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Podcast Notes

This week on the show, Aakash and Xand discuss Karat [https://www.trykarat.com]. Karat focuses on providing lines of credit to creators. The creator economy is here to stay. Patreon is the largest example of building a product for creators. However, banks haven't kept up with the times (surprise surprise!), and creators have a very difficult time getting credit for their projects. Karat provides lines of credit to creators by having a better understanding of how creators can monetize their audiences. Xand and Aakash also weave in broader discussion about financial technology as a whole.

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Syn Cole - Gizmo [NCS Release] provided by NoCopyrightSounds.

Autogenerated Transcript

Aakash Shah: [00:00:00] Welcome to All Schemes Considered, the weekly podcast where we dive deep on a new startup and examine its viability as a venture backed business --  all in 20 minutes or less! Some people say that we're essentially the Harvard Business Review for early-stage startups. I'm your host Aakash Shah.  As usual, my cohost Xand is here too. 

Today we are talking about Karat.  they are a credit card for content creators and influencers. and that that's their short pitch and that's about as much as we were able to find out about them because they only did their initial press releases about six weeks ago. the last week of June  Xand, what do you want to say to our listeners about Karat? 

Xand Lourenco: [00:00:50] so I actually think it's pretty interesting. I think we we've discussed, I don't know if we've discussed it on the podcast specifically, but I think in general, the idea of [00:01:00] credit is something that's hugely open to disruption. cause I, I think the way that people kind of calculate credit worthiness. Is like FICO scores and, , you know, TransUnion Experian, all of these credit scores are lagging indicators sometimes by years,  , what someone's credit score things they did like three or two years ago probably have very diminished impact now.

And I think a lot of companies are kind of seizing the ability to have real time financial data to kind of undercut or get at alternative,  investments that may be, that might be credit worthy.  but that the big banks wouldn't even touch or don't have the, kind of, even the means to touch. 

Aakash Shah: [00:01:33] So you're saying, you know, this credit score or the FICO score that's been around for so long hasn't kept up with the times with new, the new financial information that exists.

Yeah. And it hasn't quite You know, it, hasn't evolved to understand that there are new ways of making money and there are new ways of spending and building credit. Yeah. 

Xand Lourenco: [00:01:56] And this is even true. so as a personal example, [00:02:00] when I moved to Germany, at the time ,   if you were an immigrant coming in, you needed like a letter of recommendation from your employer to open a bank account.

If you didn't have like a SCHUFA, which is their credit score, And obviously I was a freelancer coming from the U S I didn't have an employer. It was really hard to open a bank account. And so finally I found N26, which is kind of like a FinTech disruption bank. I did a video called they verified me.

I had to make an account and I use the forever. And obviously I was a good bet. , you could look at my income statements for a month and make that pretty trivially. 

But the, the process was so ossified. Like it was so much red tape to opening a bank. They wouldn't even look at me if I didn't have these kinds of arbitrary.

Things that in the end don't matter. Right.  and so N26 is sweeping feminate because there's a lot of people like me who are immigrants who have good income, who are freelancers, don't have traditional employment where you would have a letter of recommendation kind of thing. 

Aakash Shah: [00:02:51] Oh, I actually have a background in FinTech.

You know, I was working at a new stock brokerage that was kind of cutting [00:03:00] edge in 2017, which is when FinTech really exploded. And Bitcoin also exploded that year. And so I built out a Bitcoin investing platform,  et cetera, et cetera.  And one thing I learned from that year is I believe that the big banks in the U S and probably worldwide are bad at innovation and bad at establishing new markets.

And this is a function of their incentives internally, which is to protect their gigantic existing cash flows. And to make sure that they have little to no exposure to high risk activities. Because especially after 2008 in the U S it's actually very expensive for a bank to have exposure to high risk activities.

It literally has a large cost for them in terms of locked up capital. So what has developed is this, process where the large banks are very good at acquiring finTech startups, FinTech, financial [00:04:00] technology, and incorporating them into their, existing portfolio of products. Capital One , has always been kind of a tech forward company and they are probably the   number one bank, kind of doing these large acquisitions, but you also saw Goldman Sachs acquire a consumer bank, and

 this pattern has repeated over and over.  and so that's why I think that, if you want to disrupt somethings, fintech, is actually a very interesting space because you can always have the exit strategy of being acquired,  and credit cards to bring this back to TryKarat, credit cards are of particular interest because.

