Episode Twenty Three
Credit Where It Counts:
Akshay Garg of Kredivo
10 November 2020
Welcome to episode number 23 of Indo Tekno. Thank you for joining us once again. Selamat datang kembali semuanya! My name is Alan Hellawell. I'm founder of startup consulting firm Gizmo Advisors, and Venture Partner at Alpha JWC Ventures. Now if we put juggernauts such as Grab and Gojek aside as what you might call the multi-vertical or "super app" plays, the largest areas of VC investment in Southeast Asia for the past two years, have been FinTech and e-commerce, according to Cento Ventures. Some of the largest business combinations in the tech world indeed reside between FinTech and e-commerce; Ant Financial and Alibaba, and PayPal and eBay as two such examples. Our guest today, Akshay Garg, more than five years ago founded FinAccel, which operates at this intersection of e-commerce and financial services. At FinAccel's nucleus lies an e-commerce financing product, Kredivo, a buy-now-pay-later platform to provide credit for purchases. Very excited to have you join us today, Akshay.
AKSHAY GARG 1:14
Thank you for having me here Alan.
Great. So Akshay, in preparing for today's podcast, the team discovered that much of your past routed through China. Can you share with us what led you to take an interest in Chinese and Chinese studies?
AKSHAY GARG 1:29
Yeah, sure. Your team has definitely done their research. It really started with taking a class in Mandarin during college and I just fell in love with the language. I've always had an interest in languages. I don't think I'm particularly talented at them, since I have to work a lot at getting them right. But I think studying Mandarin outside of the traditional world of Latin and the Greco-Roman languages was a new world into itself. And that led me to taking the year off after college and spending a year in China in Yunnan, in the southwest, working as a research assistant to a professor with, what I thought at that point of time was the sweetest "gig" in the world. My job description required me to assist him for two hours a day on economic research and essentially be a teaching assistant to him. And I could do whatever else I wanted outside of those two hours a day. I really fell in love with the language. I ended up spending quite a few hours per day in Mandarin Chinese classes, and then any time that I got traveling around the country. So that's the start of it. And that was 2000-2001, the start of a very long fascination and love affair with the country.
We could probably devote the rest of our podcast to some of your impressions of particularly that part of China. So Akshay, you were nearly eight years at Komli Media. Tell us about that.
AKSHAY GARG 2:43
Komli was founded in early-2007. I cofounded that company, along with Amar Goel and a couple of other individuals who then broke off into building out another firm called PubMatic. Komli was founded with the premise of adding a lot more intelligence to the world of marketing and advertising. Traditionally, advertising has been run in the way depicted by the Mad Men series, with lots of relationship driven budgeting and boozy lunches, and so on. But in the early part of the last decade, the world of marketing and advertising was also starting to be a lot more quantified. And one of the things that was starting to come up was this innovation called "RTB", real time bidding; which was essentially bringing the same frameworks or structures of automation and real time pricing as exists in, let's say, stock markets; to the world of advertising. We raised about 80 million US dollars of venture capital funding from some top tier investors, both and out of India, and eventually the company exited to Axiata, the Malaysian telco. So what is called Adknowledge which is Axiata's digital arm, is really a rebranding of Komli Media. They acquired the assets of that business in the year 2014. It was a very exciting play. I learned a lot about the world of data. That's frankly, what brought me here to FinAccel.
So Akshay, under what circumstances was the idea for FinAccel and Kredivo born?
