During his recent visit to Lendit (US), P.K. Khaitan (Managing Director) ,NeoGrowth and Jackson Scher (Quona Capital) sat down to discuss NeoGrowth, the value of high touch models, the future of Indian lending, and what separates NeoGrowth from the crowd.
J.S: Here at Quona, we believe in combining big ideas to create value. This includes combining finance and technology, east and west, impact and investing etc. As an individual, you typify these connections. Your previous start-up became the status quo for payments in India, and yet you are back again as an entrepreneur trying to disrupt a new market. In what way might your experience with NeoGrowth match these disparate ideas together?
P.K: In terms marrying ideas, we describe NeoGrowth as a tech & touch business. We’ve certainly come across businesses in our space which are all tech-lending companies who claim it’s all done instantly, that “we don’t even need to know who the customer is; we don’t need to meet her, talk to her. That’s not NeoGrowth. For us, tech is important, especially when it comes to customer acquisition, underwriting, and portfolio management. Tech is at the core of everything we do. But having said that, the touch is really important as well. For NeoGrowth to know the customer, for the customer to know NeoGrowth – to lay the foundation of a partnership and of a relationship that can go a long way is crucial to us. So to that extent, what Quona stands for and what NeoGrowth aspires to do are very closely aligned.
J.S: Something we talk about a lot is the fact that our companies are fintech startups innovating around certain shortcomings, whether in infrastructure or connectivity environments – and yet they are innovating through touch. How do you see NeoGrowth fitting into this “disruption via touch” model?
P.K: Our customers are small businesses, typically “mom and pop” establishments,convenience stores, pharmacies etc. Touch matters a lot to them. In fact, one of the things we hear from them on a regular basis is, “Why are you the only guys who come and talk to us? Nobody else seems to have time for us.” So we realize that no matter how serious (the merchants) are as business people or how important it is for them to make money, a touch and a relationship is very, very important. Now, why do we focus so much on touch? Well, it’s a new product, it’s a new concept, and we want to be sure customers understand it completely and derive confidence from knowing who we are. I remember when we were doing our last round of equity investment, one of the investors who went to meet merchants asked a small shopkeeper, “So why did you take a loan from NeoGrowth?” He responded, pointing to our loan officer, “I took it because of this guy! He came to my shop, sat with me and explained everything – that made all the difference.” So NeoGrowth is still old school as far as touch goes. What we’re trying to do is to ensure that we can still build scale. At scale, we will need to leverage technology in order to make decisions using massive amounts of data and make them very fast.
J.S: On the topic of scaling the model, we’ve seen that, in SME lending, touch inherently doesn’t scale as well as technology. Do you envision a NeoGrowth in 10 years that has the same levels of touch as today?
P.K: The unit economics of this business, customer acquisition, are always challenging. What we find is that small loans, from $4-5k up to $10-12k, are very expensive in a touch model. But the moment you cross that threshold, then you can afford to invest in touch. So what we’re actually doing, as we speak, is building technology that enables us to automate a large portion of the processing for the smaller loans. So definitely, I think, the scale on the smaller loans will come increasingly by moving to the tech side. And yes, you’re right, to some extent, the scaling process is, one could argue, compromised. But then, we have to understand the lifetime value of the customer. We find that about 70% of the people who pay their loans to NeoGrowth come back a second time. Now that is smart business – investing in the touch to build that relationship to get the customer to come back to you.
J.S: It’s interesting that you mention there’s a threshold at which point touch makes sense. We’re seeing the exact same thing with one of our investments in Brazil, called BankFacil, who focus on digitizing the processing for smaller loans. That way, the unit economics can start to make sense for loan providers at that level.
P.K: We haven’t met them, but what you say is absolutely true. I think there are certain universal truths in lending. Customer acquisition is a very big cost in this business, and figuring out how to scale it up and how to bring down the cost is one of the critical success factors.
J.S: On this topic, I wanted to ask you about learning across regions. You’re in the US this week to attend LendIt, and we just mentioned a company in Brazil. What learning do you see that you can port to different regions, specifically what you can port to India? And then do you have a sense of what we really cannot port back to India?