There the ability to access people who should have credit, but don't have credit is an untapped source of income. And also there's inherent value to having the transaction data of a known group of people. you know, the transaction data without having any identifier applied to it is not very helpful, but if Karat can [00:05:00] say "we have transaction data of premium influencers," That is more valuable than just generic transaction data.

 so that's why I think, you know, Karat's model makes a lot of sense.   let's talk a little more about the market that they're serving, which is creators and influencers.  and right now they're starting with creators and influencers, but I would assume that the reason they're starting with this group is because it's hard to get business credit when you have uneven cash flow.

Xand Lourenco: [00:05:28] Yeah. Well, I mean, and just imagine going to the bank and being like, yeah, I have a hundred K Instagram subscribers. Can I get a revolving credit account? They won't even know what that meant, which I think is, you know, 

Aakash Shah: [00:05:37] okay. One. Okay. Boomer, a hundred K Instagram subscribers, all that was wrong.

I don't even, 

Xand Lourenco: [00:05:44] I don't even have an Instagram. You're exposing my age.

 Aakash Shah: [00:05:48] he would have Instagram followers. You could have YouTube, subscribers, both of which are non monetized immediately, but you know, an audience . It is a monetizeable asset. And right now it's generally [00:06:00] monetized through ads or through sponsorships, but there is no promise that that cash flow will exist.

Six months down the line. It's very  month to month, it can be very risky. There can be a shift in public opinion. and suddenly the person you're extending credit to could lose sponsorships and lose the ability to pay you back

and so that's why I think banks have been hesitant along with the general lack of knowledge and lack of understanding of this new growing space. But content creators and influencers are here to stay. I think, you know, you have Patreon, which is a huge, huge payment platform and monetization platform for content creators.

You have Gumroad, which is another one of that sort, you know, YouTube, Twitch,  Instagram, podcasting applications and platforms  are all building in monetization models  into their platforms to help content creators, create cash for themselves and create a living. So [00:07:00] this is a growing market.

It's definitely here to stay. Everyone. I know has someone that they watch on YouTube or follow on Instagram. But why,   why hasn't this been looked at yet? , why hasn't there been a card for these people yet?

Xand Lourenco: [00:07:15] Yeah. I mean, that's what Karat's trying to answer, right? I think a lot of your points are valid and that given how new the space is, and people are unsure about it. How to approach it there's room for someone to step in and kind of take the weight in as the first people to do. So does that make sense?

Aakash Shah: [00:07:31] Yeah, that does make sense.  I guess, really this influencer economy is only five years old and perhaps the age is good enough reason. You probably need someone who understands the influencer economy also have some  connections so that they can actually get a credit card going. issuing credit cards has actually become a lot easier within the last five years because banks have created platforms for you to access effectively white list credit cards and debit cards under your own brand.

so yeah, I think that's a good one. So we've established, there's a [00:08:00] market we've established. There's a very obvious, monetization model. Let's talk about building a user base because a user base in this case is, you know, getting the cards into people's hands and getting those people to actually use the cards and spend on these cards.

Xand Lourenco: [00:08:20] That's actually an interesting, 

how big is the market cap of like influencers? It's such a young industry. It can't be more than a couple of billion, right?

I think it can't be being market sector. 

Aakash Shah: [00:08:31] I think you aggressively underestimate how large influencers are and how influencers are breaking into more traditional spaces. So, 

Xand Lourenco: [00:08:42] okay. So as of 2019, it was a $6 billion industry. So it's small 

Aakash Shah: [00:08:47] still, 

Xand Lourenco: [00:08:47] but growing really rapidly 

Aakash Shah: [00:08:49] that seems too small for me. 

define what you meant, like what was that number from and what was it measuring? Because influencer marketing is one thing and people that want to be influencers are a whole [00:09:00] nother thing.

Xand Lourenco: [00:09:00] That's true. I guess I'm looking at like influencer marketing numbers, which probably is a more formal 

Aakash Shah: [00:09:05] yeah. Influencer marketing was definitely a lot tighter. And it's specifically like, "if I want to place a sponsorship with an influencer, how do I do that? And how do I enable that?" 

Xand Lourenco: [00:09:15] Whereas the 6.5 billion would be a subset of the actual wider influencer ecosystem in terms of how much money is floating.

Aakash Shah: [00:09:22] Yeah. I mean, you could arguably say , , I would, I would bet most of YouTube views go towards influencers.  not influencer content creators, right? Cause this isn't just for influencers, it's for content creators. And that's what we should say. Influencers are a subset of content creators.

