In LATAM countries, particularly Mexico, 10% of the population has a credit card. However, within credit card transactions, according to Mexico's central bank Banxico, around 65% of transactions from credit cards in any given year are installment-based.
While working at Morgan Stanley in NYC, Angel Peña, co-founder and CEO of Aplazo, a modern payment network offering payment solutions and merchant tools to help merchants sell more and grow their brands, discovered Mexico's huge cultural preference for paying in installments but also that the country had a major roadblock for mass adoption of purchase financing installment plans.
In this episode of the Fintech Thought Leaders podcast, Host Bill Cilluffo and Aplazo CEO Angel Peña discussed Mexico's underbanked population, the benefits of merchants being able to offer installment payment plans (BNPL) to 88% of the Mexican population who do not have credit cards and campaign installments, and the work Aplazo is doing to achieve financial ubiquity in Mexico.
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Episode Transcript
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Speaker 1 (00:19):
Thank you.
Venture capital firm focused oninvesting in fintech companies
all the way from pre-seed to IPO.
Fintech Thought Leaders bringstogether the most talented
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If you're looking to learn moreabout what motivates our
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place.
Hello and welcome to FintechThought Leaders podcast.
(00:40):
I'm Bill Salufo, head ofinternational at QED Investors.
Just to orient our listeners, Iwonder if you can start by
(01:02):
sharing maybe a 60-secondcommercial on what a plazo is
and what you guys do Of course,of course.
Speaker 2 (01:08):
So a plazo in 60 seconds is a modern payment
network.
We offer payment solutions andmerchant tools to help merchants
basically sell more and growtheir brands.
With a plazo, merchants offerinstallment payment plans, or
known as BNPL, particularly to88% of the Mexican population
who does not have credit cardsand can't pay in installments.
(01:28):
But we also offer otherinnovative solutions, such as
instant payments, that allowmerchants basically to save a
lot on processing fees.
With us, merchants have accessalso to unique marketing
insights, sales insights, and wedo that through a tech stack
and AI tools that we've designedto eliminate many of the
drop-off points in commerce andbasically help these merchants
better run their businesses.
Speaker 1 (01:49):
Yeah, I mean you've got a pretty unique one in that
you both have two very differenttypes of customers.
You know you need to serve bothof them extremely well to make
this work.
So it's a pretty challengingand unique aspect of what you
guys have built so far.
Speaker 2 (02:00):
Yeah, yeah, it's very challenging.
Speaker 1 (02:03):
Operating a two market side network is
definitely interesting,definitely good, well, look,
before we dive into the businessitself, maybe I'd love to hear
a little bit about yourbackground.
You know, prior to founding aplaza, yeah for sure.
Speaker 2 (02:16):
So a little bit background on myself.
I'm not from Mexico.
I was born and raised in theDominican Republic and I went to
school in the US.
After graduating to the US, Iwent and started working at
Morgan Stanley in New York Cityand there I was mostly spending
my time investing in corporateand sovereign credits across
emerging markets and that was ahuge part of LATAM.
(02:39):
And many of the issuers inthese countries are financial
institutions and that was reallydrove my interest in starting a
plaza.
So it was very from a top downapproach and a clear
understanding of themacroeconomic opportunity and
the opportunity to make impactat scale.
(03:00):
So that's how I started.
So that's how I started.
(03:28):
So yeah, at the macro level,firsthand, I was seeing the huge
inclusion gap that card Withincredit card transactions.
According to Banxico, which isthe central bank in Mexico,
around 65% of transactions fromcredit cards in any given year
are installment-based and thatjust showed a huge cultural
preference for paying ininstallments and, given the low
penetration of 10% of creditcards, I just thought that was a
huge roadblock for massadoption of purchase financing
(03:52):
installment plans.
And, coupled with the fact alsothat there are two huge retail
stores that started in the 1950sthat later started bridging
that credit gap problem inMexico with their in-house
purchase financing programswithin their retail stores and
fast forward to today.
These are amongst the topconsumer banks in Mexico.
So I took a lot of inspirationfrom that and the relevance of
(04:16):
these stores and how influentialthey are with consumers in
Mexico.
But yet a lot of opportunity tosignificantly improve the user
experience with top class techand UX.
And it became clear for meduring my time at Morgan Stanley
, albeit from the macro point ofview, that there wasn't a
(04:36):
merchant and customer centricvalue proposition.
I got super excited about theidea of creating a product that
just democratizes purchasefinancing installments to 90% of
the population that doesn'thave credit card.
But equally exciting was theopportunity to roll out purchase
financing programs to 95% ofretail that is, not these two
(05:01):
retail stores and equip themwith purchase financing programs
needed to compete with thesemajor retailers.
And that was, for me, whatreally drove the opportunity to
start a plazo.
And then it was all aboutoperationalizing the idea.
There was many challenges thatwe faced in the beginning.
When we started out, it wasaround Q1 of 2020.
Speaker 1 (05:24):
So it was just in the beginning of COVID and me not
being Nothing like starting,nothing like trying to start a
company and then, a couple ofweeks later, everything gets
shut down.
Speaker 2 (05:34):
Right, particularly a consumer lending company.
I don't know if that's right.
You know, I would recommendanyone to do that in the face of
a pandemic.
So, yeah, it was definitelyvery challenging, a lot of
uncertainty.
Many of my closest friendsfamily mentors questioned me a
lot.
It's not easy to start thesetypes of businesses in a
(05:55):
pandemic and obviously I'm notfrom Mexico so I lacked the
local know-how that I believe isvery important in starting a
business, a local business, inMexico.
But I was very lucky to partnerwith my co-founder, alex, who is
from Mexico and he's a provenoperator that has helped scale
many tech businesses in Latin,such as Uber, uber Eats, lime
(06:18):
Scooters, oil hotels and homes.
