CRED: The Real Deal?

“It's like saying Rahul Dravid has anger issues”. The camera pans over to a usually reserved man. He fumes and smashes the windows of cars beside him on a crowded urban street. The CRED ad, a snarky 23-second clip, generated considerable hype on social media. But what is the story behind the man who made the company itself?

Kunal Shah, an MBA dropout from Mumbai’s NMIMS, the founder of CRED does not own a car. He chooses to drive an innocuous Vespa instead. His largest splurge has been a home in South Bombay for his family. An entrepreneur by nature, he has spent his life in the pursuit of the answers to two questions. How do you make money? Next, how do you raise the per-capita income of our country? Having invested in over seventy, mostly Indian, startups his answers seem to be clear. Invest in what can provide value to this country’s people in a tangible manner. You're on your way to the golden ticket, Charlie.

The year is 2010. Shah has shut down his startup PaisaBack to set up FreeCharge in August. He had noticed that mobile users tended to go to paan shops to recharge their internet and scratch cards for rewards. The entire process seemed stupid to him. If you already have data on your phone, why is it necessary to go to a specific place? The company was a sure success since it offered a viable alternative to an old, tedious way of doing things. In 2015, Shah sold FreeCharge to the e-commerce marketplace Snapdeal for $400 million.

From the funds gained, two years later in Bangalore in 2017, Shah founded the fintech startup CRED. It is a members-only credit card management app. As of 2021 CRED, valued at $2.2 billion, is one of Asia’s top ‘Unicorn’ startups. CRED offers a range of other services that include paying rent and short term credit lines. How does the app work? CRED incentivizes its users to make their credit card payments on time. It combines credit payment with a social rewards system. For every payment made, users earn an equal number of CRED coins. These may be used to redeem rewards with CRED’s partners, such as Ixigo and FreshMenu, who want to promote their products on the app. Users can also burn through the coins in one go to get a cashback which is credited to their credit cards. CRED’s target audience is a small percentage of people, namely affluent urban Indians who can afford to maintain a high credit score. Currently, the app has around 59 lakh users and 4 lakh people on its waiting list. Those with credit scores less than 750 are working towards improving them to get in. CRED’s salient feature is its exclusivity factor.

Allowing only a certain class into its user base is a deliberate move.Shah has made clear his distaste for foreign companies that come into India looking for the next 100 million users. To him the criteria used to measure the success of non-Indian apps are inapplicable. He has pointed out that a very thin sliver of the Indian population has enough discretionary income to spend on non-essential expenses. Parameters such as Daily Active Users[DAUs] and Monthly Active Users[MAUs] produce attractive numbers. But, if the Average Revenue Per User[ARPU] is not taken into account, these numbers are empty. Youtube has 265 million active users in India, but it's ARPU is two dollars which is not enough to cover streaming costs. Mistranslating foreign precepts and applying them, without context to your ventures is the same as digging your own grave. Making sustainable profit involves understanding the economic position of the different strata of society in your own country. Such perceptiveness is why CRED currently controls about 20 per cent of all credit card transactions in our country.

How is CRED already so successful? The answer lies more in investing practices rather than revenue generation. CRED’s main asset right now is its future prospects. How it monetizes its user base and which specific channels it will use will determine the course of its future. Promising startups all over the world are always met with great enthusiasm from investors. According to Crunchbase, CRED has investors such as Falcon Edge Capital, Greenoaks Capital and Sofina, among many others backing it.

The money flowing into the company has allowed it to spend huge amounts of it on marketing and advertising. Last year the company became an official sponsor for the IPL, making a 120 crore rupees three-year deal with the organisation. In-house ad content features prominent celebrities including Rahul Dravid, Madhuri Dixit, Govinda, Jackie Shroff and so on. The company has made a conscious decision to not monetize in the first two years of its operation. Currently, it offers five different products: CRED RentPay, CRED Cash, CRED Pay, CRED Store and CRED Travel Store. This begs the question, does CRED know what its main features are? Shah claims that it is too early to talk about winners among these products and that it is largely a platform play. India had around 52 million credit card users in 2019. Credit card usage showed 27% growth in the same year which is certainly great news for the company. Yet, will the exclusivity factor harm or hurt the app in its long run?

Shah has emphasized in the past that he values efficiency and change. He believes that the app’s high-sleek user interface contributes to its UBP or Unique Bragworthy Proposition. There are many channels that allow for credit payments. The list includes mobile apps of almost every commercial bank, several online wallets like Paytm and PhonePe. Shah believes CRED’s efficiency and simplicity will allow it to outrun its competition in the upcoming years. He does not claim that digitizing a process improves it. What matters is whether the new process is effective enough to make the change irreversible. FreeCharge made a tangible difference in the way we did things. How difficult is it exactly to make credit card payments? It is already a digital process that takes a few short minutes to complete, mobile app or not. Having a specific app only for credit payments does simplify the process. But the original process was never that arduous enough, to begin with. Is this a significant enough change to produce the exponential growth expected and promised?

In the IT sector, especially in the novelty apps domain, copycat apps are quick and many. There is no information asymmetry in the digital age. Flushing out the competition involves spending magnanimous amounts of money on the part of venture capitalists(V.C.s). Losses are high for the first few years, sure. But the exponential growth factor of winning companies allows for V.C.s to reap vast benefits. These strategies are not without criticisms though.

WeWork founder Adam Neumann made several promises of a globally connected network of rent for work office spaces. Softbank’s head Masayoshi Son was one of his supporters and mentors. It all seemed perfect until it wasn’t. WeWork crumbled before the world's eyes after the release of its embarrassing IPO. It revealed gaps and holes in the company’s operations that were well past the point of fixing. Neumann's company was offering glorified real estate and not the next iPhone.

Masayoshi Son

How are you supposed to produce figures of growth akin to Apple or Amazon on real estate? How are you supposed to produce such figures on a credit card payment app? Are people going to take to paying money to their banks as they have to shop online? Is the service offered valuable enough?

V.C.s have such practices of investing embedded into them. The effort to reward ratio in the past has justified all the large investments and few losses. On one hand is the damage done to small, competent companies that don’t receive adequate funds. On the other hand, is the damage done to emerging startups. As a former SoftBank executive said, “Masa decided to deliberately inject cocaine into the bloodstream of these young companies. You approach an entrepreneur and say, ‘Hey, either take a billion dollars from me right now, or I’ll give it to your competitor and you’ll go out of business.’ ”?

In FY20, CRED reported a loss of over 360 crores against operational costs of around 52 lakhs. Entrackr stated that CRED has projected revenues of 108 crores for FY21 and losses at 562 crores. Incumbent competing apps performed much better. Paytm managed to cut its losses by a reasonable amount in FY19 with a marginal 1% drop in its revenue in FY19. It managed to increase its revenue to INR 3,629 crore with a 40% reduction in losses and expenses in FY20. Paytm, which currently has over 350 million active users, has the highest user base in digital payments in India. Digital marketplaces do change to the point of non-recognition even in a few short years. None of these figures is set in stone. In January 2021, Shah claimed that there was “no clear winner on the monetization channel” for CRED. For his sake, we hope a clear winner emerges.