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Description:

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In this episode, we are joined by Rajiv Chandna, Co-Founder of Kinetic, who shares how his venture is revolutionising payments in an effort to build a more frictionless e-commerce landscape. With $300 billion tied up in escrow worldwide, Rajiv highlights how the burdensome collateral demands stifle growth and can even spell the end for small businesses.

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As we explore the complexities of advance payments, we also discuss the role of AI in risk assessment and pricing, the nuances of building a robust startup team, and the confluence of events that makes Kinetic’s solution timely in the rapidly evolving fintech space.

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Transcript:

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Jonathan Nguyen (00:00)

E-commerce has made life significantly easier for most of us, especially during COVID, where online purchasing jumped almost 40 percent. And according to some estimates, e-commerce in Asia is expected to reach $1.8 billion this year. Even though shopping online has been around a long time, behind the convenience to the consumer, there are a lot of challenges. One of those big ones is payments, and within payments there is an inordinate number of challenges that are constantly evolving from security to fraud, transaction processing, and payments insurance. This whole area represents a massive opportunity for founders. So joining us today, founded by veterans Rajiv Chandna and Tom Duncan, is one of those startups. And they're tackling a relatively arcane and unknown area of this problem. Kinetic Technology, based out of Singapore, still pre-A, but already gaining traction with the top payment providers in the region. I'm joined by Rajiv. Where are you hailing from?

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Rajiv Chandna (01:40)

Dialing in from Singapore today, Jonathan.

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Jonathan Nguyen (01:43)

Back in Singapore, I hear you've been traveling.

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Rajiv Chandna (01:47)

Yeah, I was out to meet some of our clients in the UK for the last couple of weeks, but yeah, back in Singapore now.

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Jonathan Nguyen (01:52)

So I've heard a lot, you're pre-A and you've already got a lot of traction. I know your chief technology officer, Nadeem, quite well and it took some time for me to understand exactly how the technology translates to the problem. So why don't you help me unpack the solution that you've come up with, and let's start by looking at what is the problem?

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Rajiv Chandna (02:27)

Yeah, thanks, Jonathan. Thanks for giving me the opportunity. So I suppose my big aha moment was before co-founding Kinetic I ran a payments company and I remember this one particular day where we were bringing on this education company based in Thailand, French lessons for kids, you pay upfront, $400, your poor kids attend those French lessons for the next three months. To me it sounds like a great business, we'd make a decent bit of margin, and as I was onboarding them my risk team said, "No way," because this merchant is taking a bunch of money up front from customers, we don't know if that merchant is going to be around in the next three months. What if that merchant doesn't deliver the product, i.e. the French lessons that they're promising to the customers? The payments value chain is set up such that if the merchant doesn't fulfill their promise, that liability shifts to the payments company that contracted the match. The payments company, and rightly so my risk officer, were concerned that we need to protect ourselves against that match and going bust. We were going to take 15% off the annual sales, put that into an escrow account on a perpetual basis, and we're talking about a small Thai business here, because we are afraid that that merchant may go bust at some point in the future. As I started to dig this area up, you see this everywhere–it's education, it's texting, it's venue hires, it's, of course, airlines, hotels. It's basically wherever you're not having a cup of coffee and you're paying, you're drinking, you're out of there. Everything else brings this risk to the payments company. And in the post-COVID world, where you're ordering your shirts online and made-to-order suits online, this problem is getting bigger and bigger. $300 billion sitting in escrow accounts around the world doing nothing. Money that should be sitting in the merchant's pocket so that they should be growing the business fast. Issues that payments companies should not need to solve for in such an arcane way by taking, effectively, working capital from these small businesses just so that they are protected at some future loss.

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Jonathan Nguyen (05:03)

That's a massive amount, right? That's a massive amount for a small business. I guess in the old days, if you went down to your local retail outlet, local cafe, would they have to hold the same amount of collateral given that the goods are given to the customer immediately? Was the problem the same back in those days?