AKSHAY GARG 4:05
Kredivo wouldn't be here if it weren't for my days at Komli. Part of what I did at Komli was a lot of work on the data side of things. That was my background immediately prior to joining the working world. I was enrolled in an integrated doctoral program in economics out of western Europe. And it was a very quantitative program. And generally, I enjoy the world of data a lot. I always enjoyed playing with numbers and finding patterns in them. And that's frankly, the side that I started out at Komli. But what really led to the germination of this idea around what FinAccel would do was really a confluence of a few "mega-waves," right. One was obviously that emerging markets such as Indonesia are no longer from a macroeconomic perspective, poor countries. These are middle income countries. We've touched the $3,000 per capita GDP threshold. And secondly, there's a huge amount of audience data out there through the world of Android adoption. Ten years ago, this just didn't exist, but today pretty much anyone and everyone has an Android smartphone. Thirdly, there was this market opportunity around being able to provide credit to individuals who have historically just not been approved by banks because of the lack of credit bureau data. So it was really these three things that came together. But truth be told, the driving force around deciding to go after this opportunity was really about making a difference. It was very important to me at this point in time that I devote a really good chunk of my working life to something that really makes a difference in the lives of millions of individuals. And I was a part of a pretty foundational study that was done by the International Labor Organization and the World Bank in the year 2004. This is back in the days when I was actually working at the UN as a very young junior statistical analyst, where we were looking at the role of remittances in certain markets, like Senegal in West Africa, Philippines in Asia, Mexico in North America. And as we know, there's a lot of labor from these countries that works in other countries and remits money back home. And the fact of the matter is that a lot of these remittances play the role of informal credit, simply because the families of these individuals are not able to access the formal banking network back in their home countries. And so there is a lot of data out there, and I was a part of a very, very important study that validated how important remittances are to the productive poor, to helping them build valuable businesses and improve their lifestyles over a period of time. And the idea here was that there is a gap in the market. There is an opportunity to make a difference to the lives of tens of millions of people in the long run. And the opportunity is very much present at this point of time. So why not? And that's what really got things started.
Very helpful background. Akshay, can you describe for us the actual Kredivo product, and maybe give us a sense of its popularity?
AKSHAY GARG 6:41
Kredivo exists at the intersection of e-commerce and credit. Kredivo was born at the intersection of I would say two really big problem areas. One was the lack of access to credit. And I just spoke about that in response to your prior question. But just to put this in perspective, Indonesia, which is actually the only market that we operate in today, the largest economy in Southeast Asia, a trillion dollar economy, has 70 to 80 million people in the middle class, a consumptive middle class. But a little known fact Alan: the total number of credit card holders has not budged in nearly 10 years. It was seven to eight million credit card holders in the year 2008. And it's still that same number today. I know it shocks people, but it's really true. And in that same period, the middle class has more than doubled. Clearly, something's wrong. And what's wrong is that banks in general don't do unsecured lending in this market and several others in the region as well. But Kredivo was not just attacking this problem. Kredivo was also attacking the problem of a lot of friction when it comes to e-commerce payments. With Komli, my last startup, our largest clients were the largest e-commerce players in the region across Australia, Southeast Asia and India. And one of the challenges that I discovered working very closely alongside these e-commerce players was just that payment friction was just out of control. They were spending a lot of money getting customers to their websites to come and transact. But simply because of the friction involved in actually closing a transaction at the checkout, a lot of customers would drop away. So Kredivo's idea really germinated from solving two problems: building out a really quick and simple e-commerce checkout, and building an experience that would, frankly, from our perspective, be really addictive for a customer. And secondly, giving them something that they couldn't access in the past, which is real-time credit. So that's what really got it started. And so we created this product that was really built around the pillars of a really fast application, really fast approval and instant checkout. We take the three core problem areas around application approval time, and then transaction checkout, and basically get these down as close to zero as possible in terms of the number of seconds or minutes it took. And that's what's basically gotten it started. And that's what's brought it here.
Akshay, what other ancillary services, or entirely new products are on the roadmap at FinAccel?
AKSHAY GARG 8:49
We're definitely thinking about a few. We have been very focused on just building out Kredivo over the last four, four and a half years. It's now nearly five years into the journey. In fact, we're going to complete five years with Kredivo in April next year. We're very actively incubating and building out a few other services. Some of them are actually inside of Kredivo. For example, instead of just e-commerce credit, we're looking pretty closely to launch products around education and healthcare loans, where customers can use the same credit limit to also, for example, take lower interest education loans. And some are outside of the entire Kredivo brand. But we're thinking about incubating a few other services and other spaces of the credit spectrum.
