Exclusive: ‘Rewriting the loan book’ – Stefan Moller, Klar in “The Paytech Magazine”
Challenger Klar is using alternative data to help people access affordable credit in a country where most are forced to rely on non-licensed lenders. Co-founder and CEO Stefan Moller says it – and other fintechs like it – are changing behaviours and lives.
Mexico is famously reliant on its cash – more than 80 per cent of transactions are settled that way. And the majority of loans similarly leave no trace in a society where only a privileged minority have access to mainstream financial services.
The upshot is that most people don’t have a credit file against which lenders can assess risk. Which is why Mexican challenger bank Klar offers its customers a rolling micro-credit facility, based on an alternative type of data analysis: spending through their accounts.
It’s a model that is predicated on and also encourages what its chief executive and co-founder believes will be a tipping point for the country – when millions of unbanked workers finally open a current account and switch to electronic payments via their smartphones.
Out of beta mode for only a matter of months, Klar has already opened 100,000 accounts and placed around 10,000 credit lines that have been repaid already, according to Stefan Moller.
Facilitated by a modern framework created by the country’s central bank, he sees huge opportunity in promoting financial inclusion and profiting from well-targeted micro-lending.
“Mexico still has a cash-driven economy but consumer behaviours are changing,” says Moller. “Companies such as Uber have migrated the transportation experience from physical cash to digital. Then there are companies doing the same in the entertainment space, like Netflix or Spotify – it’s all digital and people need a payment method.”
Moller helped found Klar in late 2018 with chief finance officer Daniel Autrique, and chief technology officer Gianluigi Davassi who previously worked on the development of German digital bank N26.
In September, Klar announced the raising of $57.5million in seed and debt funding to roll out its mobile app-based banking services, which offer a modern alternative to the incumbent banks’ current accounts and credit cards.
Its key offers are fee-free banking, cashback on purchases, money management tools and lower interest rates on credit compared to traditional providers. Having crystal clear visibility of a customer’s financial behaviour is key to that and means lending can be offered to people ignored by mainstream services, who may have turned to unlicensed money lenders.
Klar has offices in Mexico City, backed by a technology team in Berlin and it has partnered with application programming interface (API) and payment platform Galileo Financial Technologies as well as financial services giant Mastercard.
Moller says it sees itself as a technology company first.
“Very few banks put the technology first, but those that do here in Mexico are orders of magnitude better than the rest. Incumbent banks are held back by extremely old technology, but we had a green field, and building a financial institution from scratch is a huge advantage. We’re a young company, we’ve been around for about a year, but we can already show numbers that validate our thesis that we can drive this change forward.”
Creating a customer culture
Fewer than 40 per cent of adults in Mexico have a bank account of any kind, equating to around 200 million people, and, according to Moller, 85 per cent don’t have access to a credit card.
He blames the country’s banking system for much of Mexico’s poor financial inclusion. The incumbents, he believes, have been too comfortable earning profits servicing professional and wealthier clients. But, if that is the case, such conservatism is now a dead weight. Factors like high costs, old technology and a culture that fails to put customer needs first, present a golden opportunity to disruptors like Klar.
Moller says: “The incumbents have niches from which they can derive a lot of profit and that has made them complacent. There are also inefficiencies, mainly on the credit side, where underwriting becomes expensive, and there’s not enough data to serve the markets that are underserved.
“Look at their costs – a typical major Mexican bank has about 1,500 branches, 30,000 to 40,000 employees to serve the retail segment, and very big, expensive buildings. They’ve outdated technology and then there’s the lack of importance placed on the end user. Nobody talks about customer centricity, nobody is truly close to the user or tries to understand what type of services could be of value. There are decent products out there, offered by the incumbents, but they’re all targeting a very select group of individuals; this happens both on the debit and credit side.
“Because we use alternative data to underwrite our credit lines, we don’t depend on the same sources of information as other banks, so can expand the number of people who can access decent credit.
“By lowering our cost base and using more sophisticated technology, we can bring those products to the bulk of Mexicans.”
Klar is not reliant on credit agencies, which Moller claims cover only half of the adult population ‘at best’ due to the huge number of unbanked people. Klar instead examines 70 to 80 data variables. Those cover security and fraud issues, and spending data which helps to reveal how much a customer would be able and willing to repay, and when they typically face financial pressure each month.
“The incumbent banks have left us with a binary approach, where you either get a credit card or you get nothing,” Moller says. “We would rather ask the question ‘is a credit card truly the instrument that solves the user’s needs?’.”
He thinks credit cards are an outdated concept anyway – invented in the middle of the last century, beyond becoming contactless, not much has changed.
“We think about credit differently, and a lot of our product thinking goes into understanding how much the user truly needs, and when they need it. Most of our credit lines take into account the user behaviour we already know from their debit relationship,” explains Moller.
“We need to offer them things that the banks don’t, in order to make it compelling enough for them to come over to Klar. So, we can offer a free account that can be opened online in five minutes, their debit card arrives in 24 to 72 hours and we provide a cashback reward from one to four per cent.”
A changing landscape
Moller is supportive of the regulatory environment created by Mexico’s central bank, which he says has been instrumental in allowing the entry of fintech players such as his own.
In 2018, the country’s Fintech Law mapped out rules around electronic payments, crowdfunding and cryptocurrencies, and work is ongoing to regulate an open banking system and the use of application programming interfaces.
Creating an environment whereby fintechs such as Klar can develop compelling products for the digital age is one way to wean consumers off cash, and last year’s introduction of instant payments system CoDi, based on QR codes and mobile wallets, is another.
Moller says: “The regulatory environment is very favourable and the new Fintech Law changed things drastically, allowing us to grow, particularly on the debit side.
“The regulator, in our opinion, has been very rational in its approach. It has opened the market up to new competition, but the rules under which financial institutions are governed are also strict enough. Regulation brings complexity and technological requirements, it comes with associated costs – of advisors, a regtech team – but that’s what you want.
“I think you want to tighten the screws just enough so that the serious players remain within the market, and the players with a viable business model continue investing into their compliance.”
Moller also applauds the regulator’s drive to move away from what he calls a binary system where the only option was to be a bank with hundreds of staff tied up in a compliance department.
“The regulator has set up a rational framework in which companies, or fintechs, can start scaling their operations, offering value to the user, getting more users onboard, while climbing that ladder of regulation,” he says.
“We’ve put a lot of work into meeting these regulations, but it is work that will certainly repay us.”