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

EPISODE TRANSCRIPT

Kunal 00:00:43

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 play. And that was maybe my first step towards much more structured entrepreneurship, kind of going into becoming an actual entrepreneur and a business owner, kind of moving away from a very small operator to somebody more structured.

Akshay 00:01:14

So, this SkillWiz was what? Like an online assessment thing?

Kunal 00:01:20

Yeah. So, the way we envisioned it when my co-founder and I got together, we realized that look there is a need for skill 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 to do a lot of upskilling across professional levels. So, we decided to create a platform that 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, stockbroking, somebody working in, let’s say performance marketing, somebody working in operations research. So we picked all of these professional areas, which went away from the usual softer side of things, and slightly more functional domains. And we then spent a lot of energy and collated high-quality content for skill development. And this is all online. So people could come online. And the way they would assume this content is that they would have two parts of it. One is that they would go through a huge question-answer kind of content format, where they would quickly assess themselves.

Akshay 00:02:48

Like a psychometric assessment.

Kunal 00:02:50

Not psychometric because psychometric is more towards personality, I would say in a larger area, softer skills, but this was very hard skills, functional domains, like for example, I would have an assessment or on equity research or financial analysis, or business valuation or digital marketing, or social media marketing. So you know, very functional domains, hard skills. It is tough to create content. But once we created the content, it allowed people to quickly come on board, and it was an adaptive assessment platform, just like CAT or GMAT kind of a platform where, if you answer a question correctly, then it goes to the next level of complication. So we developed this adaptive assessment platform, and it 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 did lateral hiring for different roles. 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 in terms of 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 Skill Development Corporation), and they started using a platform for assessing their people across the country. So yeah, so I think that was interesting for us and that was the first time when we pulled together, we raised angel funding from Mumbai Angels. And that set us on a different path because now you had external stakeholders, you had angel investors who were looking at the business. They 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.

Akshay 00:05:24

Okay. So like, 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 connections happening and cold calling and so on?

Kunal 00:05:43

So I would say it is mostly if not totally, mostly a B2B play. And then a B2B2C play, wherein I would reach out to institutions, and eventually people who were using our platforms were colleges, institutions, or companies, Government of India. 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 on to campus placement, and find out what their students were good at, and whatnot, the same college institutions are reaching out to us to figure out if we 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 training, that was again delivered in person, we developed 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, and most of it, and almost all of it was B2B. But again, I think the focus was on the individual whose lives we’re impacting who would end up using the platform to assess their skills or get a job. So that was the main focus on the channels that ended up being B2B and B2B2C.

Akshay 00:06:58

Okay, so from HR and tech, how did you get into FinTech?

Kunal 00:07:04

Yeah, I think that was an interesting transition. So we had turned the company profitable then and we were just in the process of planning for our next fundraiser. And I was about to take a flight and go to one or two cities in India. We were Bangalore based, of course, so 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, okay, like people are having conversations, looks like you guys are doing something interesting, why don’t you come and talk.

Akshay 00:07:40

What kind of valuation were you seeking at that time? Like, how big were you at that time?

Kunal 00:07:45

I mean, we were not that big at all, we were very small. We were just an angel-funded company, at that time we will just be looking at a company with a valuation of like a few million dollars, very early stages. You know, because we turned the company profitable within 18 months of launch, after raising angel funding. So the whole idea at that time, again, was for us to be as much in control of our destiny as possible. And angel investors supported that. They said, “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 who are not the times when EdTech was as hot as it is today. Right? That was like some 7-8 years ago. So maybe it was a matter of timing.

Akshay 00:08:34

And your top line was like a couple of crores a month or less?

Kunal 00:08:40

Yeah, pretty much. That was the exact range and scale that we were operating in. And we were a small team and lean operations, very nimble, completely tech people in the company, and only the founders were doing all the business development. So it was a very lean and fast operation. And that’s what helped us keep growing faster, right? I mean, our product was getting used 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 was very clear that the way we were building it, and the timing of it all, I did not see that company touching $100 million, as 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 could eventually become a good company generating good cash flows. So I was confident about that part. But I did not see this becoming like a major $100 million company and then growing from there to probably much bigger than that, right. And something that I would put my entire life behind. And it was not an easy decision. Because once I could grow I mean, we got a Series A done pretty much at that time. And we would have taken the next step, but had to kind of think three steps ahead and say, Okay, what if, what if I do this? Like, am I gonna go deeper and deeper into this? Or do I need to look at the larger picture and evaluate my own opportunity cost? So anyway that happened.

Akshay 00:10:28

What made you feel that it’s not going to be big, were there any external signs or triggers?

Kunal 00:10:34

Yes, I think at that time, in the 2013-14 timeframe, the market was not very receptive to a completely technology-driven education system, or 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.

Akshay 00:11:02

I think around this time, Mettl, Aspiring Minds, these would have been your peer group.

Kunal 00:11:06

Yes, that’s correct. Absolutely. And I think when we were looking at those companies, I mean, kudos to them for building the companies in their own right. But you know, as an entrepreneur, I 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’re 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. So it’s also a discovery process, right? So, more than anything else I realized that what had changed for me is that I started making better decisions, my judgment improved significantly in terms of evaluating opportunities, evaluating costs 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 becoming a digital country, but very early days, e-commerce had not taken off through the roof. It was becoming super popular but not as big as it was today, people are still questioning like, will there be a massive digital market? 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 digital businesses be valued, and some things may not ever become properly digital unprofitable, 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 time, if I figured it out and navigated my business differently, it was a pandemic, I would have done very differently or not, you never know. Life cannot be lived on what-ifs. So anyway, we had an opportunity, and we decided to let’s see how we can build this out. And right then, we had the opportunity to, one of our clients who we worked for in Singapore, they were interested in buying the product and the IP that we had built. And it happened right about that time, just before using Series A, so we went back and spoke to a couple of our board members, and they were very supportive because we had told them that obviously, the company is profitable. And as investors, none of you will ever need to take a haircut if you exit the company, that’s like our word as entrepreneurs. And they were very supportive. They said, “Yeah, absolutely, why not?” So we ended up selling SkillWiz. And then onward and upwards. The 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.

Akshay 00:14:13  

So when you sold it, the acquirer didn’t want you to stick around, like sometimes the acquiring company wants that? But it was more of a product?

Kunal 00:14:25  

Yeah, that’s true. Yes, 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 you know, investing two-three years more in this space will be a high opportunity cost. So we did that. And honestly, it’s one of the toughest decisions you make as an entrepreneur because you build something, and even though it’s doing well, and you have a great outcome, great learning, but still, letting go of something is not easy. As an entrepreneur, you know, even when you want to sell it, you’re always thinking should I, should I not? But yeah, we made that decision. And in 2015, I think we were, again, putting our heads together like me and my co-founder. And today, who is a third co-founder at Freo, so we had all known each other from the past as well, but it’s all serendipitous that we are thinking about how things are evolving. And we are talking about consumer problems.

Akshay 00:15:21

Did you have enough money in the bank after the buyout to fund your next startup?

Kunal 00:15:27

Well, I think not as a long way down in terms of funding. But I think the whole…

Akshay 00:15:35

Enough to not need the Angel round.

Kunal 00:15:38

Yeah, I mean, that is there. But I think the path ended up being very different. Because we started the company with a large seed fund itself, right? Right from day one, we had raised, a $3 million seed fund in MoneyTap and Freo. So this journey was on a completely different scale. But, I think 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.

Akshay 00:16:09

And tell me about those discussions, like how that idea became from a vague idea to a clear vision.

Kunal 00:16:19

Yeah. So, a lot of conversation around what was happening on the ground in the country and what we were interested in and what I was interested in a lot was the consumer space, consumer and technology, right? So what is happening in the consumer space out there? Or how is technology changing things and what are some of the biggest factors which are affecting people’s lives? Money is the way people live their lives by spending money, borrowing money, and technology. The confluence of these two appealed to me the most like one of the most exciting things for me as an entrepreneur and as an engineer at heart. Technology and money then a confluence of these two, I mean, it doesn’t get more exciting than this for me. So, we were talking a lot about what is happening on the ground, and we saw a lot of trends. We saw how people were looking at banking, looking at financial services, Aadhaar had just come up. 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 transactions in the future. And at the same time, we were looking at what the banks were doing, which was trying to operate in their ways but not embracing the change the way consumers wanted it to back then. The bank was not thinking outside, they were very inside out thinking like, “I have a capability. So I will give consumers whatever I have as a capability rather than what 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 at some level, we knew that if we go down this path of creating a company or creating a business, which builds products, or delivers services for customers in the financial services space using technology, we will become a consumer FinTech company. And if we do this right, and build this right, this could be 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 in some way, but it was very vague back then. And terms like neobanks and or did not exist at that time, right? It was all about specific products and services. And today, we have this term called neobanks, 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 maybe something or some form of a bank, 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, standing outside the State Bank of India branch, HDFC branch and, standing outside a mall randomly in the middle of the day, people are walking by and I’m like, “Excuse me, ma’am, can I ask you a question?” And people saying “No, no, I don’t want anything.” They assumed you want to give them a free card or fulfil some loyalty program and some things, holiday packages? Totally. So there were incidents where I spoke to people, and some of them would entertain me because they looked like, “Okay, looks like a decent chap, nerdy guy, maybe like talk to him, say something.” One, so I remember I was standing outside an HDFC branch, it was near Sarjapur Road if I remember correctly. And I was talking to people and I think there was some junior guy from the bank branch or security guard who came out and said, “Hey, why are you talking to my customers?” So I was like, “No, I’m just doing research based on some academic work.” I cooked up a story.

