[Transcript] Data-Driven Lending in Latin America with Tarek El Sheriff, Founder and CEO of Zinobe

Miguel Armaza is joined by Tarek El Sheriff, Founder and CEO of Zinobe, a Colombian fintech specialized in online lending. Founded in 2012, Zinobe has made almost 1.3 million loans and uses technology to develop online credit products for consumers and small businesses. Zinobe has developed a data-centric credit model to help target underserved markets in Colombia. In 2020, Zinobe was the highest-ranked Colombian company on the FT’s fast-growing companies ranking with a compound annual growth rate (CAGR) of more than 100%.

Miguel Armaza 01:35

Tarek. Well, thank you for joining us on the Wharton FinTech podcast. How about we start by you telling us a little bit about yourself and your personal background?

Tarek El Sheriff 01:42

Okay, well, no, thank you very much. I’m glad to be here. My background so on the personal side, I am kind of a mixed bag. It’s, you know, always when I get asked where I’m from, it’s more complicated than usual. It’s hard for me to, you know, put it into into one place. So I was very born in New York, but I stayed there just for a couple of years. My parents then moved to London, which is where I grew up kind of in more of my formative years. And then I went back to the US for university, then my first job and business school and then after business school back to London, where I worked for a few years before starting Zinobe. So my career has been in investment banking. I’ve done both sides. So in New York, I was working on the coverage sides, advisory, and then I moved after business schools to sales and trading side working with corporates on hedging and structured products.

Miguel Armaza 02:35

That makes sense. So tell us about the early days or even before the early days of Zinobe, how did the idea come about? How did you approach the very beginning?

Tarek El Sheriff 02:47

So when I decided to leave banking, it was post crisis and I was I could have stayed and I was protected. I was working in emerging markets coverage, and I was in Deutsche Bank at the time and Deutsche I think got hit a few years after the crisis. So I wasn’t really in danger there. But I think I’ve gotten to the point where I wanted to get rid of the bureaucracy and kind of changed careers and entrepreneurship was something that I thought was an eventuality for me, my family were always business owners. So I had that in my mind for a while, just as I was leaving London, I was talking with a couple of friends there and they were starting a an FX startup. So London has a lot of those because of the kind of it’s the FX capital of the world because at the time zones, and I was telling them, yes, I’m excited to join but I’m going to Latin America, so maybe I can work with you there and get clients from Latin America for you. So that was the idea as I was leaving, once I got here, then I got to kind of exposed, the first introduction to you know, going into more regulated bureaucratic markets that you know, FX in Europe was plausible, you know, you know, but only headquartered in London. But doing anything in Colombia was not viable. So I tried that for a few months. And then I told the guys listen, you know, I’d rather you know, invest in something that I’m gonna be working on. So you know, I’ll just give you back my shares at par. And then one of the one of the partners told me, you know, why don’t you look at this, you know, they sent me a couple of companies that were doing this data driven lending. So one in the States, one in Europe, and I looked at it and they kind of was appealing from the very beginning. So I’d never worked on anything on the consumer side, everything was corporate, but kind of the automation, the user experience, kind of the speed of service and some of these data driven lenders, it was new to the market very appealing for me. So I did a kind of a legal due diligence, studied the market. And what I found was that it was even more appealing in emerging markets because you’re not only selling that improved user experience, lack of bureaucracy, but you’re taking advantage of the lack of inclusion. So by having this data driven approach on the credits, you could start assessing risk differently, and then you could start giving credit to people that didn’t have access previously. So I was very, very excited analyzing the market and the dynamics. And that’s how we got going. So it was kind of a referral from a friend who I had been working with. And just a funny anecdote, that company last year just closed investment from something there at I think, nearly $800 million, I should have kept the shares but in the end I had to make my own way.

Miguel Armaza 05:29

Well now you have your own shares.

Tarek El Sheriff 05:30

Yes, yes.

Miguel Armaza 05:31

And what year was this?

Tarek El Sheriff 05:34

The kind of legal setup and then all the due diligence was done in 2011. Operationally we started in 2012. So in June 2012, was the official launch.