And it was not until wepartnered and it was probably
around April of 2020, may of2020, that I moved to Mexico.
You know we were already two orthree months into the pandemic
and for me it was just afterlanding in Mexico and
experiencing offline retail was,surprisingly, didn't shut down
(06:43):
during the pandemic, but afterexperiencing that and seeing
firsthand the pain points that Iwas, from a macroeconomic point
of view, analyzing in New Yorkall the way in New York, I had
an idea what it was all about,but it was not until I landed in
Mexico and I saw this firsthand, that I really started getting
excited and everything juststarted to click, and that's
(07:05):
when we knew we were up tosomething.
Speaker 1 (07:07):
No, it makes a lot of sense Pulling way back on the
macro for a minute for a littledrill down before we dive into
the details.
I mean, do you have a sense ofwhy Mexico is so underpenetrated
from a credit standpoint?
I mean, if you look at othercountries around the world at a
similar GDP size or similardevelopment path, mexico stands
(07:27):
out as a particularlyunderdeveloped consumer credit
and consumer banking ecosystem.
Any sense, now that you'velived it for a few years, of
what some of the main obstacleshave been?
Speaker 2 (07:37):
Yeah, so just sharing some data points, as we've
talked before.
Mexico credit card penetrationis around 10-11% of the adult
population.
Then you look at consumercredit, personal credit it's
probably around 30% of the adultpopulation.
And when you compare it to acountry like, let's say, brazil,
(07:59):
where credit penetration ismuch higher, you start asking
yourself why is this the case inMexico?
And for us, you know it wasdefinitely attributed to the
data environment, the datainfrastructure.
It's such a data light marketthat just makes it really really
challenging to underwriteconsumers, just for basically
(08:22):
around 40, 50 percent of thepopulation we believe, just for
basically around 40, 50% of thepopulation we believe are the
ones that have sufficient credithistory to make a credit
decision using traditionalmethods.
So it just makes it reallychallenging for traditional
lenders to extend credit in away they could mitigate for risk
, and that's mostly on thesupply side, I think, and that's
(08:42):
what I mostly listen moreentrepreneurs talk about.
But something that also goes ontalk about is the demand side
as well.
We know that in Mexico, bankingpenetration or debit card
penetration is around 50 or 55%of the population, and you would
(09:03):
argue that these aredigitalized people that could
have access to credit and whenyou, you know, start double
clicking, you can do this morewith like user research,
understanding, having one on onesessions with consumers.
You know we found a lot ofinteresting data points that a
lot of consumers are very riskaverse to many traditional forms
(09:23):
of credit and we think that'sattributed to a low trust for
the traditional bankinginstitutions.
A lot of consumers haveexperienced many difficult
situations with lenders,particularly around collections,
particularly around lack oftransparency around things like
deferred interest, the fineprint and how, basically, you
(09:47):
can be two or three days late onyour payment and all of a
sudden, you have this 3x triggeron your APRs, and these are
things that consumers are notaware of at the time of
origination and that just causesa lot of low trust, and we've
seen that a lot from our pointof view and we see that
happening a lot with creditcards and microfinancing
(10:09):
companies as well.
So, yeah, I would argue, youknow it's definitely a supply
side, but it's also a demandside, particularly related to
trust, that we think that youknow, as a fintech community, we
all need to like address.
Speaker 1 (10:21):
Yeah, no, it makes sense to me really interesting
that there's both supply anddemand reasons why Mexico might
be so low.
So let me turn then to morespecifically on Applazo.
I mean, you guys have you'restill building, you're still a
young company, a lot left to do,but you've made amazing
progress on both of these sides.
Right, the ability tounderwrite customers and offer
(10:41):
them credit, but the ability toget customers to trust you and
want to take your product, andthen you throw the merchant in,
which is a whole other vector.
I'd love to hear some of howyou guys have been able to start
tackling these problems.
Speaker 2 (10:55):
Yeah, so I can talk a little bit more on the
inception story becausedefinitely it's been an
interesting trajectory, howwe've evolved.
But I would say, given that allthis financing problems in the
country and ourselves starting aconsumer lending business, the
development process was veryfocused on risk and distribution
(11:18):
.
Like I mentioned before, mexicois a very data-light market.
A lot of structural issues withthe data environment here and a
lot of low trust with financialinstitutions, and we knew that
we needed to tackle theseproblems since day one and
focusing on risk and our abilityto assess credit in the
beginning.
It's obvious that, like anylending company, you want to
(11:42):
basically shorten the learningcurve as fast as possible,
invest in a couple ofunprofitable vintages in the
beginning, and we wanted to dothat.
But we wanted to do that in away that we mitigate risk as
much as possible, learning asfast as possible.
So, from the consumer point ofview, we designed and structured
our product in a way thatallowed us to do that, by
(12:04):
offering low duration and lowaverage order values, and that
allowed us to minimize risk on aper user basis, starting with
low credit lines, focusing onrecurrency, which allowed us to
iterate fast, expedite datacapture, progressively graduate
users to higher credit limits.
And for such reasons, we neededto focus our go-to-market or
(12:25):
the sales motion on the merchantside, targeting industries that
were a good fit for thisproduct design, and these were
basically categories within theretail market, such as clothing
stores, footwear stores, sportsand equipment stores, general
merchandise stores and so on.
And that's how we set out toreally overcome the risk
(12:48):
challenge, which is basically,since day one, we were seeing
most of our consumers having nocredit files whatsoever.
We just needed to reallyunderstand as fast as possible
how to underwrite theseconsumers and we thought this
was the best way possible and inhindsight, it's been working
really, really well.
And then it's distribution,which is the entire motion
(13:12):
vector that you alluded to, andthat's a different motion.
And for us, we knew that inorder to crack credit
penetration in Mexico, we neededto rely on a proprietary and a
differentiated data set that noother traditional lender was
capturing and that in itselfgiving us an advantage to be
(13:34):
able to extend credit to thisconsumers that have never had
credit before.
