would say, a combination of search engine optimization, search engine marketing, I would say performance marketing, inbound content-based organic inflows, social media presence,
00:34:07
Speaker
and then a whole bunch of online partnerships and then I think eventually expanded a lot into different formats of partnership with other companies, affiliates, offline partnerships and so on. But largely I would say almost completely digital in the early days and then expanded into other formats of partnerships. How would partnerships give you customers? Like say with an e-commerce company that
00:34:32
Speaker
When the customer is paying for the product, then you offer him a way to take a loan. No, it's not exactly like that because that would be like a financing right at the point of checkout. It should become more like buy now, pay later or like a purchase checkout financing. But mostly in terms of other companies who had
00:34:54
Speaker
customers of their own that they were offering some other products and they reached out to those customers and said hey are you interested by the way we believe that because your profile you might be eligible for let's say a financial product like a line of credit are you interested for it and the customer said yes we are interested and that's how we forged a partnership and then we partnered with a whole bunch of people with different formats of such an age.
00:35:17
Speaker
Got it, got it, got it. Okay. Like a special offer thing, which... Yeah, in some cases, companies themselves wanted to expand into financial services themselves, right? Companies were doing other things. They wanted to expand the financial services, but they didn't want to build everything on their own, so they partnered with us and the credit line would be offered from our side. So we were very clear that we are going to be good at only a few things, but we should be the best in those few things.
00:35:46
Speaker
And for everything else, we should just collaborate and partner and eventually over a period of time, decide whether we want to build out more capabilities or not. And that created a, that created a complete business strategy for us, which is predicated a lot on partnerships. So collaboration with other players in the ecosystem, whether it is banks or NBFCs or other players or consumer companies is a big part of how we think about our business strategy. Hmm. Hmm. Hmm. Hmm. Okay.
00:36:14
Speaker
And tell me about the founding team. Who were your two founders here, co-founders? Sure. So two co-founders, Bala and Anuj, both of them, again, serial entrepreneurs. Anuj and I were co-founders in my previous company, Skillways, the analytics platform that we created. And he and I have known each other for a while. Both of us went to Indian School of Business about a year apart.
00:36:44
Speaker
So we've known each other since those days. And Bala, we knew because at that time Bala was wearing a different hat as an investor before he turned back to being an entrepreneur. But he was in Bangalore as well and used to meet in different contexts. And I think it is just serendipitous that we're going to stay in touch about a lot of things and paths crossed again.
00:37:09
Speaker
with Bala and he was thinking about this and we were also thinking about starting something. And I think that's how it came together. But both of them have phenomenal background. They just bring so much strength to the table. Anuj, being a mathematics graduate, spent the early days of his career in the advertising industry and then post his business time, his business school, he spent a lot of time in telecom and has built retail businesses and looked at retail businesses at scale.
00:37:38
Speaker
So he brings a unique perspective from that standpoint. And Bala himself has been an entrepreneur engineer from IIT Chennai who went to the valley and spent about 17 years there and done a whole bunch of startups, including Snapfish, which is one of the largest digital photo companies, which was sold to Hewlett-Packard. And then Bala spent a lot of time with the Adhar ecosystem when he was one of the volunteers with
00:38:05
Speaker
Adhar on day zero working with Mr. Nandan Nalikani. So he was quite involved in the entire ecosystem. And then he went back to being, he was the investor of the VC hat for some time. He started Prime Ventures as one of the founding partners. And then eventually he realized that the entrepreneurship calling was very strong. So he went back to, he exited his old
00:38:34
Speaker
position as an investor and went back to being an entrepreneur. And I think we all got together when we all knew each other. So that's how we all got together and we started it. Okay. And Prime Mentors is also the one who gave you the seed fund, like the initial. Yes, that's right. Bala was not a part of Prime Mentors at that time. He had already quit his position. But yes, Prime Mentors, obviously strong believers in us, Prime
00:39:01
Speaker
did come in very early on and they are still very strong believers in our business today. So how much have you raised after that initial seed round? So we went through a bunch of fundraises. We did a seed and then we did a C's A during which Sequoia came in.
00:39:23
Speaker
And that was series A led by Sequoia Capital. And like about close to around a $9 million check at series A stage. And then we again did a series B, which is close to a $26 million check in series B itself. So that's how you've done so far. And now I think as Frio, we're kind of growing
00:39:52
Speaker
coming out of COVID and growing fast again. So yeah. So from MoneyTap to Frio, when did that movement happen? So you initially started as a line of credit app, then how did that expand? Yeah, yeah, yeah. So that's an interesting part because we always had it in the back of our mind that the eventual play has to be much larger. And it has to go obviously beyond a single product company.
