PremiumIt’s a question that everyone—employees, other entrepreneurs, investors, people on Twitter—asks Kunal Shah: What’s your business model?
It’s not an unreasonable question.
Barely two years after its launch, Shah’s firm, Dreamplug Technologies Pvt. Ltd, that operates under the online name Cred, has become one of India’s most valuable financial services startups. Last month, Cred, which facilitates credit card payments through its app, raised $81 million in its third round of funding at a valuation of $806 million from DST Global, Sequoia Capital, Tiger Global and others. That’s already twice the valuation at which Freecharge, Shah’s previous startup, was sold in what remains one of the biggest M&A deals in the startup ecosystem.
Cred’s soaring valuation has attracted much scepticism. Internet startups are often criticized for burning investor cash for years without coming close to profitability. Cred doesn’t even generate substantial revenues, much less show profitability. The disparity between its revenues and valuation is glaring.
And yet, Cred feels it is onto something big, potentially. The company has the loyalty of some of India’s most affluent and upwardly mobile people, processing about 20% of all credit card bill payments. Most of its 6 million users like its service and keep coming back every month to pay their bills.
On the back of extensive advertising and word-of-mouth publicity, its brand is on its way to becoming a status symbol among its target audience.
Cred has recently launched three business lines: lending, where it offers a line of credit to users from banks at lower-than-average interest; rent payments, where it takes a cut off payments; and commissions charged on products and services sold on its app.
Last month, the company also introduced Cred Pay, which allows users to make one-click payments on other apps. It plans to add wealth management, insurance and other services on its marketplace once the existing businesses achieve some scale.
“We’re in a space that has demonstrated a good Ebitda—if you look at the credit card and personal loan categories, you’re talking about $4 billion of Ebitda (annually)," Shah said in an interview. “So our confidence comes from not having to reinvent stuff but keeping it very simple. The idea is to create a slice of income in these categories that continue to grow rapidly and are insanely profitable."
Ebitda (earnings before interest, taxes, depreciation and amortization) is a measure of a company’s operating performance.
Still, doubts about its business model may persist. Possessing a large war chest of capital, Shah is clear that the company will continue to prioritize user acquisition and engagement ahead of monetisation—a strategy that may result in a lingering disparity between revenues and valuation and a continual need for fresh capital.
Its critics say that Cred’s existing revenue initiatives haven’t proved that its business model is viable. Designing a smooth app that attracts users was the easier task; getting them to buy products and services is another matter altogether, demonstrated by the low uptake of Cred’s lending and rent payment businesses, which have generated paltry revenues so far.
The slow pace—these were launched nine months ago—at which these businesses are expanding is a harbinger of how tough it will be for the company to make money in future, critics say.
While Cred’s investors have eagerly backed its patient monetization strategy so far, at some point they may pressure Shah to chase revenues more purposefully. But that won’t be easy. Lending, which is shaping up to be Cred’s largest business, necessitates a cautious, iterative approach. Cred’s customers, who are hardly wanting for credit, will not borrow at high interest rates and require custom products whose viability is untested.
Selling these and other services in sufficient volumes may prove challenging also because many of Cred’s fin tech rivals already offer similar services—lending, wealth management, insurance—that the company is eying.
For the elite
With Cred, Shah’s thesis is diametrically opposed to that of his previous startup, which primarily offered mobile recharges to prepaid users, most of whom were middle- to low-income earners. Freecharge was bought by e-commerce firm Snapdeal for $400 million in April 2015 but collapsed under its new owner before being sold again to Axis Bank for just $60 million a little over two years later.
The experience was chastening for Shah. When Cred started, its office was in the same building that happened to house Freecharge. Shah used to joke to employees that the lift always stopped on the Freecharge floor, as if to constantly remind him of the past, a Cred executive said, on condition of anonymity.
Unlike Freecharge, Cred is made exclusively for the elite, the top 1% who earn fat salaries or incomes and spend freely. Most of Cred’s users are over 30, and many have multiple credit cards. Even among credit card users, of which Cred estimates there are about 26 million or so in the country, the company only offers its service to those with high credit scores.
Their bills are about 25-40% higher than those of the average credit card user, and they are spending more even during the pandemic. Average spending on Cred increased by 20% in the Diwali quarter compared with the period a year earlier.
Shah’s rationale is that notwithstanding its size, which is a fraction of the country’s 700 million internet users, credit card users account for a majority of discretionary spending. Focusing on these users is the easiest, quickest way to build a high-growth, high-margin business rather than chasing the masses whose meagre per capita incomes make profitability nearly impossible, according to Shah.
However, it’s not enough to identify high-income, creditworthy people, which can be done by any financial services startup. Cred’s attempt is to brand itself as an exclusive, high-status community—its website name contains the word ‘club’—that rewards members for correct financial behaviour.
