Discovering Fintech Religion - Part 2

As part of our guest series, Vikram Vaidyanathan, MD, Matrix India catches up with Rajeev Ahuja, Executive Director, RBL, Bank on “Discovering Fintech Religion”. The conversation is spread across a 2 part episode, and covers the transformational journey of Ratnakar to RBL Bank, a debate on Fin versus Tech, and phygital as a means for fintech companies and banks to scale.

Vikram: Hi and welcome to Matrix Moments. It gives me great pleasure to welcome Rajeev Ahuja to this episode. Rajeev is Executive Director at RBL Bank. He has a career spanning 30 years across banking, financial services including Citi and Deutsche and I think the 30 years gives away his experience and age. He was instrumental in building Ratnakar Bank into RBL Bank. A fascinating story over the last 7 to 10 years.

He has spearheaded the fintech initiative at RBL and really made RBL one of the best partners for most fintechs. For me, he is a friend who I can debate fintech and fintech future with and I thought it would be great to get him in for an episode and have one of our debates. And hopefully, it’s great learning for all of you all listening to this. There are these tech first founders, spent 10 years in technology, brilliant at what they do. They want to be in the fintech space. What advice do you have for how they think about team as well as this 10-year journey that you described?

Rajeev: So I actually think it’s a great advantage sometimes in not being so steeped in traditional banking or traditional lending because we’ve never been customer centric. We always push 15 forms. So, a good tech founder - tech-oriented founder can be great starting position, but I don’t think that’s sufficient. So when I meet some of these guys, they have a very keen eye on consumer experience, what do customers really want. And sometimes we are just papering over things which we have inherited 20 years ago and making modifications on that.

So I think this is a good time to start with base zero. But very rapidly you need to add talent. So, in your co-founding team is there somebody with collection experience, risk management experience, somebody who has seen cycles of credit. You see this is the other thing which worries all of us who are in the lending business, not just fintech that growth rates of 30, 50, 70% mask a lot of challenges. And when you have a large chunk of equity, your true economics of your business are never untested.

What you need to do is build these capabilities very early on. And if you do that right, I think you have the chance of actually building out a much healthy business because there will be cycles of credit. And I do think that we haven’t seen one. I mean they have been induced cycles of credit, microfinance and MSME, but we will see many of them because as more providers converge on borrowers, guess what? You start lowering standards. And the absorption capacity of credit in an economy does not move very very smoothly.

So I am a little wary of - and this is what my dotcom experience, so there is like 100 million households and if I can get 10% moving online, if I can get 10% of that, it’s a huge market. But these things move in step functions. And you can have a step down too, especially when you are lending. And one of things I mentioned is reflexivity. When you have 15 providers of small value consumer lending on an app and you don’t meet the guy because you are lending below 50-60,000 rupees. You are taking income tax, Aadhar, bank and all, you think you have conquered it. But, the fact is the guy gets so used to the fact that it’s available just like I can order a coffee, okay?

And you may be fine as the first lender, second lender, but just extrapolate the market three years hence and there is 25 of you doing it, it will lead to challenges for at least a large portion. And you take the U.S. markets, you take the more developed markets, you take China P2P, you will have those challenges. So, you better start putting the guardrails very early on because you will be faced. And if you start learning about the collections, risk compliance, thinking and embed this in your team as much as you want to embed design and tech, your chances of staying alive and really looking at the large market, which is why I say keep a 10-year cycle, okay. Don’t look as a two-three year - your growth rates will be phenomenal. But, what is your learning curve outside of tech and design? And that is what you guys as VCs on the board have to challenge and say do you have the DNA, do you have people who can give you that kind of anchoring in your business.

So, we are creatures of our recent history. Many youngsters with 5-10 years of experience haven’t seen a credit cycle. They have actually come and lucked out because they got a job in one of the large tech firms. And then, they said we want to start something. You put a lot of money at stake with these young founders on financial services. It’s a huge responsibility.

So if you haven’t seen a credit cycle, okay, it becomes very very important to have people who have seen credit cycles. And I do think that one of the trends I am seeing is that many experienced people are stepping into this business with 10 - 15 years of having done the hard work. To me, that’s a great start because my firm belief is there is nothing called fin, there is nothing called tech.