And for us, you know, it wasall about integrating and making
and convincing merchants tofurnish that data either online
and offline.
So from day one.
We invested a lot inintegrations direct integrations
with e-commerce stores, butalso with physical stores
(13:56):
through their point of sales,and capture that data related to
the purchase, related to thetransaction.
That, yes, we didn't start usingand leveraging until two years,
three years later, butnonetheless, you know, it's
making most of our underwritingdecisions to this day and that
was a good investment that wemade.
But, at the same time, theability to being directly
(14:20):
integrated with merchants alsohelped us overcome the trust
issues that I mentioned before.
Allowing merchants to extendcredits to consumer helps us
overcome these trust issues.
For instance, like a Puma storethat's already a flagship brand
in Mexico that already serves aparticularly segment of the
(14:43):
Mexican population, convincingthem of extending a credit
because they see a return oninvestment on our product also
helps us, you know, overcomethese trust issues that are very
relevant in the Mexicanoperating environment, and
that's allowed us to definitelybuild trust with consumers.
But also, from a business pointof view, it's been an integral
(15:05):
part of acquiring users withhigh purchase intent and very
efficient acquisition costs.
Speaker 1 (15:10):
No, it makes sense.
So you're able to leverage, inyour example, pumas to kind of
overcome that hesitancy with theconsumer.
Obviously, if your productwasn't easy to use and easy to
understand, then you might getcustomers once and then they
don't come back.
So you play a huge role inpeople coming back, but you're
able to use the distributionpartners maybe to overcome that
initial hesitance.
Of course, how do you juggle?
(15:31):
You know, I've certainly workedin my days at Capital One, not
in a business exactly like yours, but in some businesses where
you're distributing variouslending products through
retailers, there's always atension.
The retail partner wants you toapprove 100% of customers.
Solid risk management meansthat you're never going to
approve close to 100% of yourcustomers.
I mean, how have you sort oflearned to juggle that tension
(15:53):
over the years?
Yeah for sure.
Speaker 2 (15:55):
So I think it starts with the value proposition and
understanding the macro.
So, like I mentioned before,credit card transactions around
65% of them are installmentbased and these are usually done
by credit card companiesworking with the merchant
acquirer and having a directrelationship or a commercial
(16:16):
relationship with the merchant.
And these are programs usuallythat are promotional programs
that merchants are offeringduring seasonal periods, and
they've experienced the valueadd of adding these programs to
their operations.
And the main problem is thatcredit card penetration is very
low and merchants know thatthere is a return on investment
(16:39):
on offering installments to thecredit card, but the addressable
market of their consumer basethat has a credit card is just
very small.
So the value proposition of aplazo is that, but just
magnified to the entire Mexicanpopulation.
So that makes it really easyfor them to understand our
(17:00):
product and really easy for themto know that there is a return
on investment, which isbasically a function of higher
tickets, higher average ordervalues and higher conversion
right.
So that's something that wehave working to our advantage
that merchants are already awareof the value out of offering
installments.
What's better is that we justamplify that to the entire
(17:23):
consumer base.
The thing, like you mentioned,is always approval rates, and
particularly in an offline store, where you're basically
approving or rejecting aconsumer at the time of purchase
in a physical store, isdefinitely a challenge,
particularly when you rejectconsumers, and we've invested a
lot of effort in trying tooptimize approval rates as much
(17:44):
as possible.
That's been a key differentiatorfor us against any other player
in the space and for us it'sbeen a function of being able to
underwrite each transaction,which is a very unique advantage
in a data light environment.
You know we're underwritingconsumers at the time of
origination, but also we'reunderwriting each transaction,
(18:06):
and by underwriting eachtransaction, we do a real time
evaluation and we dodifferentiated structuring in
order to optimize approval rates.
Like, for instance, we can havedifferent down payments amount,
we can have different duration,we can have different pricing.
We're constantly monitoring theability to adjust limits
(18:27):
depending on each transaction.
So these are unique levers thatare just very different from
traditional credit products.
That allows us to optimizeapproval rates and really play
with how much principle at riskwe're willing to take at each
transaction, and that's allowedus to have over 80% approval
rates and for us, what we'remostly solving for is fraud and
(18:49):
just being transparent withmerchants and working together
in tackling fraud is where wededicate a lot of efforts, and
that's something that usuallythe merchant is really
supportive of.
Speaker 1 (19:01):
No, that makes sense, I mean.
That leads me to the nextquestion.
I mean you can't really haveany conversation in the VC space
these days without talkingabout AI, and you know older
generations of AI certainly haveplayed a role in the industry
as it relates to fraudmanagement, and so I'm sure
you're leveraging it there.
But I know this is an importantpart of kind of how you've been
building Applazo in a number ofways.
I just wonder if you can talk abit about how you're able to
(19:24):
leverage some of these tools indifferent ways.
Speaker 2 (19:26):
Yeah, so we've been using AI for a while now.
It's definitely beingencompassed across many aspects
of the business, particularlyfraud prevention and risk
assessments, of course, but alsoa lot on personalized
recommendations, customerservice automation and so on,
and these technologies hasdefinitely helped us analyze the
(19:47):
vast amount of data that wehave and make the real-time
decisions that we need to makeat the time of purchase
detecting fraudulent activity,tailoring product recommendation
to individual users andproviding more responsive and
personalized customer support.
So, particularly in fraud andin risk management, the ability
(20:08):
to underwrite each transactionand powering that with ML and AI
models for basically dynamic,risk-adjusted pricing for each
transaction, depending on theSKU, depending on the category,
depending on the location, isreally interesting.
We've seen a lot of greatadvancements there, a lot of
(20:28):
great performance onunderwriting that we attribute
to this ability of employing adifferentiating approach on each
transaction to risk, but alsoat the user level.