Fascinating. Sounds like that's very fertile grounds. You mentioned Akshay that FinAccel's current focus is Indonesia. Do we have any expansion plans in the cards?
AKSHAY GARG 9:38
Yes, sir. We do, and by now we should have been present in at least one other country in the region. But because of this little thing called COVID-19, some of those plans have been put to rest for the time being. The fact of the matter is that some countries are still under lockdown. There's no travel at this point of time obviously. For this year, we're really pulling back from international plans. But assuming that the situation starts normalizing over the next quarter or two, we hope to make an entry into at least one other market, and aspirationally we'd like to be present at least two markets outside of Indonesia by the end of next year. The markets that we're looking at are essentially other markets with very low access to credit. It will be countries like the Philippines, Vietnam, Thailand, to some extent, even though Thailand is actually a far better situation with access to credit than many other markets in this part of the world.
Now, if we take the time around FinAccel's founding around five years ago as the starting point of today's FinTech scene, what would you say have been the highlights and the lowlights of the overall industry throughout those intervening five years?
AKSHAY GARG 10:42
Before I get into the highlights, it's probably important that I give some background around why some of these things are the highlights. Southeast Asia is still a very young tech ecosystem. There's been several other companies. Tokopedia and Bukalapak started even before us. These are just a couple that I pulled out amongst a few other companies that have been around for nearly 10 years. And we're just five years old. It's not the US, it's not China, or even India, in terms of the amount of capital available or the amount of talent available. And these two things, talent and capital, are in general two pillars that really drive the tech industry in any part of the world. Lack of access to capital when we started out was the problem, and that's definitely gotten better. Lack of access to talent is also getting better. But we're still at a point where in general, the best and brightest still think about joining a more stable career rather than a startup. So, to bring this all together; what are some of the highlights? Access to capital has definitely improved. When we started out, there were a few early stage funds that were trying to solve the "Seed-to-Series-A" problem. A couple of years out, there are a few funds that were trying to solve the Series B problem. And now if you look around the market, as far as capital availability, there's plenty of capital available around Seed, Series A and B. The big problem is what do you do post-B? You still find a lack of very large capital pools that sit between that category and the private equity guys. That will improve but one highlight is the lack of access to capital has definitely gotten better. And the second highlight I would say is that there's definitely more high quality talent avaiLalble in a market like Singapore, but less so in some of the other markets in Southeast Asia, where in general, people tend to be still more risk averse. The best and brightest are still thinking about banking, consulting and law as traditional career choices. We just have to work that much harder to attract great talent. But the situation is improving. In terms of lowlights of the industry: building companies, whether it's in FinTech or anything else, is never easy. We eat challenges and problems for lunch and breakfast every single day. But I would say one of the lowlights is probably coming from the fact that this is still a really early stage ecosystem. I feel like a bunch of times, whether it's investors or employees, people think that they can get away with anything. Some of the things that I've seen, and if you talk to any other founder that has built a significant business in this part of the world, people will tell you that you see certain behaviors that you don't have in a more evolved market, simply because reputation is a very important currency. We see all kinds of things here: people deciding not to join after they've signed an offer letter from an employee perspective, investors holding back after deals have closed or just walking away. There's all kinds of early stage jazz. But it happens in most early stage markets. And hopefully things will get better over time.
Just as a follow up to that Akshay, I'm also keen to understand what challenges there have been more intrinsic to FinTech. Were there any decisions that were made that have prevented FinTech from becoming the colossus that everyone had hoped?