00:40:23
Speaker
So we launched a line of credit and then we launched other credit products and we had our own co-branded credit cards in the market, co-branded with another bank. Today we are, as far as having your own credit cards go, today as a consumer FinTech, we are the largest credit card consumer FinTech in the country. And we have about our credit cards portfolio might be maybe roughly around
00:40:53
Speaker
10% of the size of Windows and banks credit card portfolio, broadly speaking. But as we introduced more products, we knew that the larger brand that the customers relate to has to be one where they don't just associate a line of credit, but they associate other products as well. And the one thing that we realized is that
00:41:19
Speaker
The future, which is a multi-product entity, which would eventually morph into some form of a digital bank, has to have its own brand identity. And that is the umbrella mother brand that our customers should actually associate with the brand that customer should believe in, the brand that customer should want to come to. So we had to think of it from a larger consumer brand, consumer association standpoint.
00:41:49
Speaker
And we knew that while credit would obviously be one of the most important pieces in our larger banking's play, the brand associated with only credit has its own limitations. Because then if people know you for that particular product, then their association sometimes is too strong. Your strength can also be a weakness from a branding standpoint.
00:42:13
Speaker
So we decided to keep the MoneyTap brand intact focused on the credit line product and then think of creating a much larger brand as a digital or bank of the future or as a new bank today and have multiple products kind of coming under that brand with the whole vision that eventually in the future people should see as the multi-product brand.
00:42:39
Speaker
And that's how we made the transition. So it was in the works thinking about it a lot, a lot of background work and research went into when, what, timing. But eventually it all came together and that's when we announced the brand. When did you make the move from like in terms of creating a separate brand? Yeah. So this happened during the pandemic year.
00:43:04
Speaker
Uh, so we actually spend a lot of time and energy in putting it all together and towards the, towards the second half of 2020 is when this actually went, went live. And, uh, and then, you know, a lot of obviously, you know, it's like an iceberg, right? You only see like maybe top 1% and 9, 10% is below what you don't see. Um, so a lot of background work went from the team members and eventually came together towards the end of last year. Hmm. Okay.
00:43:30
Speaker
So, like, why the name for you? Like, you know, what? Yeah. So I think we obviously announced the brand and all very recently, 2021, even though the products and everything had gone live much earlier, like I said. But obviously to the branding strategy, I think the name represents it's a coined word, but it represents freedom.
00:43:59
Speaker
It represents the whole idea that we should be able to provide a window to our customers, which opens doors for them, and it provides them a lot of financial freedom in the way they want to choose how to build their lives. So I think with a mix of ideas around freedom and opening doors for our customers,
00:44:21
Speaker
we actually created this brand name, which we wanted to be simple, easy to remember, and something which kind of is very easy to go with, short and simple. And that's how the name came about. Obviously, I'm giving you a very simplified version, but the amount of late nights that the entire marketing and branding team would have spent, particularly my co-founder Anojan, his entire team was phenomenal.
00:44:46
Speaker
I'm obviously giving you the nice cool version of, you know, putting this together. So what is free? Is it like a bank for like, you know, for a layperson? What is free? Yeah.
00:45:05
Speaker
So, yeah, I mean, obviously the business version of it is that Freo is a Neobank. But for a customer, the Freo is going to be the banking platform of choice, where customers can come and get access to intuitive, simple, convenient products around credit, around payload, around savings, around a whole bunch of products. So we have disclosed a few products and a few more products are in the pipeline. And because of media reasons, I can't
00:45:34
Speaker
I disclose the names right now is exactly what and when. But the idea is that these should allow the customer to then see that, hey, I as a customer have one window or one login, which is FIO. And through which I'm able to access a whole bunch of intuitive products and services, which are important for me to build my financial life. How do I build my financial life in terms of how do I get access to money?
00:46:04
Speaker
save or let's say spend my money intelligently and how does that help me build my credit profile so that in the future when I need to actually borrow more money or do something bigger, then I should be able to do it with Freo. So for customers, Freo is a destination where they can come and meet the needs of their financial lives.
00:46:28
Speaker
in one place by accessing very simple, intuitive, flexible products, all through the convenience of their smartphone. And if they actually like the product, then they should be able to build a complete journey with us, not just for one product, but if they use one of our products, we should then be able to help them get access to other products. So it's going to be a long, long journey wherein customers can actually build a lot of things in their financial life with us, not just come and buy a product or a service and then just walk away.
