How exactly CRED credit card payments app makes money?

For past few months, one application that is constantly popping up in my radar is CRED. CRED is a credit card payments and rewards service, started by Freecharge Founder Kunal Shah. It has been around for about an year now and many of my friends and known acquaintances are users of CRED app. Most of them are very happy with the app because of various gifts, rewards and incentives they have received.  CRED ads popup in my phone every now and then. I thought of using it but failed to understand how exactly they make money. This post shares some of my thoughts and concerns.
Here's what CRED offers as service
CRED helps users manage their credit card payments. Users link all their credit cards with CRED, Cred tracks due dates, sends alerts and reminders, facilitates payments and on top of that gives lots of rewards, cashbacks, discounts etc to its users. In its current form, CRED users have nothing to loose and everything to gain. If users pay their credit card bill directly to their bank they get nothing- pay Via CRED, several guaranteed incentives and chance to win even more luck based rewards.

So at this moment, CRED app is highly lucrative to credit card users- why not pay via CRED and pocket some extra rewards? Naturally millions are drawn towards the CRED app and have started using it to pay their credit card bills, pocketing cool rewards in the process.

Then what's the problem with CRED?
For any business to be sustainable, it should generate some revenue on each transaction, which needs to be more than what it costs to facilitate that transaction. At present CRED doesn't charge its users, nor banks, helps people pay credit card bills and also rolls out lucrative rewards to its users.

My problem with CRED is on the Trust factor. If a transaction/service doesn't generate revenue how will they sustain? How are they able to give so much rewards? Most likely it is investor funded to propel the company through growth phase and acquire huge number of customers and jack up transaction volumes as well as company's valuation. Can this sustain forever? Unless CRED makes some real money per transaction, it will not be profitable. Investors can't keep funding forever. (You never know- party may last for a few more years- I might sound like an idiot if I ring alarm bell now)

How can CRED make money providing the service it provides?
If you as a credit card user making payments to CRED and CRED pays your due to your card issuing banks within 2 days, below are the revenue generation possibilities, as far as I can see:

Option 1: CRED has to charge a fee to its users- Will you happily pay say INR 100 per month to avail the services of CRED? People were and are paying their credit card bills even without CRED. Moment CRED starts charging I am sure most would opt out and pay direct to the bank. Except some convenience factor, main motive for many to use CRED is the promised rewards- can CRED make more money from this service than value of these rewards- very unlikely.

Option 2: Charge the banks
At some point, CRED may ask the banks to pay it a small fee for facilitating their credit card payments. Will banks agree? Mostly NO, except if CRED has say more than 90% of credit card users in its pocket, giving it huge bargaining power against banks, who now risk upsetting their high value customers who are under CRED if banks don't want to support CRED. If CRED's penetration is poor- say only 10-20% of India's credit card users are using CRED, then banks will have upper hand and may refuse to entertain any demand for money by CRED. All the freebies CRED is dolling out today is probably aimed at this objective- increase customer base to get better bargaining power in future. If forced to pay, banks will eventually find a way to pass it on to the consumer, you.

Option 3: Make profit from captive cash
CRED takes 2-3 days to process your payments to bank. This means they get to keep the money for 2-3 days. If there're 1 crore users who pay an average credit card bill of 25000 INR per month, then on any day, CRED will have a surplus cash of 25000 crores (25000*1 crore users). CRED can use this money interest free for 2 full days (or even more, depending on how early customer made payment). By giving this captive cash as urgent loans, CRED can charge an interest and earn. But for this to happen, there should be a huge number of active users and payment volume should also be huge. And extra manpower, process required to invest this money elsewhere, recover profit and so on. Will this happen with India? I don't know yet.

Option 4: Showing ads or making money from partners.
Showing ads in the app or sending promotions to users etc will help earn a few dollars but can this be the sole source of revenue for the company? I doubt it.

Another could be to make money from partners- like if CRED is giving Swiggy coupon to some users, make Swiggy bear 100% cost of this coupon and also pay some money to CRED (on the pretext that Swiggy may get new customers/more business from rewards given to CRED customers). This is a possibility, but again is this enough to run whole company or will partners give money just like that without some benefits like access to customer data etc? I don't know.

