Why CRED lacks CREDibility – A critical evaluation of CRED and a critique on its much touted “Unicorn” valuation!

An opinion piece from a banker with 2 decades of experience in lending with an insiders perspective on fund raising in the Indian start up ecosystem

When you can get the otherwise stoic “Rahul Dravid, The Wall” to act contrary to his otherwise soft persona, “the shock and awe” does help create a buzz around an app promising exciting rewards for merely routing card payments (only to be disappointed – more on that later). Freshly off a fund raise taking its valuation to USD 2.2 billion, a mind numbing value attributed to an enterprise within 3 years of incorporation,  CRED seems to have finally opened the floodgates from the “classes” to the “masses” while seeing its subscriber base more than double in 3 months.  

That’s inCREDible! Not quite  …

Lets critically evaluate and bust a few myths around the business of CRED and its inCREDible (stated with a fair degree of inCREDulity) billion dollar valuation!!!  While the rest of the world hails CRED for its achievement, we examine the various offerings by CRED , the value attributed to the underlying business model, the shenanigans of its maverick founder Kunal Shah and an argument which challenges every probable justification behind the exalted “Unicorn” status.

Kunal Shah’s CREDentials are as good as they come…

This is Kunal's second venture after Freecharge — a coupon-powered mobile recharge app, which Snapdeal bought for $450 million in 2015 and which was subsequently acquired by Axis Bank at a substantial discount. Axis Bank has since seen complete value erosion of its investment what with the recharge with discounting proposition practically and helpless shareholders paying the price!) Clearly, Kunal Shah has mastered the strategy to “play to the unicorn investors gallery” having played ball in his previous stint as an entrepreneur (and literally hitting it out of the park!)

A brief history of CRED and explanation of the business model is in order…

Founded in 2018, CRED rewards users for paying their credit card bills on time in the form of CRED coins/ points which can then be redeemed for various products / offerings / discounts on its online or partner stores. Ostensibly, and as per Kunal Shah’s own admission, CRED intends to create a gated community of high credibility (read high credit score) individuals who haven’t been served well. The crème da la crème (top 1-2% which forms the creamy layer)  of India’s population  is sought to be rewarded with the added proposition of ease and convenience of quick card payments through its platform. The trappings of convenience, rewards and ease allows members in the CRED ecosystem to manage their entire credit card management cycle while allowing CRED to access the members personal data. This highly sought after base of top notch quality customers would be a sub-set of the entire spending crowd with proven credentials, a gated community if you will to which partners (lenders, retailers, marketing agencies) would perhaps give an arm and a leg to gain privileged access to. While CRED has explicitly stated that they don’t share data with third parties, we know the usual spiel adopted by such platforms who claim to “partner” and not disclose private data behind vulnerable walls prone to breaches and hacks.

Basis for valuation – Debunking the myth!

This entire purported investment thesis (and hence the exorbitant valuation) seems on pretty loose ground for many reasons which are enumerated below. Lets try and unravel the mystery and critically check if the economic rationale and business justifications driving this funding party stacks up!

1)       Upon sign up, CRED get access to your entire library of mails, messages and credit card statements.

Unbridled access allows CRED to sell this data to those pandering to the needs of the top card toting consumers and potentially monetise spend and credit data (which is technically a blatant infringement on privacy of the consumer). Despite the opt-in permissions taken upon sign up, the ability to read messages, mails and bank statements is usually a blatant misuse of privilege and a “trojan horse” deployed to enter the secret chamber of highly confidential but rich data. This intrusion should unnerve all card companies (and the regulator) from blocking access but company use the “oft-misused” route of using “user permission” to use the data for its ulterior use and an unlock key which is proffered merrily by the digital natives in exchange for pennies in the form of rewards. A business proposition hinging on such invasion is likely to be frowned upon if not rejected by the premium class of customers CRED intends to target in due course.

2)       CRED rewards its users with CRED coins/ points which helps them to score offers/ discounts/ encash points by way of cash back.

