Perhaps this crisis is not what everyone thinks
Eleving Group’s CEO Modestas Sudnius has been interviewed by one of the largest and oldest Latvian business media, ‘Dienas Bizness‘. During the conversation, Modestas discussed the business results of previous years, the impact of economic stagnation on lending, new products, emphasized on the way Eleving Group is thinking about the business operations, and the overall situation in the Latvian Fintech industry.
The full interview with Dienas Bizness by Janis Goldbergs.
Let’s start with an ice-breaker! Tell us about Eleving Group; what is your business?
– The origins of Eleving Group can be traced back to Latvia a little more than ten years ago when we started financing the purchase of used cars. The basic idea was to help people who do not have the opportunity to get a bank loan and promote the purchase of vehicles that traditional banks do not finance. As we know, banks prefer to finance the purchase of new vehicles, but not everyone can afford them. During these years, we have mastered many markets and currently provide services not only in Europe but also in relatively exotic countries like Kenya, Uganda, Uzbekistan, etc. Latvia is our oldest and most developed market; the same applies to the entire Baltic region. In the Baltics, we have the most comprehensive range of mobility products because customers are more ready for classic mobility financing methods and more innovative solutions, such as car-sharing and subscriptions. As a result, we have developed the electric car-sharing business by getting involved in the OX drive project, where we are the company’s largest shareholder. We are also successfully developing the car subscription business, which carries the Renti plus brand name. It is an exciting product because the customer can get a brand-new car in use for a monthly payment, with maintenance, repairs, and insurance included in the monthly fee. The concept is similar to the movie streaming platform Netflix – the customer buys a monthly subscription, watches all the movies, and can terminate the contract without any obligations or sanctions. If the customer wants to continue watching movies (driving a car), the subscription will automatically be extended for the next month. We focus on various financing methods, but the most important is vehicle leasing. If in Europe it will be traditional car leasing, then in Kenya and Uganda – motorcycle or boda-boda leasing. Motorcycles are a very popular form of mobility in Africa because buying and maintaining a car in these countries is relatively expensive. The road and traffic infrastructure are also more convenient for motorcycles. In both African markets, the average value of a motorcycle we finance is EUR 1 000. They are used for daily transportation and transporting passengers, delivering food and goods, etc. In fact, the motorcycle is like a profit-making tool for many. We are also in the consumer lending business in Macedonia, Albania, and Moldova. However, it is a relatively small part of the portfolio for the Group.
Latvia is the beginning of the company; what is currently located here? Eleving Group head office? What do employees do in Riga?
– For our company, Latvia is like a business operations center with the shared service center principle, and the company’s head office, with almost 150 employees, is located in Riga. We also have a smaller office in Vilnius, where 30 employees work. These two offices are the brains of the Group, where product development, strategic decision-making, and implementation of IT solutions take place. Various business management services are provided here for the employees of our countries. Meanwhile, local teams are responsible for operational business activities, such as issuing and servicing loans, selling products, etc. It is a healthy vertical cooperation, as a result of which the Latvian and Lithuanian offices help the other employees of the Group to make educated and informed decisions by sharing their expertise, conducting training, and ensuring a common understanding of business standards. I like to use the example of a multi-functional agency that provides various services. Such a comparison would correspond to the Riga and Vilnius offices. In addition, Latvia is like a laboratory for us, where we can test new product concepts and systems and then introduce them to other markets of the Group.
The events of the last three years, in general, have significantly impacted various fields. How did you close the time of the pandemic, for example, the results of 2021? What are the company’s results in the last nine months?
– The pandemic years should be viewed together. The pandemic started in 2020. This year was challenging for our business. It required time to adapt to the new conditions. We had to cease business operations in some markets where growth was difficult due to Covid-19. Understandably, exiting the market at an early stage causes losses; however, in absolute numbers, 2020 had positive profit numbers. We erased all the adverse effects and gaps of 2020 and patched them a year later, which was also profitable. We are among only a few companies in the financing industry in the Baltic States that have increased turnover as fast as Eleving Group. This was based on a well-thought-out strategy with accurate risk analysis and diligent work in attracting investments. The backbone of our financial structure is the bonds issued in 2021 for a total amount of EUR 205 mln. From a term perspective, it is medium-term and long-term capital, where EUR 30 mln matures in 2024, EUR 150 mln in 2026, and EUR 25 mln in 2031. In addition to these funding sources, we also work intensively on the Mintos platform, through which approximately EUR 70 mln have been raised. This is money that we raised at a time when capital markets had more favorable conditions for attracting investment. It pays off today. We recently published our 9-month performance results. They are better than ever because we have earned almost 18 million. Our loan portfolio is the largest in the company’s history, with the best EBITDA, revenues, etc. We have successfully overcome this period of uncertainty in the economy.