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Rajiv Chandna (05:31)

So it's accentuated in the e-commerce world, but certainly even back in the days, if you had a tour package company offering a tour package that you take in six months time, that tour package company was giving up some of the working capital to the payments company. Now that comes in various ways, it could be a personal guarantee from a director, but everything is a cost, basically, to that margin just to be able to accept payments from the payments company. They're giving up some version of their working capital that they should be deploying back in their business. I guess it's one of those things we never think about. The convenience of the card, there is an inconvenience being hidden behind the scenes, right? And that's like almost a month of working capital for the merchant. And the worst part is you've held this collateral with the payments company. Now the payments company, this is the only tool they have. Now think about a scenario where the payments company gets slightly worried that, look, this furniture merchant that's taking a bunch of money up front for future dated orders for pets and couches and whatnot, they think that this merchant is going under some kind of financial distress. How do they protect themselves? They take more collateral. Instead of 10%, it becomes 15%. Instead of 15%, it becomes 20%. And effectively, that's where the merchant starts to go into even more financial distress. I'm not going to name any names, but you can go onto any of these forums and you can search, "Why did collateral kill my business?" and you'll see all these merchants basically complaining that they've got money stuck with the payments company, they should be using that money to pay their employees, pay their suppliers, delivering goods to their customers, but they can't access that money because the payments company, and rightly so, want to protect themselves. I mean, Hong Kong where you are right now, Jonathan, one gym chain went bust, and again, without naming names, one large payment company took a $5 million loss because that gym chain went bust. There's a large airline in India that went bust, left $60 million in losses to the payments company. So the payment companies are not wrongly worried. They are worried. It's just that they've got a single blunt tool in their arsenal to protect

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Jonathan Nguyen (08:02)

Okay. So that's a great segue. The problem that you're tackling is a big one. It's also one that doesn't get a lot of attention. Have you faced any friction trying to solve this problem?

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Rajiv Chandna (08:25)

Yeah, fundamentally, we'll talk about the way we've solved this problem. We've basically created a capability to answer the question, is this merchant good? Is this merchant bad? So start with a very binary answer. There are clearly some bad merchants out there who are doing fraud, who have no intention to deliver the product of the service. We have a capability to screen those merchants out right at the start. That's a very, very, very small percentage. For the rest of the merchants, we're able to risk score them and give a score to the payments company very quickly, right at the point of onboarding, and we're able to give them a range of solutions that they can protect themselves with. They can do things like, let's start out small with that merchant, they can go work with an insurance company to insure that kind of risk, of that merchant going bust, they can sell slightly deferred delivery, so they can do a T+2 delivery or T+3 delivery after that. So we come up with a range of answers for a payments company to help protect themselves. The biggest innovation that we've done is being able to price the risk of the merchant very, very accurately and be able to offboard that risk where necessary onto large insurance companies so that the payments company remain protected. They can go to these financial merchants, these tour package companies, and help them run their transactions in a friction-free way.

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Jonathan Nguyen (09:57)

I have to ask, are you using AI? Do you want to say AI or generative AI?

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Rajiv Chandna (10:04)

Look, we started off by having multiple sources of data. I guess before the big ChatGPT moment, we were using multiple sources of data to come up with intelligent answers for our payment companies that went into a knowledge graph and used machine learning technology. But sure, we're going to call it AI from now on, for sure.

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Jonathan Nguyen (10:26)

So this is almost a math problem, isn't it, that you're solving here?

