CRED’s Kunal Shah Sees Use Of Credit Cards Still At An Evolutionary Stage In India

People love credit cards, and that shows in the proliferation of the business, CRED founder Kunal Shah says.

Logos of Mastercard and Visa  sit on credit cards in this arranged photograph. (Photographer: Andrey Rudakov/Bloomberg)
Logos of Mastercard and Visa sit on credit cards in this arranged photograph. (Photographer: Andrey Rudakov/Bloomberg)

The upcoming initial public offering of SBI Cards & Payments Services Ltd. is expected to generate investor interest in a high-margin business that most lenders have been aggressively chasing.

People love credit cards, and that shows in the proliferation of the business, Kunal Shah, founder of CRED, an app that allows users to pay their credit card bills and gives rewards in return, told BloombergQuint.

The industry has grown at 22 percent compound annual growth rate since the financial year 2014-15, according to a report by Emkay Global.

BloombergQuint spoke to Shah to understand how the cards business is expected to grow in India and how it’s shaping the startup ecosystem.

Watch the entire conversation here:

Read the edited transcript here:

Forgive me for loosely branding you as a credit card payments company because I know you aim to be much more than that. But that’s how I see you because that is how I use your product. Can you tell a bit about CRED is and where do you see CRED moving towards?

I appreciate the fact that you went about doing that research and found our name popping up. It’s quite interesting because it was a part of our research while we built CRED, we found out that while the whole country was busy talking about wallets and other things, people absolutely love their cards. Not just that but credit card spends in the last 3.5-4 years went up from $1.8 billion-$8.5 billion dollars a month. The number of unique cards went up from close to 18 million cards to around 50 million credit cards.

This happened in very short period of time while you were all busy talking about wallets, apps and so on and so forth. That’s the reason we thought it will be an interesting segment to go after because it seems to be that customers love their cards and I want to use more and more of it but actually no technology company was focusing on credit cards. What do we think CRED is, I think CRED is much bigger than credit card bill payments because we realised that if we can somehow get people who are of good credit score, get much more benefits versus just getting a credit card. In India, to get a credit card which is an unsecured format of loan, you need a good credit score. A lot of people don’t have good credit score and therefore they don’t get a card. But those who do get it, usually have a high credit score but the benefits of that are not all pervasive.

For example, let’s say an online apparel e-commerce company would love to give you extra days to return your stuff versus the people who are likely to misuse the system. None of these things are possible to really segregate the customer from trustworthy and not trustworthy. In the U.S. people know their scores by heart. They check it almost on a weekly basis because hundreds of things in their life depend on their credit score. In the U.S. you cannot get an apartment on rental if your credit score isn’t high. You could potentially not even rent a car. All of these benefits allow the society to be a lot more conscious about their trustworthiness and therefore, improve the economic situation of a country.

Our goal was very simple. Can we create a platform where we actually make life better and systematically allow more and more privileges and benefits to come to people for having good credit score and therefore, creating a flywheel effect for more people wanting to improve their scores?
Kunal Shah, Founder, CRED

You obviously aim to be much more if not now than a credit card payment company. Now how much or what’s the quantum of people who use CRED currently, Kunal? Why are those patterns?

First of all, our app provides multiple benefits—especially the categorisation of expenses. It’s usually not known the way you get the statement right now. So, let me give you a broad perspective. Our objective is to consciously make you know what your score is and not let it be something that’s only known to people who are giving you a loan. Because it’s your score and you should know it. It’s important that a platform allows you to see it real time and consciously know whether you are doing a good job or a bad job. Second thing is knowing where you are spending. A lot of times, credit cards—although people love it, but also can suffer on overspending and not doing what they are really doing with the card. So, what we do is, we allow categorisation of spends and allow them to see what they really spending on.

That breaks into an interesting dimension that what are the other slices? So, approximately 10-15 percent of the money is spent on travel, around 10 percent on eating out, approximately 20-25 percent on shopping, 10 percent on utilities, 10 percent on fuelling automobiles and so on and so forth. That’s followed by the long tail of expenses. The purchase patterns are similar across customers. Obviously, some customers spend a lot more if they go abroad and they use their card to make purchases over there. It seems to have a similar pattern, usually around lifestyle expenses. Most customers do not see a score drop if they pay partial amounts.

So, just to make it clear that the customer’s credit score drops when they do not make the full payment. If they make a partial payment which is above the minimum due amount, their scores do not take any impact. But, there is a significantly a high interest rate that they might be incurring and our app allows them to make sure that they remember to pay their bills on time, constantly monitor their scores and constantly look out for any kind of finance charges that they may be incurring.