You know, credit lineassignment, customer
underwriting, customeronboarding these are all data
points that we get at the timeof purchase as well that really
(20:48):
power these models and help usunderstand from a more
comprehensive point of view, whois real and who is not, you
know.
But also doubling down onpersonalized recommendation.
That's where we've seen a gamechanger for us as well in
fostering customer loyalty andjust delivering wow experiences.
(21:08):
Nowadays, for instance, most ofour orders are being accepted
through a mobile app rather thanfrom our partner websites, and
that's a function of our valueproposition, but it's also
because we understand whatcustomers want and what they
need.
Because we're capturing SKUdata at the time of purchase, we
know what they've been buying,so we're likely able to predict
(21:30):
what they're gonna buy next.
And being able to offerpersonalized recommendations in
terms of products, in terms ofmerchants, is something that
we've been investing a lot andwe're super excited about this
potential of continuinginvesting in this area, help us
become kind of the de factoprimary account for consumers to
(21:50):
spend and offer ongoing pointsof engagement on a daily and
weekly basis.
So, yeah, we've seen definitelya lot of great efforts on an
IEI, and that's something that'sreally exciting for us going
forward.
Speaker 1 (22:02):
Thank you.
Let me pick on something thatyou said in the middle there,
which I think is a prettystunning statistic if I heard it
correctly, that over half ofyour consumer purchases are
coming through your app asopposed to your partner's app.
I think most people probablyhave the impression that most
folks, broadly speaking, in theBNPL space are sitting on top of
their partners usually websites, but maybe physical stores or
(22:25):
other things and using theirdistribution.
Is that a component of thebusiness that you always thought
would be there from thebeginning, or something that you
were able to discover elsewhereand really build on customer
loyalty in a pretty unique way?
Speaker 2 (22:39):
No, to be honest, that was a learning that we had
when we started the company.
We never imagined that we wouldget there so quickly.
We knew that as soon as webecome more and more ubiquitous,
eventually the growth motionstarts focusing more on the user
rather than on the merchant.
But we were surprised to seevery quickly a lot of that
(23:01):
gravitates, gravitating moretowards the user.
I think what we did reallyreally well spending a lot of
time in understanding the datathat we've been getting at the
transaction and at the purchaseand really understanding
customers want and trying to getthem to go to a mobile app.
(23:21):
Spend time in the mobile app,discover new merchants, discover
new products, discover newdeals, discover new promotions
and as soon as we started doingthat, we started seeing a huge
shift towards transactionsgravitating towards merchant
through our mobile app, and it'sparticularly the repeat users
(23:45):
and with repeat users,positioning herself as a
one-stop shopping destinationand our ability to keep doing
that, because we know whatconsumers want and we're likely
to be able to offer thatpersonalized experience for them
where they basically just go toa plaza to really find what
they need next.
Speaker 1 (24:04):
Yeah, that's truly amazing.
I mean, certainly we've talkedto a number of players in a
number of countries broadly inthis space and I think very few,
if any, have been able toachieve that level of purchase
driving.
And it's just important longrun right that you're able to
deliver that value to merchants.
That is quite unique not justincreasing their sales because
you provide credit, butincreasing sales because you're
(24:25):
actually driving customers tobuy their products, which is
pretty stunning.
So look, as we near the end ofthe session, you've accomplished
a lot already.
You talked about some of yourmerchant tools.
You've talked about credit.
You've talked about drivingsome of these sales.
You just completed your SeriesB, which we were thrilled to be
part of, and I know you're doingthat because there's a whole
lot more in the future for youguys than there is in the past.
(24:47):
I wonder if you can just sharesome of the big initiatives that
you're working on and if we'rehaving this conversation again a
couple of years from now, whatare some of the big changes that
will have happened with Applazo?
Speaker 2 (24:57):
For sure.
Yeah, so when we think aboutthe vision going forward, it's
really to become the preferredpayment method in Mexico as a
true-sided payment network.
We believe that we can do thatby becoming top of mind on how
merchants do payments and howusers have this top of mind when
it, with a very modest andsimple to understand purchase
(25:24):
financing product that has hadgreat success, that has
resonated really well with theMexican consumer, and pretty
soon we'll be doing much morethan that and right now our
objective is really to doubledown on the core business, on
what's been working really,really well.
We are barely scratching thesurface.
(25:44):
We see a huge opportunity tocontinue making our purchase
financing offering ubiquitous,and that's what really is
exciting us.
You know the ability to really10x our business from where we
are right now.
Keep doing that, but thencoupling it with a set of
cohesive products that allowmerchants to connect better with
(26:07):
consumers, and that's what it'sall about.
And it's all about reallysupercharging network effects
within the business.
And, yeah, we were excited thatwe're going to be launching a
couple of product launches thisyear and stay tuned for that.
But yeah, it's definitely aboutbecoming the preferred payment
(26:27):
method and doubling down onwhat's been working really well
right now.
Speaker 1 (26:31):
Yeah, that's super exciting, and I think some other
countries I think that might be.
I mean, it's a daunting goal nomatter what, but when payments
are much more electronic andmuch more ubiquitous it might be
a little harder to buy into.
But Mexico is such a uniqueplace where there's so much cash
and there's such bad optionsfor consumers, both on payments
(26:51):
and borrowing.
I think it's a wonderful,wonderful objective to have.
I mean, we've done a lot ofinvesting in Mexico but very
little on the consumer side,largely because of some of these
dynamics you've described andsuper excited about, kind of
your ability to drive lendingpayments, merchant satisfaction,
sales.
You know, I think you'rebuilding something really
exciting here and glad tohopefully be a small part of
(27:13):
that journey.
Of course, no, thanks a lot,bill, appreciate that.
Thanks for the support,definitely, and thank you for
joining us today.
