Amadeus Partner Pat Burtis explains what all the excitement is about.
It was less than 18 months ago that I wrote about Creditas’ stunning $231m Series D round. Now the company has raised another $255m in a Series E round that values the company well north of $1 billion. We could not be prouder of the Creditas team, and are delighted to continue to support them in their next phase of growth.
What does Creditas do?
Creditas is pioneering consumer secured lending in Brazil. In a secured loan, the borrower pledges a significant asset – a home, a car, a paycheck – as collateral to the lender in the event of default. This creates a powerful incentive for the borrower not to default – no one wants to lose their home or car. It also gives the lender (Creditas) something to fall back on if there is a default. This means that the risk of capital loss is greatly reduced, and the lender can charge lower interest rates than for an unsecured loan. This is particularly important in Brazil, which has some of the highest interest rates in the world.
What’s all the fuss about?
The excitement about Creditas derives principally from three factors:
- The size and profitability of the market
- The scalability of Creditas’ model
- The fact that it’s upending a very prominent oligopoly
First, the market: The Brazilian consumer lending market is big. Really big. Outstanding household debt in Brazil is approximately $500 billion, and with an average interest rate of 44%, that’s $200+ billion in annual interest payments from consumers. There are very few single-country, pure-play market opportunities in the world of this magnitude and profitability. This means that even with a small market share, and even charging lower interest rates than the banks, Creditas can build a very large and profitable business.
Second, scalability: As mentioned, Creditas is not a traditional bank – it doesn’t have branches and it doesn’t take deposits. This means Creditas must find other ways to acquire customers, serve them, and fund their loans. These constraints naturally led the Creditas team to devise a highly scalable business model. First, the company uses mostly digital channels to acquire customers. Second, rather than have loan officers sitting in branches processing loan applications, it uses technology to automate loan processing, meaning it can serve many customers cost-effectively, all across the country. And third, instead of convincing many thousands of customers to deposit money with it, it raises large quantities of debt quickly via the public markets, offering institutional investors a guaranteed rate of return underpinned by Creditas loans. These factors have allowed the company to grow very quickly.
Third, upending an oligopoly: this is more of an emotional point, the David and Goliath angle, but it’s an important aspect of Creditas’ story. The Brazilian banking industry is one of the most concentrated and profitable in the world: five banks control nearly 80% of the market, and they have historically earned ROEs (Return on Equity) in excess of 25%. These banks have enjoyed such profitability by pursuing a deliberate strategy of charging extremely high interest rates. This naturally limits the size of the market, since many people cannot afford to borrow money at such rates. Because of this – and a history of poor customer service – the incumbent banks have earned a lot of resentment from Brazilian consumers. It’s one reason Brazilians are so willing to try a new product from a FinTech startup. And it’s why many Brazilians are rooting for Creditas and its FinTech brethren to shake up the incumbent banking industry.
Why don’t Brazilian banks offer the same products?
Some Brazilian banks do offer home equity and auto equity loans – but only reluctantly, for several reasons. First, they earn huge profits on unsecured loans, credit cards, and overdraft fees, and they don’t want to cannibalize their own profits with low-interest secured loans. Second, Creditas is built specifically to make secured loans, and it has a cost structure and technology platform that allows it to process these complex loans efficiently and profitably. Traditional banks, with their legacy branches and infrastructure, employ highly manual and slow processes that are not well suited to scaling a business of this kind. As Creditas grows, the banks are beginning to react, but the window is still wide open for Creditas to build a very large business with an enduring cost advantage.
So what’s next?
With this latest infusion of cash, the company has ambitious growth plans.
First, Creditas will continue to focus on growing its core secured lending business in Brazil. This requires continued investment in customer acquisition and in technology to make the customer experience as seamless, fast, transparent, and satisfying as possible.
Second, the company is broadening its product vision to serve its customers across the wide spectrum of their financial lives, not just when they need a home or auto equity loan. Auto finance (for buying a car), home renovation loans, and the Creditas store for purchasing high value items (like iPhones) via secured credit lines are some of the new products underway. The idea is to ensure that after a customer has a great experience with Creditas, the company can continue to serve her or him for many years in the future.
And third, the company is expanding into Mexico, where consumers face many of the same challenges in accessing fair credit that Brazilians do.
The upshot
We first backed Creditas two and a half years ago and have been blown away by the company’s performance and by a team that continues to execute with intensity, passion, and focus. We see in Creditas a rare company with the opportunity to have huge positive social impact, upend a massive oligopoly, and build a very large and valuable business. Since our initial investment in 2018, we have participated in both succeeding financings in Creditas and look forward to more great things from this true star on the global FinTech stage.