00:46:58
Speaker
But we want to be able to engage with our customers, help them through their journey in different aspects of their financial life. But our focus is on helping people improve their financial lives and make it simple and intuitive and affordable. And that's how we are thinking about for you. So essentially, it's a replacement to an ICICI bank.
00:47:20
Speaker
I love how you put it out there. You start with a savings account. I have oversimplification. No, I think, look, I mean, I would love for a customer to think of us like that eventually, that we should be able to play a key role in being one of the choices and probably a digital bank of sorts.
00:47:44
Speaker
Um, if I, if I were to be a, you know, as an entrepreneur, I also, you know, I have to be humble about things in ICICI or any other existing bank, like an actual HDFC. These are great institutions for what they do in the way they do it. So I don't think that, uh, I don't think that these larger institutions are going away anywhere anytime soon. Uh, but we do believe very strongly, you know, first of all, financial services, uh, is not a winner take all market in any, in any country.
00:48:14
Speaker
in the world. You name it and that's how it is. That's the structure of the economy. But more importantly, what we believe in is that five years from now, 10 years from now, the way a consumer like you or I will consume a financial service is not going to be the way it is being consumed today. And that is what we believe we will become.
00:48:41
Speaker
Now, at that point in time, if the incumbents are able to reinvent themselves and change into the larger organizations, change into different organizations and putting customers first, then great. But if not, then I don't know where they will stand in the overall pecking order as far as the customer is concerned. But we would definitely, we believe that 10 years from now,
00:49:06
Speaker
When a customer wakes up in the morning and says, hey, look, money is a big part of my life. Finance is a big part of my life. Obviously, where is my loan? Where am I saving my money? What happened? And I did this for the past six months. What is the advantage that I got? And can I just do it all while sipping coffee on my smartphone itself? So it's not just about having a digital app.
00:49:30
Speaker
for existing services, right? Every bank provides a banking app. So it's not about taking an existing way of banking, existing way of financing, just slapping it onto a smartphone application. It's about thinking that if I can understand a customer's credit and financial needs, if I can understand a customer's payment need, if I can understand a customer's saving needs, and I can tie it together saying that because I save in a particular way, I should spend it like that,
00:50:00
Speaker
And because I spend it like that, this is the best format of credit that I should be using. If I can connect these dots for that customer and I can do it using technology so that the customer can consume it on a smartphone, then I think I will appeal to the customer. So I'm not sure about replacing the so-called ICICIs of the world, but I think I would definitely be a choice destination for the customers in the future.
00:50:27
Speaker
So do you have a savings account? I mean, you know, that's where the journey starts, right? Like the first thing is you want to open a savings account and whichever entity you open the account with also ends up getting a lot of your other business or, you know, taking care of your other needs. So at Freo, I think the savings product is obviously going to be a key part of our larger offerings. And the way we look at our savings product is it is not just
00:50:53
Speaker
about a savings account that a customer should take and just replace all of the savings account. Because a savings account in isolation is not really the biggest thing that a customer wants, right? Today, we are a country where we have close to 700, 800 million debit accounts. So it's not that most customers that we will go after, which is the individual consumers, the middle class aspirational Indians living in the cities, these are not individuals who are lacking a bank account per se.
00:51:24
Speaker
So we don't think that just by providing a great, intuitive, customer-friendly savings experience, we will become the primary bank account. I don't think anybody should think about it like that because all of us have enough savings accounts. All of us have multiple savings accounts. So we want, so the free of saving account is going to be an account which will tie very closely into building the credit journey of a customer. So while we will offer very competitive interest rates,
00:51:51
Speaker
We are offering competitive interest rates on the savings account product. It will be at par with the most competitive rates in the industry. It will be a very smooth, intuitive smartphone experience. But what is really going to be exciting about this is that this is going to tie in very smoothly with how a customer can access credit in the future. And that's one of the unique parts. In the sense that the data of your transactions would help
00:52:20
Speaker
in creating a credit limit and things like that. We would engage with our customers and help them get access to the right kind of products that we have, whether it is our Pay Later product or whether it is our credit line product or whether it is our cards product. But help customers take one step at a time, help them save in a convenient manner.
