Finance Kaart: A fintech for the “credit invisibles” in India

Abstract

In this case, we describe the journey of Finance Kaart, a fintech start-up with a vision to serve India’s financially excluded customer segments. We explore the strategic options available to the start-up and its founder’s rationale for developing an online marketplace business model focused on Micro, Small and Medium Enterprise customers in small towns of India. The case further explores how India’s fintech ecosystem enabled frugal innovation by start-ups such as Finance Kaart. In a supportive ecosystem, Finance Kaart followed a partnership-driven approach but needed to address investor concerns regarding its “over-dependence on the partners” that arguably limited its profit potential. We conclude by discussing how Finance Kaart planned to overcome the challenges to its growth strategy by transforming it into a Neo-bank.

Keywords

Fintech business model digital platforms and ecosystems financial inclusion qualitative research teaching cases

Introduction

Ganga R Gupta, a first-generation entrepreneur, founded Finance Kaart in 2018 to target the under-served Micro, Small and Medium Enterprise (MSME) customers in Tier three and four towns in India. Ganga sensed an opportunity to offer financial services to the unserved and underserved segments as traditional lenders prioritize their products and processes to the middle- and high-income populations. For example, conventional financial institutions lacked localized product offerings. They need to be more flexible regarding documentation (e.g., credit score) and collateral that first-time borrowers find challenging to furnish. In addition, they did not provide localized language options that create access barriers for the customers.

Ganga’s background played an important role in his choice of the venture. He was from Uttar Pradesh, a large but underdeveloped state in India. After completing his Master in Business Administration (MBA), Ganga rose through the ranks in the financial sector with large corporates. His stint with the financial services company helped Ganga gain expertise in distributing financial services. Being from a Tier three city himself, Ganga had an intimate understanding of the challenges in distributing financial services in smaller towns that paved the way for Finance Kaart. Ganga explained the market opportunity he wanted to tap, “MSME credit stood at only 5% of the gross bank credit in India. There was over a 20-plus trillion MSME credit gap in India. Conventional banking channels could not bridge this gap by themselves as their cost of sourcing and sales were too high. Moreover, new-age fintech companies hardly targeted Tier three and Tier four cities. Therefore, we decided to target the unserved and underserved customers in Tier three and Tier four cities.”

Finance Kaart’s business model achieved appreciable market traction in its first 3 years of operations. As a Business-to-Business-to-Customer (B2B2C) marketplace, Finance Kaart’s Go to Market approach relied on partnering with Banks and Community Entrepreneurs. By 2022, it had successfully onboarded 25 banking partners and disbursed total loans of about Indian Rupee (INR) 500 million to more than 10,000 borrowers. It received more than 1000 loan enquiries per day. It had generated more than INR 10 million in revenue and created an opportunity of INR 30 million for its partner Community Service Centers.

By 2022, Finance Kaart had successfully raised INR five million of pre-seed equity investment at a valuation of INR 50 million and raised INR five million as debt capital (total INR 10 Mn investment raised). It also secured committed funds from incubators and accelerators of INR 80 million that were in various stages of approval. However, raising investment has been challenging for Finance Kaart. In a recent investment meeting, a potential investor raised concern, “Isn’t your business too dependent on your partner companies?” Ganga painstakingly explained the critical role that Finance Kaart played in delivering financial services to customers in India’s hinterland and defended the indispensability of Finance Kaart to its customers and partners. But the investor’s inquiry also got Ganga thinking, “how does he improve the value creation by Finance Kaart to make it more attractive to its customers, business partners, investors, and other stakeholders.”

Fintech ecosystem in India

Fintech refers to high-growth organizations that combine emerging technology and innovative business models to enable, enhance, and disrupt financial services. India stood second in Ernst & Young’s Global FinTech Adoption Index with an adoption rate of 87% in 2019¹. The rapid growth of fintech in the country was credited to its vibrant FinTech ecosystem (Table 1). Multiple factors such as a robust digital infrastructure, a large customer base with internet access, a competitive talent pool, and the availability of funding for start-ups powered the rise of fintech start-ups in India. It had 645 million urban and 535 million rural wireless subscribers, driving the demand for digital financial services². Many of these subscribers owned smartphones and were leapfrogging into digital financial services without the baggage of using legacy services such as cards.