That's true. you also have content creators that are just creating wood, crafting videos on YouTube or creating podcasts like us right here. Content creation is a massive industry that it's very difficult to measure. So I definitely think there's enough people. Sure.

Xand Lourenco: [00:09:52] Yeah. So 

Aakash Shah: [00:09:54] what type of people do they want to get in front of us? Do they want to get in front of us? I don't think so. We don't have a need [00:10:00] for a credit card. 

Xand Lourenco: [00:10:01] Yeah.  

Aakash Shah: [00:10:01] Yeah, that's 

Xand Lourenco: [00:10:02] a good point. Cause , we obviously went the traditional route of. Income, right? Like we both have to both hold down, like what you would consider typical jobs, you know, we're, we have nine to five.

It's like we work remotely, but from a kind of like banker perspective. We're not alternative investments. Right. We're pretty standard investments, but I think the kind of influencer they're aiming at, and you're what you're talking about are more like your, I don't even know who like.

Where 

where 

Aakash Shah: [00:10:26] it's your full time gig? It's your primary source of income, right? having, like, creating that content. So it's more like if we were to quit our jobs  you know, go full time on creating this podcast and inviting guests and whatnot, and we didn't have existing lines of credit.

How could we get a new line of credit? And that's where that's where Karat comes in.  so I guess 

Xand Lourenco: [00:10:50] Karat's banking on the fact just looking at their website quickly Karat'sif y banking on the fact that like, there, there are certain metrics on these platforms that indicate credit [00:11:00] worthiness and or growth rate.

So if I'm, if I'm looking at, in Instagram influencer and they've grown there, Instagram followers, you know, month over month by 18%. maybe that's someone I should give, you know, a credit card to, but if they're flat or declining basically that there are a certain metrics within these platforms that are sufficiently good as proxies to income that you can give them credit without taking too much risk on.

Aakash Shah: [00:11:28] Yeah. And I agree with that premise. Yeah. Now, now my question is okay, we agree. It exists. How do they get out into the world? How did they get people? How do they get their first 10,000 users? 

Xand Lourenco: [00:11:38] So that's really interesting 

Aakash Shah: [00:11:40] hundred thousand transactions right 

Xand Lourenco: [00:11:43] if you 

Google them. They don't really pop up, but it occurred to me.

I was like, Oh, they got to work on their SEO. I thought, 

do they 

like, if you're, if you're aiming at Instagram and YouTube content, creators and subscribers is SEO even really that relevant for you? Like, or do you try to actually get at them within the same [00:12:00] channels that they kind of own and work in, Like does SEO matter for Instagram?

Aakash Shah: [00:12:04] Well, I think they need to work on their SEO so that when people Google them, they actually pop up. Right. And like any sense. Cause right now their SEO is worse than bad. It is non existant, which means they effectively do them effectively. They don't exist in the public web, but 

Xand Lourenco: [00:12:22] maybe they 

do, 

but it does that matter for them.

You know, like this is a kind of unique case for me because in typical marketing. You always want SEO, right? Because that's how most people find you. But if their market truly is people who really natively live in these spheres, like, do I have something, you know, again, betraying my age. I spoke to a friend recently who only consumes content on Instagram and doesn't really use Google  their consumption of the internet is more passive than it is active.

And I wonder if there are many people like that on Instagram and YouTube. And this is your target market, is it, does it make more sense to kind of, [00:13:00] for SEO to become a secondary concern and make sure that you have like really good presence on these platforms? 

Aakash Shah: [00:13:05] I agree that SEO is probably bad as a major acquisition channel because it's a very busy space.

and there's a lot of people out there talking about their SEO, but I think, you know, they should build out their website enough so that. When we, when you Google Karat or the bank for creators that they pop up, that's all I'm saying, I'm saying do the bare minimum so that they actually exist.

I actually think Instagram is an important place for them to ,  build a presence and maybe do some advertising there because you're right. Go to where your users are. But also I think where they're gonna. I think they're really going to see benefits through direct outreach, because they just need to find these influencers and reach out to them and say, Hey, we can extend your credit if you need it.

And I know it's hard for you because it's almost like so many. so many contents creators probably have tried to go through the traditional path and fail. [00:14:00] They don't know better. and they're like, you know, screw it. I'll just, self-fund this and it'll be hard and it'll be a struggle. so I think they're going to have to do direct outreach.