It's been great having you andthank you for joining us today.
It's been great having you.
And to all of our listeners,take care and thanks for
listening.
This has been the FinTechThought Leaders podcast, your
(27:35):
window into the world of venturecapital and financial services
with today's digital disruptors.
Qed is proud to provide thebest FinTech advice you can get
To learn more or to read thefull show notes from today's
episode, check outqedinvestorscom and be sure to
also follow QED on Twitter andLinkedIn at QED Investors.
Thanks for listening.
Thank you.
Venture capital firm focused oninvesting in fintech companies
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Fintech Thought Leaders bringstogether the most talented
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If you're looking to learn moreabout what motivates our
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place.
Hello and welcome to FintechThought Leaders podcast.
(00:40):
I'm Bill Salufo, head ofinternational at QED Investors.
Just to orient our listeners, Iwonder if you can start by
(01:02):
sharing maybe a 60-secondcommercial on what a plazo is
and what you guys do Of course,of course.
Speaker 2 (01:08):
So a plazo in 60 seconds is a modern payment
network.
We offer payment solutions andmerchant tools to help merchants
basically sell more and growtheir brands.
With a plazo, merchants offerinstallment payment plans, or
known as BNPL, particularly to88% of the Mexican population
who does not have credit cardsand can't pay in installments.
(01:28):
But we also offer otherinnovative solutions, such as
instant payments, that allowmerchants basically to save a
lot on processing fees.
With us, merchants have accessalso to unique marketing
insights, sales insights, and wedo that through a tech stack
and AI tools that we've designedto eliminate many of the
drop-off points in commerce andbasically help these merchants
better run their businesses.
Speaker 1 (01:49):
Yeah, I mean you've got a pretty unique one in that
you both have two very differenttypes of customers.
You know you need to serve bothof them extremely well to make
this work.
So it's a pretty challengingand unique aspect of what you
guys have built so far.
Speaker 2 (02:00):
Yeah, yeah, it's very challenging.
Speaker 1 (02:03):
Operating a two market side network is
definitely interesting,definitely good, well, look,
before we dive into the businessitself, maybe I'd love to hear
a little bit about yourbackground.
You know, prior to founding aplaza, yeah for sure.
Speaker 2 (02:16):
So a little bit background on myself.
I'm not from Mexico.
I was born and raised in theDominican Republic and I went to
school in the US.
After graduating to the US, Iwent and started working at
Morgan Stanley in New York Cityand there I was mostly spending
my time investing in corporateand sovereign credits across
emerging markets and that was ahuge part of LATAM.
(02:39):
And many of the issuers inthese countries are financial
institutions and that was reallydrove my interest in starting a
plaza.
So it was very from a top downapproach and a clear
understanding of themacroeconomic opportunity and
the opportunity to make impactat scale.
(03:00):
So that's how I started.
So that's how I started.
(03:28):
So yeah, at the macro level,firsthand, I was seeing the huge
inclusion gap that card Withincredit card transactions.
According to Banxico, which isthe central bank in Mexico,
around 65% of transactions fromcredit cards in any given year
are installment-based and thatjust showed a huge cultural
preference for paying ininstallments and, given the low
penetration of 10% of creditcards, I just thought that was a
huge roadblock for massadoption of purchase financing
(03:52):
installment plans.
And, coupled with the fact alsothat there are two huge retail
stores that started in the 1950sthat later started bridging
that credit gap problem inMexico with their in-house
purchase financing programswithin their retail stores and
fast forward to today.
These are amongst the topconsumer banks in Mexico.
So I took a lot of inspirationfrom that and the relevance of
(04:16):
these stores and how influentialthey are with consumers in
Mexico.
But yet a lot of opportunity tosignificantly improve the user
experience with top class techand UX.
And it became clear for meduring my time at Morgan Stanley
, albeit from the macro point ofview, that there wasn't a
(04:36):
merchant and customer centricvalue proposition.
I got super excited about theidea of creating a product that
just democratizes purchasefinancing installments to 90% of
the population that doesn'thave credit card.
But equally exciting was theopportunity to roll out purchase
financing programs to 95% ofretail that is, not these two
(05:01):
retail stores and equip themwith purchase financing programs
needed to compete with thesemajor retailers.
And that was, for me, whatreally drove the opportunity to
start a plazo.
And then it was all aboutoperationalizing the idea.
There was many challenges thatwe faced in the beginning.
When we started out, it wasaround Q1 of 2020.
Speaker 1 (05:24):
So it was just in the beginning of COVID and me not
being Nothing like starting,nothing like trying to start a
company and then, a couple ofweeks later, everything gets
shut down.
Speaker 2 (05:34):
Right, particularly a consumer lending company.
I don't know if that's right.
You know, I would recommendanyone to do that in the face of
a pandemic.
So, yeah, it was definitelyvery challenging, a lot of
uncertainty.
Many of my closest friendsfamily mentors questioned me a
lot.
It's not easy to start thesetypes of businesses in a
(05:55):
pandemic and obviously I'm notfrom Mexico so I lacked the
local know-how that I believe isvery important in starting a
business, a local business, inMexico.
But I was very lucky to partnerwith my co-founder, alex, who is
from Mexico and he's a provenoperator that has helped scale
many tech businesses in Latin,such as Uber, uber Eats, lime
(06:18):
Scooters, oil hotels and homes.
And it was not until wepartnered and it was probably
around April of 2020, may of2020, that I moved to Mexico.
You know we were already two orthree months into the pandemic
and for me it was just afterlanding in Mexico and
experiencing offline retail was,surprisingly, didn't shut down
(06:43):
during the pandemic, but afterexperiencing that and seeing
firsthand the pain points that Iwas, from a macroeconomic point
of view, analyzing in New Yorkall the way in New York, I had
an idea what it was all about,but it was not until I landed in
Mexico and I saw this firsthand, that I really started getting
excited and everything juststarted to click, and that's
(07:05):
when we knew we were up tosomething.