Akshay 00:20:35

You can’t even say this is my summer project. You probably didn’t look young enough.

Kunal 00:20:41

I looked too old to be in school by then. But, I had to come up with some reasons that they don’t throw you out. And I was not going to say that “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.

Akshay 00:20:57

What was it that you were asking, what kind of information were you trying to get?

Kunal 00:21:03

Well, just trying to ask people a lot about how 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 because they need money. They need to park their money and make their money do well in terms of investment, and the other is they need money, and by far in Indian society, the need for money is way larger than the need for investing your own money because we are a saving society right. So, credit was obviously at the heart of what we were thinking of the problem and our questions, and customer and consumer research was all centred on credit. So, we spent a lot of time talking to people. I would ask people questions like “Hey, you know, have you taken a personal loan from this bank? And If yes, then now, how has your experience been? How much time did it take? What are your interest rates? Would you go back to the same bank and get another personal loan? Is your need like a three-lakh personal loan or do you need 25,000 rupees like what do you need? And what are your choices if you did not go to a bank, what would you have done otherwise?” So, people gave very interesting answers. Right from telling us that they have no choice but to go to a bank and take this because 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 or interesting feedback. And at the same time, I also got feedback like when they don’t talk to me, and I remember one woman customer standing outside a Big Bazaar. And she was like, “No, don’t talk to me, I don’t share my personal financial information, my husband is coming, so just go away.” I’m like, Okay, fine. So she probably 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 or potential individuals. And we got a lot of information. And that was the genesis of us starting our business. And we launched our first product back then, which was with the whole objective of providing unsecured credit to individuals in the country, but completely digital on a smartphone, and not offer it as a traditional loan, but a line of credit. So we became India’s first app-based credit line product. This product did not exist in the country then. Now, overdraft facilities were there. Banks would offer overdraft facilities and credit lines to businesses, but individuals like you and I were not going to banks and asking for a line of credit, right? 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 with this approach and say 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, COOs, and we spoke to them about this product. And a lot of them said, you’re just smoking something, this is not gonna fly. This is not how banking is done in India, this is not what people want. People want what I’m offering 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 three of us were serial entrepreneurs. And we had our conviction in terms of how we looked at the world. And we were approaching it from first principles, 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 is exactly the opportunity. And that’s what makes it stand out. And that’s how we launched the product. And we call the product MoneyTap.

Akshay 00:25:29 

So this was an alternative for people seeking personal loans.

Kunal 00:25:33  

Absolutely. So anybody who was 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 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 borrow small or big amounts as per their needs whenever they wanted. And they could then decide their EMI 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 tenure 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, I suddenly 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. And yeah, but the bank would give me a personal loan of four lakh rupees, and then I would have to pay interest on the entire amount on day one. So instead of that, I mean people realized that this flexible product where they could just keep the line of trade with themselves but start borrowing from it only when they needed the cash. So that proposition 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. And then that’s how we created the company. I think one thing led to the other today, we are the largest credit line product in the country. I mean, by far, like a lot of people have tried to do it is 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 made today.

Akshay 00:27:45

Okay, so essentially, your consumer research told you that people need speed and flexibility and which is how the product got built up.

Kunal 00:27:54 

Yeah, the Indian consumer is very demanding, right. They’re like hard bargain seekers. So people wanted speed and flexibility, as you said, but they also wanted it to be convenient and affordable at the same time. So convenient, because I don’t want to leave my house.

Akshay 00:28:12  

Right. Okay, convenience, I understand but how could you be affordable compared to banks?

Kunal 00:28:17

Yeah. So I think that that was one of the other tough problems, right. So it’s like a Rubik’s Cube because you move one piece here, and then suddenly, some other side is broken, because you are solving for red colour and now the yellow colour is disturbed because you solve for red colour. So you’re right it is not easy, but when we architected the product, we worked closely with one or two banking partners, because we are going to use their balance sheet at the back end. But the product construct will be complete as the platform the technology, the entire end to end process will be ours. So when we are putting it together, when we architected it, we cut out a lot of, I would say, flab from the entire credit product.

Akshay 00:29:01

Okay. Like, typically what a bank pays to the DSAs for sourcing the loans, so that part you cut.

Kunal 00:29:10

Not just that, I mean, think about it like this. So, for a traditional bank with a traditional operating model to be able to service a home loan, you need to be paying for the branch office where the customer walks in. So the retail cost of a 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. But when you take the entire bloated cost structure out of the picture, and you introduce a slick technology platform that the customer finds intuitive to use, it changes the game in terms of how much money and manpower is thrown at that process. And, the speed in which case, the customer touchpoints go down, the time you spend internally goes down and then you can scale it right here. Your same team can now process 100,000 customers instead of processing only 1000 customers because it’s a technology process. So that allowed us to 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 caught it and they started borrowing a lot. So the unit economics started working out well. And that’s how the product at a customer level started getting very profitable. And then one step in front of another, like I said, eventually we started with one partner and then you know, the word spread very quickly, a couple of years, people knew us that look, these guys are probably the best credit line product in the country, the only guys who have been able to pull it off with that sophistication. And thanks to our team and mostly to our customers. We had a really, I would say a smooth product, a completely chat-based experience as if it’s like chatting through a WhatsApp with your friend, ported in seven vernacular Indian languages from Marathi to Bengali to Tamil to Telugu to Hindi or English. And that changed the game for us.

Akshay 00:31:21 

And did you need an NBFC license for this? Or because you had a bank partner that was not needed because the loan is not on your book?

Kunal 00:31:30

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. 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 partner, which is all about revenue sharing and risk-sharing. And along the way, so when we 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 was going to be an important piece of the larger puzzle. So we applied to the RBI and we got our own NBFC license, I think sometime in 2019. And today, although it’s a smaller portion, our NBFC is operational, and we lend on our books, in addition to lending overall as a platform in partnership with a large number of bank players.

Akshay 00:33:10

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?

Kunal 00:33:21 

Yeah, two things. One is the story that you tell. 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 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 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, 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.

Akshay 00:34:33

How would partnerships give you customers like, say, with an e-commerce company that when the customer is paying for the product, then you offer him a way to take a loan?

Kunal 00:34:44

Yes. So no, it’s not exactly like that. Because that would be financing it at the point of checkout to become more like ‘buy now pay later’, or like a purchase check out financing, but mostly in terms of companies. Other companies had customers of their own that were offering some other products, and reached out to those customers and said, “Hey, are you interested? By the way, we believe that because of your profile, you might be eligible for, let’s say, a financial product, like a line of credit? Are you interested in 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 with such arrangements.

Akshay 00:35:25

Got it. Okay, like a special offer thing.

Kunal 00:35:28

Yeah. That or in some cases, companies themselves wanted to expand into financial services. 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 will be offered from our side. So we were very clear that we are, we are going to be good at only a few things. But we should be the best in those few things. And for everything else, we should just collaborate and partner and eventually over some time decide whether we want to build out more capabilities or not. And that created a complete business strategy for us, which is predicated on a lot of 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.

Akshay 00:36:20

Okay. And tell me about the founding team, like who are your two co-founders here? 

Kunal 00:36:27

Sure. So two co-founders, Bala and Anuj, both of them again, serial entrepreneurs. Anuj and I were co-founders in my previous company SkillWiz, the analytics platform that we created. And he and I have known each other for a while. We both went to the Indian School of Business about a year apart. So we’ve known each other since those days. And Bala, we knew because at that time he was wearing a different hat as an investor before he turned back to being an entrepreneur. But he was in Bangalore as well and we used to meet in different contexts. And I think it was just serendipitous that we stayed in touch about a lot of things and you know, paths crossed again 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 backgrounds and they bring so much strength to the table. Anuj being a mathematics graduate, spent the early days of his career in the advertising industry and post his time in Business School, he spent a lot of time in telecom and has built retail businesses and looked at retail businesses at scale. He brings a unique perspective from that standpoint. And Bala himself has been an entrepreneur, engineer from IIT Chennai and 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 he spent a lot of time with the Aadhaar ecosystem where he was one of the volunteers with Aadhaar on day zero working with Mr Nandan Nilekani. So he was quite involved in the entire ecosystem. And then he went back to being, he wore 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, he exited his whole position as an investor and went back to being an entrepreneur. And I think we all got together and we all knew each other. So that’s how we all got together and started.

Akshay 00:38:52

Okay. Yeah. And Prime Ventures is also the one who gave you the seed fund initially.

Kunal 00:38:57

Yes, that’s right. So Bala was not a part of Prime Ventures at that time and had already quit his position. But yes, they were strong believers in us. Prime did come in very early on and they are still very strong believers in our business today.

Akshay 00:39:15

How much have you raised after that initial seed round?

Kunal 00:39:20

So totally. So we went through a bunch of fundraisers, we did seed and then we did a Series A during which Sequoia came in. And that was Series A led by Sequoia Capital. And was about close to a $9 million check at the Series A stage. And then we again did a Series B, which is close to a $26 billion check in Series B itself. So that’s how we’ve done so far. And now I think as Freo, we are kind of growing, coming out of COVID and growing fast again.

Akshay 00:40:03

So from MoneyTap to Freo, when did that movement happen? You initially started as a line of credit app. Then how did that expand?

