Kreditech Learns to Innovate Like a Startup, and Work Like a Bank

Kreditech-Group-Photo-2016

Kreditech’s high-flung office offers a spectacular, 360-degree view of its hometown of Hamburg. That is, when it is sunny. When Red Herring visited the fintech firm’s HQ earlier this year, the German city was enveloped in snow. One could barely see the next building–let alone the spires, ships and sights of a globally vital port city.

Its physical view impaired, Kreditech’s leadership were nonetheless looking outward–far outward–to a business model that includes rollouts in, among others, Poland, Mexico, Spain and Russia. Last week the company achieved official microfinance status in the latter, which has proved a notoriously difficult nut for fintech brands to crack (Kreditech launched its Russian business in 2013).

Kreditech’s rise to prominence has been well-documented. Since its 2012 foundation the company has won over $160 million in funding, including such heavyweights as Peter Thiel, the World Bank’s IFC and Japanese giant Rakuten, which poured $10.4m into the company last December.

All have been excited by Kreditech’s innovative credit scoring platform, which builds credit histories based on Big Data analytics. It is one of a small number of firms which have pounced on the nexus of fast-moving data, and the oftentimes glacial banking industry, to offer something new–and which plugs an enormous hole in the market.

Around two billion people globally are underbanked in financial services. Rating those potential customers has become one of the financial industry’s biggest headaches, and opportunities–hence the contribution of the IFC, which focuses on economic development in emerging nations.

Hence, too, Kreditech’s aggressive expansion policy, which, as far as CEO Alexander Graubner-Müller, is pretty unique among Europe’s growing clique of financial SaaS companies. “There aren’t many companies that have managed to build a global fintech reach, and we’re very happy we’ve done this,” he says.

Graubner-Müller, the company’s founder and former CTO, is understandably thrilled about his firm’s progress. Aged just 28, Kreditech was one of a long line of ideas he and friends had fresh out of college in Switzerland. It’s a staggering rise by anyone’s estimation.

At first Kreditech was simply a SaaS to enable better credit ratings, for people who had problems obtaining credit. “We had great hypotheses on how we could change the way credit ratings are done, but we had no way to show it, because we were lacking the data on which we could prove this was working,” says Graubner-Müller.

Soon, however, Graubner-Müller and co began to fully harness the power of Big Data to score potential loanees. They could offer fast loans via a lean, online process, to those who had previously fallen between banking’s cracks. It was well-received by the market. So it became Kreditech’s USP.

Classic means of credit scoring are done so using a number of factors–payment history, amount owed, length of credit and others–that can be greatly added to using the huge volumes of data generated in today’s connected world.

For those who could not receive bank loans, options were–and still are in most cases–tough. There are pawn shops and gray market borrowing. And then there are payday loans, whose popularity exploded in the 1990s, and which have come to characterize the predatory nature of the financial industry.

Payday loans got big off two major factors. Loan sums were too small, creating too much expense for large institutions. Second, the people who took such loans didn’t have an existing credit score.

It hasn’t taken long for payday loans to get their current notorious status. Subsequent regulatory action has strangled their market. It was “spray and pray scoring,” Kreditech CFO Rene Griemens, who previously worked at investment bank IEG, says. “If we send someone fifty dollars and they pay it back, we’ll score them well.”

Banks are not well suited to fast-paced, machine learning-baed scoring, and not just because it is a cutting-edge technology. “Banks are always strangled by two things structurally: very divided functions, which means you have to overcome a lot of individual challenges to be able to offer integrated products,” says Graubner-Müller. “And there’s a risk appetite that banks are very unwilling to do.”

Germany in particular falls behind in banking innovation. Developing nations are even worse. Kreditech moved quickly to add presences in countries where banks could not offer services to swathes of their domestic population. At first it chose territories based essentially upon “convenience and ease of entry,” says Griemens.

“We were a young company and couldn’t do much research,” he adds, “and we often prioritized smaller markets because it was easier to enter. Nowadays the focus for Kreditech is very much on selecting markets where our USP, the ability to score a customer who doesn’t have a third party score, plays off best.”

Some territories, like the Dominican Republic, have fallen by the wayside. But there is no shortage of un-scored people across the world. Kreditech’s own operations target huge numbers of people, from Spain (60% of population, or approximately 18.7m people) to Mexico (90%, or 110m).

Chinese financial regulation is prohibitive at present. But India, with a underbanked population well over a billion people, presents a massive opportunity for Kreditech and its competitors. “The industry there is moving to electronic payments and digital finance, and that of course plays into our advantage,” adds Griemens. “Therefore we continue to look at it closely.”

One growing pain for all emerging startups is HR, and it has been no different for Kreditech. These days the company uses scrum constantly for communication between regional managers–who also train in other, similar nations to get a better handle on their own market.

Graubner-Müller admits that when the company first went B2B and expanded rapidly, it suffered a “lack of focus. We built up a lot of complexity, and didn’t think about how much time and focus all these things need to do well. Then suddenly we were caught up in this giant list of priorities which were impossible to achieve…If I went back in time I would be bit more careful where to spend time and energy, and not to get too tempted by apparent opportunities.”

Kreditech has also come under fire for a lack of transparency when it comes to the data points and algorithms it employs to build credit scores. In 2015 an insider-orchestrated hack, as the company describes it, led to the release of thousands of loan applicants’ details on the Dark Web. Loans with rates above 30% APR have also been criticized. The company argues these rates reflect the loans’ levels of risk.

Graubner-Müller believes his company has turned a corner in terms of compliance, which, alongside cybersecurity, comprises a large number of Kreditech’s 300-plus employees. “The last thing you want to do is mess up with the regulator,” he says. “On the other hand, what we’re expecting to see is more companies emerging that really understand showing value to customers, on top of the data they can share with them.

“For the customer, you have to show that we are not collecting this data because we are selling it off–but because we’re really interested in using it to make the customer a better offer,” he adds.

European regulators are moving to strengthen data protection, and to liberalize data sharing, so customers can get their hands on personal data and share with other companies. It sets a higher bar for companies such as Kreditech that are, to some extent, sailing in uncharted territory.

“It still amazes me how little these technologies have actually made it into financial services,” says Graubner-Müller. “I think, besides us, I know very few companies who have shown the useful application of these things. Banks that sit on quite a lot of rich data have not been able to ensure any viable applications of machine learning.”

Griemens is more foreboding of the sector in general: “Every day when I see how banks work in this sector I see why the fintechs will be more successful, and why many of the banks will fail.”

He admits that Kreditech’s current crop of investors “are not invested for failure,” which puts a lot more pressure on the young firm to build steadily, and a little more cautious than it has been in the past. But right now, Griemens adds, “our bet is paying off, on the assumption you can provide a better product to the customer on the basis of innovative scoring.”

Kreditech is stepping more carefully these days. But it’s barely slowing down. The company is rolling out installment loan products across its territories–just one way it hopes to be IPO-ready by the end of 2018. That will come not by further rapid expansion or innovation, but by “applying good practice from the banking industry to our processes,” Griemens says.

You can only remain the upstart for so long, it seems. But with innovation in place and an expansion unrivaled in its field, there’s little wonder Kreditech’s leadership seem so calm–even if their schedules are packed tighter than a Hamburg cargo ship.

“Over the last five years honestly I would never have imagined where we are today,” says Graubner-Müller, smiling and staring out across the city’s snowcapped rooftops. “I think also the journey was quite crazy, given that we’re a great example of a company that started in one space, and ended very differently.”

Kreditech is learning that to beat the banks, you must not only think like one but become one–if just a little.

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