Financial inclusion – and finding a way into the financial system for the 2 billion or so people worldwide who live largely outside of it (or on its margins) – is a widely touted goal. The UN, The World Bank, The Clinton Foundation, The Bill and Melinda Gates Foundation – just a short and luminary list of high-profile public and private players who’ve identified financial inclusion and integration as a driving goal of the 21st century.
But financial inclusion – particularly in the developing world – though a widely pursued and lauded goal, falls into the difficult category of things that are easier praised than actually achieved.
“The goal is to improve people’s lives,” said Paul Christensen, a clinical professor of finance at the Northwestern’s Kellogg School. “Simply giving everyone a bank account does not necessarily accomplish that goal.”
Christensen believes that the widely sought goal of inclusion has no single magic bullet. Mobile money and marketplace lending have made important contributions to achieving meaningful inclusion, but key to really providing straightforward access to a full menu of financial services, according to the professor of clinical finance, is the ability to meaningfully evaluate and offer credit.
“If we come up with a system that is better at tracking people’s ability to pay back their existing debts, we’ll be able to offer financial services more effectively,” Christensen notes. “So there’s real potential in what these alternative credit rating companies are doing.”
Hamburg-based startup Kreditech is hoping to tap into that potential through its “simple mission to build a ‘digital bank’ for everyone.” Currently, Kreditech is pursuing that goal mainly as an alternative lender, focusing in particular on consumers with a credit history that is too thin, or too short for standard credit evaluation and on marketplaces where credit scoring is less than wholly developed.
“Traditional banks and most P2P lenders can usually only offer loans to customers with a credit score (FICO in the U.S.). However, in many emerging markets, only a small fraction of the population has a credit score (often as low as 10 percent of the population),” a Kreditech spokesperson explained to PYMNTS in an email exchange. “The remaining 90 percent do not have access to bank loans and need to resort to informal sources of credit like family or doorstep lenders. Kreditech’s big-data driven scoring algorithm can determine the creditworthiness of a customer with a high degree of probability, completely independent of whether the customer has a credit score.”
As it has pushed toward developing markets, Kreditech has eschewed the path of many other European entrepreneurs who looked to the U.S. to build scale. Instead, following in the footsteps of Germany’s Rocket Internet and Sweden’s iZettle, Kreditech has mostly steered clear of the United States when building its international presence and is found today in Australia, Germany, Kazakhstan, Mexico, Peru, Poland and Spain. Expansions in Romania and Brazil are scheduled to go off by the end of the year.
Pursuing the underserved has not always been an easy path and the firm has taken some heat for specifically pursuing customers without a long track record with financial services. But Kreditech is not worried, because their technology for evaluating risk is just that good.
“The technology is proprietary and self-learning, which means that now we are talking about data points that are not the same five minutes later,” a Kreditech spokesperson explained.
“While customer patterns are similar and continuously adapt to the time, so does our algorithm. It is hence much more up to date than any traditional scoring, which relies on historical data only, could ever be. We started out at very low loan amounts for short periods of time, e.g. 150 euros for 30 days. The main reason for this were faster learning cycles for the algorithm and limited defaults while the algorithms were still learning. Over time, we have moved to larger loan amounts for longer periods of time. Currently, our largest loans are up to 5,000 euros with a 48 months term.”
According to the big data lender, the firm’s algorithms use factor 20,000 data points to assess a person’s suitability as a loan candidate ranging and then clusters that data for further evaluation.
It is by no means an easy standard — as many as 80 percent of applicants have been refused in some markets — but, according to the firm’s CFO Rene Griemens, it keeps Kreditech default rates below that of traditional banks while still offering expanded access to funds to those who need it.
And those low default rates, paired with that proprietary credit rating technology, is generating interest. Since founding, the firm has evaluated about 2 million credit profiles and has extended about a half a million loans to date. And that interest extends past consumers to investors — and yesterday Kreditech announced having raised EUR 82.5 million (~$92 million) in Series C financing to fuel the company’s growth.