Kunal 00:40:16

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. So we launched a line of credit. And then we launched other credit products, and we had our co-branded credit cards in the market, co-brand with another bank. Today, as far as having your credit cards go today, we are the largest credit card consumer FinTech in the country. And our credit cards portfolio is maybe around 10% of the size of IndusInd bank’s 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 the future, which is a multi-product entity, which would eventually morph into some form of the digital bank, has to have its own brand identity. And that is the brand, that is the umbrella, the mother brand that our customers should associate with the customers, the brand that customers should believe in and the brand that customers should want to come to. So we had to think of it from a larger consumer-brand, consumer-association standpoint. And we knew that while credit would be one of the most important pieces in our larger banking play, the brand associated with only credit has its limitations. Because then if people know you for that particular product, their associations sometimes are too strong. Your strength can also be a weakness from a branding standpoint. So we decided to keep the MoneyTap brand intact, focused on the current credit line product. And then think of creating a much larger brand as a digital bank of the future or as a neobank today and have multiple products kind of coming under that brand. With the whole vision that eventually in, the future people should see it as a multi-product brand 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. 

Akshay 00:42:58

When did you make the move, in terms of creating a separate brand?

Kunal 00:43:04

Yeah, so this happened during the pandemic year. So we spent a lot of time and energy putting it all together and towards the second half of 2020, this is when this went live. And then a lot of it is like an iceberg, right? You only see, like, maybe top 1% and 99% is below water, you don’t see. So a lot of background work went from the team members and eventually came together towards the end of last year.

Akshay 00:43:37

Okay, so why the name Freo? 

Kunal 00:43:42

Yeah, we announced the brand and all very recently in 2021, even though the products and everything had gone live much earlier as I said. But obviously, there’s a branding strategy, I think the name represents. It’s a coined word, but it represents freedom, it represents the whole idea that we should be able to provide a window to our customers which open doors for them. And it provides them with a lot of financial freedom and 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, we 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. I’m giving you a very simplified version, but the number of late nights that the entire marketing and branding team would have spent, particularly my co-founder Anuj and his entire team, was just phenomenal. I’m giving you the nice, cool version of putting this together. There was a lot of work in putting this together.

Akshay 00:45:03

Okay, so what is Freo? Is it like a bank? For a layperson, what is Freo?

Kunal 00:45:11

Yeah. So obviously, the business version of it is that Freo is a neobank. But for a customer, 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 pay later, around savings and 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 disclose the names right now except 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 Freo. 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 I get access to money? How do I save, 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 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 in one place by accessing very simple, intuitive, flexible products all to the convenience of their smartphone. And if they liked 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. But we want to be able to engage with our customers and 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 them simple and intuitive and affordable. And that’s how we’re thinking about Freo

Akshay 00:47:20

So essentially, it’s a replacement for an ICICI bank like I start with a savings account? Oversimplification but.

Kunal 00:47:34

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. One of the choices and probably a digital bank of sorts. If I were to be, an entrepreneur, I also have to be humble about things like ICICI or any other existing bank, like an HDFC. These are great institutions for what they do in the way they do it. So I don’t think that these larger institutions are going away anywhere, anytime soon. But we do believe very strongly that, you know, first of all, financial services is not a winner take all market in any country, 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 has been consumed today. And that is what we believe we will become. Now then, if the incumbents can reinvent themselves and change into larger and different organizations and put 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 will believe that 10 years from now, when a customer wakes up in the morning and says, “Hey, look, money is a big part of my life, finances 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. for existing services, right, every bank provides a banking app. So it’s not about providing this or about taking an existing way of banking, an existing way of financing, and just slapping it onto a smartphone application. It’s about thinking that if I can understand the customer’s credit and financial needs if I can understand the customer’s payment needs if I can understand a customer’s saving needs. And I can tie it together by saying that because I save in a particular way, I should spend it like that. 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 ICICI banks of the world, but I think I would be a choice destination for customers in the future.

Akshay 00:50:33

So do you have a savings account? 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 taking care of your other needs.

Kunal 00:50:49

So at Freo, I think the savings product is going to be a key part of our larger offerings. And the way we look at our savings product is not just about a savings account that a customer should take and just replace all of the savings accounts. Because a savings account in isolation is not 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. So we don’t think that just by providing a greatly 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 and all of us have multiple savings accounts. So the Freo savings account is going to be an account that will tie very closely into building the credit journey of a customer. So while we will offer very competitive interest rates, 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 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. 

Akshay 00:52:22

In the sense that the data of your transactions would help in creating a credit limit and things like that?

Kunal 00:52:32

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 customers take one step at a time and go from helping them save conveniently. Maybe by being their secondary account of choice not trying to replace that primary account at all.

Akshay 00:53:00 

Why not? Like why not replace the primary account?

Kunal 00:53:05

Well, because I think from the get-go as a step one, that’s not the battle we want to pick. Maybe in the future.

Akshay 00:53:14

If you’re looking at younger people getting their first paycheck, wouldn’t it? Like if they were to?

Kunal 00:53:24

I think it can and that’s why I said that what you need to do is when customers are putting their money you need to first earn their trust, right? Just because you have an intuitive and experienced product, the customers are not going to trust you with that. And I believe in that. Because if you need to win the trust of a customer, you need to be able to provide great value for the customer. So we believe we will attract the right set of customers, but will I replace their primary account, which is driven largely by how their family thinks a bank account should be out? Traditionally, how has the family banked What location they are living in, and which is the closest branch that they can go to a lot of cultural factors have decided how we know our primary bank account operates.

Akshay 00:54:05

I do think that’s changing. I mean with the pandemic.

Kunal 00:54:09

No, absolutely. It is changing. Absolutely. And I think the way to change it is again, you have to approach it from first principles. 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 is 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 also 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 of my customers by saying that when you open another savings account with us, and we believe based on the initial response, this is going to happen on a large scale. So we are pretty optimistic about the success of this. But we should show the customers the way forward in terms of what’s going to be the other benefits that they’re going to get with us. And when we merge it, which we will disclose in terms of, you know, how the customer’s journey unravelled, and how they build their 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.

Akshay 00:55:25 

Okay, although I genuinely think opening a bank account is one of those painful experiences, which is like a certain demographic. Tech-savvy people who are always working on apps. I mean, you know, if you can get food delivered, why can’t you get a bank account through your app? You know that is like a major pain point.

Kunal 00:55:48

Yeah, 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 is 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 other advantages as a company. So at Freo, we have some very unique advantages, because we are a very successful suite of products that are operating at scale today, across our cards, now our pay later 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 of opening the savings account.

Akshay 00:56:40

Okay. And this account would not be like you would have a bank partner right because you’re you don’t have a banking license?

Kunal 00:56:50

Yes, that’s right. We are already working live with our banking partners at the backend. And when we publicly disclose a lot of things, we should be able to also share the names and details of those. But yes, the short answer is we will have multiple bank partners at the backend with whom we will collaborate to bring this value to our customers.

Akshay 00:57:08 

And so this would be like regular savings account with a debit card and features like fixed deposit and stuff like that.

Kunal 00:57:16

Yeah, I mean, it would come like we have different offerings over there. But, very lucrative, savings interest rate on the account, flexibility in terms of operating the minimum balances, frequency operation, digital access, and the ability to quickly access other products beyond the savings account through Freo, 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 in a branch. So those advantages as well, along with the advantages of a unique intuitive savings account. 

Akshay 00:57:47

So this product is a B2C product only right? Not for businesses?

Kunal 00:57:55

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, the late 40s. 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 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.

Akshay 00:58:41

So it would be like a similar base as what Cred is also targeting.

Kunal 00:58:48 

I think Cred does a great job in how they appeal to their customers. And my understanding is that Cred appeals to mostly the credit card holders today, currently. And they constitute the slightly more premium segment in the country, which is like the upper-end because 30-35 million unique credit cardholders in this country are slightly sitting on the upper end of the income spectrum. So there will be some overlap for sure. But there will be a vast disjoint set as well in the mix.

Akshay 00:59:28

Like the people who don’t yet have a credit card or a credit line, that would be a bigger…

Kunal 00:59:34

Yeah, I mean, a lot of people who have loans, but those who have 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 will be. 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. So, that tells you that obviously, credit cards have not been like the primary product so far in the country. So we are looking at a larger population and some of them will have credit cards some of them may not.

Akshay 01:00:13

Got it, okay. And you also have a ‘buy now, pay later’ product.

Kunal 01:00:18

We do have a plan ‘buy now, pay later. And we have a ‘pay later’ product for sure. So we are looking at our product spin, our own experience in terms of how to pilot a product out there, which is offering a much better experience than the very traditional offline buy now pay later.

Akshay 01:00:36

Okay, as in you’re not planning like the digital e-commerce tie-ups for buy now pay later? You’re looking at more of a card-based approach or something?

Kunal 01:00:46

Yeah, I think. We don’t believe that the traditional approach, the way the buy now, pay later is done in the country, is something that we also want to do. So we don’t want to be the 50th player and there are already 49 players doing the same thing. There is no point in doing the same thing. And some large incumbents are doing buy now, pay later right, the great organizations like Bajaj, Tata, Home Credit, they’re doing great. It’s just another name for purchase financing in some ways. And I think some institutions are doing it at scale in their way. So we don’t think that we want to enter that space and play that game by those rules. We will have our 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 approach. So being able to provide a completely app-based experience for customers who can just make a transaction right now for a service or product but pay later but completely to the smartphone.

Akshay 01:01:53

Okay, like scan the UPI QR code and like a UPI based approach?

Kunal 01:01:59

Yeah, something like that. But a combination of those collaborating with other banks or NPC and others, and then creating a product, which can operate at the mainstream. But again, doing it our way rather than doing it the way the incumbents have been doing it for several years.

Akshay 01:02:16

And do you plan to apply for a banking license also to become a full-stack bank?

