HIBT Lab! Tala: Shivani Siroya

Hello and welcome to How I Built This Lab. I'm Guy Raz. So for many of us, a three digit number can decide a lot. For our future. If we can buy a home.

how much our interest rates are, and if we can start a new business. Those three digits make up our credit score, and there are billions of people around the world who do not have one. In fact Many people around the world have no trace of a financial identity whatsoever. And this means No loan history, no bank accounts, and no credit score.

Shivani Saroya met some of these people when she was working for the UN Population Fund back in the mid-2000s. Shivani was based in Africa, where she met entrepreneurs who didn't have access to cash to expand their businesses. People who made jewelry or sold food at market stalls. And they weren't looking for gigantic loans, but rather a hundred bucks or even fifty. So in 2011, Shivani founded a financial technology company to help service these microentrepreneurs. It's called Tala, and it operates in Kenya, India, the Philippines, and Mexico. To date, Kawa has loaned out over$3 billion to artisans, taxi drivers, bakers, furniture makers, you name it, in all small dollar amounts. The vast majority of Tala's customers have no paper trail, no bank accounts, and no credit history, so Tala evaluates their creditworthiness in a very different way.

by asking them about their lives. Shivani started her career working in finance out of college, but she eventually got bored with life on Wall Street, and in 2006, she decided to go work for the United Nations. So I was working at the UN Population Fund and I was working across West Africa and sub Saharan Africa. And what I was doing was conducting microfinance research. So I was trying to understand how individuals in these nine different countries in the region

Or using their money. And I wanted to understand whether They were starting to improve their quality of life as a result. Of getting access to microcredit.

And what are some of the countries that you were you were traveling to? So I was in Malawi, I was in Ghana, Cote d'Ivoire, South Africa, I was in Kenya And then I also had the opportunity to do the same research in India as well. And one of the things you start to come across small entrepreneurs, people who might have a bakery or, you know, might repair shoes who didn't Have access to capital, essentially.

Exactly. It's that these micro entrepreneurs They had tremendous potential. They were running great businesses, but they couldn't get access to formal loans to be able to expand their businesses. Or otherwise to even be able to, you know, create assets or kind of future opportunity for their families. And give me a sense of what kind of entrepreneurs they were. I mean Blacksmiths. Yeah, woodworkers.

Crafts people. Things like that. Yeah, so I mean in countries like Ghana I did a lot of food stalls, so um women that were preparing cassava on the side of the road. I saw a lot of people doing fabric work, so Bogalan and Mali In India it was, you know, as I said, lots of tiles, jewelry, and we saw a lot of fancy stores, which was just a collection of everything. So like a convenience store in some ways. Yeah.

I think when a lot of people hear the word entrepreneur in the United States or in Europe, they have a a very specific view of what that means. Actually if you think about entrepreneurs globally, the typical entrepreneurs what you're talking about. It's somebody you know pounding cassava and selling it at a food stall on the side of the road. Exactly. And I think that's our perception, but at the end of the day, they're pursuing a venture, right? They're taking the risk.

Yeah. I know that after the UN you went back into kind of back into finance and eventually you would found Tala, which you founded in two thousand eleven Tell me about the genesis of that idea. What gave you the idea to want to create essentially a microfinance, a micro credit startup? So for me, it really stemmed from the time that I worked in emerging markets at the UN Population Fund.

You know, I had the opportunity to really firsthand see money moving through the system. So what I was studying was the effectiveness of micro credits. So small dollar loans for the underserved. And really trying to understand

you know, by providing these loans, are we actually seeing an improvement in quality of life? And I saw firsthand that there's no macro database that I can go to. And so for me, I had to essentially kind of create a quick books. I became that QuickBooks. I started, you know Going to their homes in the morning, I would go to work with them, I would sit in the back of their stores, and I would firsthand see. how much money they made that day, how many products did they sell, how many services did they provide. I would then go to the marketplace with them and understand

What they did with that money, you know, what decisions did they decide to make with it? And by walking alongside them, I saw One, that they were making really concrete decisions. They knew how to make decisions. I also saw that they were very capable of running their businesses. But I also saw that they felt stuck. They didn't have a lot of confidence in their ability to grow those businesses. or to really plan for the future of their families. And so I started to lend to them myself because I saw that potential and I knew that I had savings and

I trusted them. And so in that sense, I kind of started the solution of Tala in a very manual way, you can say, uh, before realizing oh, this is a much more systemic issue. But by doing this across nine countries, I was presented with the fact that this is a global problem. And for me it really stemmed from well, I just need to prove the potential and what's missing really was identity and the ability to prove that potential in a In a form of data, the same way that you and I have credit scores. That is what I saw was missing in these markets. Yeah.