P.K: The most important questions here are on data availability and regulation. For example, today in a mature market like the US, you have much more data that’s available. Credit bureaus get reporting not only from banks and lenders, but they get massive data from utilities, from telecom companies, etc. When you look at the small merchant who may not have large trade lines, that data becomes very meaningful. In India, it’s just not available. All we get is the banking data and the financial data.
The second aspect would be culture. There are things which you may do culturally in one market that you may not do in the other. And to that extent, all markets are unique. Certain things work, so in India what we’ve learned is touch is very important. Maybe there would be other markets where the merchant is just too busy to be disturbed and he’d rather just have an app on which he lives his entire life. So we have to be sensitive to the cultural differences as well.
J.S: On the availability of data sources – do you see a regulatory framework that 5, 10 years from now, might enable some of these models to work in your market?
P.K: It’s actually happening much faster than we can imagine. It’s really happening as we speak. We are seeing the convergence of three key factors. The first is the Aadhaar card, over 1 billion of which have been issued – this is a unique identification number which is given to all Indians. They’ll have their biometrics and fingerprints stored, and once you have this number various parts of your identity get linked to it, so whether it’s a bank account, whether it’s a driving license, whether it’s a depository account – all of that gets linked. Unrelated to this, and it’s all coming together, is of course the smartphone. You have over a billion mobile phone connections in the country, 250 million of those are smartphones, and the ratio of smartphone sales to total phone sales going forward is getting more and more favorable. So, it’s suddenly a very intelligent device which is getting into the hands of every Indian. And the third is the Unified Payment Interface (UPI), which is now allowing money to move between two Aadhar profiles through a smartphone. This has suddenly made it possible for Indians to do a huge number of cashless transactions which were not possible earlier. The cost of a transaction is down to less than a Rupee per transaction. If we take the confluence of these three factors and add to that the mobile wallets, payment banks and small banks, it creates this huge digital ecosystem with immense and available data, and it will be game-changing for businesses like NeoGrowth.
J.S: Can you share some lessons learned as a repeat entrepreneur?
P.K: Oh yes – you’ve got to make mistakes. You absolutely must. And it’s good to be very open about it. You did something wrong, what did you learn from that – what are you doing to correct/prevent it from happening a second time? The other lesson that we are still learning is we tend to get very obsessed with the quarter and with the year. And when we are growing at 5%, 10% month on month, it kind of consumes you. When we look ahead to our aspirations, it’s certainly beginning to dawn on us that there’s no way we can get there just doing more of what we are doing today. We have to do something completely different. So we need to be sensitive to where we are headed, and to invest some time and resources in getting there, while still reaching our short-term goals.
J.S: How has SME Lending changed in India in the last 5 or 10 years, what are some of the reasons for those changes, and what changes do you foresee over the next few years?
P.K: If I look at the last 5-10 years, very little has changed. SME Lending still sees government quotas for Priority sectors. So it’s being done a little begrudgingly. As such, banks are very nervous about the quality of the portfolio. There’s a deep element of mistrust on both sides. I’m hoping that a whole host of new businesses get into the space to change it – we are already seeing a number of startups getting involved. So there’s definitely huge excitement around the space, and I think that it is going to be these startups and fintech companies that are going to change the game completely. Banks will continue to be a large source of capital, but it is these new companies which are going to come in there and do the customer acquisition, the underwriting, and the portfolio management. They will help to distribute the money and collect better, and in a more secure way.
J.S: What, in your words, is the fundamental mission of NeoGrowth?
P.K: I think the mission is clear – to give loans to small businesses using technology and to create a societal change. So that’s very important to us – the impact of the loans that we give on the lives of the people we touch. We go back and we look at our customers – has it helped them to improve their credit profile? Has it helped to move them into the mainstream of borrowing? Can they get a mortgage; can they get a small business loan? We look at job creation, particularly in the lower income group, where unemployment is very high in the country. Have the loans we have given helped to grow the business and helped to create new jobs? We look at encouragement of women entrepreneurs. How many women entrepreneurs have we linked, how many jobs have we created for women? I think that achieving this outcome from our lending solution is an important part of why we’re set up.
J.S: Thank you so much, P.K., for taking the time to chat with us this afternoon! We’re looking forward to seeing NeoGrowth continue to disrupt the Indian lending market.
P.K: Thank you, it was a pleasure for me as well.