00:52:47
Speaker
Um, maybe by being there, you know, being their secondary account of choice, not trying to replace that primary account at all. Why not? Like why not replace the primary account? Well, because I think often the get go as a step one, that's not the battle we want to pick. Um, maybe in the future, I mean, if you're like, you know, looking at younger, like, you know, people getting their first paycheck, wouldn't it like, you know, if they were to
00:53:17
Speaker
Absolutely. I think it can. And that's why I said that, you know, what you need to do is when customers are putting their money, you need to first on their trust. It's just because you have an intuitive and experienced customer and I'm going to trust you with it. And I totally, and I totally believe in that because you need to win the trust of a customer. You need to be able to provide great value to the customer. So we believe we will attract the right set of customers, but will I, will I replace their primary account?
00:53:43
Speaker
which is driven largely by how their family thinks what a bank account should be, how traditionally their family has banked, what location they are living in, which is the closest branch that they can go to. A lot of cultural factors have decided how our primary bank account operates. But I do think that's changing, no? I mean, with the pandemic... Absolutely. No, absolutely. It is changing absolutely. And I think the way to change it is, again, you have to approach it from first principles.
00:54:09
Speaker
I would love to claim that yes, of course, we will disrupt all bank accounts and we'll become the bank account of choice. But I don't think it's going to happen overnight. And I don't think that's the battle I want to pick because we also need to focus on where we can be different and better for our customers. So on day one, I don't want to claim that replace your state bank account with our account. I don't want to claim that. But I first want to earn the trust
00:54:39
Speaker
of my customers by saying that when you open another savings account with us, and we believe based on the initial response, this is definitely going to happen at large scale. So we are pretty optimistic about the success on this. But we need to show the customers the way forward in terms of what's going to be the other benefit that they're going to get with us.
00:55:00
Speaker
And when we merge it together, which we will disclose in terms of how the customer's journey unraveled and how they build their whole credit and financial profile, that is what is going to allow us to then become the account of choice for our customers. So it will happen. I think it's going to be like an organic journey for us. Okay.
00:55:19
Speaker
Although I genuinely think opening a bank account is one of those painful experiences which for a certain demographic, like, you know, tech savvy people always who are working on apps. I mean, you know, if you can get food delivered, then why can't you get a bank account through your app? You know, that is like a major pain point.
Innovation in Financial Products
00:55:42
Speaker
Yeah, I think absolutely. And I believe that a lot of people are trying to solve this problem for sure. So the problem that opening an account is painful is a well-known problem. So it's going to be a point of parity for us in the sense that we have to provide the best in class experience. But that alone is not a winning proposition in the long term, I would say. In the short term, yes, but not in the long term. So you need to marry that with your other advantages of the company. And at Frio, we have
00:56:09
Speaker
some very unique advantages because we are a very successful suite of products that are operating at scale today across our cards or now our payload or our credit products. When we tie that value together and identify valuable cross-sell to our customers, that's when it really becomes interesting for them and not just the intuitive experience opening the same account. Okay. And this account would obviously not be
00:56:39
Speaker
Like you would have a bank partner, right? Because you don't have a banking license. Yes, that's right. That's right. That's right. We are already working in life with a banking partner at the back end. And when we actually publicly disclose a lot of things, we should be able to also share the names and details of those. But yes, short answer is we will have multiple bank partners at the back end with whom we will collaborate to bring this value to our customers. And so this would be like a regular savings account with a debit card and
00:57:06
Speaker
like features like fixed deposit and stuff like that. Yeah, I mean, it would come like we have different offerings over there, but obviously very lucrative savings interest rate on the account, flexibility in terms of operating, minimum balances, frequency of operation, digital access, and the ability to quickly access other products beyond the savings account through Frio, which is going to be much easier for them rather than going and standing in a queue and applying for a loan in an office and a branch.
00:57:35
Speaker
So those advantages as well, along with the advantages of a unique computer savings account. So this product is primarily for, it's like a B2C product only, right? Not for businesses, like you'll not open a business. Completely B2C. We are a B2C company. It's a complete B2C product. Absolutely. Yeah. The idea is to go out to individuals, customers who are anywhere, let's say aged anywhere from 23, 24 years, going up to as high as 45, late 40s.
00:58:05
Speaker
Aspirational, middle class, mid to high income, varied income range, people who are comfortable using a smartphone, who like using the convenience of apps and who are living in the usual locations, the cities and towns in the country. And they definitely want to move up in life in terms of a better financial situation, a better quality of life, better access to money. Those are the customers that we are going after.