Can it be said that the economic crisis caused by the war in Ukraine does not affect the lending business?
– The influence is definitely there. We have a business in Ukraine. Although small, it is affected to the most direct extent. However, we also have some advantages as the Group’s business is spread over 14 active markets, which helps us to diversify our risks. If something completely unexpected or, as in the case of Ukraine, something catastrophic happens in one of the markets, it does not mean that we immediately start working at a loss. The other markets, which have better business results and do not face external challenges, can compensate for the losses incurred in other markets.
Do you feel the slowdown of the economy in general?
– 90% of the time and overwhelmingly in most of our markets, no! Even now. Of course, the heating season in the Baltics is just beginning, and this may cause problems for a specific part of customers. To a limited extent, it could also affect the quality of the portfolio. However, we do not see any signs of a crisis of the magnitude that hit the world in 2007. Both people and companies are much more prepared now. In recent months, we have become more cautious in issuing loans, and adjustments have also been made to the strategy. This is more related to risk awareness and proactive action rather than a response to already real consequences. I predict this crisis will not be as severe as many think.
In lending, African countries and some Asian countries, as well as the Balkans, are considered risk zones. How do you feel about these markets? Exactly how do you guarantee your money back?
– It is difficult to imagine a business without risks. The question is, how high is the company’s readiness to meet these risks with a strong strategy and action plan? When learning a new market, first of all, you need to understand it and understand what consumers, trends, and habits are present there. In high-risk markets, one of the most critical issues is reliably verifying a prospect’s income. In most countries, such data are available in centralized databases and are sufficiently developed for analysis and interpretation. Also, in Kenya! If we compare Kenya with Latvia, this country has skipped the credit card stage. They started the transition to digital payments right away with e-wallets. Namely, almost every Kenyan has a smartphone that has an e-wallet application that they use for everyday payments, such as at a store, gas station, market, etc. Also, SMS payment is well-developed in Kenya. In addition, they have cheap and accessible mobile internet, which allows paying even for a souvenir on the side of the street with a smartphone. A phone is a perfect tool that shows a relatively accurate picture of consumption and a person’s financial capabilities. Our task is to understand whether we are lending to the right consumer. Also, we try to maintain control over the financed vehicle in these markets. This means that we are the formal owner of the vehicle until the last payment is made. People understand that they can lose the vehicle if they don’t meet their obligations, so payment discipline remains very high in our portfolio. In African markets, all motorcycles have a GPS transmitter and insurance, which means that our risks are minimized, and the customer is protected against various traffic accidents or vehicle theft. If the client is verified, approachable, and reliable, then there is no reason to worry much about the business.
You have already mentioned various bond issues. Is it safe to say that raising money for your business is not on the list of challenges or problems right now?
– Attracting investments is always challenging. However, our company is in a good position. We have been on the market for ten years and have left a legible mark in Europe. We have issued bonds in Latvia and Europe for the last five years. We refinance them, which means we have a reliable investor base. In total, we have raised more than EUR 205 mln in bonds and are among the largest fundraisers in the Baltics. We also cooperate with local banks. Namely, in terms of the availability of financial resources, our activity is sufficiently diversified and provides backup options if suddenly money is unavailable in one of the usual channels. Right now, investors are much more cautious, but that doesn’t stop us from finding the necessary funding if needed. Finally, it must be admitted that 2021 was highly fruitful in raising money, so there is no concern about the lack of funds in the company at the moment.
Tell us more about the e-boda financing program in partnership with Bolt in Africa. Is the market sufficiently developed? Recharge options, ability to pay back those purchases?
