Sergio Furio: From market inefficiency to business success
How Creditas is reinventing consumer lending in Brazil
How bad is the problem of high interest rates? And how does your model address it?
Today in Brazil, while interest rates are at around 15%, there is more than $100 billion in unsecured credit at 100%+ APR. Even with default rates on those loans at about 15%, that's 30% of costs for the banks, leaving a massive 70% spread. With collateralized loans, instead of charging 100%, you can charge 30-40%. Interest rates in the economy are still 15%, and the default rates drop to 5% or 10%. That still leaves us with a nice margin, but nothing compared with the 70% spread the banks are used to getting. What’s more, when you are using an asset as a collateral — your home, your car, your salary — you can deliver much bigger loans, so you increase your productivity per customer. For the banks, it’s a classic innovator’s dilemma. They have a very profitable product. Why would they transition into secured lending? But for us, that inefficiency was the opportunity.
In addition, given the low volatility of the loans we provide, we fund them by distributing fixed income funds to investors. With that, we avoid keeping the risk in our books, while still participating in the spread of the loan book.
What have been the main challenges in establishing this model?
The challenges have evolved over the years. At the beginning, it was a lack of appetite from the incumbents to partner with us. Then it was trying to find the right funding to deliver our loans. As the new kid on the block, we had to find a way to raise funds from fixed income investors. Today, we are one of the biggest securitization companies in Brazil.
The biggest difficulty today is financial education. Consumers know they can use a credit card, they can use overdraft facilities, they can use a personal loan. All those products are priced at an interest rate of 100% plus. We teach consumers that that doesn't make financial sense. And we have to explain that, given that they own assets, it doesn’t have to be that way. They can use our app — no car inspection, no visit to your house — and get a much better deal. That’s one of the biggest challenges we have. But we are getting there. The more we build the brand, the better the conversion rates, and the better the financial education we can deliver to customers.