00:58:35
Speaker
So it would be like a similar basis what credit is also targeting. I think credit does a great job in how they actually appeal to their customers. My understanding is that credit appeals to mostly the credit card holders today currently. And they definitely constitute the slightly more premium segment in the country, which is like the upper end because most of the credit card,
00:59:05
Speaker
the 30-35 million unique credit card holders in this country are slightly sitting on the upper end of the income spectrum. So there would be some overlap for sure, but there would be a vast disjoint set as well in the mix. Like the people who don't yet have a credit card or a credit line, like that would be a bigger
00:59:27
Speaker
Yeah, I mean, a lot of people who have loans, but they don't have credit, active credit cards, but even a lot of people who have credit cards. So a lot of people who are using our products today, they already have credit cards from other companies. So definitely a lot of those plus people who don't have credit cards or who don't like using credit cards. I mean, it's just amazing, right? In a country of 1.3 billion people, the total number of credit cards in the country is less than 50 million.
00:59:52
Speaker
So that tells you that, you know, obviously credit card has not been like the primary product so far in the country. So we definitely be looking at a larger population and some of them will have credit card. Some of them may not. Got it. Okay. And you also have a buy now, pay later product.
01:00:11
Speaker
Yeah, we do have a plain buy-now-pay later and we have a pay-later product for sure. We're looking at our own products, our own experience in terms of how to put a pay-later product out there, which is offering a much better experience than the very traditional offline buy-now-pay later. Okay. You're not planning the e-commerce tie-ups for buy-now-pay later. You're looking at more of a card-based approach or something.
01:00:39
Speaker
Yeah, I think so. We don't believe that the traditional approach, the way the binopilator is done in the country is something that we also want to do. So we don't want to be like the 50th player and they're already 49 players doing the exact same thing. There is no point doing the same thing. And there are large incumbents who are doing binopilator, right? There are great organizations like Bajaj, Tata, Home Credit, who are doing, who are purchasing financing and which is called binopilator effectively. The binopilator is just another name for
01:01:09
Speaker
or purchase financing in some ways. And I think there are institutions who are doing it at scale in their own way. So we obviously don't think that we want to enter that space and play that game by those rules. We will have our own spin in terms of how we facilitate a complete digital experience for customers for maybe a different type of transaction, not using the typical merchant types, but maybe having our own approach.
01:01:37
Speaker
being able to provide a completely app-based experience for customers who can just, you know, just make a transaction right now for a service or a product, but pay later, but completely through the smartphone. Okay. Like scan the UPI QR code and like something like that, like a UPI based approach. Yeah. Yeah. I mean, something like, something like that, but a combination of those collaborating with, collaborating with other banks, NPCI and others, and then creating a product which, which can actually operate at mainstream. But again,
01:02:04
Speaker
doing it our way rather than doing it the way the incumbents have been doing it for several years. And do you plan to apply for a banking license also, like to become a full-stack bank?
Future Vision and Collaborative Dynamics
01:02:16
Speaker
Well, I mean, that is the billion dollar question. Well, I think we will eventually do that. We do have a lending license of our own. Our regulator, RBI is a progressive regulatory body as such, and they have been talking a lot about
01:02:32
Speaker
different formats of bank licenses. So you have small finance bank licenses and you have the payments bank licenses and the regulator has been talking a lot about ideas around license on tap as far as the digital license is concerned. So we definitely think that a few years down the line, we will get into that as well.
01:02:53
Speaker
But how that happens, when that happens, I guess it's a little too early for me to exactly state with confidence. But that's definitely a dream for us to be able to take a company to that scale. Let's see how that pans out. But yeah. So how big is MoneyTap slash Freo today? What are the number of people, some numbers, if you can say, how many people
01:03:21
Speaker
have active credit lines, or what is the total amount of money lent out that would be interesting? Sure, sure. I mean, I can share the numbers that are there in the public domain, or we are allowed to put out there in the public domain. So I think overall, as a company at Freo, till date, we have now dispersed close to almost a billion dollars of credit.
01:03:51
Speaker
The number of users that we have overall attracted to our platform has exceeded well more than 10 million in terms of overall users who have come to our platform. The number of active transacting customers is smaller than that, obviously. And then I think the other thing is
01:04:14
Speaker
Obviously, we see a large geographical penetration. Today, we see presence of our products where customers from more than 80 cities in the country are using our products. And I think the pre-pandemic time, we were growing like a 3x year on year. I think the COVID year, we also grew significantly. We added a large number of registered users.