Kunal 01:02:22

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. You know, our regulator, the RBI is a progressive regulatory body as such, and they have been talking a lot about different formats of bank licenses, right. 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 a digital license is concerned. So we think that a few years down the line, we will get into that as well. But how that happens, when that happens. I guess it’s too early for me to exactly state with confidence. But that’s a dream for us to be able to take a company to that scale. Let’s see how that pans out. But yeah.

Akshay 01:03:17

How big is MoneyTap/Freo today? Like? What is the number of people, like, some numbers, if you can tell, like how many people have active credit lines? Or what is the total amount of money lent out? That would be interesting. 

Kunal 01:03:36

Sure, sure. I mean, I can share the numbers that are there in the public domain, or we are allowed to put them out there in the public domain. So I think overall as a company at Freo to date, we have now dispersed, close to almost a billion dollars of credit. And 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. I think the other thing is we see a large geographical penetration today, we see the 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 3x a year on year and I think the COVID year we also grew significantly, we added a large number of registered users, we added a large number of credit transactions to our platform. And now we are back to a very strong growth trajectory, where we believe the next 12-15 months are going to be interesting, where we will probably see a 3x jump in the size of our company.

Akshay 01:05:01

How much did you grow during COVID? Like was it more than 3x? Or like in the last financial year?

Kunal 01:05:08

Yeah, so I think during COVID, we grew the user base from almost 10 million registered users to well over 13 million registered users. So that was huge growth. And I think the credit by itself, just within the pandemic time was, I would say, close to around well over 2000 crores of credit, just as it was in the middle of the pandemic.

Akshay 01:05:40

Wow, okay. And what is the business economics like, what percentage of the interest do you get to keep? How much goes to the bank partners, like broad numbers, not exact numbers.

Kunal 01:05:53

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, range varies. 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%.

Akshay 01:06:16

But why would the bank agree to that? Like, I mean, I would assume that banks have a better bargaining position now.

Kunal 01:06:26

Yeah, of course, but they get their revenue earnings as well because we give them a certain thing. So they get their cost of capital and they get their profit. And then the rest of the margin is pretty much ours. So which creates like a lion’s share of the spread on that front but they make a lot of money and then. And then on the cards business, we take a share of the interchange. The other thing is, I think on the other products, which are like the cards on the saving side and the pay later there’s going to be a share of any fee or transactions on a per customer per 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. 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 the incentives being fully aligned. Right. So I have a revenue sharing and 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 centre. After all, we are growing the pie for them. We are getting new customers into the ecosystem, we are helping them cross-sell, upsell, increase the revenue pie. And we are also participating in the risk. So if something goes wrong, I also participate as much so that’s what helps these banking partnerships flourish. And we are very good at collaborating at least, like I was saying partnerships have been a key part of our overall business strategy. And that’s the reason why banking partners agree to this.

Akshay 01:08:13

How does risk-sharing happen? Do you take on a percentage of the NPS? Like the total? Whatever, let’s say someone borrowed 5000 and didn’t pay it back? Then how would you share the risk?

Kunal 01:08:25

Yeah, that’s correct. So it’s basically if the losses are X, or let’s say the loss is 100 rupees, and I agree, my commercial agreements say that I pay X and the 100 minus X is shouldered by my banking partner. 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.

Akshay 01:09:00

And who is responsible for collections, like in case there is a default?

Kunal 01:09:05

Yeah. So on the credit side, mostly, for all partnerships, we do the collections barring a couple of partners where the banks, because of their internal mandates, want to keep the corrections themselves. But barring maybe one or two cases, everywhere else, the collection is completely designed and executed by us.

Akshay 01:09:28

So that’s another cost centre for you. Is it a big cost centre?

Kunal 01:09:33

It is not, surprisingly, one would think that it will be a big cost centre, but it’s a very efficient structure. Because we use technology heavily in terms of how we process collection based on how we use technology before using human intervention to collect money.

Akshay 01:09:48

How do you do it?

Kunal 01:09:50

There’s a whole bunch of standard processes being used by the industry today, auto-debit snatches, e-mandates. 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 to their smartphone itself, they can just get online, and then we follow up using very different chat 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. 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 well. We have some of the best collection efficiencies now in the industry. So like really higher than 95% efficiency. So that puts the business on the right side of the credit risk equation.

Akshay 01:10:53

What is the percentage of defaults that you see, like, how many customers don’t pay?

Kunal 01:11:01

Well, I think overall at a business at a company level our defaults generally vary, I would say at an aggregate around 2 to 3%.

Akshay 01:11:13

Okay, and what is the industry standard? How does this compare?

we’re

Kunal 01:11:19

Similar, I think the larger banks have maybe around 1-2%. And some of the smaller banks or the NBFCs would have anywhere between 2% to 5%, depending on the portfolio, the segment of the market that they go after. So I think as far as consumer FinTech companies go, we probably are the best in class at an aggregate level. And I think across the board, I would say it 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, would be looking at a different segment of customers, right, their pricing is lower, their interest rates might be lowered and accordingly the losses are also slightly lower.

Akshay 01:12:04

Okay, got it. Between the three of you, the co-founding team, how are your roles split up? What are you looking after?

Kunal 01:12:14

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 is required. But currently, a lot of my energy goes into thinking about and working on the entire capital strategy for the company. Thinking about the entire business strategy, finance, risk, data science, I spend a lot of time on machine learning and data science initiatives around our products and risks. And then associated areas around our own NBFC. So, but a lot of business side of things. And earlier, I used to wear the product hat when I used to be heading products in the early days when we started the business. But today, I don’t wear the product hat as such, so a lot of things on the business side, capital, business strategy going forward, data science initiatives going forward. And then the risk side of things. That’s where a lot of my energies go.

Akshay 01:13:20

And what about the other two, like Bala and Anuj?

Kunal 01:13:24

Yeah, so I think they would divide the roles across, Anuj looks at a lot of things around product and marketing and acquisition and some of the projects just like also, each of us has enough allocation to special projects. And the customer-facing roles. The team also worked with him closely. And some of the other areas in terms of special projects. So working with data and some of the initiatives on that front. Some of the international initiatives that Bala looks at, 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 the 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. But I think that equation works well. I think there’s a great synergy in the way the three founders work together.

Akshay 01:14:26 

Okay. So what is advice that you would like to give to young founders in terms of what to do, or what not to do? 

Kunal 01:14:38

Wow. I can tell you what advice I would have given to my younger self if I ever had the chance to. I’m not sure about other founders, I think the people nowadays are very smart, much smarter than, 25-year-old today is much smarter than I was when I was 25 years old. But I can say a few things. One is I would have started much earlier in my life if I wanted to be an entrepreneur, but I would have been I would have. But pick the right reasons for starting, I see a lot 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 supercritical. So starting just because you’re kind of bored in your job, 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 to start, those are probably not the smartest reasons to start. So be very clear about 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 tough and bad days. And on those days the ‘why’ behind, the reason behind why you started is 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 have to get your reasons right in terms of why you want to start and end if you don’t, 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.

Akshay 01:16:42 

Can making money be a valid reason like I want to make a lot of money?

Kunal 01:16:47

I think yeah, sure. I think only making money may not be the wisest choice because there are too many factors at play that decide whether you will make money in a business or not. There are too many factors in play and your 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 there, and those factors you do not control. So the element of chance cannot be ignored. And that adds elements in the mix, which you do not control. So yeah, sure, I think making money should count as one of the top reasons but if that is the only primary reason, then I’m not sure. 

Akshay 01:17:35

It will be tough when you see bad days, like if that is the only reason.

Kunal 01:17:40

Yeah, because it takes several years to create a business that will pay off well. The costs, the taxation, the ups and downs, wipe 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 everything else. So I am a big believer in businesses that are supposed to make money, because that’s one of the sole purposes of a business, right, to 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.

Akshay 01:18:33

So my last question to you, what makes one business succeed? And the other one fails? What sets apart the businesses that take off from the ones that don’t?

Kunal 01:18:50

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. And, then I would have wished for the wisdom to be able to follow through on it. So there are a few things, I think, through our experience and it’s been a lot of experience and learning. So the market or the space that the business operates in, that’s number one. The team, I would say at least the core founding team, or the core team, that’s number two, third, the timing of when you’re doing it, and fourth is the location. So I would say these are four key ingredients. And then everything else kind of always is there, like how much capital you get, and then whether you’ve got capital on time or not. But if I were to summarize, like, you know, the space or the sector that you choose in, right, which goes back to the whole saying that, it’s not so important how hard you roll 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. 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 make tough decisions or not? Then I would say that the whole point of 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, even though there might be a theoretical and academic market for it. But can you build a thriving business? Where are the real customers today, who will pay for it today? So the timing of it matters a lot. I think the location, super important, like maybe it’s a very similar idea from a founder of a similar calibre, might succeed tremendously in one part of the world, and it might fail miserably in the other part of the world, it’s just based on how people perceive the ecosystem, and what investors see as the risk appetite to be in and in a world where that society and culture values that product or service or not. So I would say these are the four key ingredients. And you know, beyond this, they would be a long list of things, but they are the four most important things that come to my mind.

Akshay 01:21:26 

That’s true. Wouldn’t two of these be hard to change? I mean, you can’t change the timing, right? I mean, you’re doing exactly as you are. And same for location.

Kunal 01:21:37

Yeah. But 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 the US or Australia, and theoretically you believe that they have similar needs but the regulatory makeup of that, the margin 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 there’s one 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 have a starry-eyed vision, kind of get a little carried away. So while it is the most obvious it is sometimes also the toughest ones to follow.

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

EPISODE TRANSCRIPT

Kunal 00:00:43

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 play. And that was maybe my first step towards much more structured entrepreneurship, kind of going into becoming an actual entrepreneur and a business owner, kind of moving away from a very small operator to somebody more structured.