Table 1.

Ecosystem actors in fintech landscape.

Ecosystem actor	Role in the ecosystem
Start-ups	Start-ups are transforming the traditional banking value chain by innovation and agility
Government	Government provides a favorable policy environment and invests in creating a digital technology infrastructure
Technology vendors	Technology vendors develop solution stacks to enable fintech companies
Universities and research institutions	Universities and research institutions support early-stage companies by mentoring and assisting them and producing a more talented workforce
Incubators, accelerators, and innovation labs	Incubators act as intermediaries to develop the potential of young companies to attract investment and partner with Banks and Financial Institutions
Banks and Financial Institutions (FIs)	Banks and FIs engage with fintech companies to leverage their innovative products and services. There are 12 government-owned banks and 22 private banks in India. As of March 2021, private banks have a 36.5% share of total bank loans
Users	Users are businesses and customers looking to improve their services or experience to improve their experience

(Source: Adapted from a KPMG Study7).

The development of the fintech ecosystem in India gathered pace in 2009 with the establishment of the National Payment Corporation of India (NPCI) to modernize payments and settlements and the Unique Identification Authority of India (UIDAI) to create the world’s largest biometric identification database³. The two initiatives together led to the developing of an open technology stack called India Stack that combined identity with payments. India Stack emerged as a comprehensive technology solution consisting of computer language, architecture, software, and tools developers use (e.g., Application Programming Interface) to connect databases and software.

India Stack had four technology layers: Presenceless, Paperless, Cashless, and Consent. The Presence-less layer created a repository of biometric data of citizens to enable a hassle-free identity authentication process (refer Aadhaar data in Figure 1). The Paperless layer leveraged the available biometric data to ensure that users can rapidly conduct electronic Know Your Customer (KYC), such as identity and address. The Unified Payment Interface (UPI) is the cashless layer of India Stack through which users can perform digital transactions (Figure 2). Finally, the Consent layer ensured the user-controlled movement of data to ensure ethical data-sharing practices. The digital infrastructure enabled innovative offerings of fintech organizations such as electronic- and video KYC, digital signatures, application of internet of things and artificial intelligence, and infrastructures for account aggregation. In addition, to reduce operational hassles, the Government has taken new initiatives such as electronic National Automated Clearing House (e-NACH) to automate and handle all recurring payments, such as loan instalments. Indian government’s initiatives to promote start-ups such as Startup India in 2016 gave further boost to aspiring fintech ventures by promoting efforts to strengthen entrepreneurial ecosystem using facilities such as seed investment, tax breaks, and cheaper patent costs.(Source: Author using data from UIDAI Annual Report⁸).(Source: Author using data from the National Payment Corporation of India⁹ and Press Information Bureau¹⁰).

Figure 1.

Aadhaar enrollment and Aadhaar linked bank accounts in India. (Source: Author using data from UIDAI Annual Report⁸).

Figure 2.

Payment using Unified Payment Interface. (Source: Author using data from the National Payment Corporation of India⁹ and Press Information Bureau¹⁰).

There were 11 unicorns and many small start-ups in India’s FinTech sector in 2021⁴. FinTechs leveraged a competitive talent pool with science, technology, engineering, and mathematics (STEM) orientation and trained in technology and management institutes. A 2018 survey of FinTechs in India found that young tech entrepreneurs were leading the industry. Most of them were from a STEM background and had 5 years or less experience. These start-ups had been around for 3 years or less, with a median employee strength of 14⁵. The FinTech organizations populated five ecosystem sub-segments: payments, lending, wealth technology, insurance technology, and regulation technology. The majority of FinTech unicorns were in Payments and Digital lending. The promise of FinTechs had attracted significant investor funds of over US$2 billion for the sector in 2020⁶.

