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This 'neo bank' tripled its clients in the pandemic (and without using the Credit Bureau)

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October 22, 2020 8 min read

This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process.

This story originally appeared on Alto Nivel

By Antonio Sandoval

Financial inclusion has become the flag of the Fintech sector in Mexico, which has not only detected a large business niche, but is also aware that the country’s conditions in this area have to change once and for all from the traditional model bank.

With the impulse of technology, the options grow and grow, but in this context there are some cases that are striking for the amount of investments they have made, for a differentiated offer and for the prestige of its world-class business partners .

Klar is a suigéneris case, from its birth it has attracted attention in Mexico and in the world for its business model, which allowed it to raise a very important amount of resources with which it presented a disruptive product to the market, exponentially increasing demand, to also achieve a first round of capitalization in record time.

“The data seems incredible, but 60 percent of the Mexican population does not have access to a bank account in the middle of the year 2020. There are more cell phones than people and a large percentage of the population depends on old practices in terms of credit, the famous usurers. The question is: why don’t people have a bank account? It’s something that doesn’t make any sense, ”said Daniel Autrique, Co-Founder and Chief Financial Officer (CFO) of Klar, in an interview with High Level.

“We are a 100 percent digital alternative, we realized that the traditional operating model of a bank makes it very difficult to include certain sectors of the population and historically they choose to leave them out of the financial system; In addition, there is a significant phenomenon , people are already digitizing in their daily lives, but they need to digitize in their financial life, that leads us to several paradoxes because, for example, if someone deserves credit, it turns out that many times they cannot obtain it because it has no financial history, so that many are excluded for life from the system for this simple fact. This has to change, ”explained Autrique.

Faced with a scenario like the previous one, Klar was born as a real alternative for financial inclusion with 100 percent digital operation through an application through which a debit account can be initially opened, which will serve as a reference for a subsequent line of credit .

Klar’s business quickly found an echo in the Mexican Fintech ecosystem and in the increasingly digitized financial services clientele; The company started operations just last year and in less than 12 months it already has just over 200 thousand clients and managed to place more than 25 thousand lines of credit .

As we noted, their operations are not traditional. In fact, in Klar they bet on new methods for evaluating clients, this includes putting aside what they call “archaic schemes”, such as the Credit Bureau.

Credit profile with new standards

When a customer decides to purchase the Klar debit card, the first thing they find out is that the plastic is priceless and that there is no hidden additional cost, plus each month they receive between 1 and up to 5 percent of their total shopping, that’s the first step.

Your behavior with the debit card is decisive for the next disruptive product that Klar offers: credit.

“Based on the history of your debit card, we detect that, if you have certain spending behaviors, you are a person who can pay us a credit ; this is very different from the way traditional banks evaluate the customer for lending. We consider that the credit analysis based on the bureau shows us a photograph of the past that is not always reliable and leaves out many aspects of the client that serve to evaluate their current financial situation, that is why we, to grant credits, neither We even consider consulting the Credit Bureau, it is not decisive ”, says Daniel Autrique.

These innovative criteria, which have also been successful because despite the context of recent months in the country, Klar tripled its client base in the pandemic and its delinquency rates are practically non-existent, they drew the attention of investment funds from a start.

Successful capitalization round

At its birth, Klar achieved an unusual initial figure of 57 million dollars (More than 1,100 million pesos), in an initial round of capitalization (seed capital), led by Quona Capital, with the participation of Santander Innoventures and other multinational investors.

Such is the success and confidence in the business model that the company recently concluded an additional round of investment called series A , through which it managed to raise $ 15 million , in a process led by Prosus (formerly known as Naspers Ventures ), one of the largest investment funds in the startups and technology sector in the world, it is also the first time that this fund has invested in a Mexican startup and in general in any sector . In total, since it began operations a little less than a year ago, it has raised $ 72 million in debt and equity.

The resources of the series A investment will serve to consolidate its technological operation because Klar is different even in that, “we have a solid team of more than 60 top-level engineers, of different nationalities, whose headquarters are in Berlin. The capital of Germany is currently considered the Silicon Valley of the Fintech sector in the world, to a large extent we carry out our technological development there due to its high standards and constant innovations “, says the company’s CFO.

