According to the Global Consumer Credit Market 2016-2020 report the key players in the global consumer credit market are – BNP Paribas, Citigroup, HSBC, Industrial and Commercial Bank of China (ICBC) and JP Morgan Chase. The consumer credit market in the US alone has been estimated at $4 trillion.
If we were to look at the unsecured loan market, the number of people taking out such loans in Europe alone in 2015 has been put at 13.72 million. (TransUnion). Another 24 million Americans are likely to take out a personal loan this year alone. (Bankrate). Such loans are often taken by people who are seeking to undertake a big upcoming expense but have little in the way of savings.
Personal loans have generally a lock in period that ranges from one to five years. Payments are auto deducted from a checking account. This helps reduce the chances of payment default. The rationale for taking these loans is sometimes to replace a higher interest-cost debt like credit card debt. Credit card debt interest rates are usually upward of 36 percent per annum.
In India, banks offer pre approved personal loans at interest rates that range from 16 percent to 20 percent per annum. The personal loan market is dominated by aggressive marketing and customer outreach. Customers with good public credit profiles are often targeted with such loan offers.
Today, global liquidity in Europe, Japan and the US is high. This has brought cost of funds for banks to close to zero. In these times, an unsecured loan business with interest rate of 20 percent is a great source of profit to lenders.
Creamfinance is a startup based out of Latvia. They started unsecured loan lending in 2012. This was a time when Europe was at the depths of the ongoing financial crisis. Unemployment levels were high. Overall demand had plummeted. But it was also a period when demand for unsecured loans across the region would have shot up.
Creamfinance uses publicly available credit data to analyze and identify target customers in the East European and Scandinavian market. This publicly available information on individuals is machine analyzed to identify prospects. One click no questions asked loans are offered to such customers.
Creamfinance focuses on small ticket size loans. Their average loan size is just Euro 200. The credit period for such loans is short. It averages just a month. The market segment of ultra small short duration loans is particularly interesting.
It makes it possible for a lender to repeatedly roll over a relatively small amount of money. Credit is offered to large number of customers repeatedly compounding its effect. This helps enhance market reach. With more numbers benefiting from these loans, that aids in brand building and helps build brand recall.
Cost of funds, marketing, other overheads in addition to business processes, sales costs are some of the key determinants that dictate a company’s base costs. Below these costs lending becomes non profitable.
Large companies like the big banks are able to access funds at a much lower rate than smaller companies like Creamfinance. Much of this, though, gets offset by high overheads of big lenders. They prefer not to chase ultra small value loans of the type being offered by Creamfinance.
Matiss Ansviesulis the Founder of the startup is an ex JP Morgan executive and understands the market well. They identified this ultra small, extremely short duration niche market. As a startup they understood that their cost of funds would be relatively high. But they also know this falls as business expands.
A startup by keeping overheads down is able to rapidly generate surpluses provided non performance loans do not go beyond a point. Matiss placed Creamfinance, bad loans between 6 to 7 percent, much lower than the EU average of 10 percent. Surpluses generated by rapid fund turnover makes it possible to plow these back and expand business organically. This probably explains the observed fast pace of expansion of this company.
I do not think their edge is fintech and smart data analytical capability. After all customer credit profile data is publicly available to all lenders. Fintech analytical tools are also pretty standard. Also investments into tech which large companies can make can never be matched by a startup.
The edge of a startup lies in their identifying the niche market place. This has to be supported by sound business strategy and management skills. Clearly, publicly available growth information on Creamfinance indicates that team Creamfinance is able to muster all these skills.
Creamfinance is a good case study for many budding entrepreneurs seeking to find a niche for themselves in the global marketplace. Often many startup Founders look around for that one killer idea that will take them on the fast path to becoming a unicorn. In a small percentage of startups, this logic does hold.
After interviewing dozens of startups and analyzing many more businesses, I have learnt that startup success and performance is not just a factor of innovation alone. It has to be supported by sound business strategy and management skills. Matiss and his team have taken a pragmatic approach to business. This is what will lead them to become one of the first unicorns of Latvia.
Like in any business, unsecured loan business too comes with business risk. While, I do not believe that the demand for unsecured personal loans will at any time in the future abate, micro credit lenders will increasingly come under pressure from regulators to keep rate of interest down. Poland and Latvia in Europe and in India regulators are adopting different approaches to ensure that usury rates of interests are not charged by lenders.
In India, competition in micro credit business was introduced by issuing licenses to small banks. Micro credit companies are reading the writing on the wall and are innovating. Creamfinance will also need to do this in future. Until such time, they are onto a gravy train.