I also think word of mouth is going to be a big deal from them,  and referrals. So if they have a successful partnership with TierZoo who has 2 million YouTube subscribers, you know, TierZoo probably has a network of other content creators that you talks to regularly and he can recommend them.

He can talk about his experience with them and that's going to be important.  and then finally, I think they should, I actually leveraged the fact that there's so many credit card review sites out there. And you could get someone to write 10, like 5,000 word articles on them for nerd wallet or points guy or whatever, and just a benefit off that so that they have a little more social presence and they're just kind of out there.

Right. And that's also an interesting angle in that they could partner with these tools. Cause there's a whole little micro industry [00:15:00] of. Which credit card should I use and which credit card should I buy? And nerd wallet. Does this the point guy, does this a few other places do this? well, you know, there could be an interesting partnership opportunity there where it's like, if you guys can find an audience, we can serve a credit card and we'll have a kickback fee for you.

Xand Lourenco: [00:15:20] Yeah.

Yeah, it's really interesting. 

 it's interesting because you always consider yourself on the forefront of whatever it is you're doing, you know, and I, I like to think that I'm pretty hip in terms of like marketing channels and like methods of acquisition and these kinds of things, but it occurs to me that this would be a space that I would be wholly unequipped to navigate.

And. You know, if you asked me how to build like a demand gen platform for carrot, I would really have to like relearn most of the quote unquote standard marketing practices that I've internalized. 

Aakash Shah: [00:15:49] Absolutely. Well, you have a B2B background, right? Almost entirely. whereas I have flexed between a business to consumer and business to business.

And while there [00:16:00] are some similarities, there are also huge differences as you have. Just express. 

So let's actually focus in on this. Right? Cause I think it's very interesting when does a creator need, like, I really want to keep investigating this, like who is their customer? Because there are a lot of creators, but they don't want the long tail of creators.

Which are making $500 per month on YouTube. They only want the creators who are doing this full time, who are creating full time and are trying to sustain themselves with it. They don't want the creators that are living with multiple roommates Or giving up lifestyle conveniences so that they can live their dream job of creating things on the internet.

They want creators that need to make large purchases. 

Xand Lourenco: [00:16:50] Well, it's, is that 

explicitly marketed as a business card? Unless I miss my guess. I think you're right. If they want high income influencers, but it doesn't have to be that they need to buy for the [00:17:00] business. It could be that they just have enough income that they're making luxury purchases and they're using the card a lot.

Aakash Shah: [00:17:05] Yeah. I got what I'm trying to say is like, no, you're right. It doesn't have to be a business card. Right. Oh, so you're saying like, it's just, they've made their money, but they don't, they can't get traditional. Yeah. I see what you're saying. 

Xand Lourenco: [00:17:20] How frustrating would it be if you're, you know, On their site, the Russian bear and you're pulling in 15 grand a month or 20 grand a month.

And nobody will give you a credit card. 

Aakash Shah: [00:17:30] I think people would give you a credit card so you can get a credit. I feel like you can get a credit card. So easily nowadays a consumer credit card with like 10,000 limits. Maybe that's a, I guess my, you know, that's a function of my privilege. Maybe it is very difficult.

maybe let's say they can't.

Okay. I'm trying to put myself in the seat of a creator because I watch Twitch. Right. I'm trying to understand one thing that's very common is they want to buy a house because your house is your office when you're a creator, [00:18:00] right? Like you own your space. And when you want to buy a house, you often want to buy a house in A low property tax state, and a low income tax state, which actually doesn't exist. So a low income tax state, and maybe a high property tax state like Texas, like Nevada. 

Xand Lourenco: [00:18:16] Yeah. 

Aakash Shah: [00:18:16] It's also nice that Nevada is close to LA, which California, which is a big hub for creators that might want to partner with the more traditional media. Can, you get a mortgage with. I do not think you'd be able to get a mortgage with, you know, your sponsorships and whatnot. I don't think that is something that a traditional bank would extend it. 

Xand Lourenco: [00:18:35] Yeah. 

Aakash Shah: [00:18:35] So I can definitely see this eventually getting there and to being some bank for creators,

maybe this is the first step towards there. Cause they still say on their website that there's a black card. So that black card implies to me high credit limit. Let it, like, it implies like a $50,000 credit limit, which you actually cannot get  You actually can not get [00:19:00] a 50,000 credit limit on a regular consumer card where regular meetings is not the Amex black.