Another part of the resources will be invested in the operation of the company in Mexico, the only country in which they have operations to date and in which they will remain concentrated for a long time, market size and opportunities, we have work for a while, for the moment it is and will be our project ”, explains Daniel Autrique.

And it is that Mexico represents so many opportunities for the sector that startups from other latitudes have already landed in the country to obtain a piece of the market. At the end of September, the Argentine digital banking startup Ualá announced the expansion of its operations in Mexico, after announcing last year that it planned to double its size after receiving millionaire new investments from Tencent Holdings and SoftBank Group Corp, the Japanese giant investment in technology.

Ualá will offer in Mexico a Mastercard for physical and online purchases, cash withdrawals at ATMs and the sending and receiving of payments, the company reported.

To undertake and innovate it is necessary to know the market in which the project or projects are to be developed, Autrique has extensive experience in transnational companies in the financial sector, these experiences resulted in Klar, whose main objective is to bring the benefits of the banking system to millions of Mexicans who have traditionally been excluded, in that short time it was possible to consolidate a world-class neobank concentrated in the mass of the population of Mexico, 100 percent digital, with a credit offer totally different from traditional banking and to which any person living in Mexico, a financial inclusion effort with results.

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The Trump campaign celebrated a growth record that Democrats downplayed.

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The White House celebrated economic growth numbers for the third quarter released on Thursday, even as Joseph R. Biden Jr.’s presidential campaign sought to throw cold water on the report — the last major data release leading up to the Nov. 3 election — and warned that the economic recovery was losing steam.

The economy grew at a record pace last quarter, but the upswing was a partial bounce-back after an enormous decline and left the economy smaller than it was before the pandemic. The White House took no notice of those glum caveats.

“This record economic growth is absolute validation of President Trump’s policies, which create jobs and opportunities for Americans in every corner of the country,” Mr. Trump’s re-election campaign said in a statement, highlighting a rebound of 33.1 percent at an annualized rate. Mr. Trump heralded the data on Twitter, posting that he was “so glad” that the number had come out before Election Day.

The annualized rate that the White House emphasized extrapolates growth numbers as if the current pace held up for a year, and risks overstating big swings. Because the economy’s growth has been so volatile amid the pandemic, economists have urged focusing on quarterly numbers.

Those showed a 7.4 percent gain in the third quarter. That rebound, by far the biggest since reliable statistics began after World War II, still leaves the economy short of its pre-pandemic levels. The pace of recovery has also slowed, and now coronavirus cases are rising again across much of the United States, raising the prospect of further pullback.

“The recovery is stalling out, thanks to Trump’s refusal to have a serious plan to deal with Covid or to pass a new economic relief plan for workers, small businesses and communities,” Mr. Biden’s campaign said in a release ahead of Thursday’s report. The rebound was widely expected, and the campaign characterized it as “a partial return from a catastrophic hit.”

Economists have warned that the recovery could face serious roadblocks ahead. Temporary measures meant to shore up households and businesses — including unemployment insurance supplements and forgivable loans — have run dry. Swaths of the service sector remain shut down as the virus continues to spread, and job losses that were temporary are increasingly turning permanent.

“With coronavirus infections hitting a record high in recent days and any additional fiscal stimulus unlikely to arrive until, at the earliest, the start of next year, further progress will be much slower,” Paul Ashworth, chief United States economist at Capital Economics, wrote in a note following the report.

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Black and Hispanic workers, especially women, lag in the U.S. economic recovery.

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The surge in economic output in the third quarter set a record, but the recovery isn’t reaching everyone.

Economists have long warned that aggregate statistics like gross domestic product can obscure important differences beneath the surface. In the aftermath of the last recession, for example, G.D.P. returned to its previous level in early 2011, even as poverty rates remained high and the unemployment rate for Black Americans was above 15 percent.

Aggregate statistics could be even more misleading during the current crisis. The job losses in the initial months of the pandemic disproportionately struck low-wage service workers, many of them Black and Hispanic women. Service-sector jobs have been slow to return, while school closings are keeping many parents, especially mothers, from returning to work. Nearly half a million Hispanic women have left the labor force over the last three months.