India approximately spends 50 percent off all the credit cards spends that are online. In any format, either they are buying something online or purchasing a movie ticket or travelling. So, 50 percent of all transactions in terms of value are online now.

It’s interesting. So, what’s the pattern? I mean, we were analysing the SBI cards’ IPO that is coming up and I think there was report or two on what’s the card business doing. I think 25 percent of the business for some of these card companies comes via defaults as well as late payment charges and interest fees. Do you see an increasing trend defaults as the Indian household indebtedness has been on the rise?

First of all, the word “default” is a strong word. I don’t see defaults. I think the country’s NPAs on credit cards have been quite stable for customers since many years. However, we see a large chunk of customers revolving at a higher interest rate. Ideally, they should be taking a lower interest loan and just paying off the credit card bill. A lot of times, they do not understand what is the interest rate that they are paying on the credit cards.

I think at CRED, we definitely want to at least make sure that we are causing enough amount of awareness in the customers. We have to also appreciate the fact that 90 percent of the customers in India are having a card for the first time in the entire household.

So, nobody really trains them on what’s this card about, what are the good things and bad things we can do with it and what are the pitfalls for having a product like this. If we can allow people to be more aware, it really helps. Talking about how credit card companies look at it, credit card companies make money by two mediums primarily. One is, they charge MDR—which is the Merchant Discount Rate where merchants pay after 2-4 percent for every time you swipe your credit card. That’s usually spent by credit card companies by giving reward points. That’s usually a set of and doesn’t really create big profit pools but second is the chunk of revenue that comes from people paying interest on their credit cards and that’s usually not done by all the customers. You will see that depending on the card type and depending on the bank.

You will see that anywhere between 20 percent to 40 percent of customers that they do not pay the amount in full every month and they incur finance charges and or interest charges on the top of that. That has largely been the interest of the business model of credit cards from the time they have launched.

Any thoughts on the kind of rewards that you are giving, via the use of these CRED points on your platform. A bunch of services that I see that are available. They are fast changing over the last six months that I have used your product. There are a bunch of brands that have come in and gone. Then there are newer brands as well. What is the kind of spending that people are doing on these brands? What are the kind of brands which are coming in to try and get themselves noticed?

The reason you see fresh content is because we want to believe that rewards is an exciting place. It should have the excitement of new things coming constantly. We have even launched a reward which was playing a snake game on the app to unlock a reward. People burnt coins to participate in a game together.

It doesn’t mean that there is the Amazon voucher or this Shopper’s Stop voucher you will keep getting on reward points because peoples’ needs and what they get joy out of, has completely changed. What we have noticed is that brands use CRED platform for primarily three objectives. One, is that they are introducing the brand to the customers and these customers are usually very expensive to reach out to or acquire. So, CRED becomes a great platform to create trials. So, if you are a B2C brand that is launching a new yoghurt brand or you’re launching a new store format or you are launching an online platform or a car-servicing platform on app, they love CRED as a platform because they are able to target these customers and get them to try their product.

The second type of customer that we see is, brands who have already established themselves but they are trying to increase their average ticket size or their frequency in their store formats and they reach out to us on a regular basis to run periodic offers. Sometimes, they are short-term, sometimes they are long-term in nature and so on and so forth. The third category we see is where there are these long tail format which find extremely hard to reach the customers.

For example, if I stay in Indiranagar in Bengaluru and there’s a local restaurant that finds it extremely hard to reach out to me and try the format. We allow these hyperlocal experiences. You cannot do a full-page ad in print. Digital media like Facebook or Google may not be apt for the customer you are targeting. So, CRED provides a unique opportunity for a lot of these brands to offer a benefit and because the consumers are anyway getting these benefits, additional on top of their credit card points, they love this experience.

We’re considering that probably, within 30 days, you will see a live stand-up comedy coming on the app that you can buy with your coins. There’s no limit to how one can imagine, how rewards of future may look like.
Kunal Shah, Founder, CRED

When all of these brands are coming to you, are they paying you money to be present on the CRED platform?

So, most of the customers we have right now as merchant partners, do not pay us and it is a conscious call. They do realise that there is a cost to reaching out to customers and get the benefit but we believe that, at this point in time we have not reached a critical scale in business to kind of start monetising that part of the business and we want it free for the customers to participate. However, we are extremely careful in curating the partners we bring on board.