Miguel Armaza 05:42

And that’s very interesting, because that is way before this current wave that we’re experiencing of entrepreneurship in Latin America. Particularly FinTech. Did you get any resistance from your initial backers or the initial people you pitched this to?

Tarek El Sheriff 05:57

No, I mean, initially, it was just from my network. So it is either people from JPMorgan or worked in New York, Deutsche and my business school. So I was able to get kind of that initial kind of angel rounds in just a couple of weeks. It was just kind of more on my relationship and the trust they had with me. So that was quick, but there was a lot of resistance in the market. So just opening bank accounts getting just general service, receiving the money that these angel investors wer sending me took a lot of persuading was very kind of, you know, confusing for me how difficult that was, and then resistance to the market. So there’s a lack of trust here. There were a lot of fraudulent pyramid schemes which had come up few years before. So people were suspicious of new models. And despite the fact that I had no upfront cost, I wasn’t asking for anything. I was giving money out the trust was my burden. People were suspicious of what we were doing. So I remember there was a very funny anecdote in Facebook that somebody was saying like okay, I just applied I think it’s a joke. fraud is a pyramid even though they haven’t done anything. And then when they got the money, they said, I can’t believe it’s true. You know, thank you for trusting me. So we had a few of those in social media that were monitoring the early days, which were quite funny to look back on.

Miguel Armaza 07:14

They’re probably checking if the money was real.

Tarek El Sheriff 07:16

Yeah, because I think yeah, here, there’s just excessive paperwork. And the credit landscape is mainly secured. So on the consumer side, it’s what’s called Libransa, which is a payroll loan. And that’s confined to kind of government and pensioners. Everyone’s attacking the same client base. And then for small businesses, it’s factoring. So unsecured credit analysis was fairly virgin territory here, and then people weren’t used to people, you know, putting their money where their mouth is, as far as assessing risk and taking a bet on their analytical capabilities.

Miguel Armaza 07:48

And how about building the product and the technology? Did you rely on local talent?

Tarek El Sheriff 07:54

Yeah, I was very, very lucky. So a friend of my wife, (I think I mentioned my wife’s Colombian) had a software development company. So I hired them initially. So I had the trust factor. And we got along very well. And then one of his programmers who’d worked in our project, left his company. And then he recommended that I hire him from his new company, and that he could become my first programmer, and he became my CTO. And I mean, the luck was, you know, having the friend of my wife and then this first hire who was amazing who could, who allowed us not to hire the programmers for you know, nearly two years that he kind of built the majority of the platform. And he’s grown into the CTO role, where he’s managing now, you know, close to 40 people and has continued to do a very good job as he stepped back from programming and now into management, which, you know, it’s very hard to predict who’s who’s going to be good at that. And I think the skill that I had, you know, in any of the hires is maybe I felt confident in my assessment of talent, and what I was looking for, especially for this type of venture, I had a lot of holes that say on the marketing side on the programming side, that I didn’t have very much experience on but maybe you know, I was good at spotting people who are exaggerating or not very, not very good and then add a few filters which are good you know, maybe because my Spanish is not the best I didn’t like to do it, I like people who spoke English, I like people who traveled or studied abroad, because I wanted that perspective that you went abroad, you saw, you know, kind of a different landscape. So you didn’t accept the status quo. And I think in markets like Colombia, where you have kind of the same families owning everything and not much change, it was a closed economy for a while, people who were exposed to different places, had that inspiration had that belief that things are possible things could change, the other people thought, you know, it’s gonna be the same old people in the same company, the same products and services in the market.

Miguel Armaza 09:47

Now, take us also through the customer. I imagine, this is almost a decade ago since you launched, I imagine your customer has also evolved with the company?

Tarek El Sheriff 09:59

Yeah, so we learned very quickly that on the consumer side and credit in general, I mean, it’s all about retention, you know, you make your best guess, in assessing the first customer. And then once you’ve made that guess the best information you have are kind of the behavior they have with you. So we have, you know, started with kind of smaller amounts, short maturity on the credit side. And then we’ve started expanding, giving longer loans, larger loans, and then using our kind of cash management capabilities that we develop, you know, developing the platform. We’ve gotten into payments now. And then last year, we started going to small business lending. So we really have kind of grown with our customers and the offering that we give them and then in the type of type of customers that we have. And I think with the pandemic and credit markets, shrinking and less people giving credits, I think we’ll probably have another shift right now. Maybe more upmarket, maybe different types of loans. Different types of partners that we can get, as well. And I think that, you know, we’re positioned because of our technology to be quite flexible there.

