Kreditech, the German startup backed by Peter Thiel, Rakuten and the IFC that creates credit ratings and provides finance to people who may not otherwise have credit histories, has raised another round of funding from one of its strategic partners. PayU, the payments company owned by Naspers that is known by some as the “PayPal of emerging markets” — its business is mainly in providing payment services to online merchants — is investing €110 million ($120 million) in Kreditech.
The companies are not officially disclosing Kreditech’s valuation, but sources tell TechCrunch that it’s higher than the previous valuation (which we last estimated was about €300 million) but less than €500 million. PayU’s investment is mostly in equity, and it gives Naspers a minority stake in Kreditech. Kreditech to date has raised €242 million to date, including this latest €110 million injection.
Before this, PayU and Kreditech had already been working together, specifically in Poland, to provide financing options to potential purchasers on sites where PayU was powering payments. As CFO Rene Griemens describes it, services like Kreditech are important in economies where there is little credit card penetration nor existing credit histories, and so therefore limited options for how to pay for items over an extended period when you don’t the money to do so up front.
The service in Poland issued €10 million in credit to users, and now the plan will be to expand this relationship to more markets where PayU operates. The company currently works with over 300,000 merchants in emerging markets in Asia, Central and Eastern Europe, Latin America, the Middle East and Africa, covering a potential footprint of 2.3 billion users.
It’s specifically developing a stronger focus in India, where Naspers — as part of a larger investment strategy in emerging markets — acquired CitrusPay via PayU for $130 million and has made other bets in e-commerce.
PayU now competes against PayTM and others in capitalising on a fast-growing e-commerce market. Offering more financing options as a part of the payment process is one way to help differentiate PayU and make it a more attractive merchant partner. (Notably, Kreditech has recently opened an office in India and is currently hiring to fill it out.)
Giving buyers (whether consumers or businesses) an option to take out financing for larger purchases opens up the prospects for buyers to even consider certain purchases, and reduces the likelihood of shopping cart abandonment at the point of sale. Griemens said that offering these kinds of options can double the conversion rate for some merchants in these markets.
“We are excited to build a leading innovative online consumer lending player in high growth markets,” said Laurent le Moal, CEO of PayU, in a statement. “With our substantial investment we deepen our relationship with the industry-leading management team at Kreditech, and help to bring pioneering machine learning and AI technology to the many high growth markets around the world that need better access to financial services. At PayU we believe in the enormous potential of technology to unlock credit and financial services for underserved populations.” Naspers has made some €245 million in fintech investments globally via PayU in the last year, he added.
“Teaming up with PayU provides underbanked customers new possibilities and supports our mission of providing financial freedom through technology,” said Alexander Graubner-Müller, CEO of Kreditech, in a statement. “At the same time, we enable retailers to reach a new customer group and significantly increase sales volume.”
As we’ve described before, Kreditech’s business is based on a big data play. To make up for the lack of credit history for most of its prospective customers, the company brings together various sources of other data — some 20,000 data points in all — to triangulate and create a financial profile and credit score for the user to assess the risk of providing finance to that person, and setting a corresponding interest rate to that risk.
The more cynical might see loans to those who are of a lower economic bracket as predatory, providing money to people who may not have the means to pay it back, and there have certainly been some companies that have contributed to that image. But the more optimistic see services like Kreditech’s as giving an opportunity to those on the less advantaged side of the digital divide as a leg up and opportunity. Others that have tapped the gap in the market include remittance services like WorldPay and Remitly.
Over time, the theory is the Kreditech’s big data platform will continue to get more sophisticated and be able to make better decisions about who is best positioned to receive and pay back finance. Griemens said that the company has been shifting its loans over time.
“We are currently moving towards lower interest rates, giving up revenues in return for better quality customers, focusing less on subprime and more near prime,” he said. The company will be publishing its annual results soon and from what I understand revenues are currently at just under €50 million.
The company is also looking at ways to introduce some of the same instruments that it is now offering routes to bypass. One of these is credit cards — which also see low penetration in emerging markets because of the lack of credit profiles for average consumers.
“We are very open to these,” said Griemens. He noted that Kreditech has changed its business model over time to more of a partnership model, “lending as a service” delivered via an API, and this would likely be how it moves into card services, too.
“We have tested credit cards, prepay credit cards, on the basis of our credit scoring and it’s a product that we might come back with in the future. Right now, the focus is to provide direct credit in the shopping basket because the customer doesn’t have to go through the route of the credit card company can transact directly.”
Longer term, this partnership with PayU is one that could lead to a full acquisition. “We would definitely consider acquisitions,” said Griemens. “A lot of companies now recognise that it may not be as easy as previously thought to make money in the emerging markets financing sector, so we are very open to our options in future. We would certainly look at a potential stronger combination with PayU in one form or another.”