In 10-year’s time if we haven’t become tech-centric, we will be dead. If these guys haven’t become risk and compliance centric, their likelihood of not surviving is…

Vikram: No, that’s very good advice and I would echo that. We are seeing teams which are much more complete over the last six months and especially this year than we have ever done before. And some of that is there are people even within your bank and all the other banks, who are saying I want to be part of creating some of these fintech. And therefore, you are seeing teams starting with maybe a tech first design-led founder, but with a compliance guy, with potentially a CFO who understands balance sheets, and we would like to see more and of those teams as you know.

Let’s jump to this debate on data and how useful that is. We used to hear these pitches maybe a couple of years back which said, we are going to underwrite based on alternate data or proprietary data because data wasn’t available.

And then over a period of time, we have come to conclusion that actually what really works is that you have to do PDs like you said and you need people on the ground. And, there is no substitute for actual income data to do income estimation whether you get it from a bank statement analysis, expense analysis, but some way to really get an income estimation. And there is no way to get around the how do I get to ability to pay and intend to pay without doing some of these things that the traditional lenders were doing. You can do it at a lower cost, but you still have to do those steps.

Rajeev: So, I will give you an interesting data point. When we started our journey of looking at these companies, we probably met with 150+, not I but my colleague, fintech lenders who wanted to build it with data and tech. And actually if you ask them the third question on the data model or the algorithm, I don’t think there was any difference between these 150 people because technology is the simplest thing to copy, to borrow, to build. I mean I am oversimplifying it. And we felt you know what? How many of them have understood lending at its core and as a cultural construct not just as a transactional construct.

So one of the things we have learnt because we have been doing banking is that there are waves and waves of credit cycles and you just need to have a sense on when to rein in and when to add more. And if haven’t done that, data can lead you astray. So, simplistically, how does prepaid data or Uber and food data tell you about the credit worthiness of customer? It tells you their spending habits. Yes, there is a credit bureau, there is a salary.

But you know what? If you are lending a few thousand rupees, perhaps you can take a call and you are lending at very high interest rate, which in India is also a challenge because we have no societal acceptance of very high lending rates from formal institutions.

From formal institutions, you need to be just about right. And when you look at China and U.S., the cost of funding is X and the lending rates are like 10X. And even if you don’t do collections, you will make a decent amount of money at least…

Vikram: I am not sure I fully agree on that one. We have companies which help banks working through data and so on. And we are realizing that there are different pockets where you can discover data because suddenly data has become a commodity. It’s ubiquitous and you have access. If you can make sense of it, you can get to in different buckets 60%, 80%, 90% confidence that you can get through income estimation.

Rajeev: Yes, I am not disputing that. We use a lot of analytics and data by the way. I mean in our cards business, personal loan business, even our SME lending and our early warning systems is very data oriented. But, I just want to be very careful that if you believe that this is an engine which will give you yes, no, what to do, that’s my worry. And which is why I was saying that when you set up a company, you can start with data as the core but you need to add the other elements which have actually very different speeds and scale.

So it’s a question of how much do you over believe data. And I do think do think we are at very very early days of a credit cycle going bad because of high consumption led finance and the proliferation of providers including people like us who now believe static data of yesterday is good enough to lend tomorrow. The 2005, ‘6, ‘7 problems in consumer finance in India were at a simplistic level. Oh, you’ve taken a loan from bank A, there was no bureau then, you’ll be good enough for bank B. And be good enough for bank C. And guess what? It became a self fulfilling prophecy round much like the mortgage crisis because it was pro-cyclical.

I don’t know if we have seen all the elements play out totally. And we should see this habit. So, we are of the view that everybody will go through a though phase in credit. It’s a question of how you balance your thinking around it and how you pace yourself. And obviously, if you are lending larger sums of money, what happens is when you have just an app - and again, I am being old-fashioned here. If you make the guy sign, there is a certain eye contact, a moral suasion. You have got the guy and the guy knows that you are serious guy.

Now, it doesn’t make sense for a 10 - 20,000 thousand rupee loan and you will say, why do the hell do I need to do that. My cost of acquisition is high. The moment you start lending to businesses, to things - and look, we don’t think India is - the huge markets are there. It’s a question of how you want to shape your company’s capabilities.

And to us, data and technology are critical. But if it’s just that, then it becomes in my view a challenge.

