Rethinking access to revolving credit (and why we invested in YoCripto)
We would like to start this post by reminding readers that this is written by the entire DILA Capital Team as part of our “Why We Invested” series. This particular article was led by Joaquin Abal. A special thank you to Julian Arber for helping out as well.
In the last few years, there’s been an influx of B2C digital credit companies within the Latin American market. Some of them have been very good at brand positioning, others in distribution or product; some have been disciplined and capital-efficient, leveraging a robust financing strategy, and others not so much. However, as investors, we’ve had a hard time finding a genuine and structural competitive advantage within this segment that propels a 10x-sized differentiated proposition.
In parallel, there has also been a boom in cryptocurrencies in the region. Latin America now represents close to 10% of the global cryptocurrency transaction level. Moreover, according to Statista, Argentina, Brazil, Mexico, and Colombia currently rank among the top 10 countries, measured by the share of the population who have used or owned cryptocurrencies. The estimated number of crypto owners in Mexico and Colombia is 3.2M and 3.1M, representing 2.5% and 6.2% of the total population, respectively, while Argentina and Chile possess 1.3M and 0.5M crypto owners.
In DILA, we have been analyzing the cryptomarket for many years now and have been learning how specific properties of its underlying technology are suited to solve real-life financial problems at scale while waiting for an attractive opportunity to invest.
Along came YoCripto, a company sitting at the intersection of B2C digital credit and cryptocurrencies. YoCripto is essentially providing consumer loans backed by crypto assets. The Company’s first product, a Bitcoin collateralized revolving credit line offered through a credit card with Bitcoin Rewards, is intended to tackle suboptimal access to credit in the region.
We believe this product couldn’t make more sense for Latin America today. The problem in the region is about access: only 15% have access to a credit card in Mexico, and that percentage slightly increases to 19% considering the overall Latin American region. But it’s also about cost: users carrying a balance on an average credit card (not platinum or gold) from one of the top 5 banks in Mexico are being charged annual interest rates that range between 51 and 66%.
YoCripto will initially be targeting the underbanked. This segment includes both i) individuals with access to a limited scope of financial services, such as a savings account and/or a debit card, as well as ii) those that already have access to a credit card but are continuously penalized with high interest rates and fees. The solution caters to every user with a revolving credit access problem, regardless of whether they held cryptocurrency previously. This makes for a very large market opportunity.
YoCripto’s offering relies not only on the benefits of digital assets as collateral but also doesn’t burden the user with the complexity of navigating an intricate crypto ecosystem. YoCripto’s model provides an inherent advantage over both digital and incumbent competitors. By leveraging collateral in a digital form (BTC), YoCripto mitigates the risk of default, and therefore its exposure is inherently lower than that of other revolving credit solutions in the market.
This enables the company to provide a genuinely (not subsidized) lower interest rate to their end-users, as well as a much higher credit limit (the latter will depend on the amount of BTC collateral provided). YoCripto will initially offer rates that will be 50 to 80% lower than most market alternatives. However, given the collateralization strategy and under a scenario with a more comprehensive product offering (and revenue streams), the Company could eventually become the first credit card with a rate closer to 0%. This would drive unparalleled levels of inclusion in our region.
Any new fintech can offer the lowest interest rates in the market. The question is if there´s any component inherent to its model that enables them to sustain it in the long term (other than access to venture capital)?
There´s been a common denominator across our numerous investments in the digital credit space: the relationship between the user and credit provider is extremely price sensitive. That is why we believe that YoCripto’s sustained ability to offer the lowest rates in the market will be instrumental to acquire and retain users while driving value in the long term.
We won’t get into too much detail, but naturally, this part of the proposition is coupled with a very robust risk management strategy, which mitigates BTC price volatility. We can’t stress enough the importance of a solid risk management and compliance operation when it comes to credit. In this regard, the Company has managed to attract a world class team from other top-tier financial institutions, which we consider to be a very strong validation sign. In addition, YoCritpo has implemented a machine learning system that helps assessing the creditworthiness of clients.
So that’s one part of the proposition…
In addition to the lowest rate in the market, there are auxiliary components that shape and enhance the attractiveness of the proposition. A digital asset-backed revolving loan is a great way for users to access the value of their crypto without having to sell. Users that are interested in holding BTC as an investment (and are long term bulls!) will be able to capture the upside potential of crypto.
The frosting on the cake is YoCripto´s reward program in BTC. The YoCripto card will be the only credit card in LatAm that offers this kind of program. Since it is a credit card, users will not have to spend their BTC, but rather just use it as collateral. The BTC rewards represent an easier entry into crypto for those users that do not own this type of asset already, as well as for those that are not willing to learn all the mechanics of buying and holding BTC.
We believe this entry point fits perfectly in the product roadmap and platform vision that YoCripto has developed. The credit card and Bitcoin reward program will serve as the bridge between an everyday solution and a larger and more wholesome cryptocurrency ecosystem, which will be developed in phases two and three, and will include crypto-backed loans as well as high-yield savings accounts.
YoCrypto’s vision: “To be the first crypto digital platform in LatAm for credit, crypto-backed loans, high-yield savings, and exchange.”
All of this is backed by a top-tier founding team, led by Julian Arber and Rafael Maya. Julian is a Harvard MBA with experience in top firms such as Morgan Stanley, Merrill Lynch, and McKinsey, but is also a seasoned entrepreneur: he founded a search fund, operated the business and exited the company with excellent returns. He is also an early crypto adopter and has been investing and navigating the space for several years. Rafa is a seasoned entrepreneur with 15+ years of experience in Mobile, AI, and Fintech, and holds a master’s degree in AI and another one in Cognitive Systems. Rafael started the first Crypto Investment Club in Mexico.
We couldn’t let this one go: a proven team in entrepreneurship and technology, operating in a large, high-growth market, under a model with a structural long-term advantage that will drive unparalleled inclusion in the region.
So, if you are carrying a revolving balance month-to-month and wondering where those high interest rates came from, perhaps it’s time to check out YoCripto. But get in line, the waitlist is bursting…