So all right. Let me understand the problem, right?'Cause in the United States or in in most Western countries, if you run a business and you want to take a loan out There are banks and you apply and they write a credit check. And you either get a loan or you don't, and it can be several thousand dollars to hundreds of thousands of dollars to millions, depends on what you do. In these countries you are visiting.

Is there even a structure like that? And presumably there is. Presumably There's banking systems where you could formally apply for a loan. There are there are banking systems, and But when we think about how those systems have been built, they've been built in such a way that it's really focused on I would say the formal customer, the customer that has a credit history. They have paperwork they can bring in, they have national IDs, and the point is that when you look at these individuals that are underestimated, they're really thin filed and in some cases no file. Yeah.

And so there are no paper receipts. There's no database that shows how they've spent their money or how much they're earning. So you were working on these projects in these countries in Africa. And tell me somebody you came across who I don't know where you started to connect the dots and you thought

This person could use a small amount of money, like a under a thousand dollars. Yeah. So the example that always comes to mind for me is a woman that I lent to directly, her name was Seema and she lived in Chennai in India. And the thing about CEMA that was so fascinating was that You know, she was like many other women in her community, or even on the same block in that community, they were running tile businesses. She was firing tiles in a kiln. In a kiln. Exactly. And she was then hand painting them. Oh wow. And what was kind of entrepreneurial about Seema, though, was that not only did she run her tile business,

But she had a side jewelry business. Wow. She would sell bangles and accessories and bindies. And the reason for that was she was also someone in the community that helped organize weddings. And so I felt like she was pretty entrepreneurial. She's got the side hustle in addition to her business. I also saw the fact that firsthand she was saving money for her son to take a vocational training course. And so she was also saving money consistently. I saw that she paid her bills consistently. And then I also saw that she really understood where to buy inventory, what price she was buying it at, and what time of the month she was actually buying that inventory. And so I saw all of these behavioral characteristics of someone that would be likely to repay. And I also saw that she had the capacity to repay

This small dollar loan. So I'm curious, she is somebody who you came across her and She essentially said, I could really use more cash to buy more inventory, to buy more products. I mean Essentially her cash flow from her tile business and the and the jewelry business wasn't enough to buy the materials. If only she could get five hundred dollars or whatever to buy more materials she could grow her business. Exactly. So for her, she was turned away by traditional lenders in Chennai. She was turned away for those small dollar loans. And it was one, because she didn't have the necessary paperwork,

But the other aspect of it was that a lot of times the loan officers would actually just turn to me and say It's funny. CEMA is not credit worthy. We can't lend to someone like this. This is not our customer. And I kept hearing that phrase. This is not our customer. Yeah.

So From what I understand, you essentially decided to be the bank. You decided to just blend her A few hundred bucks. And uh what did you do? Did you sort of work out a repayment system? I did. So I decided to become the lender. I lent to Cima. I started lending to hundreds of other people as well in the community, and essentially came up with what I thought the risk calculation would be based on that firsthand or in person data that I was seeing.

Mm. And by the way, you were doing this with your own money? I was doing this with my own money. Wow. So I mean if it's a hundred bucks here or fifty bucks there, probably over time you were lending out maybe ten thousand dollars or more. It's true. While I worked at the UN, I was traveling market to market. So I was in a new country every four to five months and I was lending to people when I was there. And so at that point, I think I was probably about five, ten thousand dollars in. And I started to have some aha moments or realizations and kind of opened my eyes to what I was actually doing to do the underwriting.

