Cred Business Model - Deep

Dive*
By Osborne Saldanha

It's easy hate on something that we do not fundamentally understand

(e.g. India's action on Bitcoin). To understand CRED you need to throw
away your business books and refer to psychology ones. Better yet, bring
a behavioural economics book. Actually don't throw out that business
book just yet, we'll keep it for later in this post.

Any founder will tell you that to build a lasting business you need to have
customer trust or customer loyalty. But very few founders know what
that means, what needs to be done and more importantly how to
maintain trust at scale. Kunal Shah is one of the few founders who is
approaching his venture from that Trust-first angle. Think of CRED as a
business trying to codify, scale and reward trust in an otherwise
trust-deficit country. Interactions with every fintech product is
transactional, CRED seems to want to change that. Every product or
feature of CRED is a way to double down on trust.
But what is CRED?

In CRED's own words "CRED is a members only credit card bill payment
platform that rewards its members for clearing their credit card bills on time".
To me CRED is the largest (6 mn users), exclusive, community of high
spenders with the highest credit scores. High credit score doesn't equate
high spending, but does mean sound credit behaviour. In exchange for
this sound credit behaviour, CRED rewards its users.

An important feature of high credit score users is that they are

Transactors i.e. they usually repay the entire outstanding amount on
time and don't get charged any interest. Therefore, credit card
companies don't really earn any interest income from Transactors, but
earn commission (MDR) from the merchant. CRED's marketplace is its
way to earn MDR from these users, because interest income is tough.

It's important to note that CRED rewards users for repaying their
credit card bill as opposed to other rewards programs which reward
users on spends. This is a major difference which is very nuanced. There
is no direct comparable anywhere in the world or in India that I know of.
This makes it doubly tough to understand the business model, but more
importantly tough to grasp what's the potential here.
What's the market for CRED?

According to RBI, India has 60 mn credit cards and 886 mn debit cards
issued as on Dec-2020. Annual value of spends at POS in 2020 using
Credit Cards was USD 83.0 bn whereas Debit Cards was USD 85.8 bn
(Jan-2020 to Dec-2020). This, in a pandemic year, I assume spends are
much higher in a normal year. Important point to note is – Far fewer
credit cards issued but value of spends at POS is virtually similar to debit cards.
Going deeper, average monthly transaction value of Credit Cards at POS
in 2020 is INR 3,374 (USD 45.6) vs. INR 1,501 (USD 20.3) with Debit
Cards. This shows that credit card users on average spend 2.25x more
than debit card users per month. Avg. credit card spends will be much
higher if you look only at active cards in use etc. but I don't have access
to that data. This credit card spend is exactly CRED's market! Further,
within a short 2 years, CRED has 6 mn users (60 mn credit cards are
issued) and processes 20% of *all* credit card repayments in India. For a 2
year old startup, if that's not massive, I don't know what is.

How do CRED's products make sense?

As mentioned, IMO, each of CRED's product and feature is a way to

double down on "mutual trust" and "exclusivity". CRED's first product,
Card bill payments, settled within minutes – this gets users to trust
CRED. Second, Rewards on bill payments, CRED trusts that the user will
do good and rewards them via CRED Coins (can be used to spend off
platform), Cashbacks etc. Third, CRED Protect - scans the user's credit
card statement and alerts users of hidden charges. This tells the user that
CRED can be trusted and depended upon - this is super important.
Fourth, CRED Store, the marketplace of "exclusivity". Through the store
users can access exclusive products and experiences – again builds trust
that CRED will curate exclusive offers from high-end brands for the
lifestyle of its users. Other products include RentPay (pay rent via credit
cards) and CRED Cash (Instant loans). For users that don't make the cut
(min. credit score of 750), CRED has a separate user journey to improve
their credit score – again building trust.

Incredibly, CRED's trust building doesn't stop there, trust permeates

through its culture as well! CRED pays its employees' salary on the first
day of every month (as opposed to end of month), they have flexible leave
policy, deliver laptops along with the offer letter, no designations and the
list goes on. They even provided some employees with liquidity in their
ESOP's – creating wealth for those employees.

Lastly, luxury, lifestyle brands, come with an air of exclusivity, brand

value and signalling. Think Gucci, Prada and the likes. CRED's app is
designed to signal the exact same thing to its users. No other Indian app
is designed as a premium, luxurious app. It's a different thing altogether
that we do not intuitively associate software with luxury or
premium-ness.
What needs to work for CRED?

Obviously CRED has to still prove to itself that this high trust, high
spend userbase can generate revenue in the long term, but it's still early
days. Secondly, CRED has to also make sure that it provides its merchant
base with increased conversion to sale ratios for its CRED Pay feature. If
these merchants don't see better conversion or higher basket value or
even new user acquisition, it will be tough to sustain this exclusive
marketplace. Users may still use the app for the incredible ease of card
bill payment and hidden charge alerts, but surely CRED's ambition is to
be more than that. Folks at CRED are incredibly smart and already know
these things. Most likely they're already working on it. Sure, some
products may work, some may not - that's part of company building.

What's the future like for CRED?

This section is me skirting around speculation territory but hear me out.

IMO, the biggest opportunity for CRED from its current product suite is
making its CRED coins available for spending offline. That's where true
value and revenue can be unlocked, with some serious moats. Offline
coin spending is a significantly tough problem to solve for but also
where massive volumes come from. For future products, I believe there is
an opportunity for a subscription product, a wealth product, offline
experiences, exclusive event access product, embedded insurance
product, corporate card payments & benefits or even a NFT exclusive
collectibles product. I slipped that last one in to sound culturally woke.
With trust, users will use CRED's products assuming that CRED will
always do the right thing for them. There are a lot of products that can
be launched for such a mutually trusting user base.

As for whether CRED's USD 800 mn valuation is justified, honestly,

that's for CRED's investors to care about.

*This article was written and published in ‘Fintech Inside’ Newsletter by Osborne Saldanha.

https://fintechinside.substack.com/p/fintech-inside-22-27th-feb-2021-cred