Speaker 1 (07:07):
No, it makes a lot of sense Pulling way back on the
macro for a minute for a littledrill down before we dive into
the details.
I mean, do you have a sense ofwhy Mexico is so underpenetrated
from a credit standpoint?
I mean, if you look at othercountries around the world at a
similar GDP size or similardevelopment path, mexico stands
(07:27):
out as a particularlyunderdeveloped consumer credit
and consumer banking ecosystem.
Any sense, now that you'velived it for a few years, of
what some of the main obstacleshave been?
Speaker 2 (07:37):
Yeah, so just sharing some data points, as we've
talked before.
Mexico credit card penetrationis around 10-11% of the adult
population.
Then you look at consumercredit, personal credit it's
probably around 30% of the adultpopulation.
And when you compare it to acountry like, let's say, brazil,
(07:59):
where credit penetration ismuch higher, you start asking
yourself why is this the case inMexico?
And for us, you know it wasdefinitely attributed to the
data environment, the datainfrastructure.
It's such a data light marketthat just makes it really really
challenging to underwriteconsumers, just for basically
(08:22):
around 40, 50 percent of thepopulation we believe, just for
basically around 40, 50% of thepopulation we believe are the
ones that have sufficient credithistory to make a credit
decision using traditionalmethods.
So it just makes it reallychallenging for traditional
lenders to extend credit in away they could mitigate for risk
, and that's mostly on thesupply side, I think, and that's
(08:42):
what I mostly listen moreentrepreneurs talk about.
But something that also goes ontalk about is the demand side
as well.
We know that in Mexico, bankingpenetration or debit card
penetration is around 50 or 55%of the population, and you would
(09:03):
argue that these aredigitalized people that could
have access to credit and whenyou, you know, start double
clicking, you can do this morewith like user research,
understanding, having one on onesessions with consumers.
You know we found a lot ofinteresting data points that a
lot of consumers are very riskaverse to many traditional forms
(09:23):
of credit and we think that'sattributed to a low trust for
the traditional bankinginstitutions.
A lot of consumers haveexperienced many difficult
situations with lenders,particularly around collections,
particularly around lack oftransparency around things like
deferred interest, the fineprint and how, basically, you
(09:47):
can be two or three days late onyour payment and all of a
sudden, you have this 3x triggeron your APRs, and these are
things that consumers are notaware of at the time of
origination and that just causesa lot of low trust, and we've
seen that a lot from our pointof view and we see that
happening a lot with creditcards and microfinancing
(10:09):
companies as well.
So, yeah, I would argue, youknow it's definitely a supply
side, but it's also a demandside, particularly related to
trust, that we think that youknow, as a fintech community, we
all need to like address.
Speaker 1 (10:21):
Yeah, no, it makes sense to me really interesting
that there's both supply anddemand reasons why Mexico might
be so low.
So let me turn then to morespecifically on Applazo.
I mean, you guys have you'restill building, you're still a
young company, a lot left to do,but you've made amazing
progress on both of these sides.
Right, the ability tounderwrite customers and offer
(10:41):
them credit, but the ability toget customers to trust you and
want to take your product, andthen you throw the merchant in,
which is a whole other vector.
I'd love to hear some of howyou guys have been able to start
tackling these problems.
Speaker 2 (10:55):
Yeah, so I can talk a little bit more on the
inception story becausedefinitely it's been an
interesting trajectory, howwe've evolved.
But I would say, given that allthis financing problems in the
country and ourselves starting aconsumer lending business, the
development process was veryfocused on risk and distribution
(11:18):
.
Like I mentioned before, mexicois a very data-light market.
A lot of structural issues withthe data environment here and a
lot of low trust with financialinstitutions, and we knew that
we needed to tackle theseproblems since day one and
focusing on risk and our abilityto assess credit in the
beginning.
It's obvious that, like anylending company, you want to
(11:42):
basically shorten the learningcurve as fast as possible,
invest in a couple ofunprofitable vintages in the
beginning, and we wanted to dothat.
But we wanted to do that in away that we mitigate risk as
much as possible, learning asfast as possible.
So, from the consumer point ofview, we designed and structured
our product in a way thatallowed us to do that, by
(12:04):
offering low duration and lowaverage order values, and that
allowed us to minimize risk on aper user basis, starting with
low credit lines, focusing onrecurrency, which allowed us to
iterate fast, expedite datacapture, progressively graduate
users to higher credit limits.
And for such reasons, we neededto focus our go-to-market or
(12:25):
the sales motion on the merchantside, targeting industries that
were a good fit for thisproduct design, and these were
basically categories within theretail market, such as clothing
stores, footwear stores, sportsand equipment stores, general
merchandise stores and so on.
And that's how we set out toreally overcome the risk
(12:48):
challenge, which is basically,since day one, we were seeing
most of our consumers having nocredit files whatsoever.
We just needed to reallyunderstand as fast as possible
how to underwrite theseconsumers and we thought this
was the best way possible and inhindsight, it's been working
really, really well.
And then it's distribution,which is the entire motion
(13:12):
vector that you alluded to, andthat's a different motion.
And for us, we knew that inorder to crack credit
penetration in Mexico, we neededto rely on a proprietary and a
differentiated data set that noother traditional lender was
capturing and that in itselfgiving us an advantage to be
(13:34):
able to extend credit to thisconsumers that have never had
credit before.
And for us, you know, it wasall about integrating and making
and convincing merchants tofurnish that data either online
and offline.
So from day one.
We invested a lot inintegrations direct integrations
with e-commerce stores, butalso with physical stores
(13:56):
through their point of sales,and capture that data related to
the purchase, related to thetransaction.