Vikram: Okay. I think I completely agree with you on being data centric but not being data only and building all of the different operating elements.

Rajeev: And challenge that data because to me credit cycles can just change what data tells you.

Vikram: So one quick digression on the credit cycle. And all of us who have been through these cycles, we worry that the next cycle will really take us down and it will take a really long time for us to come out of it. At least my view is that we are headed towards more of a volume bust rather than a value bust because it’s sort of spread out. And therefore, the value still seems to be concentrated with the better players. And even if you have a long tail of God forbid but like 50 to 100 companies that don’t make it through, it will still not be as big a shock to the system and fintech will keep going.

Rajeev: Yes. So I am a little wary of being too simplistic here because I don’t know what all is at play, okay? Last three years, most institutions including banks have made a lot of scale in their personal loan and consumptions finance business. So we have had many events which have challenged the entire repayment capability, cash flow. So I don’t know what will trigger and how severe the pain will be in which part of the consumption or value curve. I do think the resilience is more important.

We don’t ever believe that nothing will happen to us. We believe how to do you build. What I love the word is anti-fragility because that is actually huge advantage. And somewhere, which is why I go back, that if you were starting out business say two years ago and now, and if you have only a two-three year time horizon to do these things and then you want to find the next round and exits, I think you may end up in a situation where either your business model has not proven from a positive unit economics and/or you come into a credit cycle which then scares a lot of investors generically.

But if you give yourselves 10 years - and sorry, I am just harping on that, because I think shorter than that doesn’t make sense. You could actually hone your thinking and skills and shape your portfolio far more to be profiting from anything which starts dislocating. And to me, that’s the function of the experience of your founding team, the diversity, and the advisors and the board you have, which begs the question is that if you are in this business of building valuation or you are in the business of building a business.

You start with the idea of building a business but soon you get into this circle of valuation. And we have been through as a bank ourselves, but you have to have that as a very - it’s almost like your shadow which has keep prompting you challenge, challenge, challenge, question, question, question, and that has to be intrinsic nature in the founding team and the board.

If the board does not ask these questions, is only looking at profitability and growth, you have done a big disservice to what the potential could be years from now.

Vikram: I like how you subtly pointed to me and said you know as a board member please do your work.

Rajeev: I do think you guys have taken a very important and very exciting task. And I just think that you need to bring a little level of - and see the founders today, they have a lot more scars of having suffered in business building. So I think they will understand. And they also understand that life is not just about tech. There is a human element. There is a cultural element. There is a team element, which does not scale the way technology allows you to scale. And I think you need to just absorb the two…

Vikram: I would say we are privileged to work with fantastic founders in the financial services and fintech space. And we’ve learnt a lot from them and we are trying to take those learnings to any of the new companies that we are investing in.

Rajeev, I want to end with asking you thoughts on where do you think that you are wrong when you think about all of these thoughts which might come across as very rigid and same goes for me and maybe I will ask you to go first. What sort of antithesis where you think, you know what, my assumptions are wrong and something completely different might happen?

Rajeev: Yes, I think some of the learnings we have picked up at least in my experience and now perhaps makes us cussed or makes us rigid as you rightly said. I think we might be surprised with a few trends which we haven’t really caught on to. And I think there are certain data points which are emerging. I mean the penetration of smartphones, the data, cost of data, whether it leads to a second, third order changes in businesses and scale? I don’t know.

So, we worry about being too timid in the bank. And that’s helped us in the last four years as a lot of money got invested. So we keep wondering too timid.

Now there is no perfect recepie for that. And we know that as a bank, we get valued and RBI is extremely careful and rating agencies are very careful and depositors are very careful of our profitability and low level of NPA. So those are the things we have to live with and we have to grow with that. So that forces a little timidity on us, little bit of conservatism. Are we being too conservative?

But, the way we try to balance that is work with terrific partners who have high aspirations, who see the world through different lenses and a different experience curve. Part of the problem is if you talk to people like us who started our journey 25 - 30 years ago, that history weighs on everything you do or say. It’s helpful, but it also can hold you back.