If we suddenly become a monetisation platform, the quality of merchants will certainly take a hit and we are not sure if we want to do that. We want to make sure that the merchants we bring onboard, we have personally tested tried and verified the quality before we actually list on the platform. That’s a very hard thing to do in India. It is very easy to start going down the bad quality experience just because somebody is willing to give you Rs 1 crore to list their offer, right? So, we’ve been careful about that and it’s not that we charge some merchants. In some merchant’s case, we do charge but it’s been limited right now, and it is a conscious call.

I am just wondering; would brands be open to pay you a large dollar for being present on a platform like yours? CRED is an innovative form of distribution/marketing.

The way to look at it is, the cost to reach out to affluent customers right now through any medium is extraordinarily expensive in this country. If a platform allows you to not only acquire these customers but also engage with them at scale, many brands are very open to that.

Let’s say, if you are a gym brand and you are a new launch on the platform and 30 percent of the all your new trails come from CRED, that’s more than what you get from Facebook or Google. Now, would you be willing to pay for that? The answer is yes.

The way to look at it is, the cost to reach out to affluent customers right now through any medium is extraordinarily expensive in this country. If a platform allows you to not only acquire these customers but also engage with them at scale, many brands are very open to that.

What about users, Kunal? Let’s say, I am somebody with X thousand or X lakh CRED points in my account. If I don’t have the offers that are there on CRED right now because it is an evolving situation again. Is there in the thought process an option to use credit points in some different fashion aside of the availabilities of brand on display?

We plan to create stores online as well as allow CRED coins as a way to unlock discounts also in the offline world. Probably in the few months from now, you will see some version of store where we can buy products and get discounts because of CRED coins. So, think of this as a way to pay through two currencies. One is real money and one is your CRED coins. Essentially, it is a discount currency, it is not real money, but it is something that unlocks discounts for you.

Imagine you are going to a restaurant; you can pay through CRED and basically allows you to pay 20-40 percent of the bill through your CRED coins. So, what happens is, suddenly CRED coins become an interesting way for a lot of consumption to be done and we will influence that consumption. Therefore, the discounts will be given to us.

Any other user-based insights that you would want to share? I was asking you about the patterns and the defaults etc.

I don’t want to throw some random trivia at you, but it might be interesting to you. Approximately 90 percent of all credit cards are owned by men and 10 percent by women. As a country we should not be proud of this. We should be figuring out a way for female participation of labour to grow but the current situation. It turns out it’s true for home loans, personal loans and car loans—90-95 percent is all men.

The second thing about credit cards that we have noticed is that, most customers usually used to struggle to use multiple cards before CRED. We have seen an interesting behaviour that earlier, they used to spend only on one card because I remember the date and all of that. Now that CRED allows them to seamlessly manage all the cards in one place, suddenly the spends on all the cards have increased because they are able to remember, we have used this card on Flipkart so, let’s use this on Amazon and lets use this offline. They are able to use all their cards and still not miss their due date and continue to spend. So, that is an interesting behaviour that I have seen.

The third thing that we have seen is that, people have actually increased their spends on credit cards because CRED coins have a strong correlation to how much you spend on a credit card. You don’t get CRED points till you get spending on a credit card. There are no other ways to own CRED coins. So, if you see every time a customer comes on CRED, there is a significant amount of jump that we see on the credit card spends. We have not quantified yet because we want to be sure before we put that data out there. But we see a pattern that there is a line that is bent-end before they come on CRED, and there is a line that just goes through a small step function change on total monthly expense of that credit card.

of all credit cards are owned by men

I just want to move to the startup ecosystem and by the virtue of the fundraising you have already done in the user base that I believe would have gone up. I take on board that CRED is also turning out to be immensely successful. In the past, it had a successful start as well. What’s your view on the start-up ecosystem?

Two things positive that have happened is that, for the first time we actually have a mature ecosystem. We actually have good data speed, good phones. When I started FreeCharge, it was impossible to download a 5MB application and not delete. People used to delete pictures and apps because the phones capacities were not there. Now, we have passed that stage. Data is affordable, phones are affordable, and consumers now have EMIs to buy new phones and have better phones. That is big change and that aids the tech ecosystem in a very big way.

The second thing is that, there’s literally very little fear in at least 30-40 million customers to transact online. Take 10-15 years ago when I was doing online businesses, doing online transaction, paying online all that used to be like massively a big deal issue. People, even if they had credit cards, would order stuff on cash on delivery because they would just not trust anything. I think that’s a big change. We have seen a systematic change that people are wanting to use more and more options digitally which is the big positive change.