The entire business of rewards is a  ploy adopted by credit card companies to entice card members to feel rewarded and agree to the usurious rates (payable for delays beyond the due dates). CRED points and CRED coins are, at best, an effective bait to induce rapid sign-ups but fail miserably in genuingely rewarding customers considering the ridiculously low value (of a CRED point) leading to public ridicule on social media (some meme worthy mirth there). The farce of rewards becomes apparent when one applies these points / coins to score discounts from over-priced products and services which are, in any case, listed at the same (if not lower) price on other e-commerce sites.

3)       CRED is out to change the relationship of card holders with card companies by ensuring that payments are made on time, every time.

Thanks to the general propensity of a section of card holders (around 10-15% habitual procrastinators usually) to delay payments and not pay on time, credit card companies make a decent return on capital even after accounting for write offs! CRED has lofty goals such as seeking to help improve the credit ecosystem by prompting such defaulters to pay on time!  CRED is clearly trying to hit card companies where it hurts the most! (their  bottom-lines!). The macro argument in favour of consumers at the cost of card companies is counter-intuitive as it goes against the very grain of card companies. CRED gives its members reminders and soft nudges to pay on time. Infact, any delay leading to charges and penalties is highlighted with some astonishing detail through some cutting edge and insightful (but clearly intrusive) analysis. While this can save result in precious savings for those who perennially delay in clearing their dues, it can directly impact the economics of the card companies who literally earn a large chunk of their earnings from interest (beside merchant acquisition fees which are already  under pressure). Now would these card companies resist such clever scraping of data and due dates if not completely bar access to CRED in due course?

4)       CRED can help consumers use their higher spending power to gain privileged access to luxury at a discount and are most likely to shop.

Engagement on the CRED app is definitely low compared to other fintech or payment apps and is usually restricted to the monthly credit card payment cycle. In the absence of choice, usage of CRED for shopping would continue to remain impulsive and occasional. A cursory evaluation of this section reveals and overbearing presence of ear-buds, perfumes and curated luxury items on sale on the rewards section of the app) who seem to have “paid” to be listed to profit.

5)       CRED has an aspiration value and may be used to flaunt a better credit status

While wanting to be a closed knit gated community of spenders, CRED seems to pander to the aspirational class of consumers waiting at the gates for an invite–only party (perhaps catering to the desire of the upworldly mobile to feel good for being let in or feel left out. The realisation, unfortunately, post sign up and initial use, is that the club-like feature was a sham and the feeling exacerbated post a few months of usage leading to disappointment at the quality of rewards and items on sale.

6)       CRED is free! Who doesn’t like to get paid to use for free!!

The cost, as most who have shared data on the net without an afterthought, have come to realise is that the data which the users voluntarily share but inevitably end up regretting, is not worth the rewards! If a product being sold is free,  YOU , dear reader, are the product on sale!

So what am I missing?

EnterCRED CASH, an instant on-tap loan offering, that has  started appearing on the CRED app. On wonders if all the hysterics, including claims of superlative rewards by Rahul Dravid,  are a clever segue to lending and aspirations to become a lending app. Of course, CRED has not gone to town advertising this product and it seems to be testing waters lending to high quality pre-qualified credit card users. It does seem like a surreptitious attempt to lend behind the backs of the credit card companies whose dues can eventually be cleared at significantly lower costs on tap, especially if the discerning user has no cash to spare!

Well played” said Rahul Dravid (albiet, not with a straight bat!)

Evidently, Kunal Shah believes that he can underwrite better than any other player. Agreed, CRED has deep insight on consumer behaviour allowing it to devise strategies to the avoid pitfalls and risks associated with traditional lending. CRED does have the advantage of active monitoring of all card accounts unlike traditional card issuers having access only to one card data). However, the delays and defaults would reflect with a lag as and when the statements are mailed to the user allowing CRED to pry and take pre-emptive corrective action allowing it to stay clear of potential defaults. Talk of trying to close the gates after the horses have bolted!

