An in-CRED-ible Business Model or not?

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When we notice someone talking about a funny advertisement, we can safely assume that Cred is stirring the trend. The reel shows celebrities doing weird yet funny things. Activities that are not in their set of regular behavior. For instance, Rahul Dravid having anger issues, or Neeraj Chopra getting excited like other Indians over his Olympics win. However, weird the ad may seem; they are the ones who set the trends now. During IPL 2020, videos of celebrities getting auditioned for Cred ads went viral quickly.

But how did a startup become the official partner for IPL and also manage to rope in such megastars for its advertisements? Could CRED really afford to spend so much on its marketing? Let’s find out.

What is CRED?

CRED is an Indian fintech company based in Bangalore, Karnataka, and founded in 2018 by Kunal Shah. Cred app's main feature is reward-based credit card payments. Later, Cred let users make house rent payments and introduced short-term credit lines. The products offered are - Cred RentPay, Cred Cash, Cred Pay, Cred Store, and Cred Travel Store. Currently, the company has onboarded over 5.9 million users and processed about 20% of all credit card bill payments in India.

CRED Business Model

CRED's Business Model focuses on rewarding users for making their Credit Card bill payments through the online platform. Besides every time one does so, one earns rewards, discounts, and offers that can be redeemed when shopping on the app.

The twist here is that CRED does not charge any fee from its users and is completely free for everyone. So, then how does it make money?

CRED partners with different businesses and displays their offers on its mobile app, by charging a listing fee for this. The users who redeem these offers eventually become customers of these businesses.

Additionally, as one continues using the app, CRED gathers the user’s financial data. So, as more credit card users join the app, more targeted financial data gets collected with the company. And naturally, banks and credit card companies pay CRED to get access to this important data or advertise their products directly to these customers.

CRED Financial Analysis

Source: The Economic Times

Just like all hyper-funded startups, CRED has also been registering mammoth losses year on year. It has reported total aggregated revenue of ₹ 95.5 crores for FY21. The company also reported a total loss of ₹ 523.8 crores on a consolidated basis, as compared to ₹ 361.1 crores for the year-ago period as shown in the graph above.

Losses were due to employee expenses, which stood at ₹ 134.7 crore in FY21 and ₹ 72.8 crore in FY20. Other expenses, including marketing, touched ₹ 418 crores in FY21, up 43% from ₹ 237.2 crores in FY20. But why did the company see this sharp increase in its marketing costs? Just recall the IPL partnership and megastars as brand ambassadors.

 

FY 21

FY 20

EBITDA Margin

-538.3%

-1966.2%

Expense/ ₹. Of Op. revenue

₹ 7

₹ 729.3

ROCE

-70.0%

-56.6%

Source: Entracker

Legends: ROCE stands for Return on Capital Employed

EBITDA stands for Earnings Before Interest Tax Depreciation and Amortization

On account of revenue growth, its EBITDA margins have also improved massively from -1966.2% in FY20 to -538.3% in FY21.  On a unit level, CRED spent ₹ 729.3 to earn a single rupee of operating revenue during FY20.

As the cash burn continues in search of scale, however, the company saw a jump of over 400% in revenues from ₹ 18.16 crore in FY20 to ₹ 95.53 crores in FY21.

The Positive Road Ahead

No doubt, that these figures are alarming, but this gigantic spending did help the company draw in a wave of new customers. Due to its expensive marketing campaigns, CRED managed to onboard a high spending user base of close to 5.9 million credit card users with excellent credit scores, also around 20% of all Indian credit card users are using the CRED app.

While the current financial figures of the company barely leave scope for a positive outlook on its future, we mustn’t forget that every startup that turned into a multi-billion-dollar business empire, began by booking heavy year-on-year losses. Even Facebook did not start earning profits till 2016! And with its ever-increasing customers, also being a business unicorn (in 2020), maybe CRED can be the future Facebook of the Indian startup base!

So, what do you think? Is CRED’s current business model viable, and can it turn into something bigger?

 

References:

  1. https://bit.ly/3PatmJE
  2. https://bit.ly/3smwEzI
  3. https://bit.ly/3vUZfhN
  4. https://blog.finology.in/ticker-talks/cred-business-model-really-worth-it
  5. https://khatabook.com/blog/why-is-cred-business-model-popular/
  6. https://www.bankbazaar.com/credit-card/cred-credit-card-bill-payment.html

 

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