01:04:38
Speaker
we added a large number of credit transactions through our platform. And now we are back to a very strong growth trajectory where we believe the next 12, 15 months is again going to be interesting where we will probably see a 3X jump in the size of our company. How much did you grow during COVID? Was it more than 3X or in the last financial year? Yeah, so I think during COVID, we grew the user base from almost
01:05:08
Speaker
10 million registered users to well over 13 million registered users. Um, so that was a huge growth. Um, and, uh, and I think, uh, uh, the credit by itself just within the pandemic time was, uh, I would say close to around well over 2000 crores of credit, just as bursted in the middle of the pandemic. Wow. Okay. Hmm. Hmm.
01:05:35
Speaker
And what is the business economics? What percentage of the interest do you get to keep? How much goes to the bank partners? Like broad numbers, not exact numbers, obviously. So we have a revenue sharing and a risk sharing arrangement, wherever we take any risk in the financial partnerships that we have. And otherwise, the products that we run, whether it is credit or cards or period, the range varies.
01:05:59
Speaker
Obviously, in some of our credit products, the interest earnings that we get from the customer, we keep the lion's share of the interest earnings with us, which is well over 50%. But why would the bank agree to that? I mean, I would assume that banks have a better bargaining position. Yeah, of course. But they definitely get their revenue earnings as well because
01:06:28
Speaker
We give them a certain cost of capital and they get their cost of capital and they get their profit. And then the rest of the margin is pretty much ours, which actually creates like a lion's lion's share of the spread on that front. But of course, obviously they make money. They make a lot of money.
01:06:47
Speaker
And then on the cards business, we definitely make a share of the interchange. The other thing is, I think on the other products, which are like the cards on the savings side and the payload, there's going to be like a share of any fee or transactions on a poor transaction basis as well. And on the credit business, wherever there is any credit risk involved, because we like to control the credit decision making to the extent possible.
01:07:17
Speaker
And there we provide a partial risk cover on the credit portfolio that we are building. And so the banks like the relationship because the structure is one of incentives being fully aligned. So I have a revenue sharing and a risk sharing arrangement. So I'm incentivized to build a high quality business. And the banks love it because the banking partners look at us as a revenue center because we are growing the pie for them.
01:07:43
Speaker
We are getting new customers in the ecosystem. We are helping them cross the upsell, increasing the revenue pie. And we're also participating in the risk. So if something goes wrong, I also participate as much. So that's what really helps these banking partnerships flourish. And we are very good at collaborating. Like I was saying, partnerships has been a key part of our overall business strategy. And that's the reason why banking partners agree to this. How does risk sharing happen?
01:08:10
Speaker
take on a percentage of the NPAs, like the total, whatever, let's say someone borrowed 5000 and didn't pay it back, then how would you share the risk? Yeah, that is correct. So it's basically if the losses are X, or let's say the losses are 100 rupees, and I agree, my commercial arrangements are such that I pay X and the 100 minus X is shouldered by my banking partner.
01:08:34
Speaker
And that value of X varies from partner to partner, depending on a whole bunch of things in terms of details of segments, risk profile, portfolio, revenue, and so on. But it's a partial risk sharing arrangement where we do not take 100% liability or risk on any of the portfolios. And who is responsible for collections in case there is a default? Yeah, so on the credit side, mostly for all partnerships, we do the collections.
01:09:05
Speaker
barring a couple of partners where the banks, because of their own internal mandates, they want to keep the collections to themselves. But barring maybe such one or two cases, everywhere else, the collection is completely designed and executed by us. So that's another cost center for you. Is that a big cost center?
01:09:27
Speaker
It is not actually. Surprisingly, one would think that it would be a big cause center, but it's a very efficient structure because we use technology heavily in terms of how we process collection base, how we use technology before using human intervention to collect money. How do you do it? A whole bunch of these standard processes being used by the industry today, auto debits, snatches, e-mandates.
01:09:51
Speaker
In addition to that, making sure that there is a strong engagement with our customers such that we provide them convenient ways of making repayments on an ongoing basis for their smartphone itself. They can just get online and then we follow up using very different digital channels. And then in certain cases, we obviously can interact with our customers through phone and in person if it is required to help them make payments if they're not able to make it by themselves.
01:10:17
Speaker
So a combination, but a heavily digital approach, but a combination of digital and human touch based approaches is what's helping us create a very lean collection infrastructure, which is performing really well. We have some of the best collection efficiencies now in the industry. So like really higher than 95% efficiency. So that really puts the, yeah, that puts the, or I would say business on the right side of the credit risk equation.
