If you missed the webinar with Kestrl's co-founder, Areeb Siddiqui, we’ve summarised some vital information about Kestrl in a Q&A session.
1. What was the motivation for you founding Kestrl rather than focusing on Islamic finance rather than another area?
Kestrl: The motivation behind Kestrl came from a personal place of frustration, straddling between having a successful career in financial services and management consulting and working in a non-Muslim friendly environment - from riba to drinking culture to every time I used my debit card So that was really the impetus for me doing an MBA. I took a year out to study towards an MBA at the University of Cambridge, which I was fortunate enough to get into. I had no real intention of trying to return back to financial services, but that's when I met Daeng Termizi, my co-founder. He had worked in financial services, but in a very different context in Malaysia, where Islamic banking and Islamic finance were the norm. He really opened my eyes up to how things could be very different. That's when it really came into my head that perhaps I was led down this path for a reason - perhaps I worked in financial services with some of the leading wealth management firms and wealth tech firms, so that I could combine my skill sets with other people who are knowledgeable in the space to try and solve a problem for Muslims around the world, starting with right here in the UK. So that was the reason behind it.
2. Most banks have their own banking apps, distributing products directly to customers with IT teams working on the apps. What advantage do you provide them?
Kestrl: Most conventional banks have their own apps, but a lot of Islamic banks are not in that position. When we actually went through the top 250 Islamic banks, the vast majority of them - I think 85% - were not in a position where they had any decent kind of app out in the market. Specifically, we're looking at Malaysia, Indonesia, Pakistan, Saudi Arabia, Bangladesh, and the UAE. If they did happen to have an app, it was very, very basic - just a debit card linked to an app. Their ratings in the App Store and Google Play were typically terrible, and they had no additional features. What we saw as the norm with Monzo, Barclays or NatWest had not reached these countries yet. We saw an opportunity - our consumer app that we built in-house with our own tech team for the UK, was a solution that we could give to these banks who did not have the internal tech capability, and whose budgets were not being allocated to feature improvements within their apps.
We are now at this turning point in these Muslim countries - Malaysia, Saudi, Pakistan - where central banks and the regulators are issuing digital banking licenses, driving change and want to see more focus on the consumer and protecting the consumer, and the large incumbent banks - Islamic banks - are scared of falling behind.
3. To summarise, Kestrl has two product offerings: one for budgeting for consumers and a digital integration platform. Could you touch on that and summarise the sizes of those two offerings in comparison to each other?
Kestrl: We have a consumer app here in the UK that you can download and try for yourself. The app started as a budgeting tool, but we are now launching an auto-saving feature, an investment marketplace and a stock screening tool. It was really an innovation hub where we trialled different things to see what Muslim consumers in the Western world really wanted.
This new opportunity for B2B came to us when banks liked what we were doing. Bank Islam, in particular, said they wanted us to power their banking app. This opened a new door for us, and we saw that we could make a lot of money in the short term by catering to these banks. Alhamdulillah, we went from bleeding money and considering a significantly larger raise to acquire customers to overnight profitability.
So that's what we're focusing on for the next 2 to 3 years - acquiring more of these banks. Meanwhile, we are experimenting with our consumer app in the West. We are about to launch Kestrl Eggs, an auto-saving feature, as well as introducing auto credit scoring, where we can provide people with credit scores based on their transactions, budget, and ability to repay their rents. This is a popular product right now, and many banks in Saudi, in particular, are looking to focus on it. So, the majority of our focus will be on B2B for now.
4. What is the overall risk profile with rolling out with the banks if the banks fail? How is Kestrl protected?
Kestrl: The main risks of partnering with these banks are around the contract timeline. Right now, our contracts are 12-month rolling contracts, with automatic renewal and a break notice period of 6 months.
The risk there is lessened because as soon as they've plugged in with Kestrl, it takes about three to six months to actually get up and running with us. Then it goes live to the consumers so they can not offload Kestrl without consumers having to see a real lapse in features, which would be a very poor customer experience, and people would be very confused as to what was going on as they try to offboard us.