The Indian FinTech ecosystem was characterized by collaboration between the major banks and the FinTech players. Banks and FinTechs have come together to tap under-served segments and enable innovative digital offerings. Leveraging an open technology architecture (e.g., India Stack), FinTechs developed innovative applications that helped them work with multiple Financial Institutions to provide a seamless experience to their customers. Leading private banks (such as HDFC Bank, Axis Bank, and ICICI Bank) and government banks (such as State Bank of India and Bank of Baroda) used internal partnerships and open innovation events such as hackathons to develop partnerships with the FinTech start-ups. Ganga reflects on his journey, “when I first thought of venturing, I felt entrepreneurship was for the privileged. My success in sustaining the venture is also due to the support I have received from the larger fintech ecosystem.”

Ganga’s entrepreneurial journey

Ganga started exploring entrepreneurship as an option while pursuing graduate studies in 2011. He explains, “At that time, a new insurtech start-up called Policy Bazaar had just made an impressive entry in the Indian market. I used to watch their advertisements on television. I could sense an opportunity in the insurance industry in a large country like India. Insurance penetration was quite low. I believed I could create a competitor to Policy Bazaar.” However, the venture could not move beyond registering a web domain. Ganga reflected on his first crack at entrepreneurship, “I was too inexperienced at that time. I sought help from a college alumnus who worked in KPMG insurance advisory, but it did not eventually work out.”

While the InsureTech start-up did not take off, Ganga persisted with his interest in the insurance business by joining a leading multinational corporation in a managerial position. However, he continued to explore entrepreneurial opportunities on the sidelines. One such opportunity came when his ex-colleague offered him the chance to be a Co-Founder in a Quick Service Restaurant (QSR) venture. However, the experience turned out to be a loss-making one as it faced several teething troubles in its initial phase. Ganga reflected on the venture’s failure, “In hindsight, I did not choose the right industry since I had no prior experience in the QSR business. Probably, I just went with the thought that I had to start from somewhere. While the venture was not successful, it taught me a lot about what it takes to survive as an entrepreneur from a business and a family perspective. It was the worst experience of my life, but it was also the best experience of my life!”

Evolution of Finance Kaart

Ganga first hit on the idea of Finance Kaart in 2015. At that time, he was still involved in the quick-service restaurant venture. Having recovered from the setback, Ganga registered the holding company of Finance Kaart called Renaissance Global Marketing and Consulting Private Limited in November 2018. He started his FinTech journey by participating in start-up events to gain understanding and develop engagement with actors in the fintech ecosystem. Ganga explains the interest of the ecosystem actors in their venture, “We had two points of differentiation in our business model. First, about the choice of customer segment, our focus on unserved customers in Tier three and four cities got banks and other institutions interested in our venture. Second, regarding the choice of technology, we focused on key pain points for the target segment, such as lack of digital literacy and absence of credit scores that got the stakeholders interested in our venture. Banks were particularly interested as we could substantially reduce their cost and time in reaching out to these customer segments. Also, my experience in distribution and professional networks in the financial sector reassured them of our potential. Most of our competing start-ups came from a pure technology background but lacked financial distribution experience, making it difficult to develop products and services suitable for the segment.” The investment pitch of Finance Kaart made it to the finals of multiple prestigious events, such as HDFC Bank’s Digital India Summit, NASSCOM India Fintech Awards 2019, and IIM Lucknow’s FINPITCH18.

Success in start-up events opened several opportunities for Finance Kaart. First, Finance Kaart was selected for incubation at the Indian Institute of Management Lucknow’s SIDBI Center for Financial Inclusion (SCIFI). As an incubatee company at SCIFI, Finance Kaart got access to low-cost facilities such as office space, technology infrastructure, and a necessary professional network. It slowly developed a small core team of 10 skilled professionals and mentors with a background in technology (Mr Sunil Gupta, a technocrat) and Banking (Mr Anil Dubey, an ex-Banker). (see Table 2 for detailed staff and mentor profiles) Second, Finance Kaart was selected for co-incubation at the Software Technology Park of India (STPI), which made an initial financial investment in the venture. Third, Finance Kaart developed linkages with Banks and Financial Institutions in the start-up events, who later became its partners.

