Traditional lending (banks) institutions in India have been relatively inaccessible for the majority of the nation’s small and medium-sized enterprises (SMEs) for a variety of reasons ranging from imperfect risk models to the sheer inefficiencies of their legacy systems and operating models. Capital Float (CF) set out to solve that with a digital-first approach and a data-driven risk model that can use unconventional sources of data to identify previously overlooked customers. In the 5 years since its founding, CF has disbursed over $1bln in loans and added a variety of products to its portfolio and expanded to consumer lending through the acquisition of a personal finance application, Walnut . CF has partnered with various other businesses, most notably one of the largest Edtech companies in the world to finance its end customers, some of whom have been less than satisfied. Despite the recent bad press, continued growth should not be an issue for CF because of the digital native operating model and it can future proof itself by enabling superior ownership of customer relationships.
Small, quick, and easy Loans
When CF started off, they termed the target customer segment the “missing middle”. These were SME businesses seeking relatively smaller ticket loans (< INR 1mln); an amount that was expensive for traditional banks to service at their typical interest rates. CF built out a loan origination and distribution platform that was largely digital and relied on data that was beyond the financials of the business, sometimes including psychometric analysis of conversations with business owners . In addition, this new operating model also approved loans on a much quicker basis and was far more intuitive for customers to use as opposed to the application processes in traditional banks.
Growing through partnerships
CF made a conscious decision to place itself as close to customers as possible and when that was not an option, leveraged various partnerships. For example, a key partner (and investor) is Amazon India. Through Amazon, CF has access not only to a range of customers in the form of Amazon sellers but more importantly a sizable amount of data that they can leverage to build out a credit risk model. CF prides itself on a multitude of API integrations that is has built with its partners that help streamline the entire business. Initially, the most popular product was CFs working capital product for SMEs but it has been able to retain customers successfully and attract partners and businesses towards the consumer loan products that now constitute 50% of its originations.
Financing the future
Not all partnerships worked out well for CF. One, in particular, an arrangement where CF financed consumers buying K-12 education products from a well-funded, high-growth startup led to a high level of dissatisfaction, primarily because consumers were not aware that they were “borrowing”, leading to recovery issues and bad debts.
The key shortcoming of partnerships for consumer loans is that CF might not always own the customer relationship, especially if the partner is the one selling the loan and addressing this will have several two benefits towards enabling scale:
- Focusing on the customer relationship will create a customer for CF rather than just for the partner allowing opportunities for cross-selling
- Building out multiple integrations to various partners for collecting customer data to improve the underwriting and origination process is not a scalable process – the key to scale lies in the single integrated platform that is controlled by CF.
Currently, CF is also looking to consolidate its core business – small/medium ticket working capital loans to SMEs. It is hard to differentiate oneself in a relatively commoditized business such as lending when it is easy for a better-funded competitor to offer more attractive rates. It is of paramount importance for CF to explore opportunities that can increase customer retention as it pursues profitability and some of the typical platform strategies can work well.
- The loan book at CF is financed by a mix of equity funding and debt from various partners. By providing a more efficient, data-driven “match” between debt providers and consumers, while catering to each one’s risk profile and preferences, CF can increase the debt-to-equity ratio of its loan book and lower its cost of operations.
- Similarly, for customers, providing a “financial suite” of products (taxation, inventory management, etc) will incentivize them to stay with CF.
 “How Capital Float Is Fighting SME Lending Battles On The Unicorn Path”. 2020. Inc42 Media. https://inc42.com/startups/inc42-upnext-how-capital-float-is-fighting-sme-lending-battles-on-the-unicorn-path/.
 Yadav, Rohit. 2020. “Deep Dive: AI Behind The Rise Of Capital Float In The Lending Space”. Analytics India Magazine. https://analyticsindiamag.com/deep-dive-ai-behind-the-rise-of-capital-float-in-the-lending-space/.
 “The Making Of A Loan Crisis At Byju’S – The Ken”. 2020. The Ken. https://the-ken.com/story/the-loan-crisis-at-byjus/.
 Prime, ET. 2020. “Capital Float: Why All’S Not Well With The Poster Boy Of Fintech Lending – ET Prime”. ET Prime. https://prime.economictimes.indiatimes.com/news/72133594/fintech-and-bfsi/capital-float-why-alls-not-well-with-the-poster-boy-of-fintech-lending.