Akshay 00:01:14

So, this SkillWiz was what? Like an online assessment thing?

Kunal 00:01:20

Yeah. So, the way we envisioned it when my co-founder and I got together, we realized that look there is a need for skill 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 to do a lot of upskilling across professional levels. So, we decided to create a platform that 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, stockbroking, somebody working in, let’s say performance marketing, somebody working in operations research. So we picked all of these professional areas, which went away from the usual softer side of things, and slightly more functional domains. And we then spent a lot of energy and collated high-quality content for skill development. And this is all online. So people could come online. And the way they would assume this content is that they would have two parts of it. One is that they would go through a huge question-answer kind of content format, where they would quickly assess themselves.

Akshay 00:02:48

Like a psychometric assessment.

Kunal 00:02:50

Not psychometric because psychometric is more towards personality, I would say in a larger area, softer skills, but this was very hard skills, functional domains, like for example, I would have an assessment or on equity research or financial analysis, or business valuation or digital marketing, or social media marketing. So you know, very functional domains, hard skills. It is tough to create content. But once we created the content, it allowed people to quickly come on board, and it was an adaptive assessment platform, just like CAT or GMAT kind of a platform where, if you answer a question correctly, then it goes to the next level of complication. So we developed this adaptive assessment platform, and it 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 did lateral hiring for different roles. 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 in terms of 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 Skill Development Corporation), and they started using a platform for assessing their people across the country. So yeah, so I think that was interesting for us and that was the first time when we pulled together, we raised angel funding from Mumbai Angels. And that set us on a different path because now you had external stakeholders, you had angel investors who were looking at the business. They 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.

Akshay 00:05:24

Okay. So like, 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 connections happening and cold calling and so on?

Kunal 00:05:43

So I would say it is mostly if not totally, mostly a B2B play. And then a B2B2C play, wherein I would reach out to institutions, and eventually people who were using our platforms were colleges, institutions, or companies, Government of India. 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 on to campus placement, and find out what their students were good at, and whatnot, the same college institutions are reaching out to us to figure out if we 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 training, that was again delivered in person, we developed 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, and most of it, and almost all of it was B2B. But again, I think the focus was on the individual whose lives we’re impacting who would end up using the platform to assess their skills or get a job. So that was the main focus on the channels that ended up being B2B and B2B2C.

Akshay 00:06:58

Okay, so from HR and tech, how did you get into FinTech?

Kunal 00:07:04

Yeah, I think that was an interesting transition. So we had turned the company profitable then and we were just in the process of planning for our next fundraiser. And I was about to take a flight and go to one or two cities in India. We were Bangalore based, of course, so 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, okay, like people are having conversations, looks like you guys are doing something interesting, why don’t you come and talk.

Akshay 00:07:40

What kind of valuation were you seeking at that time? Like, how big were you at that time?

Kunal 00:07:45

I mean, we were not that big at all, we were very small. We were just an angel-funded company, at that time we will just be looking at a company with a valuation of like a few million dollars, very early stages. You know, because we turned the company profitable within 18 months of launch, after raising angel funding. So the whole idea at that time, again, was for us to be as much in control of our destiny as possible. And angel investors supported that. They said, “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 who are not the times when EdTech was as hot as it is today. Right? That was like some 7-8 years ago. So maybe it was a matter of timing.

Akshay 00:08:34

And your top line was like a couple of crores a month or less?

Kunal 00:08:40

Yeah, pretty much. That was the exact range and scale that we were operating in. And we were a small team and lean operations, very nimble, completely tech people in the company, and only the founders were doing all the business development. So it was a very lean and fast operation. And that’s what helped us keep growing faster, right? I mean, our product was getting used 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 was very clear that the way we were building it, and the timing of it all, I did not see that company touching $100 million, as 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 could eventually become a good company generating good cash flows. So I was confident about that part. But I did not see this becoming like a major $100 million company and then growing from there to probably much bigger than that, right. And something that I would put my entire life behind. And it was not an easy decision. Because once I could grow I mean, we got a Series A done pretty much at that time. And we would have taken the next step, but had to kind of think three steps ahead and say, Okay, what if, what if I do this? Like, am I gonna go deeper and deeper into this? Or do I need to look at the larger picture and evaluate my own opportunity cost? So anyway that happened.

Akshay 00:10:28

What made you feel that it’s not going to be big, were there any external signs or triggers?

Kunal 00:10:34

Yes, I think at that time, in the 2013-14 timeframe, the market was not very receptive to a completely technology-driven education system, or 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.

Akshay 00:11:02

I think around this time, Mettl, Aspiring Minds, these would have been your peer group.

Kunal 00:11:06

Yes, that’s correct. Absolutely. And I think when we were looking at those companies, I mean, kudos to them for building the companies in their own right. But you know, as an entrepreneur, I 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’re 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. So it’s also a discovery process, right? So, more than anything else I realized that what had changed for me is that I started making better decisions, my judgment improved significantly in terms of evaluating opportunities, evaluating costs 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 becoming a digital country, but very early days, e-commerce had not taken off through the roof. It was becoming super popular but not as big as it was today, people are still questioning like, will there be a massive digital market? 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 digital businesses be valued, and some things may not ever become properly digital unprofitable, 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 time, if I figured it out and navigated my business differently, it was a pandemic, I would have done very differently or not, you never know. Life cannot be lived on what-ifs. So anyway, we had an opportunity, and we decided to let’s see how we can build this out. And right then, we had the opportunity to, one of our clients who we worked for in Singapore, they were interested in buying the product and the IP that we had built. And it happened right about that time, just before using Series A, so we went back and spoke to a couple of our board members, and they were very supportive because we had told them that obviously, the company is profitable. And as investors, none of you will ever need to take a haircut if you exit the company, that’s like our word as entrepreneurs. And they were very supportive. They said, “Yeah, absolutely, why not?” So we ended up selling SkillWiz. And then onward and upwards. The 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.

Akshay 00:14:13  

So when you sold it, the acquirer didn’t want you to stick around, like sometimes the acquiring company wants that? But it was more of a product?

Kunal 00:14:25  

Yeah, that’s true. Yes, 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 you know, investing two-three years more in this space will be a high opportunity cost. So we did that. And honestly, it’s one of the toughest decisions you make as an entrepreneur because you build something, and even though it’s doing well, and you have a great outcome, great learning, but still, letting go of something is not easy. As an entrepreneur, you know, even when you want to sell it, you’re always thinking should I, should I not? But yeah, we made that decision. And in 2015, I think we were, again, putting our heads together like me and my co-founder. And today, who is a third co-founder at Freo, so we had all known each other from the past as well, but it’s all serendipitous that we are thinking about how things are evolving. And we are talking about consumer problems.

Akshay 00:15:21

Did you have enough money in the bank after the buyout to fund your next startup?

Kunal 00:15:27

Well, I think not as a long way down in terms of funding. But I think the whole…

Akshay 00:15:35

Enough to not need the Angel round.

Kunal 00:15:38

Yeah, I mean, that is there. But I think the path ended up being very different. Because we started the company with a large seed fund itself, right? Right from day one, we had raised, a $3 million seed fund in MoneyTap and Freo. So this journey was on a completely different scale. But, I think 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.

Akshay 00:16:09

And tell me about those discussions, like how that idea became from a vague idea to a clear vision.

Kunal 00:16:19

Yeah. So, a lot of conversation around what was happening on the ground in the country and what we were interested in and what I was interested in a lot was the consumer space, consumer and technology, right? So what is happening in the consumer space out there? Or how is technology changing things and what are some of the biggest factors which are affecting people’s lives? Money is the way people live their lives by spending money, borrowing money, and technology. The confluence of these two appealed to me the most like one of the most exciting things for me as an entrepreneur and as an engineer at heart. Technology and money then a confluence of these two, I mean, it doesn’t get more exciting than this for me. So, we were talking a lot about what is happening on the ground, and we saw a lot of trends. We saw how people were looking at banking, looking at financial services, Aadhaar had just come up. 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 transactions in the future. And at the same time, we were looking at what the banks were doing, which was trying to operate in their ways but not embracing the change the way consumers wanted it to back then. The bank was not thinking outside, they were very inside out thinking like, “I have a capability. So I will give consumers whatever I have as a capability rather than what 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 at some level, we knew that if we go down this path of creating a company or creating a business, which builds products, or delivers services for customers in the financial services space using technology, we will become a consumer FinTech company. And if we do this right, and build this right, this could be 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 in some way, but it was very vague back then. And terms like neobanks and or did not exist at that time, right? It was all about specific products and services. And today, we have this term called neobanks, 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 maybe something or some form of a bank, 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, standing outside the State Bank of India branch, HDFC branch and, standing outside a mall randomly in the middle of the day, people are walking by and I’m like, “Excuse me, ma’am, can I ask you a question?” And people saying “No, no, I don’t want anything.” They assumed you want to give them a free card or fulfil some loyalty program and some things, holiday packages? Totally. So there were incidents where I spoke to people, and some of them would entertain me because they looked like, “Okay, looks like a decent chap, nerdy guy, maybe like talk to him, say something.” One, so I remember I was standing outside an HDFC branch, it was near Sarjapur Road if I remember correctly. And I was talking to people and I think there was some junior guy from the bank branch or security guard who came out and said, “Hey, why are you talking to my customers?” So I was like, “No, I’m just doing research based on some academic work.” I cooked up a story.

Akshay 00:20:35

You can’t even say this is my summer project. You probably didn’t look young enough.