Business model of Finance Kaart

Finance Kaart was founded in bootstrapping mode. Within a limited capital, Ganga had the challenge of developing the business from scratch by simultaneously working on the products, processes, technology, partners, and team. There were two possible entry modes for setting up a fintech business at that time. Some FinTech companies entered the market using the payment route, while others used the credit route. The payment route requires large patient investment upfront but can be scaled quickly. Relative to the payment route, the credit route was easy to start. Ganga assessed that compared to the technological and product innovations in the banking sector, distribution channels needed to catch up, so he decided to start with a distribution-as-a-service approach. He explains his entry route, “Distribution-as-a-service was easy to start model. In a direct lending model, the regulatory requirements are much stricter. We could use our lead referral experience to start direct lending down the line. As a beginner, we played on our strength in financial distribution.” With time, Finance Kaart started taking up lending in a partnership mode. The main elements of the business model of Finance Kaart are the following:

Marketplace model for financial services

Finance Kaart created a B2B2C digital platform which acted as a matchmaker for its financial service partners and customers. The platform was hosted in an interactive website and a multilingual mobile app with an easy interface. The platform had an artificial intelligence-driven recommender system to suggest the most suitable products precisely targeted to the diverse profile of its customers. It could be integrated with the Enterprise Resource Planning (ERP) software of its financial service partners. Besides, it had complementary services that supported its user community, such as identity verification, fraud protection, and payment and collection services. Its service of providing business reports and loan reconciliation could reduce the compliance effort of its user community. To resolve user queries, it had an artificial intelligence-based neural advice-driven call center capable of responding to customer complaints in multiple languages.

Community Service Centers as assisted service platform

As Finance Kaart’s target customers lacked digital and financial literacy, it followed a phygital model with assisted services. Ganga explained the reasons for going for a phygital model, “We were serving Tier 3, and Tier four centers where digital adoption is low and trust factor is missing. The customers needed somebody they could trust to assist them. That is where a phygital model came into the picture. We looked for players in the value chain who already have trust in the community.”

Unlike other digital intermediaries primarily partnering with online and offline merchants, Finance Kaart tapped the Common Service Center (CSC) channel, a digital infrastructure created by the Indian Government for e-governance services with extensive presence across India. Entrepreneurs from the local community ran the CSCs. They had a robust social network and could leverage social relations to develop trust in business exchange. Further, as intermediaries in government services, they were naturally equipped to help prospective borrowers with documentation and other loan-related services.

Ganga started by tying up with Round Pay, a Lucknow-based Banking Correspondent (BC) Company with many agents in rural and semi-urban centers that would onboard and provide last-mile connect to the customers of Finance Kaart. Although the agents did electronic payments on behalf of the banking partners, banks found them too risky for their lending business. The marketplace model of Finance Kaart created new opportunities for these agents by linking them with Non-Banking Finance Companies (NBFC) apart from Banks. In addition, Finance Kaart incentivized the agents by passing on 50% of the sales commission to its Community Service Center partners.

Lending model and alternative credit score

Finance Kaart’s first algorithm for matching customers with financial service partners was based purely on the lending parameters of its financial services partners. Ganga explained, “We started with a simple matchmaking concept. We developed an algorithm where we set the partner parameters. When customer data came, we matched it with the bank parameters and generated leads and referrals.” However, Finance Kaart’s target customers often did not have the credit scores needed to validate their borrowing credentials. As such, it had a poor conversion ratio of its leads. Ganga explained, “As we started working, we realized the shortcomings of the distribution-as-a-service approach. The dependence on the financial services partner is high, and we had a limited role to play. The natural evolution for us was to start lending in a partnership model by offering a loss guarantee to the partner banks and financial institutions.”

