Airfox Brings Financial Services & Blockchain to BrazilBy Jules Schwerin
What began as an ad-tech play to offer affordable mobile services in the US has evolved into an Ethereum-based mobile financial services company to allow unbanked Brazilian consumers to “skip the bank” and access financial services. A few weeks ago, I had the chance to catch up with Victor Santos, CEO of Airfox.
The original idea and founding of Airfox
The genesis of Airfox was in 2015, when Sara Choi (Harvard ‘09, Harvard Business School ’19) and Victor Santos (Berkeley ‘13) met while working at Google. The duo, who had both previously founded telecom-based startups, had the idea to make mobile services more affordable by allowing wireless carriers to monetize their networks with a new ad product they would build. By allowing wireless carriers to monetize Airfox’s ad-serving technology, they could create a new revenue stream, pass savings to consumers, expand access to cellular service, and increase subscriber retention for telecom companies.
In January 2016, Victor and Sara relocated to Boston to pursue the venture full-time. By March, the team had raised a small round of venture capital from Right Side Capital Management and by August, Airfox was accepted to Techstars, subsequently closing a $1.1MM round. But the team soon discovered that long sales cycles and customer purchasing traits would make scaling the venture challenging.
As Victor Santos recalls, “we realized that the number one reason for mobile carrier churn was a consumer’s inability to pay their bill, generally due to adverse life events. This wasn’t a mobile access problem, it was a capital problem.”
Reconsidering the Business Model
Upon that realization, the pair reconsidered the business model and discovered an opportunity: the data they were collecting could accurately predict when a consumer was about to churn, and they realized that could be a hugely valuable insight with implications outside of telecom. Instead of using carriers as a channel to sell an advertising product, Airfox decided, they would focus on the core issue affecting consumers: efficient access to capital.
Santos, a native of Brazil, understood that the country needed financial services disruption. The CTO, James Seibel, was well versed in the Blockchain space. So began a plan to use the blockchain to enable the unbanked of Brazil to access financial services and “skip the bank”, Airfox’s new motto.
The Brazilian Context
Brazil, the largest country in Latin America, was particularly attractive to Airfox for several reasons. With a population of around 200MM and around 198MM smart phones, Brazil is the largest mobile internet market in Latin America. Further, unsecured loans represent $56BN of outstanding debt priced at over 200% interest, generating 70% of the credit industry’s interest margin while only comprising about 15% of all outstanding debt obligations. Credit card APRs considered to be “low” still scratch at triple digit interest rates, with some as high as 696%. Bloomberg estimated credit card rates in Brazil are around 38 times higher than the US. This is partially due to the fact that nearly 40% of Brazilians are “unbanked” or otherwise excluded from the financial system, including the credit bureaus needed to assess consumer credit risk. Many Brazilians rely solely on cash for most, if not all, of their financial transactions. A huge market with heavy mobile adoption, Brazil is a country whose consumers need new financial products like AirFox. It is a textbook example of a market craving disruption.
Airfox and AirToken Launch in Brazil
Airfox believed that if they could get the Brazilians who operated in the cash economy onto their digital wallet, then they could use the data to generate a credit score and efficiently devise loan portfolios. Their first challenge was figuring out how to onboard a cash economy to their digital wallet. They turned to Boleto, an existing federally regulated system. Boleto allowed Brazilians to use one of 40,000 points of sale to deposit cash and essentially ‘wire’ that money to the intended recipient. Used by millions of Brazilians to pay many recurring bills like rent or utilities, Boleto became the financial infrastructure behind Airfox that would convert physical cash to digital currency. However, executing the pivot would be costly, and the team would need to raise more capital. As Santos recalls, “we had to figure out if we would go back to our VCs or look to an ICO (initial coin offering) since we knew we would leverage the blockchain with the pivot. It was a really tough decision but I think an ICO was inevitable.”
“We had to figure out if we would go back to our VCs or look to an ICO (initial coin offering) since we knew we would leverage the blockchain with the pivot. It was a really tough decision but I think an ICO was inevitable.”
Victor Santos, Co-Founder and CEO of Airfox
In October 2017, the company successfully raised $15MM via its AirToken ICO. By February 2018, they had launched the new Airfox app in Brazil, receiving 10,000 loan applications in just the first day. As of this article, Airfox has deployed over 1,000 loans to hone the credit scoring algorithm. By the end of the second quarter, Airfox aims to have 10,000 active digital wallets and 2,000 loans. Once their credit scoring algorithm is perfected, Airfox envisions allowing third-party lenders onto the platform to provide liquidity and increased access to credit markets at reasonable rates.
Issues to Overcome
While the company has seen significant traction, Airfox must resolve several challenges before scaling. According to Santos, the number one issue on his mind is perfecting the credit scoring algorithm. To scale, Airfox will need to permit third-party lenders to join the platform. To succeed, they’ll first need to generate a credit score that’s at least as trustworthy as that of a traditional credit bureau. Proof via their own proprietary lending on the platform that the algorithm works and can scale as new users and lenders join is critical.
Another risk is volatility. Cryptocurrencies are notoriously volatile. Because Airfox is an intermediary between Brazilian Real, which consumers deposit and spend, and AirToken, which Airfox uses on the backend to transfer assets, they could find themselves taking on significant exchange risk. This risk has the potential to materially impact the company’s unit economics. While Santos plans to address this via use of variations of Stablecoins, they are still very nascent in the Blockchain ecosystem and will need careful monitoring for effective hedging. If the company is unable to effectively hedge, they could drive lenders off the platform and be left with little liquidity.
Further, Airfox’s ICO thrusts the company, along with many others, into an almost wholly unknown regulatory environment. As a US-based company, they’ll be subject to the whim of the IRS, SEC, and alphabet soup of other agencies once the federal government articulates a stance on whether certain ICOs are securities. This uncertainty along with other signaling concerns could also affect Airfox’s ability to raise follow on funding from the traditional venture sources.
Last but not least, there is certainly no shortage of competition in the space. After all, this is a text book example of a market ripe for disruption.
Airfox has had quite the journey, starting as a US-focused mobile ad-tech company and pivoting to address the needs of unbanked Brazilians. Along the way, the team’s ambitious management team has had some major victories, including raising two venture rounds, launching two distinct products and conducting an oversubscribed ICO. The performance has been impressive, and the future looks bright. But a long road fraught with uncertainties awaits them. Their mission, to bring financial services to the bottom of the pyramid in emerging markets, is laudable, lucrative, and difficult. Keep your eyes on these folks.