AKSHAY GARG 13:30
That's a great question. There's definitely challenges with a P2P (peer-to-peer) regime. But let's not take away the fact that certain markets like Indonesia have been very forward thinking and proactive in creating a P2P regime; unlike markets like Vietnam or Thailand, where nothing like that actually exists. This has also led to the creation of certain credit plays, including us. That's how we started out Alan. We're now no longer a peer-to-peer company. We operate under a multi-finance license. But starting out, that was the best access point for us and many other companies. Back to your point: the core point there is that whether it's peer-to-peer or multi-finance or payments; starting out, one of the areas that I might have underestimated is the sheer complexity around regulations when it comes to financial services, simply because it is financial services. And by definition, you expect it to be regulated. But regulations are complex and deep. Very often, if the regulations say that you need to have X amount of capital before you can enter a particular space, there's only so much you can do. And all of these regulations were designed with the right intentions. But one consequence of that is probably a slightly negative impact on the sheer amount of innovation that could happen simply because a lot of startups are not able to scale because of the weight of regulations in certain areas. The reality is that it's a very complex space. And back on that point, I would say one highlight is that regulators in quite a few countries, most notably Indonesia, have been very proactive in creating the right set of regulations to encourage innovation.
Now Akshay, what crucial decision, whether it was the product of a studied calculus or simply dumb luck, did FinAccel make to get to its current position?
AKSHAY GARG 15:09
I would probably highlight two really core decisions that have been crucial to our success to date (and success is a relative term; we could still do a lot of things a lot better, Alan). If I were to be forced to highlight one or two things, the first would be building our own tech capabilities. There are a lot of companies in the region and also out of the region, notably from China, that are peddling credit scoring and automated collection software. And some of these are amazing solutions. But if you really have to aspire to greatness, you need to really understand what's going on end-to-end, and control every aspect of your stack. So we've taken a proprietary credit scoring and collections approach. With pretty much anything that we do in terms of application approval, or the collections engine that we run, is designed entirely internally. We don't really use any external third party software licensing from anyone else. It seems obvious now, but it was a little bit of a "head scratching" move in the early days, whether it was certain members of the management team or some investors. But it's paid off, because when we see the kind of results that we're actually driving, even in the midst of what is a very deep economic slowdown, which typically ends up impacting credit metrics very negatively, we can see the "proof in the pudding". The fact that we know our customers and the data inside out and that we know what we're doing with the algorithms, really helps us control the situation and navigate the situation in a much better way than some others who might be relying on outsourced parties. That's number one. Number two was really thinking about this not just as a lending play, but as a payments and lending play. Most lending companies tend to really operate as personal loan providers or instalment loan providers, helping users get access to capital when they have a large purchase coming up. But the fact of the matter is that users don't have large purchases every single day. They'll typically have one every three to six months, if not even less often. When you have such a small frequency of large purchases or large needs, you're not creating any loyalty in your customer base. The customer can easily shop around six months later for a different product. So it leads to, generally speaking, unit economics that are perhaps not as strong. In our case, a very important call that we took in the early days was that we have to think about retention very deeply. And that led to a product which is not just about accessing instalment loans or high ticket personal loans, but one that also simplifies payments. And that's our core "pay later" product, where you can make transactions of as low as 5,000 Rupiah, or as much as 1 million Rupiah, and pay back over 30 days at no interest at all. So the fact that we were actually not just solving for credit access, but for payments friction; ended up creating one of the stickiest payment methods for e-commerce in the country. And that has led to some very positive network effects for our instalment business.
That makes eminent sense. Akshay, you've mentioned that the e-commerce platforms have clearly played a role in FinAccel's success. How does that relationship evolve going forward?