Wait, CRED can anticipate such delays through analysis of spend patterns and use its “superior intelligence” to avoid lending to such customers in the first place.

This argument can have some merits in the short term. However, it is unlikely to remain a sustainable edge over competition what with every  digital wallet, social app, and ecommerce sites and now, payment and traditional lenders tapping alternate data directly (or through SDKs housed within their app developed by third parties)  allowing real time monitoring of data within the android ecosystem. However, such use continues to be frowned upon and remains a regulatory grey area. Fast evolving regulatory restrictions on access, use and sale of personal data can lay asunder repeated attempts by such essentially data mining companies (in disguise, of course).

An expensive game plan with the promise of a  rainbow with a pot of gold at the end…

Retail credit is a last frontier for most lenders. It continues to attract most banks, NBFCs and fintechs in droves. Despite high lending rates, impairment due to credit losses which can overwhelm any player in due course, the lure of high margins is  too difficult to resist. Perhaps, CRED hopes to straddle the space of a digital lender with negligible delinquencies owing to its superior “insights” in the high stakes game of instant loans. However, the digital lending space is a landscape littered with corpses  of failed ventures thanks to aggressive lending fuelled by a burst of investor glory. The folly of basing valuations without testing the underwriting capability and track record of a “fintech” need not be over-emphasised.

But ain’t CRED building the blocks for which it must spend?

As any analyst worth his salt would admit, the devil is in the details. CRED has spent more than Rs. 700 for every rupee of revenue.  The total earnings of Rs. 18 crores in FY 21 comprised of ~ Rs. 0.5 crore in business income and Rs. 17.5 crores earned out of interest on deposit! (Caveat - These numbers are based on reported numbers available in the public domain). 

Now comes the hard part!

Purportedly, CRED would offer “customised” products at “lower rate” or “cheaper price” to high - quality customers. Credit card usage data and spend patterns with  repayment track records can be highly deceptive in understanding and underwriting credit. Credit history from cards is influenced by sudden need, impulsive purchase decisioning while occasional delays in repayment due to mismatch in cash flows or even something as incongruent as “missing out” on a due date is commonplace. Considering the fact that the tendency to default on cards by those who possess a high credit score is low, the ability to serve same set of high quality customers with instant loans on a platter cannot be valued at such exorbitant sums (when the same data set can be accessed for as low as Rs. 10 per CIBIL report by traditional lenders and aggregators in bulk). A successful lending institution needs an entire village working for it. From operations, to collections, to recovery, lenders have to manage a complex regulatory environment while ensuring that the book is pristine, a tall ask for anyone without any history in lending. If investors have placed their bets on another lending app without a proven track record, they are in for some surprises!

So am I claiming to be smarter than those Ivy League educated investors who have invested their money!

Investors who have funded Kunal Shah have initially endorsed an idea - to change the credit card landscape in India  and funded an amount of USD 30 million (led by Sequoia which had incidentally, also  backed FreeCharge). This was followed by another round by the members of the big boys club in the PE space (DST Global, Ribbit Capital, Tiger Global, Sequoia who jointly invested USD 80 million). They have again thrown their collective weight in the last round amount of USD 215 million taking the enterprise valuation to USD 2.2 billion (all in a span of 3 years!) Not surprisingly, the early set of investors have thumped their collective chests claiming a stellar track record of superlative gains!