Kunal 00:20:41

I looked too old to be in school by then. But, I had to come up with some reasons that they don’t throw you out. And I was not going to say that “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.

Akshay 00:20:57

What was it that you were asking, what kind of information were you trying to get?

Kunal 00:21:03

Well, just trying to ask people a lot about how 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 because they need money. They need to park their money and make their money do well in terms of investment, and the other is they need money, and by far in Indian society, the need for money is way larger than the need for investing your own money because we are a saving society right. So, credit was obviously at the heart of what we were thinking of the problem and our questions, and customer and consumer research was all centred on credit. So, we spent a lot of time talking to people. I would ask people questions like “Hey, you know, have you taken a personal loan from this bank? And If yes, then now, how has your experience been? How much time did it take? What are your interest rates? Would you go back to the same bank and get another personal loan? Is your need like a three-lakh personal loan or do you need 25,000 rupees like what do you need? And what are your choices if you did not go to a bank, what would you have done otherwise?” So, people gave very interesting answers. Right from telling us that they have no choice but to go to a bank and take this because 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 or interesting feedback. And at the same time, I also got feedback like when they don’t talk to me, and I remember one woman customer standing outside a Big Bazaar. And she was like, “No, don’t talk to me, I don’t share my personal financial information, my husband is coming, so just go away.” I’m like, Okay, fine. So she probably 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 or potential individuals. And we got a lot of information. And that was the genesis of us starting our business. And we launched our first product back then, which was with the whole objective of providing unsecured credit to individuals in the country, but completely digital on a smartphone, and not offer it as a traditional loan, but a line of credit. So we became India’s first app-based credit line product. This product did not exist in the country then. Now, overdraft facilities were there. Banks would offer overdraft facilities and credit lines to businesses, but individuals like you and I were not going to banks and asking for a line of credit, right? 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 with this approach and say 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, COOs, and we spoke to them about this product. And a lot of them said, you’re just smoking something, this is not gonna fly. This is not how banking is done in India, this is not what people want. People want what I’m offering 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 three of us were serial entrepreneurs. And we had our conviction in terms of how we looked at the world. And we were approaching it from first principles, 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 is exactly the opportunity. And that’s what makes it stand out. And that’s how we launched the product. And we call the product MoneyTap.

Akshay 00:25:29 

So this was an alternative for people seeking personal loans.

Kunal 00:25:33  

Absolutely. So anybody who was 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 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 borrow small or big amounts as per their needs whenever they wanted. And they could then decide their EMI 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 tenure 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, I suddenly 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. And yeah, but the bank would give me a personal loan of four lakh rupees, and then I would have to pay interest on the entire amount on day one. So instead of that, I mean people realized that this flexible product where they could just keep the line of trade with themselves but start borrowing from it only when they needed the cash. So that proposition 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. And then that’s how we created the company. I think one thing led to the other today, we are the largest credit line product in the country. I mean, by far, like a lot of people have tried to do it is 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 made today.

Akshay 00:27:45

Okay, so essentially, your consumer research told you that people need speed and flexibility and which is how the product got built up.

Kunal 00:27:54 

Yeah, the Indian consumer is very demanding, right. They’re like hard bargain seekers. So people wanted speed and flexibility, as you said, but they also wanted it to be convenient and affordable at the same time. So convenient, because I don’t want to leave my house.

Akshay 00:28:12  

Right. Okay, convenience, I understand but how could you be affordable compared to banks?

Kunal 00:28:17

Yeah. So I think that that was one of the other tough problems, right. So it’s like a Rubik’s Cube because you move one piece here, and then suddenly, some other side is broken, because you are solving for red colour and now the yellow colour is disturbed because you solve for red colour. So you’re right it is not easy, but when we architected the product, we worked closely with one or two banking partners, because we are going to use their balance sheet at the back end. But the product construct will be complete as the platform the technology, the entire end to end process will be ours. So when we are putting it together, when we architected it, we cut out a lot of, I would say, flab from the entire credit product.

Akshay 00:29:01

Okay. Like, typically what a bank pays to the DSAs for sourcing the loans, so that part you cut.

Kunal 00:29:10

Not just that, I mean, think about it like this. So, for a traditional bank with a traditional operating model to be able to service a home loan, you need to be paying for the branch office where the customer walks in. So the retail cost of a 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. But when you take the entire bloated cost structure out of the picture, and you introduce a slick technology platform that the customer finds intuitive to use, it changes the game in terms of how much money and manpower is thrown at that process. And, the speed in which case, the customer touchpoints go down, the time you spend internally goes down and then you can scale it right here. Your same team can now process 100,000 customers instead of processing only 1000 customers because it’s a technology process. So that allowed us to 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 caught it and they started borrowing a lot. So the unit economics started working out well. And that’s how the product at a customer level started getting very profitable. And then one step in front of another, like I said, eventually we started with one partner and then you know, the word spread very quickly, a couple of years, people knew us that look, these guys are probably the best credit line product in the country, the only guys who have been able to pull it off with that sophistication. And thanks to our team and mostly to our customers. We had a really, I would say a smooth product, a completely chat-based experience as if it’s like chatting through a WhatsApp with your friend, ported in seven vernacular Indian languages from Marathi to Bengali to Tamil to Telugu to Hindi or English. And that changed the game for us.

Akshay 00:31:21 

And did you need an NBFC license for this? Or because you had a bank partner that was not needed because the loan is not on your book?

Kunal 00:31:30

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. 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 partner, which is all about revenue sharing and risk-sharing. And along the way, so when we 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 was going to be an important piece of the larger puzzle. So we applied to the RBI and we got our own NBFC license, I think sometime in 2019. And today, although it’s a smaller portion, our NBFC is operational, and we lend on our books, in addition to lending overall as a platform in partnership with a large number of bank players.

Akshay 00:33:10

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?

Kunal 00:33:21 

Yeah, two things. One is the story that you tell. 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 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 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, 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.

Akshay 00:34:33

How would partnerships give you customers like, say, with an e-commerce company that when the customer is paying for the product, then you offer him a way to take a loan?

Kunal 00:34:44

Yes. So no, it’s not exactly like that. Because that would be financing it at the point of checkout to become more like ‘buy now pay later’, or like a purchase check out financing, but mostly in terms of companies. Other companies had customers of their own that were offering some other products, and reached out to those customers and said, “Hey, are you interested? By the way, we believe that because of your profile, you might be eligible for, let’s say, a financial product, like a line of credit? Are you interested in 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 with such arrangements.

Akshay 00:35:25

Got it. Okay, like a special offer thing.

Kunal 00:35:28

Yeah. That or in some cases, companies themselves wanted to expand into financial services. 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 will be offered from our side. So we were very clear that we are, we are going to be good at only a few things. But we should be the best in those few things. And for everything else, we should just collaborate and partner and eventually over some time decide whether we want to build out more capabilities or not. And that created a complete business strategy for us, which is predicated on a lot of 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.

Akshay 00:36:20

Okay. And tell me about the founding team, like who are your two co-founders here? 

Kunal 00:36:27

Sure. So two co-founders, Bala and Anuj, both of them again, serial entrepreneurs. Anuj and I were co-founders in my previous company SkillWiz, the analytics platform that we created. And he and I have known each other for a while. We both went to the Indian School of Business about a year apart. So we’ve known each other since those days. And Bala, we knew because at that time he was wearing a different hat as an investor before he turned back to being an entrepreneur. But he was in Bangalore as well and we used to meet in different contexts. And I think it was just serendipitous that we stayed in touch about a lot of things and you know, paths crossed again 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 backgrounds and they bring so much strength to the table. Anuj being a mathematics graduate, spent the early days of his career in the advertising industry and post his time in Business School, he spent a lot of time in telecom and has built retail businesses and looked at retail businesses at scale. He brings a unique perspective from that standpoint. And Bala himself has been an entrepreneur, engineer from IIT Chennai and 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 he spent a lot of time with the Aadhaar ecosystem where he was one of the volunteers with Aadhaar on day zero working with Mr Nandan Nilekani. So he was quite involved in the entire ecosystem. And then he went back to being, he wore 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, he exited his whole position as an investor and went back to being an entrepreneur. And I think we all got together and we all knew each other. So that’s how we all got together and started.

Akshay 00:38:52

Okay. Yeah. And Prime Ventures is also the one who gave you the seed fund initially.

Kunal 00:38:57

Yes, that’s right. So Bala was not a part of Prime Ventures at that time and had already quit his position. But yes, they were strong believers in us. Prime did come in very early on and they are still very strong believers in our business today.

Akshay 00:39:15

How much have you raised after that initial seed round?

Kunal 00:39:20

So totally. So we went through a bunch of fundraisers, we did seed and then we did a Series A during which Sequoia came in. And that was Series A led by Sequoia Capital. And was about close to a $9 million check at the Series A stage. And then we again did a Series B, which is close to a $26 billion check in Series B itself. So that’s how we’ve done so far. And now I think as Freo, we are kind of growing, coming out of COVID and growing fast again.

Akshay 00:40:03

So from MoneyTap to Freo, when did that movement happen? You initially started as a line of credit app. Then how did that expand?

