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A quick guide to the consumer credit value chain

16 Dec 2019

Aside from the payments sector, the credit and lending space has produced more unicorns than any other in fintech. While WeWork has shown the fragility of private market valuations, I still think this is a good enough benchmark for success.

You can crudely split the credit value chain into three parts:

1. Customer acquisition

2. Underwriting and account management

3. Debt recovery

In this article, we’ll briefly cover what I’m looking for in the various parts of the value chain and how new business can disrupt the behemoth of an industry.

As to be expected, nearly all the investment has gone into acquisition and origination. It’s the pretty side of credit. Money is generally going out, people are happy and plenty of commission is to be made. In the acquisition space, leaders like Credit Karma and LendUp have raised nearly $900m and $350m respectively. In the credit decisioning and account management space, we have seen Zest Finance go on to raise over $200m or Aire (an Octopus Ventures company) raise over $20m.

It’s an entirely different story in the debt collection where the most funded player is likely Dog the Bounty Hunter. Joking aside the highest funded fintech disrupting the space is True Accord which has raised $34m in funding. Beyond that, you have an exciting business in Australia called Indebted which has raised less than $10m. More on them later.

Customer Acquisition

This is the most competitive part of the value chain. A quick google of best credit card will give you insight into how many businesses are competing for your attention.

In the UK the comparison sites own the PPC space. Clearscore will give you a free credit score first in order to sell you something later. New entrants in this space have to be extremely creative. A great example of this necessary creativity is a Nordic business called Anyfin. By taking a quick picture of your existing credit card statement they can instantly find you a better credit provider and switch you to them without you lifting a finger. This sort of radical improvement is required if you are to have a chance of starting a business in this crowded part of the value chain.

Underwriting and account management

Driven by the ever-increasing amount of data streams available, this part of the value chain has seen the most innovation in recent years. Credit bureaus have more data than ever and there is an increasing amount of alternative data scoring business appearing on the map.

I’m excited by the new credit scoring models based on alternative data. While it is easy to gather all this data the hard part is making sense of it. Kreditech tried, unsuccessfully, to do this with social data. Open Banking remains a promising new data stream and you’re seeing businesses such as Koyo Loans or Credit Kudos make a real go of it. However, it remains to be seen how effective knowing consumer purchase habits really is to credit repayment. Does going out to dinner frequently mean I have money to spare or that I’m careless with my free cash? My belief, like many others, is that Open Banking data will become an increasingly important data stream for credit scoring.

Debt recovery and debt purchasing

It is only fitting that we leave the unappreciated back end of the credit value chain till last. I doubt Intrum or Arrow Global are names that mean much to you, but they are certainly worth a fair share, with both of the aforementioned companies having market caps of over a £1bn.

Out with the old

The recipe for starting a traditional debt collection agency is as follows: one spoonful of fake legal letters, a healthy sprinkling of terrible google reviews and as many call centre workers as you can find.

It’s great to see businesses like True Accord and Indebted completely flipping this industry on its head. Indebted collects over 70% of its debt with no human in the loop. The market average is 7%! They do this whilst maintaining a 4.8 star Google review. The opportunity for AI to automate digital relations with debtors is ripe for the taking.

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The credit industry is built on data and there has never been a better time to start a business in this space. We have been shown how not to operate (cough…Wonga), and we are being shown by exciting businesses such as Wagestream, that you can do good and build a great credit business at the same time. At Octopus we are eager to invest in the next wave of morally conscious credit businesses, so do get in touch if that sounds like something you’re working on.

 

 

 

 

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