The Russian Connection (To Alt Lending Globally)

ID Finance Co-Founders Boris Batine and Alexander Dunaev were far from newcomers to the world of finance when they started up their business in 2012. Long before founding a data science, credit scoring and digital finance company, the Russian-born and U.K.-educated entrepreneurs met while working abroad at Renaissance Capital and Deutsche Bank.

When news of the financial crisis broke in 2008 and big banks all over the world were eschewing consumer and small business credit markets, Batine and Dunaev saw an opportunity — one that was particularly pressing in developing nations, an area of the world that was below the big banks’ radars.

And so, in 2012, with only a few hundred thousand of their own dollars to get up and running, ID Finance launched in one of those underserved markets — their home market of Russia.

As the financial crisis unfolded in 2008, they met to discuss what they saw as the rise of FinTech and the increasing availability of financial software and data. Observing the rise of disruptive companies in Europe and the U.S., such as Zopa and Lending Club, they saw an opportunity in emerging markets that had been ignored by the big banks, such as Russia, Georgia and Kazakhstan.

It was an exciting and nerve-wracking period in their professional and personal lives, Dunaev admitted. “At the time of the launch, I had a six-month-old baby.”

“He also had an understanding wife,” his Co-Founder Batine said.

And that understanding had to do with a lot of extending in the firm’s early days — when things continued to be, well, exciting. Two years after founding ID Finance, the bottom fell out of the Russian economy, when the Russian ruble collapsed.

“The ruble went from something like 30 to the dollar to 90, in the space of a month,” the 33-year-old Batine said in an interview in London. “That’s something nobody could predict.”

But it was something the firm was able to survive — mostly due to a strong background in FinTech, where “the first thing you learn is asset liability management.”

By 2015, the firm was profitable, and in 2016, it officially relocated it headquarters to Barcelona, Spain, one of three nations outside Russia ID Finance has expanded its efforts into — Belarus and Brazil being the other two.

These days, the firm originates 50,000 new loans a month — loans that it mostly finances off its own balance sheet, as opposed to selling them off on a marketplace. As of February of this year, the firm raised $50 million in debt from a consortium of banks to fund further expansion in South America.

According to its founders, the situation across the developing world remains much the way it was when ID Finance first started taking on the market five years ago.

“The opportunity for FinTech in emerging markets is so large it’s difficult to measure — we’re talking about a massive structural consumer demand for credit that is not being met by incumbents,” Batine said.

That’s because, he emphasized, these are often large markets with highly uncompetitive financial services and limited availability of credit. But the growth of internet and mobile changes that, making it easier for people to apply for loans. And, by using alternative sources of data, ID Finance says it can extend credit to a much larger portion of the population.

That is a business opportunity for ID Finance directly, whose founders report a fondness for markets where “things are difficult” and “complex.” But it’s also an opportunity to build out the market itself and become a key player in how those markets evolve.

A New $200 Million Fund

As ID Finance has expanded around the world — and partnered with various FIs — its founders realized that there are a host of small businesses that are simply being underdeveloped because they are almost invisible to investors.

“The vast majority of money going into FinTech is chasing a small number of well-known startups. There are many more high quality FinTech companies all over Europe, some of which are performing extremely well, that are seeking capital to scale,” Batine commented. “We see a huge opportunity to support these companies while providing a superior risk-adjusted return to investors.”

Working with Elbrus Capital Fund Manager Yury Popov and asset management company Da Vinci Capital, the FinTech Credit Fund is being jointly offered as a $200 million debt finance fund aimed at FinTech companies focused on alt lending innovation. The funding from the credit fund, according to Batine, is aimed at helping up-and-coming FinTech lenders fund their own loans — and finance their loan portfolios.

The FinTech Credit Fund will initially focus on projects within the CIS (former Soviet Union) and European markets, splitting its focus between firms taking on consumer and small business lending. According to Batine, the fund is particularly seeking out products that are leveraging Big Data for alt lending credit scoring models, as well as solutions that leverage machine learning and artificial intelligence in building those solutions.

“ID Finance and Da Vinci Capital will provide a solid investment process and infrastructure for the Fund, as well as access to our broad network of institutional and private investors. Our expertise in FinTech and alternative lending at an international level will also help to reduce credit risks,” added Oleg Jelezko, managing partner at Da Vinci Capital.

Criteria for funding is still being developed but will focus in on the quality of applicants’ loan portfolios, technology and business models — particularly their likelihood to attain profitability at scale.

“The alternative lending market is worth a potential $2 trillion, and we see a huge opportunity to back the billion dollar companies of tomorrow focused on digital lending,” Dunaev said.

In a large part of the developing world, a lot of opportunity is getting overlooked. Elbrus Capital’s Yury Popov, Da Vinci Capital and the FinTech Credit Fund is hoping to get $200 million closer to remedying that problem.