Miguel Armaza 11:09

So you’ve kind of mentioned the products that you offer, can dive a little bit deeper there. So you offer loans that are based on data that’s typically not relied upon for banks, for example, right. But can you tell us about all the products that you have?

11:27

Yeah. So actually, let me just touch on that data point, I think you know, about people wanting you to mention, let’s say, let’s call it alternative data, they they talk about social media is something that maybe is very far removed from traditional credit analysis. I think we use data that intuitively is connected to traditional data, but it’s alternative in that it’s not used directly for analysis. So you know, when you start in a market like Colombia, where there’s not much experience, so it’s 45 million people in total and 8 million people with credit cards on the consumer side. So a lot of the people are excluded from traditional credit products. So when you start on that basis, you have people without much experience. And that could be a factor for them, maybe not understanding not having discipline, not, you know, having the practice and going with credit. So it’s best to start with them on kind of shorter commitments and smaller risk and then grow with them. So we have kind of a graduating model. So our product is a revolving credit line, so that once we approve them and for rettention, you know, you give them that revolver for an extended period of time, but they have to pay it back in either 30 to 90 days. So it functions like a virtual credit card, but it’s cash that’s sent to their account. And we’ve added a lot of bells and whistles to that. So we started selling insurance, we started selling top ups, and we’re testing bill payments as well trying to find a good provider there. So that’s on the consumer side. On the small business side, we have kind of working capital loans. We have kind of Long Term capex loans were quite opportunistic. They’re so jumping around leveraging partnerships with large companies to give access to the data that’s not being used, transaction data, or some kind of relationship data that exists to fill in the formality gap that exists in the small businesses. But you know, our expertise is more on the kind of the shorter term credits for both consumer and small business. We’re trying to go towards more on the payment side as we evolve.

Miguel Armaza 13:32

Has it become easier to obtain customer data over time?

13:36

Yes, let’s say last year, one of the most important databases came online we were the first company to use it, which is so security information. So that one I don’t know how many markets have it. So typically, you’re verifying employment status and salary, you know, in a letter, which is hard to verify. Here, we can go directly to the database and get 12 months of data. We can you know, on the business side, you could look at the stability of the payroll, the size of the payroll and lateness and payment and so forth. on the consumer side, you get to see exactly all the movements they have, you know, dating back for a year that came online last year, and it’s become, you know, very quickly one of the stronger weighted variables in our scoring system.

Miguel Armaza 14:21

That’s exciting. And so let’s talk a little bit about the COVID crisis. Obviously, the whole world is being impacted some countries more than others. But this is also a time where FinTech companies, particularly startups, are using it to actually enhance their value proposition. Right? How is this playing out in Colombia?

Tarek El Sheriff 14:43

Yeah, so I think if you are truly digital truly online, then that’s definitely one key advantage with the kind of the social distancing that exists all over the world. If you came to have a data driven model. That’s kind of can evolve more quickly can react more quickly. And if you do have a platform that you can make tweaks instantly, then you should be able to navigate these waters better. So it doesn’t mean that you’re going to do better than we did pre pandemic, but it means that we can probably intelligently navigate these waters, so we can take risk. So a lot of traditional guys, maybe will shut up shop and wait it out. We can grow intelligently, maybe having higher hurdle rates for origination, and be more wary and maybe, you know, have some kind of sector specific policies. But I think the transparency that we have through our platform enables us to kind of see things instantly reactively and make make changes instantly as well. So I think, it has, you know, magnified the advantages of having a model like ours, and I think companies similar to ours, will feel that too. And what happened with the government is that banks all over the world are being used to push liquidity into the markets. But in emerging markets where there’s a significant percentage of the population that are excluded from traditional banking system, they have to look for other channels. And we were very lucky that we had access, we had channels with the government. So they asked us, you know, to look at, you know, first product, we’re looking at independent workers, which made up 25% of our portfolio historically, anyway, so we had comfort assessing them, and to see if we could develop a product quickly to roll it out. So we rolled out the product in two weeks, just the landing page, and then started processing loans in the third week, you know, the government has done a fantastic job, you know, marketing us and getting clients there. And it was very important milestone for us to kind of been selected for this program. So it is open to all fintechs I think, but we were the fastest to be able to roll out so I think we’re currently the only ones in the market doing it. And then we’re now approaching you know, in other areas looking to finance payrolls for small businesses. So both those programs what makes them interesting is the government is giving guarantees to kind mitigate the uncertainty that exists in the coming months, you know, while we’re going through the quarantine. So it kind of showed off our kind of speed to market with a new product and our comfort and taking risk in these kind of uncertain times.

