Zoodpay – Building a lending powerhouse for Frontier Markets
Company Deep Dives
When Kaspi IPO’d in 2020 for $6.5bn, few understood the company's true nature. It had an eCommerce business, a lending business, and a payments business. Further confusing investors, Kaspi was a company operating in Kazakhstan, a country of only 18m people that were traditionally associated with natural resources.
Given the fact that there were few (to no) analogous business models in developed markets, investors deliberated over whether Kaspi was a technology company or a bank - importantly, the former typically commanded a higher multiple. Today, the company generates over $1bn in net income, has an ROE above 70% and has become the country’s de-facto operating system, with one-third of Kazakhstan’s population who use the application daily. Kaspi is now valued at around $12bn.
What we believe the market initially misunderstood was that Kaspi was a new type of business model tailored for frontier markets. In this post, we will expand on this point through the lens of our investment in ZoodPay, a similarly digitally enabled lending business targeting over 300m people.
The realities of frontier markets
At a high level, frontier markets share several characteristics that are important to understand:
Over 50% of the populous does not have a bank account.
A very high proportion of transactions are cash-based.
Sub-3% of the population has access to a loan from a financial institution.
SMEs typically account for 40-60% of GDP and have very little access to financial services.
Light-touch credit bureaus with limited depth of credit data on the population and SMEs.
Incumbent banks are principally incentivised to take deposits and lend to the government or state-owned enterprises as it provides an attractive spread. As such, a limited amount of investment goes into building the capability to fully serve retail customers and SMEs.
As such, the starting point/landscape is vastly different to developed countries when building a new lending business, so the approach must be very different. The three fundamental problems every frontier market lending business must overcome are as follows:
Distribution: Outside of telecom operators, no businesses serve millions of customers in frontier markets. Distribution is where the value really sits, and if developed meaningfully, it provides a deep moat and a way to lower customer acquisition costs (CAC) for additional services. In frontier markets, the businesses with significant distribution are rarely “banking-first” but rather other high-touch services like messaging (WeChat) and e-Commerce (Alibaba and Ant Financial). Until recently, Frontier market consumers were near impossible to reach, distributed over large areas. The rapid increase in internet/smartphone adoption has (for the first time) made the aggregation of huge amounts of unmet demand possible.
Credit data: Companies need the ability to gather meaningful data from their distribution base to begin the process of accurate credit scoring. In the absence of customer data, lenders must process huge amounts of proprietary data to lend at competitive rates and to ensure NPLs are kept low.
Balance sheet access: For any lending business, equity cannot be the source of funding to build a loan book – equity should be used to develop the infrastructure. As a result, access to a meaningful balance sheet to scale lending is very important.
ZoodPay – the journey so far
In 2019, ZoodPay began developing the rails to enable cross-border e-commerce. This involved integrating local logistics and payment providers with their international counterparts. Using this infrastructure, they onboarded product catalogues from China and Turkey. The result was 6m products being available for consumers to buy online, and early customer traction developed.
The team further developed the infrastructure for eCommerce and gained a few million app downloads. Following this, the local merchants then plugged into the platform, instantly enabling both local and cross-border eCommerce. Quickly, ZoodPay had several thousand local merchants selling through the platform, enticed by the large and fast-growing distribution base (and associated logistics network).
By early 2021, ZoodPay became the most downloaded shopping app in their first three target markets and quickly reached 10m downloads and 1.5m MAUs – in addition to a rapidly growing merchant base. At this point, the company could easily claim to be the most significant distribution base across consumers and SMEs in their markets.
In mid-2021, 90% of transactions were completed in cash upon delivery. Although working with cash was a necessity to enable transactions, the company was pushing digital payment adoption. ZoodPay’s credit team (arguably the most capable team in its field globally) began working with the huge volume of original transactions being generated through eCommerce. The initial result was ZoodPay’s first lending product: BNPL. For the first time, consumers could buy products in instalments interest-free. The result was that 90% of the transactions previously conducted in cash became digital. Average order values increased from $40 to $140. On the first 350k of lending facilities, the open bad debt rate remained below 5%. This loan data further bolstered the quality of the credit scoring algorithm.
As the distribution base grew and the credit scoring was refined, longer-term (12 months) interest-bearing loans were rolled out. Rather than lending from its own balance sheet, ZoodPay developed APIs to integrate with incumbent banks. The value proposition was simple, the banks required ZoodPay’s enormous distribution base, and ZoodPay required a balance sheet (not being a deposit-taking institution). In parallel, ZoodPay integrated with the largest payment processors to enable BNPL offline at point-of-sale through QR codes on the ZoodPay app. The self-reinforcing ecosystem goes from strength to strength. Both short-term and longer-term consumer lending products are showing tremendous traction, with monthly growth in excess of 20% on average.
Attention is now being paid to developing an SME lending product. ZoodPay is acquiring and partnering with a handful of companies that own fulfilment and warehouse spaces in their target markets. ZoodPay can now request merchants place inventory in their warehouses, both increasing delivery speed (now next day), and acting as a source of collateral for working capital loans and invoice factoring. To enable this form of lending, ZoodPay attracts credit lines from incumbent banks to finance their growing loan book off balance sheet, monetizing in a capital-light manner.
Today: ZoodPay has now passed $100m in annualised gross merchandise value (GMV) with a take rate of nearly 17% (effectively their top-line revenue) and maintains a monthly growth rate of 20%. In Uzbekistan (their first and largest market), ZoodPay is the second most downloaded app. ZoodPay is also the most downloaded shopping app in Jordan. ZoodPay has laid all the groundwork to incorporate Pakistan into its ecosystem. Initiating a very similar playbook to that outlined here.
The Future
With a significant lead in distribution, credit scoring and (partner) balance sheet access, ZoodPay has a near insurmountable competitive advantage across its target markets. The business model is formed around a mutually reinforcing ecosystem whereby each element of the business supports the other. Given eCommerce penetration is sub 3% in their markets (as is lending penetration), with an incredibly long runway for the company – they are targeting $1.1bn in annualised transaction value by the end of 2025 – in other words, a >$170m revenue business. The opportunities don’t stop there, the company can add payments to its ecosystem and leverage its distribution base to provide more services both to consumers and merchants and develop into what Kaspi is today for Kazakhstan: a daily operating system for the lives of consumers and merchants.
Founders are everything
Laying out a Kaspi-style playbook - and outlining the story as we have so far – somewhat belittles how incredible ZoodPay’s founding team is. One of the most challenging aspects of frontier market investing is finding killer Founders with the experience, drive, and integrity to execute ruthlessly. ZoodPay’s founders Michael Khoi and Martin Muranski encapsulate the qualities we look for, the former being a serial entrepreneur with deep knowledge of eCommerce, and the latter being a seasoned risk manager having led one of the largest online consumer lending companies in Eastern Europe. We are obviously biased, but they are near-perfect operators and complement each other beautifully. As the first outside investors in the company, we have witnessed the grit and skill required to succeed at the highest level.
Final word
Like Kaspi, ZoodPay employs an “ecosystem” business model built around frontier markets' realities and boundary constraints. The company is targeting the largest TAM (so large that no spreadsheet is required) in frontier markets and doing so in a manner that is developing an unprecedented moat – that keeps growing!
For more information please reach out to the team or visit STURGEONCAPITAL.COM.