A breakthrough round for a unique company
The number of fintech startups has exploded in recent years as capital and entrepreneurs pursue the massive opportunities presented by a digitizing financial services industry. On one hand, this is great news. On the other hand, it has led to a rapid commoditization of parts of the fintech ecosystem. What was novel three or four years ago – instant lending via mobile phone to unbanked consumers, for instance, or a full-service digital bank – has already become commonplace, and it’s increasingly hard to differentiate startups in this crowded field.
That’s why it is so notable when we come across a company like Creditas, which we backed in 2018. Where most fintech founders avoid complexity and friction in the financial value chain, Creditas founder/CEO Sergio Furio sought out the most complex and thorny pockets of the Brazilian lending market. He recognized that if he could solve the hardest problems in this huge market, he would create a strong defensive moat for the business while creating immense value for consumers.
Pioneering a new product category
Creditas is pioneering consumer secured lending in Brazil, initially in the form of home equity and auto equity loans. In these sorts of loans, the borrower pledges their home or car as collateral to the lender. This creates a powerful incentive for the borrower not to default, and also gives the lender (Creditas) something to fall back on if there is a default, greatly reducing the risk of capital loss. As a result, Creditas can lend at much lower interest rates than if the loan were unsecured. Given that Brazil has some of the highest interest rates in the world (unsecured debt often carries 200%+ interest rates), this can make a huge difference to consumers. Borrowing from Creditas at interest rates as low as .99% per month, customers unlock stored value in their homes or autos and can use the cash to invest in education, health care, small businesses, home improvements – or to pay off high-interest loans that can cripple a household.
Sounds simple, right? It’s not.
Consider the challenges in lending to someone using their home as collateral. In addition to all the “usual” challenges of figuring out if the person is creditworthy, whether they can afford the loan payments, how much other debt they have, and so on, the lender also needs to deeply understand the borrower’s property and secure claim to it.
Market metrics indicate the notional value of a home, but the devil is in the detail: Will the lender actually be able to repossess and sell the house if needed? If so, for how much, and how long will that process take? How much will it cost to manage that process? What if there’s a recession – how much will the house be worth then?
The lender needs to verify that the house is in good condition and well maintained. It needs to ensure the title to the house is valid. And it needs to ensure no one else has a potential claim on the property – an ex-spouse, for instance, or another lender.
This is hard enough in any country – but Brazil presents its own special challenges. As the saying goes, “In Brazil, the future is uncertain… and so is the past.” Paper trails are often murky and incomplete. Public records are mostly on paper and not easily accessed, and so on.
Given all these challenges, if handled manually, processing a secured loan would be immensely costly and could take many months. This is one reason why, prior to Creditas, the secured lending market in Brazil was almost non-existent.
To address these challenges, Creditas has invested heavily in technology to create a great user experience and reduce processing costs and time. It has developed sophisticated analytic tools to better assess the value of the assets it lends against. And in January it received a new type of banking license, authorized by the Central Bank of Brazil, allowing it to issue loans directly to consumers, without relying on a partner bank.
These efforts, led by a great team, have given Creditas a unique profile and a substantial first mover advantage in Brazil. The unique positioning, the quality of the team, and a huge market potential are what attracted Amadeus to invest in Creditas’ Series C round. Now, with $231 million of fresh capital* from new investor Softbank and existing investors including Amadeus, Creditas is set to continue the hypergrowth trajectory that has distinguished it to date.
* The transaction remains subject to applicable authorizations and closing conditions.