It awards points for credit card bill payments that can be used by members to get discounts on a range of products and services, cashbacks and participation in lotteries. It brings to the notice of users the exorbitant costs of late or partial bill payments and hidden charges—which the company said most card users weren’t aware of.
“When we started, we asked our members, ‘What do you think is your interest on your credit card?’ A majority of them said 10-15%, when it was actually 42% plus GST (goods and services tax). There was no correlation of income to financial literacy," Shah said. While Cred users like the points they earn, what they appreciate most is that Cred has made “their life super disciplined".
“For example, if you try to pay lower than the full amount, there’s a warning that comes up saying, ‘If you will pay less you will have close to 35-40% interest charges.’ So many people change the amount after that," he added.
Such features are typically designed by Cred based on social science and other insights into psychology and behaviour, from sources like books, blogs, YouTube videos and posts on social media.
The use of psychology insights isn’t restricted to customers either. Cred’s human resources policies—sending Apple MacBooks to new employees before they join, offering market-beating compensation, paying monthly salaries on their first day, offering free professional therapy (which has been especially useful during the pandemic)—are intended to cultivate rather than command loyalty and generally mark out the company as a ‘cool’ employer. Using his vast network, Shah arranges AMA (ask me anything) sessions for employees with accomplished technology executives and other leaders in Silicon Valley and elsewhere.
It seems to be working. The firm’s design and product team is widely regarded to be among the best. “The social capital of being at Cred is undeniable," a former Cred product manager said. “The day I decided to leave Cred, my friends told me, ‘Are you out of your mind?’"
The sceptics
Cred is betting that its brand-building efforts—apart from digital marketing and word-of-mouth publicity, it sponsored last year’s Indian Premier League Twenty20 cricket tournament—will soon translate into substantial revenues. Because the Cred customer profile has a combination of creditworthiness and large spending power, the company believes it can persuade financial services firms to offer the best, bespoke deals and products to its customers.
But the company’s ability to persuade sufficient numbers of its users to buy these products and services is far from clear. Only a very small number of Cred’s 6-million users have availed of the firm’s credit line and rent payment services so far.
An indicator of the difficulty in selling services is the relatively low user engagement levels on Cred. Most of its customers use the app once a month to pay their bills and then forget about it. Cred employees that Mint spoke to confirmed that an overwhelming majority of coins earned by customers remain unused and keep accumulating. Cred has introduced games and other services to increase usage but engagement levels have remained stagnant.
Cred also faces stiff competition from bigger rivals like Phonepe, Google Pay and Paytm, as well as speciality fintech startups both in lending and other businesses within financial services, which could limit its expansion.
Moreover, neo banks, Ola Money, the financial services venture of cab-hailing service Ola, and others like online service providers Zomato, Amazon and Flipkart are all launching co-branded credit cards in partnerships with banks that are linked with their wider offerings.
“Cred’s business model is a mystery to me," a Bengaluru-based venture capitalist said, on condition of anonymity. “For it to work, they’ll have to create a huge lending business but I don’t see that happening. Their target audience is too small in number and there’s a lot of competition. All fintechs want to lend. What you’ll get is a zero-sum game where everyone is offering loans at low interest rates (in Cred’s segment)."
Shah, on his part, is not too worried about competition. According to him, Cred’s strength is its exclusivity—its sole focus on the top 1% where a majority of spending power is concentrated.
“It’s very hard for mass platforms to serve affluent customers. Cred’s moat is nothing but our exclusive focus on the affluent and being able to understand their needs differently than others. Everyone can launch credit card bill payments but the question is whether that is their focus area. For example, take mobile recharge. I will never put it on the top of my app like Google Pay and Phonepe do," Shah said.
An analogy he draws to prove his point that value and profitability are concentrated at the top is that the market capitalization of HDFC Bank is three times that of State Bank of India’s despite being much smaller in size than the latter.
Shah estimates that Indians now spend about $100 billion annually on credit cards, up from $25 billion five years ago, driven by a host of factors like demonetization, the rising popularity of Airbnb (which requires credit cards) and expansion in digital payments.
According to him, some 10-20 million new credit cards are likely to be issued over the next three years, which will significantly expand the current market of 26 million active users.
As credit cards and credit instruments become more pervasive and easier to use, more consumers are expected to move to credit. To strengthen its hold on the market, Cred wants to offer more services related to credit cards like real-time spending data and usage patterns directly on its app.
“We are working with banks to kind of integrate and give them a superior interface to work with. For example, a consumer should be able to experience Bank A on their app and also on Cred seamlessly, get more information, do more with their card," Shah said.