That, yes, we didn't start usingand leveraging until two years,
three years later, butnonetheless, you know, it's
making most of our underwritingdecisions to this day and that
was a good investment that wemade.
But, at the same time, theability to being directly
(14:20):
integrated with merchants alsohelped us overcome the trust
issues that I mentioned before.
Allowing merchants to extendcredits to consumer helps us
overcome these trust issues.
For instance, like a Puma storethat's already a flagship brand
in Mexico that already serves aparticularly segment of the
(14:43):
Mexican population, convincingthem of extending a credit
because they see a return oninvestment on our product also
helps us, you know, overcomethese trust issues that are very
relevant in the Mexicanoperating environment, and
that's allowed us to definitelybuild trust with consumers.
But also, from a business pointof view, it's been an integral
(15:05):
part of acquiring users withhigh purchase intent and very
efficient acquisition costs.
Speaker 1 (15:10):
No, it makes sense.
So you're able to leverage, inyour example, pumas to kind of
overcome that hesitancy with theconsumer.
Obviously, if your productwasn't easy to use and easy to
understand, then you might getcustomers once and then they
don't come back.
So you play a huge role inpeople coming back, but you're
able to use the distributionpartners maybe to overcome that
initial hesitance.
Of course, how do you juggle?
(15:31):
You know, I've certainly workedin my days at Capital One, not
in a business exactly like yours, but in some businesses where
you're distributing variouslending products through
retailers, there's always atension.
The retail partner wants you toapprove 100% of customers.
Solid risk management meansthat you're never going to
approve close to 100% of yourcustomers.
I mean, how have you sort oflearned to juggle that tension
(15:53):
over the years?
Yeah for sure.
Speaker 2 (15:55):
So I think it starts with the value proposition and
understanding the macro.
So, like I mentioned before,credit card transactions around
65% of them are installmentbased and these are usually done
by credit card companiesworking with the merchant
acquirer and having a directrelationship or a commercial
(16:16):
relationship with the merchant.
And these are programs usuallythat are promotional programs
that merchants are offeringduring seasonal periods, and
they've experienced the valueadd of adding these programs to
their operations.
And the main problem is thatcredit card penetration is very
low and merchants know thatthere is a return on investment
(16:39):
on offering installments to thecredit card, but the addressable
market of their consumer basethat has a credit card is just
very small.
So the value proposition of aplazo is that, but just
magnified to the entire Mexicanpopulation.
So that makes it really easyfor them to understand our
(17:00):
product and really easy for themto know that there is a return
on investment, which isbasically a function of higher
tickets, higher average ordervalues and higher conversion
right.
So that's something that wehave working to our advantage
that merchants are already awareof the value out of offering
installments.
What's better is that we justamplify that to the entire
(17:23):
consumer base.
The thing, like you mentioned,is always approval rates, and
particularly in an offline store, where you're basically
approving or rejecting aconsumer at the time of purchase
in a physical store, isdefinitely a challenge,
particularly when you rejectconsumers, and we've invested a
lot of effort in trying tooptimize approval rates as much
(17:44):
as possible.
That's been a key differentiatorfor us against any other player
in the space and for us it'sbeen a function of being able to
underwrite each transaction,which is a very unique advantage
in a data light environment.
You know we're underwritingconsumers at the time of
origination, but also we'reunderwriting each transaction,
(18:06):
and by underwriting eachtransaction, we do a real time
evaluation and we dodifferentiated structuring in
order to optimize approval rates.
Like, for instance, we can havedifferent down payments amount,
we can have different duration,we can have different pricing.
We're constantly monitoring theability to adjust limits
(18:27):
depending on each transaction.
So these are unique levers thatare just very different from
traditional credit products.
That allows us to optimizeapproval rates and really play
with how much principle at riskwe're willing to take at each
transaction, and that's allowedus to have over 80% approval
rates and for us, what we'remostly solving for is fraud and
(18:49):
just being transparent withmerchants and working together
in tackling fraud is where wededicate a lot of efforts, and
that's something that usuallythe merchant is really
supportive of.
Speaker 1 (19:01):
No, that makes sense, I mean.
That leads me to the nextquestion.
I mean you can't really haveany conversation in the VC space
these days without talkingabout AI, and you know older
generations of AI certainly haveplayed a role in the industry
as it relates to fraudmanagement, and so I'm sure
you're leveraging it there.
But I know this is an importantpart of kind of how you've been
building Applazo in a number ofways.
I just wonder if you can talk abit about how you're able to
(19:24):
leverage some of these tools indifferent ways.
Speaker 2 (19:26):
Yeah, so we've been using AI for a while now.
It's definitely beingencompassed across many aspects
of the business, particularlyfraud prevention and risk
assessments, of course, but alsoa lot on personalized
recommendations, customerservice automation and so on,
and these technologies hasdefinitely helped us analyze the
(19:47):
vast amount of data that wehave and make the real-time
decisions that we need to makeat the time of purchase
detecting fraudulent activity,tailoring product recommendation
to individual users andproviding more responsive and
personalized customer support.
So, particularly in fraud andin risk management, the ability
(20:08):
to underwrite each transactionand powering that with ML and AI
models for basically dynamic,risk-adjusted pricing for each
transaction, depending on theSKU, depending on the category,
depending on the location, isreally interesting.
We've seen a lot of greatadvancements there, a lot of
(20:28):
great performance onunderwriting that we attribute
to this ability of employing adifferentiating approach on each
transaction to risk, but alsoat the user level.
You know, credit lineassignment, customer
underwriting, customeronboarding these are all data
points that we get at the timeof purchase as well that really
(20:48):
power these models and help usunderstand from a more
comprehensive point of view, whois real and who is not, you
know.
But also doubling down onpersonalized recommendation.
That's where we've seen a gamechanger for us as well in
fostering customer loyalty andjust delivering wow experiences.