Kunal 00:40:16

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. So we launched a line of credit. And then we launched other credit products, and we had our co-branded credit cards in the market, co-brand with another bank. Today, as far as having your credit cards go today, we are the largest credit card consumer FinTech in the country. And our credit cards portfolio is maybe around 10% of the size of IndusInd bank’s 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 the future, which is a multi-product entity, which would eventually morph into some form of the digital bank, has to have its own brand identity. And that is the brand, that is the umbrella, the mother brand that our customers should associate with the customers, the brand that customers should believe in and the brand that customers should want to come to. So we had to think of it from a larger consumer-brand, consumer-association standpoint. And we knew that while credit would be one of the most important pieces in our larger banking play, the brand associated with only credit has its limitations. Because then if people know you for that particular product, their associations sometimes are too strong. Your strength can also be a weakness from a branding standpoint. So we decided to keep the MoneyTap brand intact, focused on the current credit line product. And then think of creating a much larger brand as a digital bank of the future or as a neobank today and have multiple products kind of coming under that brand. With the whole vision that eventually in, the future people should see it as a multi-product brand 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. 

Akshay 00:42:58

When did you make the move, in terms of creating a separate brand?

Kunal 00:43:04

Yeah, so this happened during the pandemic year. So we spent a lot of time and energy putting it all together and towards the second half of 2020, this is when this went live. And then a lot of it is like an iceberg, right? You only see, like, maybe top 1% and 99% is below water, you don’t see. So a lot of background work went from the team members and eventually came together towards the end of last year.

Akshay 00:43:37

Okay, so why the name Freo? 

Kunal 00:43:42

Yeah, we announced the brand and all very recently in 2021, even though the products and everything had gone live much earlier as I said. But obviously, there’s a branding strategy, I think the name represents. It’s a coined word, but it represents freedom, it represents the whole idea that we should be able to provide a window to our customers which open doors for them. And it provides them with a lot of financial freedom and 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, we 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. I’m giving you a very simplified version, but the number of late nights that the entire marketing and branding team would have spent, particularly my co-founder Anuj and his entire team, was just phenomenal. I’m giving you the nice, cool version of putting this together. There was a lot of work in putting this together.

Akshay 00:45:03

Okay, so what is Freo? Is it like a bank? For a layperson, what is Freo?

Kunal 00:45:11

Yeah. So obviously, the business version of it is that Freo is a neobank. But for a customer, 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 pay later, around savings and 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 disclose the names right now except 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 Freo. 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 I get access to money? How do I save, 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 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 in one place by accessing very simple, intuitive, flexible products all to the convenience of their smartphone. And if they liked 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. But we want to be able to engage with our customers and 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 them simple and intuitive and affordable. And that’s how we’re thinking about Freo

Akshay 00:47:20

So essentially, it’s a replacement for an ICICI bank like I start with a savings account? Oversimplification but.

Kunal 00:47:34

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. One of the choices and probably a digital bank of sorts. If I were to be, an entrepreneur, I also have to be humble about things like ICICI or any other existing bank, like an HDFC. These are great institutions for what they do in the way they do it. So I don’t think that these larger institutions are going away anywhere, anytime soon. But we do believe very strongly that, you know, first of all, financial services is not a winner take all market in any country, 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 has been consumed today. And that is what we believe we will become. Now then, if the incumbents can reinvent themselves and change into larger and different organizations and put 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 will believe that 10 years from now, when a customer wakes up in the morning and says, “Hey, look, money is a big part of my life, finances 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. for existing services, right, every bank provides a banking app. So it’s not about providing this or about taking an existing way of banking, an existing way of financing, and just slapping it onto a smartphone application. It’s about thinking that if I can understand the customer’s credit and financial needs if I can understand the customer’s payment needs if I can understand a customer’s saving needs. And I can tie it together by saying that because I save in a particular way, I should spend it like that. 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 ICICI banks of the world, but I think I would be a choice destination for customers in the future.

Akshay 00:50:33

So do you have a savings account? 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 taking care of your other needs.

Kunal 00:50:49

So at Freo, I think the savings product is going to be a key part of our larger offerings. And the way we look at our savings product is not just about a savings account that a customer should take and just replace all of the savings accounts. Because a savings account in isolation is not 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. So we don’t think that just by providing a greatly 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 and all of us have multiple savings accounts. So the Freo savings account is going to be an account that will tie very closely into building the credit journey of a customer. So while we will offer very competitive interest rates, 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 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. 

Akshay 00:52:22

In the sense that the data of your transactions would help in creating a credit limit and things like that?

Kunal 00:52:32

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 customers take one step at a time and go from helping them save conveniently. Maybe by being their secondary account of choice not trying to replace that primary account at all.

Akshay 00:53:00 

Why not? Like why not replace the primary account?

Kunal 00:53:05

Well, because I think from the get-go as a step one, that’s not the battle we want to pick. Maybe in the future.

Akshay 00:53:14

If you’re looking at younger people getting their first paycheck, wouldn’t it? Like if they were to?

Kunal 00:53:24

I think it can and that’s why I said that what you need to do is when customers are putting their money you need to first earn their trust, right? Just because you have an intuitive and experienced product, the customers are not going to trust you with that. And I believe in that. Because if you need to win the trust of a customer, you need to be able to provide great value for the customer. So we believe we will attract the right set of customers, but will I replace their primary account, which is driven largely by how their family thinks a bank account should be out? Traditionally, how has the family banked What location they are living in, and which is the closest branch that they can go to a lot of cultural factors have decided how we know our primary bank account operates.

Akshay 00:54:05

I do think that’s changing. I mean with the pandemic.

Kunal 00:54:09

No, absolutely. It is changing. Absolutely. And I think the way to change it is again, you have to approach it from first principles. 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 is 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 also 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 of my customers by saying that when you open another savings account with us, and we believe based on the initial response, this is going to happen on a large scale. So we are pretty optimistic about the success of this. But we should show the customers the way forward in terms of what’s going to be the other benefits that they’re going to get with us. And when we merge it, which we will disclose in terms of, you know, how the customer’s journey unravelled, and how they build their 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.

Akshay 00:55:25 

Okay, although I genuinely think opening a bank account is one of those painful experiences, which is like a certain demographic. Tech-savvy people who are always working on apps. I mean, you know, if you can get food delivered, why can’t you get a bank account through your app? You know that is like a major pain point.

Kunal 00:55:48

Yeah, 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 is 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 other advantages as a company. So at Freo, we have some very unique advantages, because we are a very successful suite of products that are operating at scale today, across our cards, now our pay later 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 of opening the savings account.

Akshay 00:56:40

Okay. And this account would not be like you would have a bank partner right because you’re you don’t have a banking license?

Kunal 00:56:50

Yes, that’s right. We are already working live with our banking partners at the backend. And when we publicly disclose a lot of things, we should be able to also share the names and details of those. But yes, the short answer is we will have multiple bank partners at the backend with whom we will collaborate to bring this value to our customers.

Akshay 00:57:08 

And so this would be like regular savings account with a debit card and features like fixed deposit and stuff like that.

Kunal 00:57:16

Yeah, I mean, it would come like we have different offerings over there. But, very lucrative, savings interest rate on the account, flexibility in terms of operating the minimum balances, frequency operation, digital access, and the ability to quickly access other products beyond the savings account through Freo, 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 in a branch. So those advantages as well, along with the advantages of a unique intuitive savings account. 

Akshay 00:57:47

So this product is a B2C product only right? Not for businesses?

Kunal 00:57:55

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, the late 40s. 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 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.

Akshay 00:58:41

So it would be like a similar base as what Cred is also targeting.

Kunal 00:58:48 

I think Cred does a great job in how they appeal to their customers. And my understanding is that Cred appeals to mostly the credit card holders today, currently. And they constitute the slightly more premium segment in the country, which is like the upper-end because 30-35 million unique credit cardholders in this country are slightly sitting on the upper end of the income spectrum. So there will be some overlap for sure. But there will be a vast disjoint set as well in the mix.

Akshay 00:59:28

Like the people who don’t yet have a credit card or a credit line, that would be a bigger…

Kunal 00:59:34

Yeah, I mean, a lot of people who have loans, but those who have 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 will be. 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. So, that tells you that obviously, credit cards have not been like the primary product so far in the country. So we are looking at a larger population and some of them will have credit cards some of them may not.

Akshay 01:00:13

Got it, okay. And you also have a ‘buy now, pay later’ product.

Kunal 01:00:18

We do have a plan ‘buy now, pay later. And we have a ‘pay later’ product for sure. So we are looking at our product spin, our own experience in terms of how to pilot a product out there, which is offering a much better experience than the very traditional offline buy now pay later.

Akshay 01:00:36

Okay, as in you’re not planning like the digital e-commerce tie-ups for buy now pay later? You’re looking at more of a card-based approach or something?

Kunal 01:00:46

Yeah, I think. We don’t believe that the traditional approach, the way the buy now, pay later is done in the country, is something that we also want to do. So we don’t want to be the 50th player and there are already 49 players doing the same thing. There is no point in doing the same thing. And some large incumbents are doing buy now, pay later right, the great organizations like Bajaj, Tata, Home Credit, they’re doing great. It’s just another name for purchase financing in some ways. And I think some institutions are doing it at scale in their way. So we don’t think that we want to enter that space and play that game by those rules. We will have our 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 approach. So being able to provide a completely app-based experience for customers who can just make a transaction right now for a service or product but pay later but completely to the smartphone.

Akshay 01:01:53

Okay, like scan the UPI QR code and like a UPI based approach?

Kunal 01:01:59

Yeah, something like that. But a combination of those collaborating with other banks or NPC and others, and then creating a product, which can operate at the mainstream. But again, doing it our way rather than doing it the way the incumbents have been doing it for several years.

Akshay 01:02:16

And do you plan to apply for a banking license also to become a full-stack bank?

Kunal 01:02:22

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. You know, our regulator, the RBI is a progressive regulatory body as such, and they have been talking a lot about different formats of bank licenses, right. 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 a digital license is concerned. So we think that a few years down the line, we will get into that as well. But how that happens, when that happens. I guess it’s too early for me to exactly state with confidence. But that’s a dream for us to be able to take a company to that scale. Let’s see how that pans out. But yeah.

