After 12 years working for banks and consulting firms on the digital transformation of financial services, Creditas founder Sergio Furio finally found a problem he felt he could build a business around.
Over dinner with his Brazilian wife in their New York apartment one night in 2011, she casually mentioned that consumers in her country were paying more than 200 percent interest rates on consumer loans. The longtime fintech professional basically did a spit-take. After digging a bit deeper into the problems that consumers faced, Furio had his business idea and Creditas was born.
Roughly six years after that fateful dinner, Furio is wrapping up a $50 million venture capital financing round (one of the largest in Latin America’s history) and preparing to radically reshape lending in a country that sorely needs it.
The heart of Furio’s innovation is the notion of a collateralized loan. While the lenders that require collateral to issue a loan in the U.S. are typically catering to low-income customers, Furio views collateral as one of the only ways to lower interest rates for would-be borrowers in Brazil.
So far, the company has originated about $100 million in collateralized loans. Furio’s company charges anywhere from 17 percent to 25 percent for home equity loans and between 23 percent and 50 percent for auto equity loans, according to Furio.
Creditas actually makes money in three ways: through loan origination fees; through servicing fees; and return on investment for the junior tranches in the funds that supply the loans.
There’s an acute need for services like Creditas in Brazil. Banks in the country don’t typically offer loans with collateral, because they prefer the high-margin unsecured loans that they’re used to. A typical personal loan has 120 percent APR, and revolving credit cards in the country typically have 480 percent APR.
So far, less than 1 percent of the loans that Furio’s Creditas has issued have resulted in default. According to internal projections, that default rate may go up next year… to 2 percent.
For Brazilians, the benefits of collateralizing the loans are obvious, says Furio. The company sees lower default rates because the consumer has aligned incentives. Then, even if customers do default, losses aren’t as great, because there’s still the underlying asset that covers part of the risk of the loan. Finally, these loans are typically a bigger size that have a lower rate of return and high maturity, so it reduces installment pressure, according to a company spokesman.
According to company estimates, about 75 percent of the 55 million households in Brazil include families that own their own homes. These families have mortgage penetration rates of about 30 percent. That means there are approximately 30 million households with 100 percent equity in their residence. It’s that roughly 100 million people will be affected. Meanwhile, only 25 percent — roughly 37 million cars — have little or no car insurance.
That’s the opportunity that attracted investors like lead investor Vostok Emerging Finance (VEF), the publicly traded investment firm focused on early and growth-stage fintech companies. Previous investors, including Kaszek Ventures, Quona Capital, QED Investors, International Finance Corporation and Naspers Fintech also participated in the investment.
Creditas currently has 285 employees, up from 110 at the beginning of the year, and Furio said the new money will continue to expand the company’s labor force and work on its relationship with regulators.
“We operate through a banking-partner model, we book the loan in a traditional bank and then sell that loan to an investment fund that is the vehicle that is funded by institutional investors and ourselves. This model is 100 percent compliant with regulation, although it generates a dependency,” said Furio. “Central Bank in Brazil has been an ally and is creating a new regulation that will allow us to get our own license to issue the loans directly. This has already finished the public consultation phase and we expect it to be effective in Q1-2018.,” Furio said.