This round was something of a complicated undertaking for Kreditech, as it kicked early in the summer when Peter Thiel and Amadeus Capital Partners (Amadeus) invested earlier this year in a bridge loan that has now fully converted into Series C equity.
“We launched the fundraising process in spring and fairly quickly got firm interest from several high-profile investors including Peter Thiel and Amadeus Capital, who were not in a position to lead the round,” the firm told PYMNTS. “We therefore decided to get their investment in and continue the process with the potential lead investors. It is correct that the round took a little bit longer than we initially expected, but with fundraisings of this size, this is often the case.”
Existing shareholders Värde Partners, HPE Growth Capital and Blumberg Capital also participated in the round. Loren Felsman of J.C. Flowers will join the company’s board.
“We are excited to bring these world-class investors on board who will support us in strengthening our integrated financial services platform, bringing us closer to our vision of becoming the ‘digital bank for the underbanked,’” said Kreditech’s Co-Founder and CEO Sebastian Diemer noted in a company release. “We are a technology company, but also a provider of consumer financial services, and we are fortunate to have a sophisticated shareholder group whose experience and network spans both areas.”
And, it seems, the round is not quite closed out yet. Kreditech has confirmed advanced discussions for a final closing that could increase the Series C round to over EUR 100 million (~$112 million).
“There are people without access to fair and affordable credit in every market we have analyzed, and technology is enabling new and better ways of offering credit to these customers. Kreditech has developed a remarkably sophisticated approach to real-time consumer banking, and focuses on markets that are relatively less well-served by traditional credit bureaus and financial services providers. Most lenders, including those built on modern technology, may not crack these markets for years,” Felsman noted.
Apart from the upcoming expansion in Europe and South America, Kreditech says it is looking into strategic partnering with retailers to provide credit ranking and possibly credit lines to consumers.
All in, Kreditech explained, expansion is the goal, as the firm will continue to look for new ways, and new venues, for their technological platform and vision for financial inclusion.
“[This funding] will support moving our business towards its vision building a ‘digital bank for the underbanked.’ We will hence use the funds to further expand our product portfolio, i.e. moving to larger loan amounts at lower interest rates, launch new countries (the next big one being Brazil), and to launch our fully integrated Personal Finance platform.”
Though Small, International Deals Dominate
As has been the trend in past weeks, the PYMNTS Investment Tracker has been marked by rather anemic activity – and whether due to market doldrums or dry powder, the end result remains the same. Only a couple of triple-digit deals marked the fund flows for the week that ended Sept. 25, and literally just a couple. Just two, and both were beyond the shores of the United States – in fact, all of our top deals this past week were international ones.
Of the lonely duo at the top of the triple digit roster, one was Ecobank, which is based in Nigeria, and which secured a $285 million loan from Deutsche Bank. The loan is going to be used to refinance existing debt, according to the company.
In other news, peer-to-peer lender Harmoney, which calls New Zealand home, grabbed $200 million from P2P Global, a trust that is in turn listed in London. The funds will be earmarked for expansion into the Australian P2P marketplace, according to the financial trade press.
Much further down the line we find Leetchi, having been taken out in a $56 million deal by Credit Mutuel Arkea, which post transaction will own 86 percent of the French startup. Leetchi operates a payment processing platform and is geared for international expansion. Closely on the heels of that acquisition, in terms of monetary value, was the $55 million garnered by Daraz, which a delivery startup that is based in Singapore. The company’s new funding round, through a consortium of investors, is going to help Daraz push into new territories, ranging from Sri Lanka to Laos.
Below is a list of the Top 5 deals from the week that was.
And, as we are just at the end of the third quarter, a look at the year to date movement of money brings us to a $66 billion bottom line across all sectors. Banking and trade finance have the firepower, and the biggest contributions to that tally, with a respective $17 billion and $12 billion.
Drilling down a bit and turning attention to the financial technology sector, there seems to be rebound from previous bumpiness seen through the end of August and into the late stage of September – though the total, which excludes large deals, is quite a bit lower than the $600 million seen weekly only as recently as June.