This start-up success story sounds familiar! Of course it does …

The usual trope of a serial entrepreneur (read serial fund raiser) is as follows:

a)       Find a niche within an addressable market large enough to entice gullible investors (read angel, VCs, PEs followed by Tigers/ SoftBanks of the world and guided by “dyed in the wool” investment bankers!)

b)       Show rapid adoption through clever GTM (go to market) strategies (referral or word of mouth followed by celebrity endorsement a la Rahul Dravid and the entire 90s cricket team usually  fuelled by investor dollars)

c)       Use data as a tool to cut through the clutter and personalise offerings of non-essential luxury items with maximum opacity in pricing (and hence the lure of high discounts)

d)       Find engagement hooks to show high retention and usage ratio – rewards, games, prizes et al, to fool investors into showing higher app usage metrics than warranted by actual app usage

e)       Keep pivoting the model until you strike gold! (read another fool to wear the investor hat in the ever- increasing valuation round robin)

CRED seems to have adopted the playbook to perfection what with the prior experience in fund raising and knowing the investor pulse as well as Kunal does! CRED has quickly evolved from credit card payments to Rentpay (monthly rent on credit card for a small transaction fee) to CRED Rewards (points/ coins) to show increasingly improving  metric on every valuation parameter such as GTV, (Gross Transaction Value),  GMV (Gross Merchandise Value), unit economics (revenue and cost per unit of transaction) and the usual industry benchmarking standards such as CAC (customer acquisition cost), MAU (monthly active user), time spent on the app, drop off rates and the like.

But this Emperor has no clothes!

This would seem like a pretty successful investment thesis as long as these investors are not the last ones holding the proverbial lemons!  The so-called success story is sold through countless reams in mainstream media and every pink paper or online publication glorifying the mind-numbing valuation as if it were an end in itself. FOMO (Fear of Missing Out) and hubris leads a clamouring for a piece of the pie resulting in an eagerly awaited and anticipated IPO at lofty valuations which is invariably lapped up by gullible retail investors. A veritable “Pump and Dump” scheme where the retail investor bears the brunt and realises that the “Emperor is not just naked”, they are the ones left without clothes on!

Meet the man behind the myth!

If one is guided nature of his answers to most interviews (and I have personal witness to his dismissive smirks on India and Indians), Kunal Shah likes to play the card of a crafty entrepreneur who likes to tout his  ability to “disrupt” the status quo and who clearly knows how to find the elusive “pot” of honey in the crowded landscape due to his “deep” insight into the consumer psyche.

From selling “free” coupons to “free” CRED points, the only clear disruption that he seems to have showcased, till date,  is an unequivocal pandering to the innate desire of an Indian to load up on anything available “free” or “discounted”.  To use this oldest trick in the trade (and you don’t need to be a Bania or a Gujarati to understand that!), Kunal is clearly raising money cheap to create a sexy app to read your card statements, throw investor dollars at the salivating freeloaders, and use that privilege of access, to sell the “insight gained through AI/ ML (Artificial Intelligence and Machine Learning) to other “friends” in the fintech, ecommerce or consumer space sloshing around in investor cash!

The CRED House of Cards!

While ease of use and eye-catching UI/UX have helped CRED entice the initial set of consumers, one cannot help but wonder if card companies are oblivious to the clear conflict in interest in allowing CRED to use their proprietary (and often confidential client data despite user permissions) to start lending to the same customer set and gradually fill its coffers (with investor cash and not business profits which are elusive right!).

This conflict between CRED and CARD companies will, perhaps, eventually prove to be the undoing of this well positioned but fundamentally flawed house of cards IMHO!

Standard Disclaimer: All investing is a gamble and so is this opinion piece which would rather “Go Short” on CRED!

So before the investor dollars dry up, lets play the CRED slot machine which, incidentally, is an addictive in-app casino game designed to keep you hooked (talk of playing to the gamblers instinct and that of the “investors”). I am sure that there are better odds of winning at these games than betting on CRED changing consumer behaviour while monetising data in a legit and ethical way! You better encash those CRED points before they disappear for good!  

P.S:

I have nothing personally against Kunal Shah and don’t despise his status. I don’t envy his position or achievements till date.  I am merely aghast by the fact that a mere payment app has earned a valuation of USD 2.2 billion with revenues of less than a crore and annual losses exceeding half a billion dollars! This would rival the market cap of listed banks in India who take the entire credit risk only to see a glorified data thief in the guise of a payment/ rewards app laughs all the way to the bank!