What could be better? I think what could be better is that we build more India-focused problems. For example, CRED wouldn’t make sense in many countries because 50 percent of customers in many developing markets have to auto-debit on their credit card and they don’t need to remember due dates. But India is a low-trust country and therefore it is a very unique offering on the built over here. People want to check the bill, make sure the amount is proper and then take a pill in not have automatic deduction on the platform.

The second point is about the majority of the ecosystem which has come in right now. I believe that a lot many original ideas still are to be done and I think, second time founders—you see a pattern. They are going for unique ideas that make sense for the country. I would expect that a lot of new founders should take up learning from that and make sure that they do not copy ideas from China and U.S. and try to plant them in India. India’s a unique country with its unique challenges and has very different reasons.

So, there are lots of opportunities and gaps and as long as founders start thinking about where people are spending money and build products around that versus build products and then hope that people spend money on that. That behaviour has to change.

We know that India spends disproportionately on weddings. How many startups do you know are with more than $10-million valuation in the wedding space? The answer is zero.

I wonder if it’s the issue of the ecosystem or availability of good quality seed funding, but we see a lot of startups in Silicon Valley building platforms/apps which are going out and making their presence felt across geographies and not just in that country. What do you think holds back the start-up ecosystem in India from being able to do that?

I think what I would say is the market size. Even if in the U.S. if you made a start-up for your pet to be taken care or monitored on the app, it’s a large market. There are probably 200 million pets that can be monitored on a camera and people are very happy to pay $30 a month for that kind of a product. The market in India is extremely shallow. If you look at the Bollywood industry, maybe 2,000-3,000 screens contribute to 80-85 percent of all box offices revenue.

If you look at credit card spends and debit card spends, with 900-million debit cards, we have $8.5-million of spends and 22 million unique customers having credit cards in India have the same amount of spend. So, I think it’s about identifying what the market is—India is not China. 92 percent of urban Chinese women work and there is dual income in all the urban Chinese households. In India, less than 10 percent of urban Indian women work and there is no dual income in the household.

Therefore, you have to understand that what the Indians are spending on is not the same. Our per capita income growth is going to be a big thing that I worry about. Personally because, no country has managed to cross $3,000 per capita income growth without 30-40 percent of women actively participating in the labour force. Nobody seems to have been talking about that, but Bangladesh has 68 percent of urban participation of labour from women and Pakistan now has around 20 percent. That’s higher than India.

Is availability of large risk capital at the initial stage also an issue here? I hear a lot of people speak about how they have an idea which is brilliant, but funding needn’t necessarily come in at a good price. If it comes, it comes at a price at which it squeezes off almost everything that the entrepreneur may have.

I disagree with that notion. I think we have trained those founders in a very poor manner in this country. It’s like saying that I cannot run till I have Nike shoes. That’s terrible. If you can show that you can run, people will give you Nike shoes. There is difference between the two. I think we cannot say that startups aren’t happening because there is no capital.

Historically, all the Indian startups didn’t happen by funding. People borrowed money, sold their houses, got something started, built it from scratch. I think it is unfortunate that we are assuming that. That is also happening because every time a startup news is covered, it’s only when it raises funding. You put the founder’s picture and show this guy raised $5 million and this guy raised $10 million. You assume that’s the benchmark and that’s the mark you need to hit. But we don’t understand that only when you hit a traction and metric, people give you money. But unfortunately, very little coverage is done on these things and therefore a lot of aspiring entrepreneurs think of capital is the only first mark to make their startup successful.

The way you started off these businesses, both of them, tech-enabled. But you weren’t a tech guy, as I’ve learned. In a manner, you’re an inspiration for people who don’t essentially have any coding background but want to start a company. What’s the secret sauce?

First of all, I am not a technology guy. I am a philosophy major, I stumbled into technology. We tend to forget knowledge of technology֫—the ability to be able to write a code and our ability to understand what technology can do are two different things. If you don’t understand the discrimination between that and you say, “I am not doing a tech start-up because I do not understand tech”, that is not a fair justification.

We all need to understand tech. I don’t think we have a place in future if we do not have the ability to understand tech what I can do to make things better. Now at least I will be fortunate to try multiple experiments. This is my fifth or sixth startup in different categories. The thing is that, we have to understand that one cannot say I don’t understand tech. Even if you’re running an apparel business, you have to understand tech because you if you don’t get Instagram right, you will never give to make a big business. If you don’t understand online commerce, you’ll not understand good business. If you don’t understand how to make WhatsApp work for you, you will not understand.

So, this notion of saying that “I don’t understand Tech” is limiting. I think we should get out of that thing. I think there are enough and more avenues to learn tech. Probably, I would urge people to work in tech companies to understand that.