AKSHAY GARG 17:58
We view this as a really symbiotic sort of relationship. Both parties are benefiting. We are an e-commerce enabler. It's as simple as that. It's what PayPal is to e-commerce folks in the US, or what Klarna is to e-commerce players in Europe: essentially simplifying payments and access to credit. And that's exactly what we do. Our view is that we are here to essentially help you as an e-commerce player increase your sales. And that's what we do. We don't operate an e-commerce play on our own. It's a completely horizontal payments platform or credit platform that is now adopted by more than 300 merchants. Eight or nine out of the top 10 e-commerce merchants in Indonesia already working with us. So the fact that we don't have any interest other than helping you as an e-commerce merchant increase your sales, leads to a pretty strong alignment of interests. Less than 3% of the population have access to a formal credit product. So the fact that we're really filling a core need is clear. And secondly, our interests are aligned; that we do better if we help you do better, which is to say increase your sales, really makes it a very strong and symbiotic relationship. Pretty much all of our merchants think about it the same way. We're not doing something particularly unique here. Like I said, it's no different from how PayPal is enabling sales in the US or Klarna is doing the same in Europe, or others are doing in other parts of the world.
Now Akshay, you made reference to the regulator earlier. What would you describe as the role of a regulator these days as it relates to Kredivo?
AKSHAY GARG 19:23
Kredivo in Indonesia is regulated under the multi-finance regulations. The primary role of the regulator is: a) to make sure that we're not doing anything that harms the consumer's interests (our lending practices and collections practices are in line with the regulations), and b) frankly, that we continue as a going concern. So there's several financial metrics that we need to report to regulators around capital adequacy ratio, leverage, etc. And all of these are essentially meant to ensure that we will not end up doing things that are too risky for our survival long term. The role of the regulator is to essentially make sure that they lay out the playing field and that the companies stay inside that area. Regulators are doing, from our perspective, a phenomenal job with that. We're frankly very grateful to be a regulated company simply because it helps us increase the amount of trust as well in our customers' eyes.
Now, as I alluded to earlier, China has had quite an interesting roller coaster ride throughout the cultivation of the FinTech industry. What are the most important takeaways you would cite from the China precedent?
AKSHAY GARG 20:23
I should probably study China a little bit more than I do. The one that really stands out is how the peer-to-peer industry in China has really blown up. One really important takeaway from that is that whether it's from a regulation angle, or it's from a company building angle, you've just got to be a little bit more thoughtful about other ways of building a successful credit business than a peer-to-peer model. Because that model definitely has some challenges. I would say that that's one important takeaway. In some ways, it's been a little bit of a warning shot or a wake up call to everyone that that might not be the best or biggest license for people to build credit businesses around. And the other really interesting takeaway is that you need to respect the laws of the land and the reality of each land. In light of what's just happened with Ant's IPO, everyone's been shocked by the fact that what was the largest IPO offering in the history of public markets just got pulled 24 hours before it was supposed to go out, demonstrates that while we're living in a very globalized world, and we're building businesses; it's really important to know, the territory that you're actually in, and stay within those bounds as set by the regulators. It's not a space where people can just do whatever they want. It's as simple as that. And that's for a good reason.
Just continuing this line of questioning: are there any qualitative comparisons you can share with us regarding penetration or adoption of online financial products between China and Indonesia?
AKSHAY GARG 21:44
Qualitatively, the two things I will point out are: 1) speed and 2) quality of execution. China blows our minds. As a founder, as an entrepreneur, I really look at what's happening in China simply from the perspective of how fast they move, and how well they move, despite how fast they moved. It's a country where time is measured, I honestly feel, not in terms of years, but hours and minutes. I still remember how much my mind was blown. Buildings were going up in a matter of months, not years. 24 hour shifts seven days a week. And Chinese companies take that same approach to building products and launching them. Really fast adoption, fast execution. And then the second thing I would say is that they're just building incredible products. I don't think there's any other ecosystem in the world with there's such a diversity of financial services and products available across the entire spectrum. And that gives you reason for pause because they're creating the future in a way that no one else is. China's a great place to look up to for examples of what the future might look like in terms of financial products and services adoption, as well as speed of penetration.
