Big Spender CRED Banks On Rent Payments, Credit Lines For Revenue

It's the brand that seems to be everywhere these days. Splattered across IPL screens. Trending on social media timelines with star-spangled advertisements. Offering customers a chance to bring home a Mercedes if they use their service.

Kunal Shah-promoted CRED has upped its visibility this year as it tries to lure a larger share of India's 31 million credit card users. In September, it became the official partner of the Indian Premier League— one of the world's most expensive sports properties, It also brought in the biggest of stars from Madhuri Dixit to Anil Kapoor and Govinda to Bappi Lahri to front the ‘not everyone gets it' campaign.

What has this advertising and marketing blitz cost the now two-year-old company? CRED declined to share details. However, CRED's founder, Kunal Shah, said that these campaigns have helped the company focus on distribution.

“This has enabled us to grow our user base meaningfully, creating a community of high trust individuals who in turn offer value to various stakeholders,” he told BloombergQuint in a written interview. CRED's user base, he said, grew from a million to over 3 million within the last six months.

The high-visibility, high-cost advertising, while not unique to CRED, may not yield the benefits that companies expect, said brand specialist Harish Bijoor, who also runs brand consulting firm Harish Bijoor Consults Inc in Bengaluru.

The kind of expensive ad campaigns that some well-funded tech companies such as CRED are undertaking has a high cost-to-benefit ratio, which is not sustainable for any business in the long-term, Bijoor said.

CRED's financials for FY20 are not yet available with the Registrar of Companies. But even in FY19, the first year of operations, the company spent heavily on marketing.

About a quarter of the year's expenses of Rs 63.72 crore went towards marketing and communication, the filings show. That year the company reported a net loss of Rs 60.86 crore.

Ideally, the advertising spends should be between 12-20% of the annual business expenses, said Bijoor, adding that anything over that exceeds the benefits the company can get out of such ad campaigns.

Will Revenue Follow The Blitz

To be sure, a number of consumer product start-ups upfront their spending on advertising and marketing as they seek to build out a customer base. The idea being that a loyal customer base eventually turns into paying customers and revenue follows.

“This (making heavy spends to expand user base) seems to be the playbook of most fintech startups in India,” according to Vivek Ramji Iyer, partner and leader - financial services risk at Grant Thornton Bharat LLP. According to Iyer, investors in these companies attach a valuation premium to user data, which can be later targeted to sell products and services.

“The idea is to first create a loyal user base for an anchor product by investing heavily into advertising, and then deriving revenue streams from merchants and partner banks who want to leverage that network,” Iyer said.

“Initially, our focus was on distribution— to build a community of high-trust individuals, all with a credit score above 750. Our focus on revenue began in Jan 2020, and we have exceeded our goals for the year already,” he said without disclosing details.

What does a tech company know about ads?

@CRED_club pic.twitter.com/M4dESpbpu1

September 25, 2020

From CRED RentPay To CRED Cash, Will Customers Bite?

Owned by Dreamplug Technologies Pvt. Ltd, CRED started out with a focus on building a community of credit-worthy customers, with credit scores of over 750, and offered them a free-to-use platform to make their credit card bill payments. The use of the platform is incentivized through cashbacks and discount-based rewards, which can be availed by burning CRED coins— equivalent to the customers' transaction value on the app, to buy products, services and experiences from a curated list of partner merchants.

In April, the company launched CRED RentPay, which allows its members to pay their recurring rent payments through credit cards, directly on the CRED app and get reward points in return. The customers are charged a transaction fee, ranging from 1% to 1.5%, for using the service.

CRED's rent payment feature, according to independent digital lending expert Parijat Garg, can be likened to a personal loan product, marketed as a payment service.

“The RentPay product for a recurring user is like a personal loan with 30-45-day unsecured credit at 12%+ annual interest rate that a consumer pays in the form of card transaction fees. Though this is marketed as payment service through credit card, one can see it as a low-cost short-term credit facility available to CRED members on a user-friendly app,” he added.

The second product, CRED Cash, is a flexible, low-interest and instant credit line, was rolled out as a pilot with IDFC FIRST Bank for select members. The offering allows CRED members to avail a pre-approved active credit line of up to Rs 5 lakh, with the flexibility to choose the payment duration of their loan installments.

The loan product, said Garg, offers a cheaper and simpler alternative to CRED members who want to roll-over their credit card dues. “But the future challenge could be that of collections, for such pre-approved loans. As these products gain traction, banks, credit card issuers and other players may also start offering such services and at more competitive rates.”

Besides financial products, the company has also been focusing on increasing the brand offerings to its members. Having created a partner network of over 1,300 brands and financial institutions, the app added an option for its members to shop in-app through its curated e-commerce offering ‘CRED Store'.

“The new section under the Club section on the app offers a selection of handpicked and curated products and experiences at member-exclusive prices,” said Shah.

Up next, CRED plans to create a sort-of social network for credit-worthy individuals by making CRED an exclusive platform for them, where they could shop, make payments and even interact with each other.

Over a period of time, they (customers) will be able to interact with each other as trusted members of a closed network. This could translate into a CRED member choosing to rent their home only to other CRED members, trade with each other or develop stronger personal networks with trusted individuals.

Kunal Shah, Founder, CRED

Have Funding; Will Spend

It's unclear how quickly the products will gain traction enough to generate material revenues for CRED. But this may not worry investors too much.

“While investors are okay to fund the advertising spends for technology businesses to acquire customers, it goes without saying that there needs to be some revenue visibility, at least over a horizon of 3-5 years. But for a deep-pocketed investor, the return horizon could be longer, even as much as 10 years,” said Naveen Surya, chairman of the Fintech Convergence Council. Surya is also an angel investor in credit card management app Wizi, OneCard, and credit score monitoring firm OneScore.

“Today, investors are seeing huge potential and scope in the growing credit card user base in the country, and once an app has acquired a sizeable chunk of customers, there are endless revenue opportunities,” he said.

Capital does not seem like a challenge for Shah.

So far, CRED has managed to raise nearly $145 million (approx. Rs 1,071 crore) between the early stage and first tranche of its Series A financing rounds, and was last valued at nearly half a billion dollars in August 2019, according to an Economic Times report.

“We're fortunate to have enough runway for the next three years to continue offering value to our members and partners. We look to raise capital when available, to support our operations,” said Shah.

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