To mitigate the risk of banks failing, our plan is to try and offset that by catering to a number of different banks and a number of different geographies. We have 19 different banks in our pipelines from 5 different countries, including Pakistan, Saudi Arabia, the UAE, Bangladesh, and Indonesia.
So it is our intention by the end of the year to have at least one bank in each of those geographies, which will offset and diversify some of the risk.
5. You presented year 1 to 6 graphs with profitability. Is this futuristic, and is there a reason for the increase in year six?
Kestrl: We are set to make about £16,000 in profit by the end of this year. In Year 2, we think we can continue strongly by acquiring four new banks by the end of the year and continuing with our bank acquisition. In Year 3, we are predicted to make a slight loss as we focus on expanding into new markets and accelerate marketing activities.
We have been accepted to a fantastic accelerator, Techstars. At this point, we are focusing on inbound leads and our mentors at Techstars have advised us that at some point, inbound leads will dry up, and we will really need to spend on marketing activities in certain countries to get new banks and fintechs on board. This is why we are predicting a loss in Year 3.
The reason for the spike in Year 6 is that we want to move to a different business model. Between Year 4-5, we will see pay off in Year 6, contracts will be extended, and we will be charging clients per 1000 users instead of a flat monthly cost per month. As new users are onboarded, we will bring in significantly more revenue from our client banks.
At the moment, we are using our flat fee model due to our current status as a new player in the market, relative to larger players like Oracle. By Years 4-5, we will be established enough that we can start introducing those more heavy-hitting financial models.
6. You mentioned that banks had poor user experience. So what do you do differently to improve that for your banks that are your clients?
Kestrl: We conduct deep research into the customer segments to understand exactly where their pains lie and what features they would like to see. More often than not, users are looking for more spending insights and a way to save towards their goals. They don't want to go into a clunky app and have to look around for a product they may not be eligible for.
Currently, users that do want to apply for a loan or mortgage have to go into a branch, fill out paperwork, and then wait 2 to 3 months before hearing back on their approval. Unfortunately, this is the experience in most Islamic banks, whether it's in the West or in the Muslim world today.
Our approach to putting out a solution is customer-driven and always problem-led. . Our app is completely led by what users are telling us they need, which is increased financial literacy and knowledge around how to save towards their goals and grow their wealth in the future.
7. Will you consider making Kestrl an Islamic bank or providing debit cards, etc., in addition to providing software?
Kestrl: Our initial vision for the app was to be the Monzo for Muslims. There are two reasons we pivoted from that: Firstly, we realised that launching a digital bank is very capital intensive. Monzo, Starling and Revolut have all raised hundreds of millions, because they required huge amounts for customer acquisition.. The average customer acquisition cost for issuing a new debit card is anywhere from £250 to £750 per user, and it takes a very long time to actually make that money back.
Secondly, we carried out a nationwide survey once we were at Cambridge to gather ideas for the Islamic fintech space. We interviewed 1,500 people around the country, and whilst 90% of them said they were interested in Islamic finance and they wanted a way of avoiding riba, fewer than 4% were interested in a debit card as the primary solution.
It was a nice and easy solution, but not a debit card as it exists today. They were at the time very happy keeping their money and the likes of HSBC or Barclays as opposed to moving all of their money into a no-name digital bank. So if the time is right, we might want to do that.
It's also worth pointing out that, of course, Wahed is rolling out new debit cards. They have the capital and experience in order to make that work and get those growth loops going.
Rather than being another player getting into digital banking, we want to be able to support Wahed with our expertise and really make that work together. Instead of many people trying to do this and launch their own digital banks. I think a collaborative effort is what's needed because it's a very expensive solution, a digital bank, and there's a lot of financial literacy required, which in itself is very expensive.
8. What is your current operating profit or loss for the current financial year? In addition to that, you're raising £2 million right now at a £10 million valuation. So how was that valuation determined?
Kestrl: For this tax year, we are projected to make about £16,000 in profit with our contract with Bank Islam signed in June of last year.
There are two ways to determine the valuation. Firstly, we performed a discounted cash flow model where we looked at our current cash flows and projected those based on the financial model. We discounted that based on a projected exit multiple and discount ratio, and we arrived at a little over £10 million. Secondly, we actually received an exit offer late last year from a large Islamic bank that is really keen on acquiring us and this technology so that competitors couldn't make use of it. The offer they gave us was £10 million, and it was when due diligence was taking place with WahedX. These two things came together to justify the £10 million valuation.