Miguel Armaza 17:15

Sounds like it’s almost a case study example of how this crisis has accelerated some timelines, and has actually nudged governments or regulators, and in a more flexible direction.

Tarek El Sheriff 17:30

Yeah, funny, say case study. So I’ve told the guys in the team to start taking notes because I do want to write about this later, because we’ll see how it works out. In the end, we’re still, you know, only kind of three, four weeks in, but hopefully it’ll be a success story. And then we could look back and say, this was an important time for us.

Miguel Armaza 17:50

We’ll make sure our Wharton professors notice. Can you talk a little bit more about how do you envision the future of Zinobe?

Tarek El Sheriff 18:00

Yeah, so an important another important milestone that we had this year is that we kind of was our first venture outside of Colombia. And it was also a validation of our technology capabilities. So we were approached by a very large leasing company in Mexico, very traditional 25 year old company that was looking to either do something in-house or partner with a FinTech to try to develop a more digital solution for the market. And we had kind of connections with them through previous work through our investors and through myself. So kind of it went quite smoothly. And we contributed our technology platform and know how they’re they computed the capital, which I think is the model that I like for the future, you know, that I want to leverage what we’re good at, which is, you know, user experience retention, risk assessment, product development in general, and then partner with somebody who has maybe a large client base, you know, deep pockets so that we can get the best of both worlds. So that’s the model that we just kind of formalized beginning of the year, we’re about to kind of roll out loans coming up. But that, for me, is the direction I want to go in. So instead of being, you know, the balance sheet, which is not, you know, where our strength lies, to focus more on our skills, and the kind of technology and risk. So I think, on the traditional business, as I mentioned, you know, keep expanding that offering, keep expanding the touchpoints, try and keep offering more products and services for our clients and partnering with other companies that maybe they could fill in the holes. So I could maybe maintain the relationship and have a marketplace for different products. So that way, I can keep the clients as long as I can. So instead of you know, historically having only one product to sell them, and they would stay with me for three years. I can keep that long to increase the revenue that I have in whatever time they stay with me and then move towards, you know, more, increase the kind of the weighting of payments. So it’s not only credit, and then look for partnerships, I think we’re trying to replicate the same partnership we have in Mexico and Colombia, we’re talking to a couple of players there as well. So reducing the focus on credit risk on balance sheet, moving more towards technology, or SAS or white label or kind of partnerships, those are the kind of opportunities that I’m exploring right now. Being in the market, you know, since 2012, we’ve dispersed over, you know, 1.3 million loans coming up to 1.4. So our platform, our risk assessment is validated. So now it’s sellable. So I think going into this partnership model is better than being kind of a pure play software development company where they have to kind of take a leap of faith to us where we actually put money in the market, we’ve made money and we’ve grown and we’ve retained client’s so we can kind of offer that validated proposition to a lot of people.

Miguel Armaza 21:05

And sounds like you also benefit as the FinTech environment in the region becomes more established.

Tarek El Sheriff 21:11

Yes, yes. I think, you know, starting out, you know, when there was all that skepticism now, you know, we have a Industry Association, we have partnerships with banks and international partnerships now, and government partnerships. So, I think it’s much easier and it’s open a lot of people’s minds of what’s possible. So I think people have more trust in us. And people also can see a partnership is more viable.