We're gonna take a short break, but when we come back, more from Shivani about how her company, Tala, is working to support underbanked populations around the world. Stay with us. I'm Guy Raz, and you're listening to How I Built This Lab. Welcome back to how I built this lab. I'm Guy Raz, and I'm talking with Shivani Sroya, the founder of Tala,

A financial technology firm that helps provide microfinance loans. So You're starting this really cool program, I mean it's so cool. And what did it mean if you were to lend fifty or a hundred or two hundred dollars to a micro entrepreneur? What were they doing with that money? They were expanding their businesses. And something that I still think a lot about is

Yes, access to capital is definitely something that is not equitable across the globe at this point. We know the majority of individuals lack access to formal financial services, as we know them, so credit products, savings products. But for me the thing that I was seeing firsthand was a change in confidence and a change in their own agency. And so the fact that someone was willing to believe in them and that I wasn't just turning them away. That is what I saw actually change their businesses the most. So what was I'm curious.

out of the let's say I don't know what hundred, two hundred people you lent to while you were working for the UN Population Fund. What was the default rate? I had I would say a less than five percent default rate. Wow. And how would you figure out your interest rate? What did you charge them?

It really depended on, you know, what I saw as the tenor of the business. Um, I was really trying to assess how fast did I think that they could actually expand that business. But I would say anywhere between five percent up to about fifteen percent. Well. And how did you manage this. I mean, this is like we're talking about two thousand eight, two thousand nine when you're doing this.

You were just manually keeping up with it and you'd go in person and visit these lenders and uh You know, once a while it's like, Hey, I'm here to collect my payment. Is that sort of how you did it? It is. Uh I was obviously in their stores, so I was interviewing them about their businesses, their cash flows, and so in every country, I was interviewing I would say about five hundred people. And so I was actually seeing them very regularly, but the point is actually that I started to actually get help from the community organizations. From the local NGOs who caught wind of what you were doing.

Exactly. And that was also how I started to meet customers in these countries. So the project I was working on required me to get that input data. And so I needed to work with these community organizations to start to interview the customers on their cash flows. And so through that experience, I kept meeting more and more customers and being able to assess or compare, I would say, micro entrepreneurs to each other. So you sort of launch this project and you start to see some real impact. And by the way You never intended this from the beginning to be a charity. I mean,'cause some people might have said, Shivani, why don't you just like just raise money and just give people grants? Like why was it important to make it into

A loan that would be repaid. So when I was doing this while I still worked at the UN, for me it was well, we are exchanging value. I am giving you value to grow your business. And so as a result of that, we're partners in this. Yeah. In terms of kind of the future of the solution, I also knew that I had to create something scalable because again, I'm one person, my savings was limited. And so at some point it would run out and I needed to find a way that others would actually do what I was doing. So eventually w this idea kinda planted in your head.

you decide to start a business around this. Now before we get to the business that you started, which is Tala. We should mention there's a very famous microfinance organization called Grameen started by Mohammed Yunis, I think in Bangladesh. And he won the Nobel Prize for that. Um And they're huge. They're all around the world and they do this work. Tell me about what you wanted to do.

Was it gonna be Pretty much the same thing that they do, or was it gonna be different? It was going to be different because What I saw working in traditional microfinance was Access to small dollar loans that were helping individuals start to move from that day to day to moving to this place of opportunity.

But what I saw was that traditional microfinance was essentially assessing their risk or kind of solving for that risk calculation by putting individuals in a small group. So using social pressure to actually guarantee the loan. So you're in a group of let's say six other women, if you default the five other women are then liable for your loan. Yeah. And so it created a very sticky experience and high repayment rates.

But What I saw as one of the gaps was that when one of those individuals, let's say, had more potential to grow her business than the others, she was still not able to go into a traditional institution because she didn't have that identity that she could just stand on on her own. And so that lack of data was what I saw as the missing bridge between traditional microfinance and the formal banking system. All right, so you decide to create this business around

small dollar lending. And um The idea was to help them develop a credit score initially. That was exactly it. Yeah. It was to develop a credit score. And what I would say is actually it wasn't to really solve this problem of How do we provide access to small dollar loans? It was really trying to solve the system problem in the sense that what I really wanted was that these individuals could actually just one day walk into a bank that they had a credit score like the rest of us. And they do that by borrowing money from you guys and paying it back.