Akshay 01:03:17

How big is MoneyTap/Freo today? Like? What is the number of people, like, some numbers, if you can tell, like how many people have active credit lines? Or what is the total amount of money lent out? That would be interesting. 

Kunal 01:03:36

Sure, sure. I mean, I can share the numbers that are there in the public domain, or we are allowed to put them out there in the public domain. So I think overall as a company at Freo to date, we have now dispersed, close to almost a billion dollars of credit. And 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. I think the other thing is we see a large geographical penetration today, we see the 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 3x a year on year and I think the COVID year we also grew significantly, we added a large number of registered users, we added a large number of credit transactions to our platform. And now we are back to a very strong growth trajectory, where we believe the next 12-15 months are going to be interesting, where we will probably see a 3x jump in the size of our company.

Akshay 01:05:01

How much did you grow during COVID? Like was it more than 3x? Or like in the last financial year?

Kunal 01:05:08

Yeah, so I think during COVID, we grew the user base from almost 10 million registered users to well over 13 million registered users. So that was huge growth. And I think the credit by itself, just within the pandemic time was, I would say, close to around well over 2000 crores of credit, just as it was in the middle of the pandemic.

Akshay 01:05:40

Wow, okay. And what is the business economics like, what percentage of the interest do you get to keep? How much goes to the bank partners, like broad numbers, not exact numbers.

Kunal 01:05:53

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, range varies. 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%.

Akshay 01:06:16

But why would the bank agree to that? Like, I mean, I would assume that banks have a better bargaining position now.

Kunal 01:06:26

Yeah, of course, but they get their revenue earnings as well because we give them a certain thing. So they get their cost of capital and they get their profit. And then the rest of the margin is pretty much ours. So which creates like a lion’s share of the spread on that front but they make a lot of money and then. And then on the cards business, we take a share of the interchange. The other thing is, I think on the other products, which are like the cards on the saving side and the pay later there’s going to be a share of any fee or transactions on a per customer per 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. 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 the incentives being fully aligned. Right. So I have a revenue sharing and 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 centre. After all, we are growing the pie for them. We are getting new customers into the ecosystem, we are helping them cross-sell, upsell, increase the revenue pie. And we are also participating in the risk. So if something goes wrong, I also participate as much so that’s what helps these banking partnerships flourish. And we are very good at collaborating at least, like I was saying partnerships have been a key part of our overall business strategy. And that’s the reason why banking partners agree to this.

Akshay 01:08:13

How does risk-sharing happen? Do you take on a percentage of the NPS? Like the total? Whatever, let’s say someone borrowed 5000 and didn’t pay it back? Then how would you share the risk?

Kunal 01:08:25

Yeah, that’s correct. So it’s basically if the losses are X, or let’s say the loss is 100 rupees, and I agree, my commercial agreements say that I pay X and the 100 minus X is shouldered by my banking partner. 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.

Akshay 01:09:00

And who is responsible for collections, like in case there is a default?

Kunal 01:09:05

Yeah. So on the credit side, mostly, for all partnerships, we do the collections barring a couple of partners where the banks, because of their internal mandates, want to keep the corrections themselves. But barring maybe one or two cases, everywhere else, the collection is completely designed and executed by us.

Akshay 01:09:28

So that’s another cost centre for you. Is it a big cost centre?

Kunal 01:09:33

It is not, surprisingly, one would think that it will be a big cost centre, but it’s a very efficient structure. Because we use technology heavily in terms of how we process collection based on how we use technology before using human intervention to collect money.

Akshay 01:09:48

How do you do it?

Kunal 01:09:50

There’s a whole bunch of standard processes being used by the industry today, auto-debit snatches, e-mandates. 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 to their smartphone itself, they can just get online, and then we follow up using very different chat 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. 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 well. We have some of the best collection efficiencies now in the industry. So like really higher than 95% efficiency. So that puts the business on the right side of the credit risk equation.

Akshay 01:10:53

What is the percentage of defaults that you see, like, how many customers don’t pay?

Kunal 01:11:01

Well, I think overall at a business at a company level our defaults generally vary, I would say at an aggregate around 2 to 3%.

Akshay 01:11:13

Okay, and what is the industry standard? How does this compare?

we’re

Kunal 01:11:19

Similar, I think the larger banks have maybe around 1-2%. And some of the smaller banks or the NBFCs would have anywhere between 2% to 5%, depending on the portfolio, the segment of the market that they go after. So I think as far as consumer FinTech companies go, we probably are the best in class at an aggregate level. And I think across the board, I would say it 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, would be looking at a different segment of customers, right, their pricing is lower, their interest rates might be lowered and accordingly the losses are also slightly lower.

Akshay 01:12:04

Okay, got it. Between the three of you, the co-founding team, how are your roles split up? What are you looking after?

Kunal 01:12:14

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 is required. But currently, a lot of my energy goes into thinking about and working on the entire capital strategy for the company. Thinking about the entire business strategy, finance, risk, data science, I spend a lot of time on machine learning and data science initiatives around our products and risks. And then associated areas around our own NBFC. So, but a lot of business side of things. And earlier, I used to wear the product hat when I used to be heading products in the early days when we started the business. But today, I don’t wear the product hat as such, so a lot of things on the business side, capital, business strategy going forward, data science initiatives going forward. And then the risk side of things. That’s where a lot of my energies go.

Akshay 01:13:20

And what about the other two, like Bala and Anuj?

Kunal 01:13:24

Yeah, so I think they would divide the roles across, Anuj looks at a lot of things around product and marketing and acquisition and some of the projects just like also, each of us has enough allocation to special projects. And the customer-facing roles. The team also worked with him closely. And some of the other areas in terms of special projects. So working with data and some of the initiatives on that front. Some of the international initiatives that Bala looks at, 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 the 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. But I think that equation works well. I think there’s a great synergy in the way the three founders work together.

Akshay 01:14:26 

Okay. So what is advice that you would like to give to young founders in terms of what to do, or what not to do? 

Kunal 01:14:38

Wow. I can tell you what advice I would have given to my younger self if I ever had the chance to. I’m not sure about other founders, I think the people nowadays are very smart, much smarter than, 25-year-old today is much smarter than I was when I was 25 years old. But I can say a few things. One is I would have started much earlier in my life if I wanted to be an entrepreneur, but I would have been I would have. But pick the right reasons for starting, I see a lot 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 supercritical. So starting just because you’re kind of bored in your job, 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 to start, those are probably not the smartest reasons to start. So be very clear about 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 tough and bad days. And on those days the ‘why’ behind, the reason behind why you started is 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 have to get your reasons right in terms of why you want to start and end if you don’t, 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.

Akshay 01:16:42 

Can making money be a valid reason like I want to make a lot of money?

Kunal 01:16:47

I think yeah, sure. I think only making money may not be the wisest choice because there are too many factors at play that decide whether you will make money in a business or not. There are too many factors in play and your 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 there, and those factors you do not control. So the element of chance cannot be ignored. And that adds elements in the mix, which you do not control. So yeah, sure, I think making money should count as one of the top reasons but if that is the only primary reason, then I’m not sure. 

Akshay 01:17:35

It will be tough when you see bad days, like if that is the only reason.

Kunal 01:17:40

Yeah, because it takes several years to create a business that will pay off well. The costs, the taxation, the ups and downs, wipe 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 everything else. So I am a big believer in businesses that are supposed to make money, because that’s one of the sole purposes of a business, right, to 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.

Akshay 01:18:33

So my last question to you, what makes one business succeed? And the other one fails? What sets apart the businesses that take off from the ones that don’t?

Kunal 01:18:50

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. And, then I would have wished for the wisdom to be able to follow through on it. So there are a few things, I think, through our experience and it’s been a lot of experience and learning. So the market or the space that the business operates in, that’s number one. The team, I would say at least the core founding team, or the core team, that’s number two, third, the timing of when you’re doing it, and fourth is the location. So I would say these are four key ingredients. And then everything else kind of always is there, like how much capital you get, and then whether you’ve got capital on time or not. But if I were to summarize, like, you know, the space or the sector that you choose in, right, which goes back to the whole saying that, it’s not so important how hard you roll 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. 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 make tough decisions or not? Then I would say that the whole point of 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, even though there might be a theoretical and academic market for it. But can you build a thriving business? Where are the real customers today, who will pay for it today? So the timing of it matters a lot. I think the location, super important, like maybe it’s a very similar idea from a founder of a similar calibre, might succeed tremendously in one part of the world, and it might fail miserably in the other part of the world, it’s just based on how people perceive the ecosystem, and what investors see as the risk appetite to be in and in a world where that society and culture values that product or service or not. So I would say these are the four key ingredients. And you know, beyond this, they would be a long list of things, but they are the four most important things that come to my mind.

Akshay 01:21:26 

That’s true. Wouldn’t two of these be hard to change? I mean, you can’t change the timing, right? I mean, you’re doing exactly as you are. And same for location.

Kunal 01:21:37

Yeah. But 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 the US or Australia, and theoretically you believe that they have similar needs but the regulatory makeup of that, the margin 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 there’s one 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 have a starry-eyed vision, kind of get a little carried away. So while it is the most obvious it is sometimes also the toughest ones to follow.

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About Founder Thesis

Candid conversations with some of the most celebrated startup founders of our nation. On Founder Thesis we are on mission to uncover the secrets to building a Unicorn!

HOSTED BY

Akshay has held a lifelong fascination with the people who dare to disrupt, and with The Podium, he hopes to discover what makes one a successful disruptor.

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