“If we’re thinking that the economy is recovering completely and uniformly, that is simply not the case,” said Michelle Holder, an economist at John Jay College in New York. “This rebound is unevenly distributed along racial and gender lines.”

The G.D.P. report released Thursday doesn’t break down the data by race, sex or income. But other sources make the disparities clear. A pair of studies by researchers at the Urban Institute released this week found that Black and Hispanic adults were more likely to have lost jobs or income since March, and were twice as likely as white adults to experience food insecurity in September.

The financial impact of the pandemic hit many of the families that were least able to afford it, even as white-collar workers were largely spared, said Michael Karpman, an Urban Institute researcher and one of the studies’ authors.

“A lot of people who were already in a precarious position before the pandemic are now in worse shape, whereas people who were better off have generally been faring better financially,” he said.

Federal relief programs, such as expanded unemployment benefits, helped offset the damage for many families in the first months of the pandemic. But those programs have mostly ended, and talks to revive them have stalled in Washington. With virus cases surging in much of the country, Mr. Karpman warned, the economic toll could increase.

“There could be a lot more hardship coming up this winter if there’s not more relief from Congress, with the impact falling disproportionately on Black and Hispanic workers and their families,” he said.

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Ant Challenged Beijing and Prospered. Now It Toes the Line.

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As Jack Ma of Alibaba helped turn China into the world’s biggest e-commerce market over the past two decades, he was also vowing to pull off a more audacious transformation.

“If the banks don’t change, we’ll change the banks,” he said in 2008, decrying how hard it was for small businesses in China to borrow from government-run lenders.

“The financial industry needs disrupters,” he told People’s Daily, the official Communist Party newspaper, a few years later. His goal, he said, was to make banks and other state-owned enterprises “feel unwell.”

The scope of Mr. Ma’s success is becoming clearer. The vehicle for his financial-technology ambitions, an Alibaba spinoff called Ant Group, is preparing for the largest initial public offering on record. Ant is set to raise $34 billion by selling its shares to the public in Hong Kong and Shanghai, according to stock exchange documents released on Monday. After the listing, Ant would be worth around $310 billion, much more than many global banks.

The company is going public not as a scrappy upstart, but as a leviathan deeply dependent on the good will of the government Mr. Ma once relished prodding.

More than 730 million people use Ant’s Alipay app every month to pay for lunch, invest their savings and shop on credit. Yet Alipay’s size and importance have made it an inevitable target for China’s regulators, which have already brought its business to heel in certain areas.

These days, Ant talks mostly about creating partnerships with big banks, not disrupting or supplanting them. Several government-owned funds and institutions are Ant shareholders and stand to profit handsomely from the public offering.

The question now is how much higher Ant can fly without provoking the Chinese authorities into clipping its wings further.

Excitable investors see Ant as a buzzy internet innovator. The risk is that it becomes more like a heavily regulated “financial digital utility,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”

“Utility stocks, as far as I remember, were not the ones to be seen as the most exciting,” Mr. Howie said.

Ant declined to comment, citing the quiet period demanded by regulators before its share sale.

The company has played give-and-take with Beijing for years. As smartphone payments became ubiquitous in China, Ant found itself managing huge piles of money in Alipay users’ virtual wallets. The central bank made it park those funds in special accounts where they would earn minimal interest.

After people piled into an easy-to-use investment fund inside Alipay, the government forced the fund to shed risk and lower returns. Regulators curbed a plan to use Alipay data as the basis for a credit-scoring system akin to Americans’ FICO scores.

China’s Supreme Court this summer capped interest rates for consumer loans, though it was unclear how the ceiling would apply to Ant. The central bank is preparing a new virtual currency that could compete against Alipay and another digital wallet, the messaging app WeChat, as an everyday payment tool.

Ant has learned ways of keeping the authorities on its side. Mr. Ma once boasted at the World Economic Forum in Davos, Switzerland, about never taking money from the Chinese government. Today, funds associated with China’s social security system, its sovereign wealth fund, a state-owned life insurance company and the national postal carrier hold stakes in Ant. The I.P.O. is likely to increase the value of their holdings considerably.