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Rajiv Chandna (10:35)

I think it's definitely a very, very data-driven solution. It does take multiple sources of data to be able to price the risk accurately and build an underwriting model that, for example, a triple A rated trillion dollar balance sheet insurance company would be happy with. So it definitely is data-driven. But there is a lot of creativity that comes into it. I'll give you an example. If today you're a payment company and you want to onboard a hotel, which is doing classic delay delivery, you book a room booking, you basically apply the same logic to both of them. But if you work with us, we help you differentiate between a Hong Kong city center hotel, quite different to a ski chalet in France. Because a Hong Kong city center hotel is maximum of one day booking, one week in advanced booking, or maybe two weeks in advanced booking. Very different risk versus a ski chalet that you built maybe six, even nine months in advance because you want to go on a holiday to Europe with your family. Very different risk, very different classification of risk, very different types of protection that you need. So there is creativity, there is nuance, and I'll say, we do use a lot of artificial intelligence to help us think about what are the predictive delay delivery, how risky does that delay delivery mean. And nine months in advanced booking is fundamentally more riskier than a Hong Kong city center hotel. Even though if you were to do a pure data-driven approach, you'll just put them both under a hotel category and in theory have the same level of protection against them, which doesn't make any sense.

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Jonathan Nguyen (12:31)

Yeah, because essentially, what you're talking about there is the customer is different, the customer intention is different, and then the merchant's intention, and probably the merchants themselves, are different from the perspective of who they are and what their business models are. So it's an interesting way of looking at it that normally you wouldn't really think about, right?

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Rajiv Chandna (13:00)

Yeah, or like take football clubs in the UK, something that we've been helping payment companies manage. If you're buying tickets for a football game, you'll have two types of tickets, you'll have season tickets, very different risk, paying a bunch of money up front for the next 10 months of matches, versus you're buying a ticket for a match next week. How do we help you disaggregate that payment information to help you really think about what's your value at risk? Sure, you need to protect yourself against those season tickets, because for whatever reason that tier three football club is not able to host some of those games. Sure, yes, you need to protect yourself and insurance is a fantastic answer for that. But you don't need to protect yourself for tickets for a match next week, because it's near guaranteed that that will get delivered. But that's not the approach a payment company is able to take today. And I think that's some of the capability that we are able to bring. That's kind of where I think it is a math problem, but it's also an art problem.

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Jonathan Nguyen (14:05)

So talk a little bit more about who your customers would be, you've mentioned payment companies. Would it be merchants directly? Or would it be always bundled as part of a payment company's value proposition?

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Rajiv Chandna (14:23)

Yeah, to begin with, it's payment companies, because I think the risk, one, is poorly understood, so we think that's clearly the right starting point for us. The next level up from there is marketplaces, I'm not talking about the Amazons of the world, I'm talking about aggregators that aggregate vet offerings or other kind of hospital type offerings, where again, lots of people are paying up front, and you've got lots of merchants on that platform promising to deliver medical devices at some point in the future. Now, how do I make sure that that underlying merchant is actually able to deliver? So it's a very classic old age problem that's surfacing up in the e-commerce digital era. Well, how do I trust the person who I haven't met, who I have no relationship with, where I'm going to be paying a bunch of money up front, that person will actually deliver what I need? How do I protect myself against that unknown risk of an unknown player?

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Jonathan Nguyen (15:28)

And to be clear, it's not just credit card payments, right? There are other types of payment companies you would look at.

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Rajiv Chandna (15:44)

Oh, 100%. As real-time payments is picking up around the world, regulators are equally worried about what's happening to those payments going through even account to account transactions from real-time transactions. I think the reality is, and maybe this is a tip for your listeners, is that in today's world, card transactions are the safest way of paying, because that's where, as a consumer, you've got the best defined rights to protect yourself against. I'm not saying account payment transactions aren't safe. It's just that to get your money back in a difficult scenario, it's not as black and white where your rights are. But in a card payment environment, those rights are black and white. But the regulatory environment is changing very quickly. We're working with a number of Indian companies now, with the Indian regulator, because non-card payments are a bulk of the transactions in India, for example. I was saying, I want the same level of protection for customers who are using non-card methods as for the card methods. So we're now seeing a whole range of companies that are reaching out to us talking about that problem–How do we safeguard our customers? How do we safeguard our merchants against probability of default?

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Jonathan Nguyen (17:06)

This, to me, sounds like common sense. As with most reasonable startups, the idea, the product typically is not the problem. It ultimately comes down to a distribution problem, which leads to the 90% failure rate of startups. What kind of challenges have you guys had trying to sell this idea? You're doing quite well now. Have there been any major questions or hurdles you've come across along the way?