Option 5: Data mining!
When you sign up for CRED, CRED will have access to lots and lots of personal data. Your financial history, payment history and so on. CRED over time will be sitting on  a huge pile of highly valuable data w.r.t who is earning how much, who is paying huge bills, who is defaulting again and again and so on. This data will be priceless for products trying to target high value customers, or banks trying to know if someone has ability to repay the loan and so on. Thus if CRED has genuine financial data, there will be brands would happily pay to get access to this data. Of course CRED will never officially accept they will make money from your info, but in today's world, having correct data is priceless and there's always someone looking to benefit from the insight they can get from that data. It is up to you how much you want to trust CRED. I hesitate to trust them till I understand how exactly they are planning to sustain, without the investor funded incentives.

I can't think of any other means how CRED can make money from its actions. It is possible I am missing something or CRED can evolve to do something else in future, helping it earn. Also as we know most startups these days aren't really focused on making a profit. Their focus is to build user base, boost transaction volume, gain market dominance, get increased valuations, get more investments/cash out. Worry of actual profitability comes much later when investors hesitate to pump in more money and force founders to cut cost and try to earn a profit. But harsh truth is no company can keep partying with investor money forever. At some point they need to make more money per transaction than what it costs them to fulfill/facilitate that transaction.

Following scenarios bother me at this stage
1) No SLA or Compensation plan by CRED. If you've paid CRED two days before due date but CRED failed to credit it to bank, you own the risk 100%. Bank will charge interest and late fee and other things from you, not to CRED. CRED doesn't have any SLA or compensation plan in its terms and conditions to offer protection against this scenario. For every 100 payments that went smooth, if one payment fails and you've to cough up say 5000 Rs in late fee/interest, will you be happy? CRED should commit to own up any penalty/interest if they fail to make payment to bank within 48 hours of customer making payment.

2) CRED, like most startups these days, has no customer care number to call. You've to deal with computerized chat support which can be very painful when you have a pressing issue to explain but chat bot utters generic pre-determined template texts irrelevant to your concern, irritating you further. Most startups try to cut cost by not having a customer care, hoping their solution works fine 99.99% of the time and rest of the time issue can be resolved by skeleton support crew offline or customers eventually give up in frustration and there won't be any need for anyone to call support. But in country like India such a perfection is tough to achieve. Not having any real human to assist you during your crisis would upset you further. If you scan Quora and various online form, here and there you will find some complaints of CRED failing to process some payment on time. Their % could be very very low, but it is a possibility and it could be you next month.

3) Unsustainable incentive program: CRED is luring credit card owners to sign up promising rewards and incentives. While this is good for the time being, it is most likely funded by investor money and company might be suffering a loss on each reward/incentive given. Such a model can not survive forever- at some point CRED will be forced to cut down on incentives and explore ways to make money. Would you continue to use CRED if there're no incentives and some small risk of trouble?

4) Risk of exposing your personal and financial info to a 3rd party: Hacking and data theft incidents are very common. Brands trying to use AI and exploit customers based on data they have is also not a secret anymore.(Like Uber charging extra if battery is too low). Less the number of parties who have access to your data, you are that much safer. Handing over everything to a 3rd party app in a golden platter and then hoping for rest of your life that nothing goes wrong- I would probably play it safe than sorry, even if it means loosing some free gifts and rewards in immediate future.

Disclaimer: This is my personal opinion based on information available in public domain about CRED. I am not a CRED user, I don't declare myself as a financial/startup expert, I am not privy to the team/inside information and it is possible that I might have missed some crucial points/angles in this analysis. I will be happy to update the post if more credible/reliable information comes to my attention. Please use your discretion before making final decision.

On a personal note, I just have one credit card and I spend very little on that every month. I am happy dealing directly with my bank and a bit hesitant to let a 3rd party in. So while rewards are tempting, I am doing a risk vs reward assessment and haven't made up my mind on trying CRED yet.

Let me know your thoughts...

Updates: Twitter user Jatip Poptani has shared this video in which Kunal Shah shares his thoughts- in summary, he is looking to build a trusted community of high value individuals and find ways to help individuals, businesses and make money in the process.

My other similar posts: Travel Spice's business model explained * Skoda buy this year, pay next year scheme

2 comments:

Appreciate your efforts and interests to comment. Comments may be moderated due to increased spam. Will ideally respond to comments within few days.Use Anonymous option if you don't wish to leave your name/ID behind- Shrinidhi

Powered by Blogger.