9. You're raising £2 million in this round. How will this be used?
Kestrl: The majority will go towards expanding our team of people. Our team is working flat out at the moment to cater to this one bank and to maintain our consumer app. We expect to land our next bank in Q2 of this year. As soon as we do that, we won't have capacity unless we significantly expand the team. Specifically, we need new data scientists, UX designers, and backend engineers. We need that money to hire new people and also to better reward these people so they don't get poached. We lost a brilliant data scientist who, honestly, I think he's going to go off and start his own company someday, and it's unfortunate because that kind of talent is very easily poached since they have no shortage of options. In order to retain this high-performance team, I want to be able to better reward our existing team.
The second part is marketing activities. We expect our inbound leads will dry up at some point. So we want to do more marketing activities in the B2B space, holding large events and Islamic banking conferences in Malaysia, Indonesia, and Pakistan. That is what we have on the roadmap for this year to really cement the Kestrl brand. When people see the name Kestrl, they immediately think, "they are powering Islamic banks. I get what Kestrl is trying to do to - power every Islamic bank in the world."
10. What is the long-term hiring strategy for attracting top talent?
Kestrl: Over the last three years, we have hired top talent from some of the best universities in Malaysia, including Kuala Lumpur and Johor Bahru, where our team is located. We hire people at a relatively junior level with a starting salary, and then train them in the way we want them to work, teaching them all the lessons that our CTO Irfaan and Head Data Scientist Mussab have learned in their tech careers. We found that this has been a really effective model.
Additionally, as soon as we enter a new country, we realise that we need to set up an office there and hire a local customer relationship manager, who speaks the local language. They will go out and pitch and sell for us, so they need to be more senior and have a few more years of experience in the banking space. Therefore, we hire junior employees on the tech side and more senior ones for customer relations.
11. What are the implications regarding the different markets you're looking to enter? What are the regulatory implications? Have you taken into account the effort and cost it will take to onboard and manage banks in different jurisdictions?
Kestrl: Yes, definitely. One concern is identifying which banks are cloud-enabled and which are not. Cloud-enabled banks can integrate our product quickly, almost at the flick of a switch, but we are seeing a 50/50 split between Islamic banks that are cloud-enabled and those that are not and need to migrate. This can take 12 to 24 months, meaning we would need to build features into their app onsite, which is more costly and time-consuming.
We are exploring Saudi Arabia heavily at the moment, but the country does not allow data to be moved outside its borders, which means most banks are not cloud-enabled. We have spoken to two banks in the past week that are interested in working with us, but it would require us to send a team there to build and code onto their servers for the next 6 to 8 months. This is feasible as long as the bank has the budget to cover the higher implementation fees. This is currently the biggest hurdle we face. However, if we can establish ourselves there, we will be in a prime position when they become cloud-enabled.
12. Would there be any limitations to how many banks you can onboard in a certain country? For example, let's assume Saudi Arabia. Would you be limited to one bank in Saudi Arabia, perhaps due to conflicts of interest or competition?
Kestrl: We were worried about that at first, but it certainly has not been the case in Malaysia. After onboarding Bank Islam, the first people to reach out to us were all of Bank Islam's competitors, which has helped our entrance into the market. When we went to Pakistan, we spent a lot of time in January pitching to different banks. They were very open to working with us, especially when they heard that we were pitching to some of their competitors. So it seems to be working that way. And the markets we've explored heavily, which are Malaysia, Indonesia, Pakistan, and Saudi Arabia, that may be something to think about and take into account. But I also temper that with the fact that in Saudi Arabia, an individual bank is willing to pay a lot more, some multiples of the banks in Pakistan and in Malaysia. So we are exploring ways to offset any limits on the number of banks we can onboard.
13. What was the exit multiple used in your DCF, and what was your exit multiple valuation? And in general, what do you foresee as the plan for an exit, i.e., a financial buy, a strategic buyer, or an IPO? And what are your valuation expectations?