Finance Kaart could develop its own lending products and processes in the partnership lending model. It started tapping the Banking Correspondent value chain by developing loan products based on the cash flows of its target customers. It tied up with Signzy, an alternate credit score company. Ganga came across Signzy while he was participating in the India Fintech Conclave. Compared to other fintech infrastructure provision companies that required high technology licensing fee payments, Signzy charged based on hits and offered an affordable price per use of its alternative credit score. The credit score used a range of traditional and alternative data footprints to generate alternative credit scores for its customers. The alternative credit score used by Finance Kaart was built on non-conventional data footprints such as location data (e.g., Global Positioning System, Global System for Mobile communication, and Wi-Fi), behavioral data (e.g., spend categorization and lifestyle choices), transactional data (e.g., e-commerce purchases, telecommunication and utility bill payments, and ATM declines), social media profiles (friends, connections, and activities), and other data (e.g., Internet Protocol addresses, click streaming, and device fingerprinting). Finance Kaart has also partnered with ConfirmU (a Singapore-based company) to build a psychometric-based alternative credit score without taking any documents.

Finance Kaart recently started targeting the micro enterprise segment of borrowers in different government schemes as the next pivot of Finance Kaart’s business model. To begin with, Finance Kaart was partnering with its fintech peer 1Money to finance micro business owners under the Prime Minister Samridhi Scheme. While 1Money specialized in digital payment, Finance Kaart complemented it through linkages and financial sector expertise. In the scheme, Finance Kaart gave a business loan of INR 10,000 for 3 months at an interest rate of 18% per annum. Upon timely repayment, the customers were reimbursed the interest as cashback. The default risk in the scheme was mitigated by the credit guarantee given by the Government. Besides, 1Money operated a micro-savings scheme with the same borrower segment to ensure that the borrowers keep enough balance in their account to meet the loan repayment requirements. Successful performance in this partnership would help Finance Kaart reach out to 50,000 borrowers and create a loan portfolio of INR 1000 million on a rolling basis. Ganga explains, “We are scaling the 1Money partnership to 3–4 states. In addition, we are onboarding multiple NBFCs to reduce the interest rate for the customers.”

Digital lending process

Finance Kaart’s simplified digital lending process helped it to significantly reduce the hassles and turnaround time for its customers, who would often be denied a loan or wait for weeks and months to get the loan. Ganga explained, “Frankly, the digital lending process was similar across lending platforms. The variations were mostly on whether the lender was focusing on choice or access for its customers. Those specializing in choice focused on speed and alternatives. Since our focus was on access, our customers were ready to wait for a reasonable period if we could say Yes or No in time and keep them informed about the loan application progress.”

Finance Kaart’s digital lending and collection process (Exhibit) involved eight steps:

1. A loan application link is shared with the CSC Kiosk. If a client is prequalified for the loan, the available details are pre-filled in the loan application fields.

2. The CSC Kiosk entrepreneurs fill the remaining fields in the loan application using details from the Know Your Customer and other required documents.

3. The customer verification process is completed using a Video Know Your Customer (Video KYC).

4. The rate of interest on the loan is finalized using a proprietary credit assessment.

5. The customer completes the loan documentation by electronic signing and authorization using eNACH facilities.

6. The customer receives the loan amount in her bank account within a day of signing the loan document.

7. The loan instalment is collected directly from the customer account through the automated eNACH facilities.

8. To reduce hassles in the collection, Finance Kaart regularly updates its client about loan instalments, outstanding, etc., using messages.

The transaction flow through Finance Kaart’s process is often smoother relative to the direct bank branch channel in the smaller centers. Rahul Agnihotri, the Business Head of Finance Kaart who has previously worked in the bank branch channel, explained, “While working in the bank branch channel, I often lost face due to bureaucratic delays. As a result, we could not give a firm commitment to the customer regarding her chances of getting a loan or the time frame required to disburse the loan. While working with Finance Kaart, I have much more control over the lending process. I could give a firm commitment to the customers and directly reach out to the banking partners in case of delays.”

Revenue model

Finance Kaart had three revenue sources. First, it earned sales commissions from its partner banks and financial institutions. Second, it had revenue-sharing arrangements with Banks and Financial Institutions for loan borrowers using its alternative credit scores. Finally, it generated income from technology platform sharing (API/White label) to digitize the entire lending value chain for B2B institutional tie-ups. From the revenues it earned, it paid commissions to its banking agents, the technology fees for using alternative credit scores, and its other operating expenses. (see Table 3 for financial details of Finance Kaart)

Table 2.