Miguel Armaza 21:38

Absolutely. So we have a lot of listeners on the podcast, who are either entrepreneurs or they’re operators of FinTech startups. Do you have any advice for our audience?

Tarek El Sheriff 21:50

I mean, I think the standard advice I think is still relevant about the resiliency about you know that you can’t convince anybody of anything that you should not kind of waste your time there’s opportunities. But let me let me kind of stay in something more for emerging markets that’s maybe more specific to it. So I think one lesson that that we found here is that in Colombia, you know, which was separated from, you know, from Brazil or Mexico, maybe there isn’t as much institutional investor activity. So we’re very fortunate. We’re backed by QED Investors. Who’ve been, I think, on the Wharton podcast, I think a couple of the partners have been on. So they spotted us and they’re specialists in credit. So it was a good validation for us and very fortunate to have them, but apart from that, let’s say in a country that’s not on the radar as much. I think the utilization of family offices and local investors, particularly businesses like ours, when we are looking for partnerships, so if you go with, you know, wealthy families, wealthy local families, firstly, they have a much longer term vision, and then they could open a lot of doors for you that that the VCs, maybe the states can but but they they So much here, and then maybe a twist on the view that you can’t convince anybody of anything. I think in the beginning, there was a lot of frustration, telling people about how good Colombia was the opportunity that you know that information available is very good, the behavior is very good. And, you know, if you, if you adjust, you know, default from Mexico to here, and with inflation, we have, you know, the lack of competition, I can have a bigger company here than there and with better performance, you know, I was spending a lot of my time trying to convince people of Colombia and I think that’s, again, where that you can’t convince anybody of anything, Maxim, is relevant that I think, if somebody doesn’t have your sector or your country on their radar, then it’s best to kind of move on and not waste too much time on that. I think that was one lesson that I learned that I thought ideas were quite compelling, but it is still very hard, you know, to change people’s thinking on a particular topic. And I think that you need to think of the future let’s say if you aren’t a lending business, so where you have Access to bank lines access to securitization, access to you know, different types of funds and different more developed markets, you have to think where are you going to go? Where are you going to end up and how you’re going to fund yourself, and how you’re going to compete. So you can’t look at a business where you have the same basic model that’s overseas, and thinking that applied here without looking in the future. Because yes, you can find you know, pockets for 5–10 million, maybe 20 million, but then you’ll be capped. So you have to really think about the sustainability and long term where’s the business going and, and how you’re going to fund yourself and how you’re going to compete, and so forth. So it’s not every model is translatable and initial success doesn’t translate to long term success as well.

Miguel Armaza 24:44

That’s fantastic. Well, Tarek, before we let you go, we have one more question that we like to ask all of our guests, and it’s about your personal hobbies. So what are some of your favorite hobbies and what are some of the things that you enjoy outside of work?

Tarek El Sheriff 24:58

So with my Egyptian heritage it is Squash. I’m not as good as the typical Egyptian but it is one of my passions here. I do have a family. So I spent a lot of time with my two daughters and we just have a new puppy a baby Rottweiler. So a lot of time at home, you know, pre quarantine, I know quarantine has forced everybody stay at home. I like sports in general. So if it’s not squash, it’s tennis. It’s working out running. I entered the tough mudder last year, we were planning to do some triathlons this year. But that’s that’s a little bit on hold. I think it’s important to kind of push yourself outside to kind of free your mind. I think when I travel, when I work out, that’s really when I get to kind of separate myself from day to day and then think of kind of more long term issues that the company has some strategies and partnerships and so forth. So I think it’s very important, you know, to separate, you know, for quite a few hours and to push yourself as well to get that inspiration.

Miguel Armaza 25:57

Fantastic. Well, again, Tarek. Thank you. So much for joining us on the Wharton FinTech podcast. I think you’re the first entrepreneur from Colombia to join us. Post-quarantine, you’re always welcome to join us on campus.

Tarek El Sheriff 26:14

Perfect. Thank you very much. I enjoyed it.

Written by

Co-President & Podcast Host of @WhartonFintech. MBA /MA Candidate at @Wharton / @LauderInstitute. Fintech investor and advisor. Previously @Citi & @MUFGAmericas

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