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Rajiv Chandna (17:58)

I'm sure you must have had this answer many times. Personally, I think there are two biggest hurdles that you face. One is a hurdle of self-doubt, where when the idea is just a piece of paper and you're getting good feedback, you're getting average feedback, you're getting negative feedback, and being able to wake up every day and convince yourself, convince your next hire, convince your team, convince your investors, your first partner, that you could do this. That takes an overcoming your own self-doubt, quite a bit, before you have to get over the self-doubt or the doubt that you have from other parties. The second big challenge is the team. Building a team around an unknown solution is really hard. You want specialists, but you also want generalists. You want somebody who can do the very, very micro work, but you also want somebody who has a big picture. Those are the initial days, and we're very much in the initial days, but I think we've got a really rock-solid team now. You, of course, know our CTO. Our Chief Risk Officer, a big shout-out to him, he's based in the UK. He's been a great addition to the team. Our head of product, he's been a great addition to the team. We're very grateful for the team we've been able to build. Very grateful to our first partners who've come on board, supported us in getting this ship off the ground. As they say, once you've got the first few partners, the next one becomes a little bit easier. I think we're starting to feel that, but yeah, as you said, early days, lots to solve.

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Jonathan Nguyen (19:52)

There is an element of founders have this strange dichotomy of self-doubt and delusional confidence. I'm a founder as well. I'm not going to try to raise money against a professional services firm, which I think is a crazy thing to do, but you have moments of like, "Am I going to pull this off?" set against the overwhelming data that says, "You're not going to pull it off." But if you don't have people who are wired this way, we'd never solve any new problems. It's a very strange dichotomy, so I totally get it. A lot of people I've spoken to, like you mentioned, are wired very similarly.

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Rajiv Chandna (20:52)

Yeah, certainly. I guess the other reflection I have is that there is a certain magic to this process, that idea of that you've created something from nothing, and I'm not saying I have done that, but we as a team have created something from nothing. We've got a product that people are paying for. We've got a product that people look at it and think, "Oh, yeah, I never thought of solving it quite this way. That's pretty clever." There is a certain magic to it. There is a certain slide-to-code journey, which is, I'm grateful I got to, it's very rewarding.

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Jonathan Nguyen (21:37)

So what has been, obviously when these things come about, there's a problem. A lot of founders, if you remember an app called Seesmic, it was short video sharing, maybe 10, 15 years ago. It didn't stick because the videos were bad, internet was slow, all of those things. Now we've got TikTok that's the biggest social media platform. What's the confluence of events? What's drawing the elements together that makes your solution right for today? Why are you guys here today?

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Rajiv Chandna (22:22)

Yeah. thanks for asking that question. I certainly feel, despite where the macro environment is in terms of funding, we couldn't have timed it better. Coming out of COVID, everyone's now digital. Effectively everything is becoming delayed delivery. You're ordering your suits online, made-to-order suits online, the whole e-commerce shift is huge, and therefore every payment company has now to think about, am I taking collateral or not? Or am I managing a risk of the match? So it's become a front and center problem. Second thing is that interest rates are super high, so that cost of collateral keeps going up. That $300 billion left in an escrow account, a SME working capital loan is no less than 10% today, even in a benign environment, in a difficult environment, 10% to 15% interest rate on that stuck capital, that cash is becoming much more precious. So much ends up pushing back against, look, we don't want to hold collateral with you anymore, you need to come up with something else. The third is, ironically, during COVID, because of the huge amount of government stimulus, businesses actually didn't go bust. Actually, the level of bankruptcies went down during COVID. But now, as the government stimulus is pulling back and there is no more small business support, and the economic distress and high cost of funds and so forth, means that more and more businesses are going through financial distress. Payment companies are actually very, very worried, but they can't default to taking collateral because that collateral is precious. So we find ourselves coming into conversations with payment companies and insurance companies saying, "Look, there's a better way to do this. There's a market for this." Interestingly enough, payment companies and insurance companies aren't the best of bedfellows. There's been a huge amount of innovation in payments, lots of new players coming in, and so on and so forth. But these large trillion dollar insurance balance sheet that need to think, "What's the world going to be 50 years from today," aren't designed to react to it very, very quickly. We find ourselves in a fortunate position where the market is pushing towards a different solution, and we are able to bring insurers on the table to protect payment companies against that risk. It's a very interesting place you guys find yourselves in because in this environment capital is drying up everywhere because everyone wants to stick their money in bank accounts.