01:10:47
Speaker
And what is the percentage of defaults that you see? Like how many customers don't pay? Well, so I think overall at a business, at a company level, you know, our defaults generally vary, I would say at a magnitude level around 2 to 3%. Okay. And what is the industry standard? Like how does this compare?
01:11:12
Speaker
Similar, I think some of the larger banks have maybe around 1% to 2% and some of the smaller banks or the NBFCs would have anywhere between 2% to 5% depending on the portfolio or the segment or the market that they go after. So I think as far as consumer fintechs go, we probably are the best in class at an aggregate level.
01:11:33
Speaker
And I think across the board, I would say we would be pegged equally for a company of our size. But I think some of the larger banks who do an amazing job in terms of the collection infrastructure, they would definitely be looking at a different segment of customers. Their pricing is lower and their interest rates might be lower. And accordingly, the losses are also slightly lower. Okay, got it.
01:11:59
Speaker
So between the three of you, the co-founding team, how are your roles lit up? What are you looking after? Well, as a founder, of course, one has to be responsible for everything. So we obviously juggle many hats and also fill in for each other, rotate roles wherever it's required. But currently, a lot of my energy goes into thinking about and working on the entire capital strategy for the company.
01:12:29
Speaker
Thinking about the entire, I would say the business strategy, finance, risk, data science. I spent a lot of time on machine learning and data science initiatives around products and risks. And then associated areas around our own in VFC. But a lot of business side of things. Earlier I used to wear the product hat when I used to be heading products in the early days when we started the business.
01:12:56
Speaker
But today, today, I don't know where the product has had such. So a lot of things on the business side, capital business strategy going forward, data science initiatives going forward, and the risk side of things. That's where a lot of my energies go. And what about the other two, like Bala and Nanook?
01:13:17
Speaker
Yeah, so I think they obviously divide the roles across. Anoj looks at a lot of things around product and the marketing and acquisition and some of the projects, just like also each of us have enough allocation to special projects. So we do that and Anoj spends time in some of those areas and the customer facing roles, the team also work with him closely.
01:13:42
Speaker
and some of the other areas in terms of special projects, working with data, and some of the initiatives on that front, some of the international initiatives that we have, and then we have a bunch of roles that we divide amongst each other. And we also end up doing a lot of role rotation, depending on bandwidth of each person. So sometimes I'll be wearing a hat that I was not normally wearing, but because of the way things are going and the bandwidth for each of the partners, we decide to share the load with each other.
01:14:12
Speaker
So I think that equation works really, really well. I think there's a great synergy in the way the three founders work together. So what is advice that you would like to give to young founders in terms of what to do or what not to do? I can tell you what advice I would have given to my younger self if I ever had the chance to.
01:14:40
Speaker
I'm not sure about other founders. I think the people nowadays are very smart, much smarter than what 25 year old today is much smarter than I was when I was 25 years old. But I can definitely say a few things. One is I would have started much earlier in my life if I really wanted to be an entrepreneur, but pick the right reasons for starting. I see a lot
01:15:10
Speaker
of young, talented individuals starting up businesses, which do not make sense. The product ideas are not powerful enough, which warrant the time of such smart people. So picking the space and the idea that you want to work on is super critical. So starting just because you're kind of bored in your job
01:15:37
Speaker
or starting because you think there's a great opportunity and all your friends are talking about it and you know that domain so well. So just start. Those are probably not the smartest reasons to start. So be very clear why you want to start your journey as an entrepreneur. Because no matter what path you choose, it is going to get tough. They're going to be really, really tough and bad days.
01:16:02
Speaker
And on those days, the why behind what we started, the reason behind why we started is really going to be the main thing which will help you get through the day. So if your reasons are wrong, then you will give up very easily. So you've got to get your reasons right in terms of why you want to start.
01:16:25
Speaker
And if you're not clear in your head, then either don't start or be prepared to let the journey take you in all possible directions without feeling too bad about it. Can making money be a valid reason? Like, I want to make a lot of money. I think, yeah, sure. I think only making money may not be the wisest choice.
01:16:47
Speaker
because there are too many factors at play that decide whether you will make money in a business or not. There's just too many factors and then your own determination is just one part. There's just a lot of serendipity. There's real chance involved in terms of your timing, your exposure, your location, the people that you work with, the way the world is turning. And those factors you do not control. So the element of chance cannot be ignored and that
01:17:14
Speaker
ads, elements in the mix, which you do not control. So yeah, sure. I think making money should definitely, would definitely count as one of the top reasons, but that, if that is the only primary reason, then I'm not sure. It's a bit up to sustain when you see the bad days, like if that is the only reason. Yeah, because it takes several years to actually create a business which will pay off really well.
