The story behind Cred’s $800-million climb within two years

Not everyone gets the business model of Cred and the justification behind its eye-popping valuation, but Kunal Shah has made something click with his second venture after a successful exit from Freecharge.

The Bengaluru-based startup has been moving swiftly in terms of products, customers and valuation. Shah started with a bang, raising $30 million in late 2018 in a seed round, one of the largest then in the Indian startup ecosystem.

Post that, Shah bagged $120 million from investors such as Sequoia Capital, Ribbit Capital and Apoletto Asia in a series A round that catapulted its valuation to $450-500 million. Finally, the startup raised another $80 million this week in a round led by DST Global, with existing investors. Shah took two years to push the valuation of a credit card bill payments company to $800 million.

So, how did Shah manage to knock at the coveted unicorn club within a couple of years of launch? Unicorns are startups that have a billion-dollar-plus valuation.

A coveted club

The entrepreneur Shah is a unique mix of product and marketing, something he did really well with Freecharge and something he is doing amazingly well with Cred. In a country where everyone talks about the country’s 500 million smartphone users, and a billion-plus population with youth forming a large chunk, Cred took a contrarian bet. He targeted the premium credit card users in the country and seems to have struck gold.

As of September, there are 5.8 crore credit cards in the country, with a market estimated less than 3 crore unique credit card holders. On top of that one has to be a prime borrower to be able to break into this club. As of October, Cred had 30 lakh customers on the platform and 20 percent of all premium credit card holders as its users.

It has also managed to get them coming back to the app with high engagement rates.

“They have a great customer engagement rate, I am told the app open rates for their customers is three to four times a month,” said the founder of a startup that operates in the credit card space, on condition of anonymity.

New business verticals

High engagement is the key to understand the Cred story. While the first part is all about the customer acquisition strategy, its engagement strategy now needs to be understood. Once you have a base of 30 lakh highly valuable customers on the app how do you ensure they remain engaged?

The answer is to keep offering interesting products. That is where Cred has launched an ecommerce store and a rent paying facility. Two extremely valuable products for this category of customers.

Cred Store is an in-app purchasing platform, where consumers can buy curated products. Then it also launched Cred Rent Pay, with which consumers can pay their monthly rents through their credit cards. Imagine earning rewards on rental payments and redeeming them within the app itself.

“The actual story of Cred is how its products and services have been consistently working, which has caused investor intrigue,” said a person who tracks the company closely.

While an exclusive club is a good marketing buzz, getting customer engagement is the key and that was what drove its valuation northwards over the last few months, he added.

Also its allied businesses around rent payments and ecommerce are not that exclusive either; they are used by almost every salaried professional who works in places such as Bengaluru, Noida or Mumbai. Cred, while claiming exclusivity, has also kept its products simple and usable.

Indian Premier League

Cricket and Bollywood are the top big draws for Indian consumers and Cred has played both the cards together. It advertised heavily during the 2020 IPL tournament and brought in the best actors of yesteryears to campaign for the product. From the likes of singing sensation Bappi Lahiri to Bollywood stars such as Madhuri Dixit, Govinda and Anil Kapoor, everyone was pitching for the product.

Interestingly, none of them got it. But, apparently, consumers loved it.

“You have to agree that investors do get drawn to the dazzle of a startup that is growing really fast. Also, Kunal is a big draw himself,” said one of the industry insiders quoted above.

He added that Cred managed to get 20 percent of the most premium consumers in two years. These are business metrics that investors love and they want to be part of such a growth story.

Another startup founder pointed out that looking at the way Cred spends on acquiring new customers, they must have internal analytics to prove that a customer once on the platform sticks on and remains engaged.

An ecosystem play

The buzz around the startup world now is an ecosystem game, where consumers might come in with a central hook. Then, offer everything to them and keep them engaged. Shah is trying the same with Cred. While he has created a central hook through credit card bill payments, with ecommerce, payments and lending, he is trying to set up the entire ecosystem.

Cred offers UPI payments, which can be used to make all forms of transactions. Then it offers rent payments and credit card bill payments. This means that at the beginning of the month, any working professional can come to Cred and get all his basic needs fulfilled.

Next there are rewards for every transaction, which is massively gratifying for this customer base. For instance, Cred ran a Twitter poll on October 25 asking if its users wanted more Cred rewards and almost 85 percent voted an overwhelming yes. What made this interesting was the follow-up tweet, asking respondents to send a screen shot of their answer and those who said ‘Yes’ would get a reward.

What Paytm did with ‘cashback’, Cred is doing with ‘rewards’. There seems to be something for everyone here.

The ultimate cash cow

Lending is the ultimate money making game and Cred has started testing that, too. Cred has piloted Cred Cash in collaboration with IDFC First Bank, where consumers get a credit line and the interest rates offered are one-third of that of the credit cards. While that might sound low, credit card interest rates are very high and in terms of consumer loans, Cred seems to be offering credit at interest rates that are pretty much industry standard.

But what is important is that while Cred has customers who have a strong credit score, the platform also has been tracking their bill payment behaviour. It can boast of a good set of borrowers whose chances of default are low. This can be a future growth prospect in terms of business revenue for Cred.

“With every passing day I can see how lending is becoming more of a feature in the startup ecosystem. Get consumers for something, then offer them credit,” said the founder of the credit card startup quoted in the beginning.

While these are still early days for the credit business, the prospects continue to be high. In fact very recently, Razorpay, which marched into the unicorn club with a $100-million funding round, is understood to have drawn investor interest with its neo-banking platform and not its core payment gateway business. From Cred investors’ perspective, they are looking at the future and lending might emerge as a strong play there.

Into the future

Crystal gazing, there are two things that may happen to Cred from here: one is to create an exclusive club of 100 million active users, who use Cred like the American Express credit cards of old. Two, customers lose interest as the buzz fades away.

In the first scenario, Cred will gallop onwards in terms of valuation and there is a high chance that a strategic investor might want to scoop it up at a premium.

In the second scenario, Cred has a massive challenge to keep coming out with attractive products and features. While its ecommerce proposition might have worked, Cred will need to partner with more brands to offer interesting bargains to consumers. Further it has to keep the brands happy with sales and promotions so they remain interested in the platform.

Shah had once wondered during an interaction about offering exclusive visa access to Cred users, since they are the cream of society. Surely, he will conjure more interesting ways of keeping customers engaged.

Then there are the banks and credit card companies. Banks have been actively trying to become super apps themselves with shopping, bill payments, rewards, loans all built into their digital banking offering. SBI Yono is a prime example. Can it create a Cred equivalent for SBI Card holders through Yono? Perhaps. Perhaps not.

What about HDFC Bank, Axis Bank and ICICI Bank? It is mostly their customers who use Cred. Will they look at Cred more as a partner or as a threat? In the initial days, while partnership works best, if Cred becomes big enough there will be competition. If Cred goes aggressive on lending will these banks not lose their prime customers?

The questions are many and the answers few. But what can be said with certainty is that Cred has created massive ripples in the credit card ecosystem in India. The small but highly valuable consumers that Cred has targeted bring with them a massive business opportunity just waiting to be exploited, and Shah has already sniffed that out before everyone else.