“That’s how the state gets its payoff,” Mr. Howie said. With Ant, he said, “the line between state-owned enterprise and private enterprise is highly, highly blurred.”

China, in less than two generations, went from having a state-planned financial system to being at the global vanguard of internet finance, with trillions of dollars in transactions being made on mobile devices each year. Alipay had a lot to do with it.

Alibaba created the service in the early 2000s to hold payments for online purchases in escrow. Its broader usefulness quickly became clear in a country that mostly missed out on the credit card era. Features were added and users piled in. It became impossible for regulators and banks not to see the app as a threat.

ImageAnt Group’s headquarters in Hangzhou, China.
Credit…Alex Plavevski/EPA, via Shutterstock

A big test came when Ant began making an offer to Alipay users: Park your money in a section of the app called Yu’ebao, which means “leftover treasure,” and we will pay you more than the low rates fixed by the government at banks.

People could invest as much or as little as they wanted, making them feel like they were putting their pocket change to use. Yu’ebao was a hit, becoming one of the world’s largest money market funds.

The banks were terrified. One commentator for a state broadcaster called the fund a “vampire” and a “parasite.”

Still, “all the main regulators remained unanimous in saying that this was a positive thing for the Chinese financial system,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics in Washington.

“If you can’t actually reform the banks,” Mr. Chorzempa said, “you can inject more competition.”

But then came worries about shadowy, unregulated corners of finance and the dangers they posed to the wider economy. Today, Chinese regulators are tightening supervision of financial holding companies, Ant included. Beijing has kept close watch on the financial instruments that small lenders create out of their consumer loans and sell to investors. Such securities help Ant fund some of its lending. But they also amplify the blowup if too many of those loans aren’t repaid.

“Those kinds of derivative products are something the government is really concerned about,” said Tian X. Hou, founder of the research firm TH Data Capital. Given Ant’s size, she said, “the government should be concerned.”

The broader worry for China is about growing levels of household debt. Beijing wants to cultivate a consumer economy, but excessive borrowing could eventually weigh on people’s spending power. The names of two of Alipay’s popular credit functions, Huabei and Jiebei, are jaunty invitations to spend and borrow.

Huang Ling, 22, started using Huabei when she was in high school. At the time, she didn’t qualify for a credit card. With Huabei’s help, she bought a drone, a scooter, a laptop and more.

The credit line made her feel rich. It also made her realize that if she actually wanted to be rich, she had to get busy.

“Living beyond my means forced me to work harder,” Ms. Huang said.

First, she opened a clothing shop in her hometown, Nanchang, in southeastern China. Then she started an advertising company in the inland metropolis of Chongqing. When the business needed cash, she borrowed from Jiebei.

Online shopping became a way to soothe daily anxieties, and Ms. Huang sometimes racked up thousands of dollars in Huabei bills, which only made her even more anxious. When the pandemic slammed her business, she started falling behind on her payments. That cast her into a deep depression.

Finally, early this month, with her parents’ help, she paid off her debts and closed her Huabei and Jiebei accounts. She felt “elated,” she said.

China’s recent troubles with freewheeling online loan platforms have put the government under pressure to protect ordinary borrowers.

Ant is helped by the fact that its business lines up with many of the Chinese leadership’s priorities: encouraging entrepreneurship and financial inclusion, and expanding the middle class. This year, the company helped the eastern city of Hangzhou, where it is based, set up an early version of the government’s app-based system for dictating coronavirus quarantines.

Such coziness is bound to raise hackles overseas. In Washington, Chinese tech companies that are seen as close to the government are radioactive.

In January 2017, Eric Jing, then Ant’s chief executive, said the company aimed to be serving two billion users worldwide within a decade. Shortly after, Ant announced that it was acquiring the money transfer company MoneyGram to increase its U.S. footprint. By the following January, the deal was dead, thwarted by data security concerns.

More recently, top officials in the Trump administration have discussed whether to place Ant Group on the so-called entity list, which prohibits foreign companies from purchasing American products. Officials from the State Department have suggested that an interagency committee, which also includes officials from the departments of defense, commerce and energy, review Ant for the potential entity listing, according to three people familiar with the matter.

Ant does not talk much anymore about expanding in the United States.

Ana Swanson contributed reporting.

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