(21:08):
Nowadays, for instance, most ofour orders are being accepted
through a mobile app rather thanfrom our partner websites, and
that's a function of our valueproposition, but it's also
because we understand whatcustomers want and what they
need.
Because we're capturing SKUdata at the time of purchase, we
know what they've been buying,so we're likely able to predict
(21:30):
what they're gonna buy next.
And being able to offerpersonalized recommendations in
terms of products, in terms ofmerchants, is something that
we've been investing a lot andwe're super excited about this
potential of continuinginvesting in this area, help us
become kind of the de factoprimary account for consumers to
(21:50):
spend and offer ongoing pointsof engagement on a daily and
weekly basis.
So, yeah, we've seen definitelya lot of great efforts on an
IEI, and that's something that'sreally exciting for us going
forward.
Speaker 1 (22:02):
Thank you.
Let me pick on something thatyou said in the middle there,
which I think is a prettystunning statistic if I heard it
correctly, that over half ofyour consumer purchases are
coming through your app asopposed to your partner's app.
I think most people probablyhave the impression that most
folks, broadly speaking, in theBNPL space are sitting on top of
their partners usually websites, but maybe physical stores or
(22:25):
other things and using theirdistribution.
Is that a component of thebusiness that you always thought
would be there from thebeginning, or something that you
were able to discover elsewhereand really build on customer
loyalty in a pretty unique way?
Speaker 2 (22:39):
No, to be honest, that was a learning that we had
when we started the company.
We never imagined that we wouldget there so quickly.
We knew that as soon as webecome more and more ubiquitous,
eventually the growth motionstarts focusing more on the user
rather than on the merchant.
But we were surprised to seevery quickly a lot of that
(23:01):
gravitates, gravitating moretowards the user.
I think what we did reallyreally well spending a lot of
time in understanding the datathat we've been getting at the
transaction and at the purchaseand really understanding
customers want and trying to getthem to go to a mobile app.
(23:21):
Spend time in the mobile app,discover new merchants, discover
new products, discover newdeals, discover new promotions
and as soon as we started doingthat, we started seeing a huge
shift towards transactionsgravitating towards merchant
through our mobile app, and it'sparticularly the repeat users
(23:45):
and with repeat users,positioning herself as a
one-stop shopping destinationand our ability to keep doing
that, because we know whatconsumers want and we're likely
to be able to offer thatpersonalized experience for them
where they basically just go toa plaza to really find what
they need next.
Speaker 1 (24:04):
Yeah, that's truly amazing.
I mean, certainly we've talkedto a number of players in a
number of countries broadly inthis space and I think very few,
if any, have been able toachieve that level of purchase
driving.
And it's just important longrun right that you're able to
deliver that value to merchants.
That is quite unique not justincreasing their sales because
you provide credit, butincreasing sales because you're
(24:25):
actually driving customers tobuy their products, which is
pretty stunning.
So look, as we near the end ofthe session, you've accomplished
a lot already.
You talked about some of yourmerchant tools.
You've talked about credit.
You've talked about drivingsome of these sales.
You just completed your SeriesB, which we were thrilled to be
part of, and I know you're doingthat because there's a whole
lot more in the future for youguys than there is in the past.
(24:47):
I wonder if you can just sharesome of the big initiatives that
you're working on and if we'rehaving this conversation again a
couple of years from now, whatare some of the big changes that
will have happened with Applazo?
Speaker 2 (24:57):
For sure.
Yeah, so when we think aboutthe vision going forward, it's
really to become the preferredpayment method in Mexico as a
true-sided payment network.
We believe that we can do thatby becoming top of mind on how
merchants do payments and howusers have this top of mind when
it, with a very modest andsimple to understand purchase
(25:24):
financing product that has hadgreat success, that has
resonated really well with theMexican consumer, and pretty
soon we'll be doing much morethan that and right now our
objective is really to doubledown on the core business, on
what's been working really,really well.
We are barely scratching thesurface.
(25:44):
We see a huge opportunity tocontinue making our purchase
financing offering ubiquitous,and that's what really is
exciting us.
You know the ability to really10x our business from where we
are right now.
Keep doing that, but thencoupling it with a set of
cohesive products that allowmerchants to connect better with
(26:07):
consumers, and that's what it'sall about.
And it's all about reallysupercharging network effects
within the business.
And, yeah, we were excited thatwe're going to be launching a
couple of product launches thisyear and stay tuned for that.
But yeah, it's definitely aboutbecoming the preferred payment
(26:27):
method and doubling down onwhat's been working really well
right now.
Speaker 1 (26:31):
Yeah, that's super exciting, and I think some other
countries I think that might be.
I mean, it's a daunting goal nomatter what, but when payments
are much more electronic andmuch more ubiquitous it might be
a little harder to buy into.
But Mexico is such a uniqueplace where there's so much cash
and there's such bad optionsfor consumers, both on payments
(26:51):
and borrowing.
I think it's a wonderful,wonderful objective to have.
I mean, we've done a lot ofinvesting in Mexico but very
little on the consumer side,largely because of some of these
dynamics you've described andsuper excited about, kind of
your ability to drive lendingpayments, merchant satisfaction,
sales.
You know, I think you'rebuilding something really
exciting here and glad tohopefully be a small part of
(27:13):
that journey.
Of course, no, thanks a lot,bill, appreciate that.
Thanks for the support,definitely, and thank you for
joining us today.
It's been great having you andthank you for joining us today.
It's been great having you.
And to all of our listeners,take care and thanks for
listening.
This has been the FinTechThought Leaders podcast, your
(27:35):
window into the world of venturecapital and financial services
with today's digital disruptors.
Qed is proud to provide thebest FinTech advice you can get
To learn more or to read thefull show notes from today's
episode, check outqedinvestorscom and be sure to
also follow QED on Twitter andLinkedIn at QED Investors.
Thanks for listening.
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