Thread by @jainmayank_943

1/ Thread on our investment thesis in "in-store credit" market. We like to call it "Offline checkout".

In 1-line, transfer of workflow control in-store from merchant to consumer will unlock the in-store credit market in India.

#offline #checkout #thesis #fintech @Stellaris

2/ To begin with, let's understand the market top-down.

Annual consumer spends on offline merchants are over $1T, of which only a sliver is bought on credit.

Consumer durables and mobiles is the only category where over 25% spends are on credit. Rest categories are all small.

3/ If we talk about the unsecured consumer lending market, lending book stood at $73B pre COVID (to be precise Jan '19).

Of this, $54B was Personal loans, $13B was Credit card and only $6B was Consumer loans (In-store).

4/ Over 80% of the above $73B is used to fund offline transactions.

If we break the $6B Consumer loan book down, $3.5B is for Consumer durables, $2B for mobiles, and $0.5B for others.

5/ A good part of Personal loans and Credit Card book is also to fund offline purchases.

Key offline spend categories being wedding, home improvement, healthcare, travel and consumer durables.

However, much of above are out-of-store loans and not in-store.

6/ I increasingly believe that the future of consumer credit is in-store and at point-of-sale (POS), than out-of-store.

Above is also reflected in the in-store credit market growing much faster then the overall consumer credit market i.e. 35-40% CAGR vs 20-25%.

7/ At risk of oversimplification, I see the "in-store credit" market having 3 distinct phases:

Phase 1: Bajaj's agent-led model
Phase 2: "Pine + Bank" card EMI at POS model
Phase 3: Consumer app + Bank

IMO we're still in the middle of Phase 2, with Phase 3 yet to begin.

8/ Pre-COVID (Jan '19), 75% of the $6B Consumer loan book came from agent-led model, and rest 25% came from "card EMI at POS" model.

However, the latter is growing faster than the former and taking share.

9/ Now moving on to a more bottom-up view of the market from a top-down view.

Bajaj, nearly a decade back, pioneered the "genius" consumer value proposition of "NO cost EMI".

Bajaj partnered with merchants and brands, and got them to pay interest instead of the consumer.

10/ This was a WIN for all 3.

Brand and merchants got higher AOV and better conversion through the grease of credit.

While, consumers got affordability without any interest. This led them to upgrade, and purchase the 55 inch TV instead of the 32 inch they had initially thought.

11/ While Bajaj had built this walled garden, other banks and NBFCs were on the sidelines figuring how to play.

And came Pine which collaborated with banks to enable EMIs on bank cards at POS itself. This was for both credit and debit cards.

12/ HDFC, the key aggressor within banks, drove card EMI at POS with the lure of attractive rewards.

Remember the last time you went to Croma and saw attractive cash back and discount hoardings on HDFC cards. And this is on top of NO cost EMI, which has now become table stakes.

13/ While banks are trying to compete with Bajaj still, and we're in Phase 2, I see the opportunity for entry of another player.

One which solves for the following gaps in the present market:

14/ Gap #1: Driving in-store credit in categories outside of consumer durables and mobiles.

Both Bajaj and POS players have been trying this with the EMI value proposition, but *maybe* this needs the value proposition to be packaged differently, but not entirely sure.

15/ Gap #2: Driving in-store credit in the long tail of merchants.

Bajaj's agent-model and underlying costs pose restrictions on how many long-tail merchants they can acquire.

On the other hand, prohibitive cost of hardware POS limits its reach to the long tail of merchants.

16/ Gap #3: Walled garden of Bajaj in-store for customer acquisition

Bajaj has it's agents in-store for acquisition and onboarding (application, KYC, documents etc).

However, Banks and NBFC's struggle with their limited agent reach.

17/ Gap #4: Tedious and paper heavy process for agent-led onboarding

This often takes upto 1 hr and is a common complaint of customers in-store.

18/ Gap #5: Rewards discovery

It's complex for consumers to understand the best offer for them within credit cards, debit cards, cardless EMIs, BNPL lines etc. they have.

Store staff is often unaware of the details, and leads to a poor experience for the reward-hungry consumer.

19/ Gap #6: Checkout control lies with the cashier /agent

UPI scan and pay led to checkout control shifting from merchants to consumers.

However, Pine gives in-store credit workflow control to cashier, which leads to sub par consumer experience including reward optimisation.

20/ Gap #7: Poor awareness around debit card and pre-approved cardless EMI

Friction in information about debit card EMI, its eligibility, approved amount is a consumer pain. Often, debit card EMI is not applicable across SKUs too.

21/ We believe there is an opportunity to build a consumer-first offering for in-store credit which solves for the above pain points. This is while leveraging merchants for GTM.

One which is not agent-led like Bajaj, or is not merchant-first like Pine.

22/ We also believe this consumer application can level the playing field between all banks and NBFCs in a market which is dominated by a few (Bajaj, HDFC and IDFC).

And aggregate credit lines and rewards for consumers across their banks, NBFCs and fintechs.

23/ I look forward to inputs, critiques, comments from the Fintech community to help us further refine our investment thesis.

I also look forward to brainstorming with teams who're building for this market.

#offline #checkout #thesis #fintech @Stellaris

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I can be also reached at [e-mail].