On time. And that essentially would start to help them develop a paper trail. Exactly. So the idea was could we start to develop a credit history by using let's say the loan repayment data, but for me it was actually what's the underlying data? So that same data that I saw firsthand in Chennai or in all of these countries, that daily life data that I was using to do the underwriting and then lend to them was What I was really after was how do we gather data? And I didn't know what kind of data.

But I had this hypothesis that it was this daily life data could actually be turned into credit scores and then we could make lending decisions. And the kind of turn for me was realizing I could only get this data if I was actually willing to give value up front. Hm. I know you're in four countries. You're in Kenya, the Philippines, India, and Mexico. How does it work? I mean, what happens? Let's say you have a bakery in Kenya. And uh you

have no access to capital What do you do? You would go to the Google Play Store, you would download our app, and you would give us access to key pieces of information. Things that allow us to really understand what your capacity is. So we're wanting to understand things like consistency of bill payments. Uh we want to understand your deposits.

Essentially, how do you make money? You answer a bunch of questions on the app, right? Exactly. So you go through about eight to ten questions within the app, and we're really trying to understand how fast you go through it, what is your behavior, how do you engage with those questions, and also questions like what are you using your loan for? And then that allows us to then credit score you and then from there We provide you with access to capital. So I know it it right now it's just on Android and that presumably because of the vast majority of people in the developing world use Android phones. Yeah, exactly. There's two billion individuals in emerging markets that have Android devices. But it's also in terms of just the price point. You know, now you can get a smartphone for under twenty five dollars in these countries.

Yeah. So what I'm curious about is you sort of answer these questions, but there's no documentation. You're not uploading a screenshot of anything'cause They're literally just answering these questions and you're just hoping that they're truthful or assuming they are? Yeah. Well, I would say two things. One, we are uploading the front and back of a national ID. Right. So that's the first thing. Uh the second thing is we're asking them to take a selfie because we do want to verify identity. So we do want to make sure that you know the person answering the questions is the same person whose phone it is. So we are essentially Yeah.

The other thing is when it comes to verifying the self reported data, the That is one of the things that we understood about these markets is when you pay your phone bill, you are getting a text message back. that confirms the receipt of your payment. When you get a remitance, you get a text message that confirms that you received that remitts. And so what we do is with the customer's permission, we actually parse for that transaction data. And so that allows us to really tie together that understanding of, is it realistic that what they say they're using their loan for is what they're using it for? Is the income that they're stating the same as what we can understand or the proxies of data that we have to understand that? And so again, there are different elements to this, but at this point we are majority using our own proprietary data and our understanding of their behavior more than transaction data even.

All right, so they go on and they get approved. I read something like eighty five percent of them get approved within minutes for a loan. It's true. And it's also actually that eighty five percent of them get money in their accounts in under two minutes. And so imagine, you know, you go from the Google Play Store, you answer eight to ten questions, and then right into your mobile wallet, you have money in under two minutes. And I don't have access like that. So they have bank accounts at traditional banks or this is a wallet inside the app? This is a wallet inside the app, or it could be, you know, collected in cash at a bill payment center, a remittance center. You know, obviously the travel time is what would take them more, but in terms of our delivery, it's under two minutes.

So you can basically get this deposit into your wallet in the app and then how do you spend that money from the app? Is it just like electronic cash or like sort of Apple Pay has it work? It is. So in markets like the Philippines, our customers can pay bills, they can send money to other family members, they can cash out, so they can go to a seven eleven and actually withdraw physical cash as well. What's the average amount?

But people are borrowing. So at this point on a monthly basis I would say it's between one hundred and fifty to two hundred dollars. And how long do they have to repay them, generally? It can go anywhere between one day all the way up to one hundred and twenty days. Hm.