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Jonathan Nguyen (25:30)

You're in this weird space where actually attention exists that increases the demand for the product in this environment. But now you've got to find investors that understand the long play on that and give you guys liquidity. It's a very interesting problem I haven't heard from anyone else.

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Rajiv Chandna (25:53)

Yeah, and I think we've been very lucky with our investors so far. Like you said, we've had pretty good early traction. So hopefully that process won't be too difficult going forward. Let's see how we get on.

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Jonathan Nguyen (26:08)

So I have one last question for you. This is the hardest question for every founder because it's so open. What's your vision or your view on this situation - and you can go as broad as like overall kind of payments or overall e-commerce and consumer behaviors, or you can go very niche and look at just your very specific area of payments - what do you think the future holds two, five, 10 years from now? I mean, 10 years is hard, but what's the end state of this? What's the next evolution?

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Rajiv Chandna (27:06)

The big thing that I'd love to see is businesses being able to work with each other instantaneously in the most friction-free way possible. And these are businesses that don't need to know each other, don't need to have a relationship with each other, but don't need to go into very, very expensive risk mitigation routes before they get into business with each other. And I say this way beyond payments is because this stuck collateral, this stuck money is everywhere. So we're speaking to this one company in Indonesia that sells mobile top-ups. Today they host, I mean in Hong Kong maybe it's not that common, but in Indonesia 90% of the Indonesians run on buying mobile credits as and when they run out. They buy these from third-party aggregators, but these third-party aggregators are leaving millions of dollars in collateral with telcos because telcos are like, "Well, you're selling something to your customer, we don't know if you're going to be around." So wherever we start to unpack, we see businesses aren't able to get into a trusting relationship with each other because they either don't understand the risk of the business they're working with or don't want to understand the risk of the business they're working with because it's just too much hassle. We want to take all of that out of the equation. We want to create trust in the system, we want to create transparency in the system. We are obviously starting with payments because it's just a huge market. The rules are black and white. We can establish it, we can help people understand it. But really, the success of this business as we go along will be in helping businesses to work with each other in a friction-free way over and over again in domestic markets, in cross-border markets. That's maybe my biggest picture there is, but certainly a year, year and a half down the line, we'd love to just take collateral out of the payment system. That would be a huge win. That'll be $300 billion being injected back into the real economy. Business is investing that into the staff, into technologies, into capabilities, into new supply relationships so that they can grow. I think that would be a huge win in the next one to two years. But really, the long term, how do we basically let businesses work with other businesses quicker, faster, easier?

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Jonathan Nguyen (29:38)

Well, I hope you guys succeed because that's the fundamental state that humans want to be and how we built our society is a trust-first cooperative environment. And when doing business, you have to take so many counterintuitive steps to protect the business that introduces, not just that this is a business problem, but also introduces a human problem in that it's much harder to trade person to person across borders, which we all want to do now, than it is to just trade domestically. That probably doesn't do our global harmony any favors. So I hope you guys succeed and thank you so much for sharing your thoughts today. I hope to be seeing you guys out there making headlines soon.

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Rajiv Chandna (30:43)

Thanks, Jonathan. We're very excited and thank you again for this opportunity. Very happy to get this chance to share what we're doing.

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Jonathan Nguyen (30:47)

Thanks, Rajiv. Have a great day.

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Rajiv Chandna (30:54)

All right. Have a good one. Bye. Bye.

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