Interview: CTOS Digital (CTOS MK)

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I recently had the great pleasure of speaking to Malaysian credit bureau CTOS Digital's (CTOS MK - US$353 million) new CEO, Ankur Sehgal, in a call organized by independent research platform Smartkarma.

He comes from a banking background. And he's provided a vision for the future that promises a higher return on equity than in the past. The call also emphasized the growth potential in the Philippine and Indonesian operations, as well as cost cuts.

1. CTOS Digital is a Malaysian credit bureau

First, let's talk about what CTOS does. It's a Malaysian credit bureau, a sector that I wrote about back in May:

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In short, credit bureaus aggregate data on the creditworthiness of borrowers, whether individuals or corporations. They then sell this data to lenders, which typically include banks and other financial institutions, as well as companies that extend trade credit.

CTOS's business model fits the profile of a typical credit bureau. It's accumulated 30+ years of data on over 5 million consumers and over 20,000 companies. Its customers buy credit reports for loan origination, to track the quality of a loan portfolio, to assess counterparty risk, to comply with know-your-customer (KYC) regulations, etc. It also offers fraud/identity solutions.

The company has made two major investments. One is a 49% stake in the Experian-linked company JurisTech, a software platform for loan origination. The other one is a 25% stake in Thai corporate credit bureau Business Online (BOL TB – US$123 million), a partner to Dun & Bradstreet.

Yet, CTOS's exposure remains almost completely Malaysian:

By product segment, CTOS focuses on the following:

• The credit reports segment is about selling credit reports on individuals. Banks buy them before extending loans, and individuals sometimes purchase them themselves.
• The business information segment is about selling credit reports on companies to other companies. Counterparties will want to know whether the company they're extending trade credit to can repay the receivable, for example.
• Then, CTOS provides decision analytics, including CTOS consumer credit scores, predictive scoring models, and other decision tools, which customers use to make better decisions.
• Finally, CTOS provides identity and fraud solutions, including know-your-customer checks, identity verification, and fraud screening for companies and individuals.

As you can see, CTOS is no longer just about providing data on historical payment behavior or corporate accounts. It's incredibly helpful to provide customers with credit scoring models based on its own data that help them make faster, better decisions, as well as comply with stringent financial regulations.

2. CTOS Digital's competitive advantages

The beauty of the credit bureau model is its scalability. Producing and selling another credit report costs practically nothing, which means that incremental margins tend to be high. As such, they can end up with incredible operating margins, as high as Singapore's Credit Bureau Asia's ~50%.