How does the interest payment get I mean, I guess the interest is determined by the sort of the risk of the lender, or how do you decide what they're gonna pay in interest? We do our own credit scoring, but essentially it's tied to is this a first time customer, is it a repeat customer? Right. You know, we've developed something called custom due date, allowing our customers to have the power of choice in their hands. And so depending on how long they want to keep out the capital or how much they want to take out. It's really again allowing them the flexibility to choose. And so by creating something that is so customized, it's almost creating something as credit that you're paying for in the moment. So it's pay as you go credit as opposed to these kind of fixed terms that you know we're all used to. Given that many of your customers don't have bank accounts.

And they're operating on a cash basis. So they might get the loan from you and then they might go to seven eleven and pick up the cash. How are they repaying the money? Are they doing it the same way? Are they going to a seven eleven and handing it handing cash over? They are. So they are going into a bill payment center, a remittance center, a convenience store like you mentioned. Some of them are doing bank transfers. But the majority of them are doing it in person in cash.

Well. And the ones that do it digitally, where does the money come from? I mean if they don't have a bank account. Are there other options they have to repay through the app? So they may not have a bank account, but many emerging markets now do have mobile wallets. Right. So a market like Kenya has M Pesa, the Philippines has G Cash.

And we are integrated with each of those wallets. And so what we did was in the early days we said we need to be where our customers are. And so we actually became, I would say at this point, probably the most interoperable lending company that there is where we can work in cash, traditional bank accounts, mobile wallets, and then we have our own wallet infrastructure as well. We're gonna take a quick break, but when we come back, more from Shivani Saroya, the founder of Tala on expanding the future of microfinance. Stay with us, I'm Guy Raz, and you're listening. to how I built this lab. Welcome back to How I Built This Lab. I'm Guy Raz, and my guest is Shivani Saroya, the CEO and founder of Tala, a company that makes microfinance loans to entrepreneurs around the world.

From what I gather, right, the global market for microfinance is massive. I mean it's From what I've read it's projected to be like over three hundred billion dollars in twenty twenty six, so that's a pretty big global market, right? You know, obviously there's good to be done there, but there's money to be made there as well. Exactly. And if we think about this population that are currently operating outside of our traditional financial system. And so if we can give them purchasing power, imagine what it does for these economies. Yeah.

So I know by this point you have raised hundreds of millions of dollars to finance And presumably the money that you raise, I mean that's the bank. That's what you're lending out, right? It's a mix. So we've raised our own equity capital that allows us to again continue to expand geographies, expand the product set, so into things beyond credit. And then we've also raised specific debt facilities for each of our markets. So give me a sense of how people are using it. I mean are there some specific examples of entrepreneurs just top of mind in how they're using this service right now?

Definitely. So we've got a woman named Amy who's in the Philippines. She's a single mother and she uh was dependent on remittances historically to be able to get by on her day to day expenses, but then also run her food business on the side. And what was interesting is for her during Covid, she actually saw a huge opportunity to increase that food business because of the lockdowns in her community. And so, you know, people weren't able to go outside of the community. And so she wanted to find a way to be able to expand and Her family members were not able to send the remittance and so that's when she came to Tala. And so as a result of her Tala loan, she could expand her business and now she actually talks about it as she has peace of mind. She's not having to, you know, think about the day to day or how she's gonna make those bill payments, but she is actually now on to setting up her second location. Yeah.

So now you are in these countries, you've got This service that's available to micro entrepreneurs.

And now let's talk about the business side of what you do because obviously there's a mission and clearly the mission is central to what you're doing. You want to build more entrepreneurs who will then hire people and expand their businesses out and that's good for communities, right? But you have to run a sustainable business. And I know you've raised money from a lot of different some really significant venture funds and and other places. At what point does Talib actually become Profitable. So when it comes to our portfolio, we are profitable.

Oh wow. I mean, I think again, this is this is really critical to us and to myself because the point is to show that these customers are consumers just like the rest of us. And so the way we service them and their ability to repay us is actually extremely important to proving that this business model actually works and that these customers are worth focusing on. And what happens to You know, eventually is the idea that these micro entrepreneurs'cause I think that's what you call them, the idea is eventually they've built enough of a record that when they actually need to take out a thousand dollars or five thousand dollars, they will be able to do that because they have this credit history now. I would say yes, the goal is in markets where there are bureaus, we are already reporting back to them. So that we are really creating that trail for them or that credit history for them. I would also say that we've continued to evolve our product. And so in that sense, as our customers grow and their needs grow.