Profile of the founding team and advisors of Finance Kaart.

Name and designation	Profile
Ganga R Gupta, CEO	MBA from Banaras Hindu University, MDP in entrepreneurship from IIM Lucknow, 10+ years in the BFSI sector
Shailendra Kumar, Head Technology	B. Tech (computer science) with 10+ years of experience in the information technology industry
Rahul Agnihotri, Head, Business Development	MBA with 10+ years of experience in financial services distribution
Kashyap Raj, Operations Manager	B. Tech with 2 years of experience
Mr. Anshul Saxena, Chief Strategist (Advisory Role)	MBA from IIM Ahmedabad, MS in computer science from University of Mississippi, and B. Tech in computer science from GGSIPU with 16+ yrs. Of diversified professional experience across India and the USA
Dr Anil K Dubey, Advisor	An alumnus of Harvard Business School and Faculty of Management Studies Delhi, ex-executive director of Bank Swadesi, Jakarta
Mr Sunil Gupta, Advisor	An alumnus of IIT Kanpur and Cambridge University, founder of Quicksun Technologies and Doorastha Analytics; ex CTO of Fino Payment Bank
Mr Jatin Srivastava	Chartered accountant, Co-founder, Seth and associate, ex JP Morgan

(Source: Finance Kaart).

Table 3.

Key financial numbers (in INR).

Item	FY 2022	FY 2021	FY 2020
Total revenue	54,86,424	30, 46, 350	19, 26, 530
Employee cost	20,15,000	16, 60,780	13, 58, 600
Technology cost	9,55,000	4, 10, 350	3, 42, 500
Marketing expenses	6,45,500	2,15, 460	4. 260
Commission paid	5,35,000	1, 84, 750	–
Net profit	(9,705)	(1,27, 387)	(2,71,906)
Total equity and liabilities	51,18,460	4, 29, 643	3, 78, 697

Finance Kaart in 2022: The next stage?

Finance Kaart’s long-term plan is to become a neo-bank. It had a phase-wise execution strategy where it wanted to broaden its scope of operations from a pure play lending platform to get into insurance brokerage aggregation and further diversify into mutual fund aggregation by 2024. To fund its ambitious plan, Ganga was working to raise INR 70 million in seed funds. Ganga proposed to utilize the seed fund to support his several initiatives. First, Finance Kaart planned to use the seed fund to acquire a Non-Banking Finance Company (NBFC) license. As an NBFC, Finance Kaart could directly lend to the borrowers without depending on Banks and Financial Institutions for funds. The move would help Finance Kaart with the flexibility to identify and target new borrower segments that will improve its market positioning and value creation. It would also improve its revenue per customer which is limited to the current commission income. However, becoming an NBFC would also increase the credit risk for Finance Kaart as a loan originator. Second, Ganga planned to invest in acquiring an insurance broking license. Obtaining an insurance broking license would help Finance Kaart exploit cross-selling opportunities for its customers. Third, Finance Kaart planned to invest in technology development and hire a full-time Chief Technology Officer. Finally, Finance Kaart intended to invest in strengthening marketing and branding efforts to extend its outreach. While putting together the funding requirement and investment plan, Ganga wondered how he would convince the investors about the immense value-creation potential of Finance Kaart.

Assignment questions

1. What business opportunity did Finance Kaart target? How did its business model seek to convert the opportunity into a successful venture?

2. Ganga Gupta is a first-generation entrepreneur with a non-technical background and from a Tier three city in India. This profile may be a disadvantage in a technology-intensive venture like fintech. What role did the entrepreneurial ecosystem play in Ganga Gupta’s entrepreneurial journey?

3. Evaluate the business model of Finance Kaart. Was Finance Kaart merely playing the game it found or actively shaping the rules of the game? How should Finance Kaart grow its venture?

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Priyatam Anurag

Notes

Author biography

Priyatam Anuragis an assistant professor at Indian Institute of Management Lucknow. He received his PhD from Indian Institute of Management Bangalore and his research interests are competitive strategy, regulation, and inclusion in healthcare and financial markets.