So maybe, maybe that's a differentiator. Like they just offer you such a large credit limit. And then on top of that, you know, maybe they're doing the Brex model of. Brex is a company which provides credit for startups who don't have business credit built up. maybe they have a little, they have some perks.

That's along the lines of, if you're a beauty creator, you get cash back on beauty. Or if you're, gaming creator, you get cash back on video games. Which is just a little bit of a perk on that additional spending. Everyone wants that 3%. Right, right.  I don't know. I think it's interesting. I think it's a very interesting space. I think it's a very needed product. I think the market is growing and I think you and I are stumped on how to really grow the user base, so to speak,

 Oh, you, 

Xand Lourenco: [00:19:56] you raise a really good point that I hadn't considered. [00:20:00] So what we just went over for the last couple of minutes.

Like you could see maybe like a mortgage service or a bank service for these influencers, but that cards maybe as a smaller need. But what if, what if that is the end goal? What if this is the sort of land and expand strategy where it's like, okay, influencers and content creators more generally. Are an underserved market.

The low cost low risk way to get into that market is to create this part, gather some financial data about them, and then potentially see if we can expand that into the bank for creators. what I'm wondering is the card kind of a low risk, low effort way to start gaining. Much more granular transaction data about these influencers, which would then enable you to decide if like a larger bank style service would be lucrative or even worthwhile.

Aakash Shah: [00:20:46] I mean, I think it is going to be worthwhile. Yeah. I think, I think these kinds of specialized things are always helpful. We've seen square and Stripe build entire businesses around taking a very focused  market or [00:21:00] product, and then build new services around that product, around it.

Like, you know, square started as swipe your card anywhere. And Stripe started as swipe your card on the internet. And now they're offering loans. They do fraud detection, they do consulting services, all sorts of things. So I agree. It's an initial bet. 

I have this theory that every FinTech company eventually becomes a bank 

Xand Lourenco: [00:21:23] because it's a logical end point, right? Yeah, exactly what this needs as possible. 

Aakash Shah: [00:21:27] It is a logical end point if you're chasing profits. yeah, I think the only way they grow is. By individual outreach and word of mouth it's an exclusive club right now and they need to get people into that exclusive club, but they need to be careful about who they get, because they probably don't have that much cash 

you can't just like give someone a $50,000 credit line. And then if they, you know, it's very bad, if that gets wasted. So 

Xand Lourenco: [00:21:54] their ideal scenario right, is like, All of the top 1% or 2% of influencers, it becomes the [00:22:00] card to have, so the influencers then brag about it on their channels and it becomes a thing you have to have and show off.

And that, and that and growth becomes exponential that way. 

Aakash Shah: [00:22:10] Yeah, absolutely. And, you know, If they ever want to do a big marketing push, I think they'd be pretty good at influencer and creative marketing, 

Xand Lourenco: [00:22:19] right? Yeah. 

Aakash Shah: [00:22:20] They could get sponsorship spots everywhere. So I'm not too worried about that.   

Well, we've pontificated for a little bit. Anything else you want to add? 

Xand Lourenco: [00:22:29] No, I think it's a pretty cool, I think, I think it'll do well. it doesn't seem like they have a great marketing pipeline right now, but I also don't foresee problems creating one, given that there's kind of a lack of competition in this space.

It won't be too hard to kind of distinguish yourself. Yeah. 

Aakash Shah: [00:22:43] I mean, again, they launched late, June, 2020. we're recording this August 7th, 2020, I think it's okay. Not to have an incredible marketing pipeline . Sure. Yeah, I'm excited to track how these guys go. I expect an acquisition within five to seven years.

[00:23:00] Follow up with me seven years guys. Okay. See you guys 

Xand Lourenco: [00:23:04] later. 

 Aakash Shah: [00:23:09] Thanks for listening to this episode of All Schemes Considered. It means a lot to Xand and I. If you enjoyed this episode, make sure to subscribe and check out a few of our older episodes. We're available on our website allschemesconsidered.com and every podcatcher under the sun. If you really want to make our day, consider sharing it with a friend or coworker.

If you have a scheme, you'd like us to consider a guest you'd like us to have on. Maybe you just loved or hated this episode.  We want to know your thoughts. I'm on Twitter @aakashdotio. That's A A K A S H D O T I O. Or you can send an email to allschemesconsidered@aakash.io. Xand, you can't find online because he doesn't believe in the digital public forum. 

Thanks again and keep scheming. See y'all next week.