01:17:39
Speaker
The costs, the taxation, the ups and downs, it wipes out a lot of value if you're not smart about it. And it takes a lot of time to get good at it. So I would say, yeah, making money for sure. I love the idea of making money. I'm a true capitalist at heart. So definitely I would encourage that, yes, that should be at least at the heart of how you're doing your business planning and your economics, if not anything else.
01:18:05
Speaker
So I definitely am a big believer in businesses which are supposed to make money because that's one of the sole purposes of a business. Create value and make money. So yeah, that should be there. But yeah, that may not be the sole motivator because then you might end up picking up the wrong kind of business also. Who knows? So I think, yeah, that's how I think about it. So my last question to you, you know, what makes
01:18:33
Speaker
one business succeed and the other one fail. What sets apart the businesses that take off from the ones that don't? Yeah, I think that's probably one of the most important questions that everybody wants an answer to. I would have loved to know the answer to this on day zero of my entrepreneurship journey.
01:18:59
Speaker
And then I would have wished for the wisdom to actually be able to follow through on it. So there are a few things, I think, through our experience. And it's all been a lot of experience on learning. So the market or the space that the business operates, that's number one.
01:19:22
Speaker
The team, I would say at least the core founding team or the core team, that's number two. And the timing of where and how you're, the timing of when you're doing it. And four, I think the location.
01:19:40
Speaker
So I would say these are four key ingredients and then everything else kind of always is there, like there are how much capital you get and then whether you've got capital on time or not. But if I were to summarize, you know, the space or the sector that you choose in, right, which goes back to the whole saying that, you know, it's not so important how hard you row in a boat. But what's important is which boat you are in. So I think that's what I would say, that the boat that you choose to row in is way more important.
01:20:10
Speaker
So the sector and the space is super important. Then the team matters a lot, like what kind of maturity do you have adults in the room who can take adults and adult like tough decisions or not. Then I would say that the whole point of the timing of it, are you thinking about building a business which is probably 10 years ahead of its time because you have an idea. That is a big one.
01:20:34
Speaker
even though there might be a theoretical and academic market for it. But can you build a thriving business? Are there real customers today who will pay for it today? So the timing of it matters a lot. I think the location is super important. Maybe a very similar idea from a founder of similar caliber might succeed tremendously in one part of the world, and it might fail miserably in the other part of the world.
01:20:59
Speaker
It's just based on how people perceive the ecosystem and what investors see as their risk appetite to be, and whether that society and culture values that product or service or not. So I would say these are the four key ingredients. And beyond this, there would obviously be a long list of things. But these are the four most important things that come to my mind. That's true. And wouldn't two of these be hard to change? I mean, you can't change timing, right? I mean, you're doing it when you are. Exactly.
01:21:28
Speaker
And same for location. Yeah. But you know, that's actually that's the reason why the mortality rate in startups is so high, right? Because you are driven by a lot of irrational optimism, because you see a business model succeed in, let's say, England or, you know, or in the US or in Australia. And theoretically, you believe that customers have similar needs. But, you know, the regulatory, the regulatory makeup of that the margin
01:21:55
Speaker
in that ecosystem, the way customers perceive the value, the trust in the product, it changes from society to society. So if you can just take a model that worked somewhere else and just want to copy paste, that's a voluntary mistake that you're making. So a lot of it cannot be changed, but if you know a lot of these things, then you should also not be blindly going about it. So I think that is not an easy choice to make because you're driven, you have these dreams and you're like in a starry eyed vision, kind of get some little carried away.
01:22:25
Speaker
While it is the most obvious, it is sometimes also the toughest ones to follow. While it is the most obvious, it is the toughest to follow. What a note to end our conversation with Kunal Varma, co-founder of Freo. We thank him for joining us, sharing his story and helping us understand the journey of his company in detail.
01:22:48
Speaker
If you like the Founder Thesis Podcast, then do check out our other shows on subjects like Marketing, Technology, Career Advice, Books and Drama. Visit thebotium.in that is T-H-E-P-O-D-I-U-N dot I-N for a complete list of all our shows.
01:23:08
Speaker
This episode of Founder Thesis Podcast is brought to you by Long Haul Ventures. Long Haul Ventures is the long-haul partner for founders and startups that are building for the long haul. More about them is at www.longhaulventures.com