Co-founder and Group CEO of Funding Societies | Modalku, Kelvin Teo
This Means Business series showcases startups in Southeast Asia (SEA) and how they are making their money. If you want to be featured in this series, please contact writers@e27.co.
In April, Funding Societies–the digital finance platform known in Indonesia as Modalku–announced that it had crossed US$3 billion (approx. S$4.1 billion) over more than five million business financing transactions to small and medium-sized enterprises (SMEs) across the region.
This milestone encouraged e27 to reach out to the company to learn more about how it is making its revenue and building a strong and sustainable business in the fintech sector.
“Our revenue model consists of payment fees, lending and service fees, as well as interest income from SMEs and funders. As our name Funding Societies suggests, funding is a main part of our business and revenue, because it is the biggest pain point for SMEs. We hope to uplift SEA societies by giving every SME a fair opportunity for growth and by accumulating the wealth of funders,” explains Funding Societies | Modalku Co-founder and Group CEO Kelvin Teo in an email interview.
“Nevertheless, since 2019, we have explored SaaS and payments through organic buildout of supply chain finance platform Silk Road; investment into GoGMGo, Paper.id and Bank Index; and acquisition of CardUp, as well as various partnerships, to complement lending. We aim to help SMEs manage their cash flow end-to-end.”
In this conversation, Teo explains more about this business model and the lessons learned from the discovery process they had to go through to build it. The following is an edited excerpt of the interview.
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Can you explain how you came up with the existing business model and the process you must go through?
We started as a peer-to-business lending platform in 2015. However, soon we realised that it is an excellent model to start, but not a good one to end. Hence, we have consistently evolved our business model.
We learnt that the name of the game in SEA is aggregation. This is because distribution here is nascent, hence we offer all forms of short-term financing to SMEs through our channels. This increases LTV (loan to value) and reduces CAC (customer acquisition cost).
Secondly, fintech is a risk management business – diversify. We diversify our borrower base over five countries, industries and segment sizes; diversify our funding base to include on- and off-balance sheet lending, individual and institutional funders, local and foreign funders; and finally multiply licences in each country.
This helped us to ride through COVID-19 lockdowns, market slowdown and domestic country risk.
Our approach prioritises external risk management and business nimbleness but increases internal operations complexity. Thus we’ve built up internal capabilities, streamlined products and automated processes for years.
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Who are your users and what is your strategy to acquire them?
We have two groups of users. Firstly, they’re under-served MSMEs from sole proprietors to small listed companies and traditional SMEs to startups, in our five operating countries across sectors. They typically come to us for their first-time business loan, top-up to a bank loan, fast credit approval and flexible financing options.
With our integration of CardUp and the soon launch of accounts, we would also help SMEs save time by automating payments, improving receivables collections and earning points by allowing card usage in more places.
Secondly, we serve individuals and institutions looking for fixed-income investments, in the form of private SME debt. They include retail and accredited individual investors, as well as banks, credit funds and impact funds that want quality, short-term, convenient and fixed-return investment.
We take an omnichannel approach towards reaching our users, i.e. digital channels, partnerships, referrals and sales, progressively moving them from offline to online.
Your company is now operating in different markets in Southeast Asia. What uniqueness does each market have? How do they contribute to sustaining your business?
Currently, we operate in Singapore, Indonesia, Malaysia, Thailand and Vietnam. Each country is unique. While we can leverage best practices, technology and talents from the group, we have to localise ~40 per cent of our business for each market.
Singapore (which we entered in 2015) is more mature in our business model evolution, Indonesia (2016) has a much larger market and Malaysia (2017) is our most stable business. Vietnam (2021) is a tough but promising market, while Thailand (2021) is up-and-upcoming.
Having a regional footprint diversifies our business from facing risks instead of only operating in one country. Our regional presence gives us economies of scale and allows us to be more productive in serving a multi-country customer base – in turn, more growth opportunities to be sustainable. Each country is a Center of Excellence for instance, we launched our first card in Singapore, Shariah-compliant trade finance and digital finance in Malaysia, and supply chain finance in Indonesia.
Also Read: How embedded lending will drive healthy growth in credit in Indonesia
There has been greater pressure for startups today to become more sustainable businesses financially. How do you achieve this with your business model?
Since 2019, we’ve had a dual focus on growth and profitability. This is demonstrated in three ways. Firstly, since inception, we’ve focused on building a credit-led business model because of its shorter path to profitability, yet longer time to build out.
Secondly, we track our product unit economics and line items in our cost-to-income ratio closely with intellectual integrity, to ensure that every loan is profitable on the first transaction and we are making meaningful steps towards group profitability.
Hence we often avoid unhealthy price wars, when others under-price the risk and cost of SMEs.
Finally, we’ve taken a conservative approach towards fundraising and capital allocation. After our first and only right-sizing in COVID-19, we’ve controlled our recruiting carefully to ensure we do not hire ahead of the business. We stay disciplined with growth experiments. And we fundraise before we need to minimise undue stress.
How do you deal with back-to-back global crises?
In the recent global crisis of credit crunch, rate hikes and continued supply chain disruption, we expect banks to cut back on SME lending, SME loan demand to stay high allowing us to cherry-pick, NPL (non-performing loans) to climb but manageable for solid firms like us, funding cost to rise yet volume to fall, equity investors to be selective, talent competition to drop giving us upgrade opportunity, and fintech market to consolidate. Overall, we’d continue growing, as the SME financing business is counter-cyclical.
The back-to-back global crises are transformative events. Most of us have not seen a pandemic like COVID-19 in our lifetime and such high US central bank rates since 2007.
Nevertheless, in my chat with my co-founder Reynold Wijaya, we realised that we have experienced some crises each year, since our founding in 2015. Yet we’ve overcome each of them.
In fact, we doubled our revenue and improved our profitability by 30 per cent last year, and grew through COVID-19 in 2020 and 2021. We attribute it to an aligned leadership, team and shareholders; Sequoia’s feedback of us when they invested in 2016 “aggressive in execution and expansion, but conservative in risk management and compliance”; our pre-emptive thinking and a dose of luck.
Also Read: Why digital lending is the future for SMEs in India
What other opportunities do you aim to seize this year?
I’d be sceptical if a fintech firm could commit to a big plan for 2023. In fact, an investor suggested that we run on a quarterly rather than annual budget, given market volatility.
We’re strategically expanding beyond lending, through our CardUp acquisition and integration since Q4-2022, progressively across our countries. This is building on our Elevate card introduced in Q1-2022, our business expense solution with a credit line, which benefited nearly 2,000 SMEs in Singapore in just one year. We’d also be combining and scaling up CardUp’s solution to allow SMEs to make card payments in places that typically do not accept cards and facilitate collections from their customers.
For our financing business, we’re further strengthening core functions for profitable growth, team learning and development, and organisational capabilities required for an eventual public listing. In reality, we find ourselves working even harder than before.
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Image Credit: Funding Societies
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