So beyond just the uh I would say working capital needs, but actually savings, insurance, bill payments. We've continued to evolve our product and also increased the loan sizes as well. So I know you're in four countries. You're in Kenya, the Philippines, India, and Mexico. Presumably there are a lot of regulatory challenges, right? You know, you need access to other lending institutions or financial systems in order for your money to be transferred to the lenders and also for them to be able to spend it. What are the plans to expand beyond these four countries? Yeah, at this point, I would say that, you know, our addressable market even across these four countries, we're looking at

already about seven hundred million individuals. Wow. And so, you know, for the next I would say year, we are staying really heads down and really ensuring that we are really moving beyond credit, that we are providing our customers with that full holistic set of financial products that they need and that we are that financial partner to them. From there, once we've really understood how they engage with things like savings and credit and bill payments all together, Then we want to bring that entire package to new markets. And give me a sense of what you imagine this to be. I mean What could Tala be in

You know, in the developing world. I think of Tala as a financial ecosystem that works globally. And so in that sense, I would say similar to how we think about entertainment. I want to make sure that every customer really has a customized path within their financial lives. And so each one of us has different needs, has different aspirations. And so I want us to be a financial partner that really understands them from that person up. And then from there, we're able to create different journeys within the Tala ecosystem. So some may start with credit. And some may start with savings, or some may start with a credit card. But the point is that there are different paths and ways to stay within this ecosystem.

Hm. I'm curious, by the way. How many Loan defaults can you absorb. And still be profitable like five percent, seven percent, ten percent.

So our global default rate is actually less than seven percent. Four tala. Well. And so that's small enough where the repayments

More than cover. The losses. Exactly. And for us, the way we think about this is it's a lot about retention. So it's really about ensuring that we're not taking a transactional approach to our customers' financial lives. We're trying to create a relationship with them. So we're not trying to make as much money as we can on our first loan. We're really thinking of this as we want them to stay with us. And so over ninety-seven percent of our customers will come back for a repeat interaction with us. Well.

As traditional blenders. in these countries start to see the success of what you're doing I mean, is it changing how they're operating? We have seen traditional banks trying to come downstream, but what I would say is they're still limited by the data side. So again, the kind of data that Tala is using is very different than what a traditional bank is used to. And so in that sense, they can't completely overhaul their entire system because for them, they're still making the majority of their money on the Prime customer. And so it still doesn't make a great business case for them to go downstream to where we are.

And then in addition to that, it's not just about the data, but it's about the experience that you're providing your customer. And so to serve the underserved customer, you have to really think about what are the different payment options I want to put in place? How do I support this customer so that they have the ability to repay? Right? How do I chunk it out? How do I stay top of mind? How do I show them the importance of a repayment and what it could lead to? But that is really around again. Designing that journey and that ecosystem to really cater to each individual in this segment of the population. It's just such a cool thing. I mean, essentially this is a massive, massive untapped market that you're tapping into. And presumably I mean I know that there are others trying to tap into it as well.

Mm. It is. I mean if you think about the numbers, we've now served, you know, over seven million with access to credit, so it's about three and a half billion dollars in total at this point that we've dispersed. So that's just a drop in the bucket. Yeah. Shivani, thank you so much. Thank you.

Hey, thanks so much for listening to How I Built This Lab. Please do follow us on your podcast app so you always have the latest episode downloaded. If you want to follow us on Twitter, our account is at HowI Built This, and mine is at GuyRoz. And on Instagram, I'm at guy.Roz. If you want to contact the team, our email address is H I V T. at id.wondery.com This episode was produced by Carla Esteves with editing by John Isabella. Our music was composed by Ramteen Arablui. Our audio engineer was Patrick Murray. Our production team at How I Built This includes Alex Chung, Casey Herman, Chris Massini, Elaine Coates, JC Howard, Liz Metzger, Josh Lash, Sam Paulson, Catherine Seifer, and Carrie Thompson.

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