So this is a constant struggle which I am sure in families we have with our kids too. And then, we find the golden mean to work through them. But in an organization, therefore, it’s very critical for us to be open to influences I said. So we have a - we use the term biological or evolutionary thinking which is not revolutionary but evolutionary that if you are part of an ecosystem and you are open to experiences, it makes you battle hardy. And it leaves a lot of room for - so you may never be number one, which we are very happy to concede we will never be. And why should we even bother because there is enough business. Can you be the number five or six player, hopefully avoiding mistakes of a very large magnitude which you cannot absorb, but yet doing business? And then how do you build that insight and experience having not gone through it yourself which is where our partnership matter.

So I can give you for every partnership we have, we have a contra-example of what we tried doing ourselves and we give it up in three months. And we are glad that we gave it up because we wouldn’t have been able to build it ourselves because it would have dragged us into areas where we just don’t have the core competence. Our core competence is four or five things. And I have learnt an interesting word from you guys is full stack. So we want to be full stack in a few areas where we know things will not change for 20 years. And we want to be in a partnership mode in many areas where we know our speed is always going to be a deterrent to being going it alone. And as long as you build that careful and respect that partnership and leave enough value for both of us, I think it’s great for both. But sometimes you can get it horribly wrong.

Vikram: As always, that’s fantastically thoughtful and introspective. I would say the things that I worry about is that because of the financial services “baggage” that I might have that I missed the truly tech first disruptors, and there is a business model where you get to large number of transactions and large amount of data flowing through the platform and transaction flowing through the platform and then back fill a business model. It can happen in supply chain financing and flow-based lending. It can happen in consumer tech while capturing a lot of the thread data. And sometimes, I worry that I might miss some of these.

And like you said, founders actually teach you. And all we can do is be more and more open to some of that. The same thought process on sort of call it look or learn new way of doing microfinance. Again, the traditional approach is unless you are seeing these people and unless you are doing personal interviews with them, it’s very hard to give loans to them. But, I am surprised at the level of digital trust that the next tier of consumers has with financial services. I don’t trust my bank through an app as much they do. And it’s just fantastic to see.

Rajeev, thank you again. Any closing thoughts and comments? Thanks so much for agreeing to be part of it and your time.

Rajeev: No, so thanks Vikram. And like I said, for us these conversations have been material to our journey. And so, one thing I am very sure of that when we go back, we have a few more things to chat with. And I think as long as we are all working towards - because I just don’t think this is zero-sum game. It’s we have to create access to newer services. And India is going to have a tremendous inflection curve. Because of more experience, I am a little conservative. But I think if people can actually drill down and work at it, we have a lovely phrase internally which is also borrowed, hi-tech and hi-touch. So many financial services businesses need both of them. And if you can marry both, which is what we would love to do, I think you improve your chances of succeeding at scale.

And some of the companies we work with in your portfolio and others, I will give them a high mark for thinking around these lines. Obviously, there is a lot of work still to be done, and you will find that they will create businesses which no bank would have thought of because for many banks, unfortunately, it’s about a chase of aggregates. It’s not a consumer centricity or conversation. We chase aggregates, we chase averages. And then when you become big, you become a little arrogant which all banks do. And then, it starts a very slow process. In India, that slow process can be a decade. In other markets, it can be very rapid. But we should not be complacent as a bank into thinking that born yesterday, we have the benefit of 25 years of brand legacy which is why we keep frustrating ourselves so that we can stay alive longer.

Vikram: Thanks Rajeev for the time and the candid conversation. Lot to learn from and some views that we scribe to as well.

I am recapping some of these here. First, banks are fintech, probably more fintech than we give them credit for. Great to see the introspection and the learning mindset, and frankly the openness to contra-views. Second, hi-tech, hi-touch or phygital which physical and digital is the way to scale and especially given the Indian context.

Third, be data centric but not data only. Question the data and build operations to solve the open risk. Fourth, if you are bank, evangelize tech. And if you are a tech first, build risk, operations compliance and imbibe that mindset in each and every person who is part of your company. Finally, it’s a 10-year journey, expect cycles. Your resilience to these cycles will define how large you become.

Here’s wishing all of us in the fintech ecosystem luck to be resilient through all of these cycles. Thanks again for joining us Rajeev and good luck to all of us in the fintech ecosystem. And, happy resilience.

Salonie: Thank you for listening. And you can find the transcribed version of this podcast on matrixpartners.in. You can also follow us on Twitter and LinkedIn for more updates.