– We previously financed the purchase of motorcycles in Kenya and e-bodas are a continuation of this program. We are interested in expanding the use of electric motorcycles in the African market, as it promotes the popularity of climate-friendly mobility and the diversity of our products. An electric motorcycle will be cheaper in the long run than its internal combustion engine counterpart. It also produces no CO2 and less noise pollution, an important factor in cities with millions of inhabitants. In addition, we (Mogo Kenya) finance boda-boda drivers who buy them to provide themselves with income. Bolt, in this project, is a company that brings together such people (couriers, passenger carriers). In contrast, we are the ones who provide these people with financing for the purchase of an e-boda. It is clear that internal combustion engines are easier to use in Kenya, and this type of vehicles will be more common for quite some time as the customer does not have to worry about charging the vehicle. However, this is also solved in our project, as the service includes replacing an empty battery with a full one. Here we can say big thanks to another partner – STIMA. Overall, I believe that e-mobility is the future. In Kenya, just like they skipped the credit card stage on the way to digital payments, they can skip a stage in the development of e-mobility and start straight away from a more advanced stage.
If we compare Kenyan electric motorcycles and Tesla as car-sharing service cars, here we have the most expensive possible solution. Teslas are expensive! Why this choice?
– Why not?! If e-mobility will define the future of transportation, then sharing electric cars is a great solution. An intermediate stage in which society gets used to e-mobility. In addition, in the case of car-sharing, the client travels short distances per day, and charging during the day is not a problem. It is carried out overnight by the company’s employees. There have already been car-sharing platforms in Latvia, so people are already familiar with this concept. Previously, this offer was relatively boring, because you had to choose between small cars, and small engines, which, moreover, have a rather simple configuration, and were only useful for getting from point A to point B. Nothing exciting! Tesla, meanwhile, is an entirely different experience, design, convenience, and driving. And also, ecology! The price of the service is also competitive, evidenced by the results of the first months of OX drive. People are curious and want to try what it’s like to drive the much-discussed Tesla, and many stick with Teslas. In the future, we plan to offer this service in other markets as well, but until then, we can enjoy the experience of electric car-sharing with 45 Teslas right here in Latvia.
In recent years, the Lithuanian financial sector’s development, which includes financial technologies, banks, and other financial instruments, has been much faster than in Latvia. Why so? Where are the reasons?
– The financial sector is generally sufficiently developed in both countries. There are many industry players and relatively healthy competition. The circumstance that helped the Lithuanian fintech sector to grow more rapidly in the last five years may be the actions of the Central Bank of Lithuania (CBL), which facilitated the inflow of foreign investments into the market. The process of obtaining a special banking license was simplified. If you have a banking license in one EU market, then you can conduct operations in the entire EU market, and why not obtain this license in one of the Baltic countries? Lithuania used this opportunity more successfully, which is likely reflected in the development pace of the industry. The second factor contributing to the development was the licensing of payment platforms. A large number of payment platforms have opened directly in Lithuania. I could be a better expert in the overall assessment of the industry in Latvia, but in the case of Lithuania, the key to success is a cocktail of several actions and circumstances. It is not only the decisions of the CBL but also the marketing of these decisions. More than successful regulation is required; the foreign company must learn about the opportunities to come to the Baltics and establish a company here. It is also crucial for the investor to understand whether people, IT resources, and many other things will be available. Lithuania has likely been able to present this package to investors better, and therefore we can see faster industry growth. In essence, the AML requirements for financial industry players in all Baltic countries are very similar; the question is about the procedure, the process itself. The strictness of regulation or standard requirements does not play a role. Lithuania’s growth is based on the entry of new investors and players into the market, and their entry is not based on regulation, which is established by a directive for the whole of Europe.
Twenty years ago, there was no financial technology industry; there were payday loans. Your company was born ten years ago, yet people still think of this industry as payday loans with all the negative background. What is the Latvian Fintech industry now?
– There is a diverse set of services in the financial technology sector. Besides lending, there are many other things – identification tools, data analysis, payment security, payment platforms, etc. These products are not directly related to lending. If we look at lenders in the fintech industry, the primary focus should be technology, not lending. This business is about speed and convenience, which allows you to serve many customers with a small number of employees. Fintech in Latvia is definitely no longer just about short-term consumer loans; it is a saturated and innovative ecosystem with many startups. In addition, non-bank loans have changed significantly and become more mature, responsible, and focused on long-term development. Likewise, the traditional banking sector and alternative financial service providers offer comparable services. You can get a short-term or car loan from one or the other. A law also regulates interest rates. I think the difference right now is more in the financial technology itself and the availability of the products than the product itself.