You've mentioned earlier in the conversation that credit scoring is mission-critical to the success of any lending initiative. What important ingredients or data does successful credit scoring require these days in your mind?
AKSHAY GARG 23:02
The quality of your credit scores is directly correlated with the breadth and depth of the data that you actually have. And what does that really mean? It definitely helps to have more and more data sources. And it's also very important to have high quality data sources. Just one of the two alone is not going to do the job. We wouldn't be where we were if we were not consuming massive amounts of data across a very wide diversity of sources. And not just diversity, but ensuring that all of this data was really high quality. The kind of data that's going into credit scoring today is a combination of traditional KYC ("know your customer") data that comes out of your identity cards and which is validated by the national authorities, e-commerce data, telco data and location data to some extent. I would say those are probably the four really big buckets going into alternate database credit scoring today. It is super critical for anyone that wants to build a lending business in an emerging market to access as many of these sources as possible, but then also have a lot of depth. Getting telco data as an example, sounds easy, but it's not because you need to tie up with each telco, negotiate with them for various cuts of data that you can actually get and make sure that all of this is actually fully compliant with the laws of the land. Because you can't obviously just go do whatever you want without customer consent. All of these problems are fairly complex. It's taken us nearly five years to get to a point where we actually believe that our data stack is more comprehensive than anyone else's in the market. Broadly speaking, I can't understate the importance of having the very high quality data stack. It's something that we invest a lot in.
Akshay, can you walk us through the various stages of how COVID-19 has impacted our business since the beginning of the year?
AKSHAY GARG 24:42
COVID-19 was a fast and furious tsunami, if you will, as far as Indonesia is concerned. We saw it coming. COVID-19 had touched the shores of the West a little bit earlier than it did Indonesia. And we saw the full brunt of that in April in the country. So starting in April, we slowed down disbursals quite significantly. Peak-to-trough we slowed down about 50%, or slightly less than that, in terms of dispersals. And the only reason for doing that is that the risk metrics will actually deteriorate. You want to reduce your exposure as any prudent lender will do. So you're still lending to high quality borrowers. But in general, you're just taking a more conservative approach when it comes to others. We slowed down disbursals. We saw some stress in our portfolio in Q2, which we then worked very hard to manage by doubling down on collections, tightening underwriting rules, etc. Starting in Q3, we've been back essentially to a fully normal mode. Since September, end of Q3, we're already ahead of where we were pre-COVID. So long and short; we went through a stage of slowing down, and essentially just reducing exposure to higher risk customers, adjusting our risk thresholds as a second stage to only onboard customers who we thought were an acceptable risk, and then to a third stage, which really started in the back half of last quarter; a return to full normalcy. So from our perspective, right now, the business is actually bigger than where we were pre-COVID and we are operating totally back to normal.
That's great to hear. Akshay, what inspires you most about the Indonesian consumer? Is it a certain demographic or socio-economic segment that you're particularly optimistic about?
AKSHAY GARG 26:12
As far as the Indonesian consumer is concerned, what really motivates me and inspires me about Indonesia and the Indonesian consumer is the fact that they're so experimental. They want to adopt new products and services, and they express a need for a lot more. So if you create a great product or service, you then stand an amazing chance of being successful simply because customers are willing to adopt new products and services. There's a very large number of customers who are underserved by a very wide variety of financial services. We are here to try and do our best to serve as many as we can, hopefully tens of millions of customers, with a variety of financial services that make their lives a lot better. That's what makes me, and that's what makes my company, tick.
I've always enjoyed our conversations over the years, Akshay, and I once again, come away having learned a lot from you through our chat today. Thanks a lot for joining.
AKSHAY GARG 27:01
Well, thank you for inviting me here. This was really fun. Thanks for having me Alan.
You're very welcome. Today's podcast was translated from English to Bahasa Indonesia by Alpha JWC Ventures. Terima kasih telah mendengarkan. Sampai jumpa lagi!