Kestrl: The multiples we used in our DCF was eight. We hope that by the time we exit (which we are looking at within a 5- to 8-year timeframe), we will be valued at somewhere between £30 to £50 million, maybe even higher than that. We have already received exit offers. One of the big Islamic banks in Malaysia gave us an offer at £10 million. I think between the 10 to 20 million mark, we are likely to see offers from banks who want to strategically acquire us. As soon as we cross the certain points, which I think will be about £20-25 million, exit offers will most likely come from private equity firms who want to acquire us and move us into a telco or want to chop up the company as they see fit.
And if we get any larger than that, it is most likely an IPO. At the moment, we are not primarily focused on our exit as there is a lot more to be done. I think as soon as we land our next Islamic bank, if we get the four new ones by the end of the year, our valuation will go up significantly. There's just so much more of the mission that we have yet to fulfil. It's been great validation to receive the exit offers that we have already.
14. Would it be possible to know when I will be able to invest in this company and in others?
WahedX: Kestrl is open for investment on the WahedX platform at portal.wahedx.com/invest/kestrl. We are open to investors globally, excluding the US, Canada, and Japan at the moment. Those looking to invest can create an account at portal.wahedx.com.
If you are outside of the UK, we may request additional documentation in the onboarding process.
15. The core focus of this is to develop your B2B, as you're profitable in this area, but you are looking at a longer-term horizon of tackling the B2C market and the problems that Muslims in the West face. Could you touch a little bit on some of the other markets? Is the UK consumer market too small? What about markets like France, where there are 6 million Muslims, and Germany as well? Do you plan to solve problems for Muslims in those areas as well?
Kestrl: Yes, definitely. We did a lot of research into France, Germany, Italy, the Netherlands, Spain, Canada, and the US, in particular, as there are a lot of Muslims there. However, we found differences in the Muslim markets in each country.
A really good example is a large Islamic bank in Turkey, Al Baraka, which tried to launch a neobank in Germany, which has 6 million Muslims. They launched this bank called Insha, but it just did not take off. The reason for that is that the Islamic financial market in Germany was not as developed as in the UK, and therefore the Muslim population did not have the same level of financial literacy in Islamic financial and banking products.
Every single market needs to be looked at very carefully. We have already started this journey, looking at these markets. The next market we are looking to launch our consumer app is most likely North America. We find that the Muslim market there is similar to that in the UK, with a strong focus on faith and understanding of Islamic finance, but with higher per capita wealth among US Muslims There's something to be done there in terms of licensing and what's required. There will be the additional challenge of obtaining regulatory approval but fortunately, open banking is already prevalent in North America.
In the EU, it is relatively easy to outsource a licence or get your own licence to launch a site, even post-Brexit. Launching our app as it is today would be pretty easy, but we want to focus on launching country by country, rather than targeting Europe as a whole.
16. Apps like Monzo, Starling, and these banks were very successful with the way they marketed their products. So, how is Kestrl planning to get the word out there to have a similar level of access and success among the Muslim community in the UK and hopefully Europe and beyond as well?
Kestrl: We have had success through word-of-mouth at the moment, with on the ground marketing, speaking at universities and other functions, and inviting people to our offices for lunch or coffee sessions. We have also experimented with referral marketing and found that TikTok has been effective at targeting the younger generation. We will be exploring those kinds of customer acquisition channels further.
Another channel we are keen to explore more is through Wahed and WahedX, as there is a lot of synergy there.
17. How did you actually come up with the name Kestrl?
Kestrl: Kestrels are a type of small species of falcons native to the UK and much of the world, and they prey on other birds, including starlings. It started as a small joke in our ideation stage that we will grow large enough to take on Starling Bank. Daeng and I also learned in our marketing classes on the MBA that brand names starting with a hard ‘K’ sound seem to stick in the mind better, like Kodak and Kellogg’s.
18. What's a timeframe can investors expect if they're looking to invest in this round with Wahed X, when can they kind of expect to have the return?
Kestrl: Realistically, we are looking at 5 to 8 years, which we anticipate will give us enough time to build up a significant multiple with what we are doing with enough banks to justify that and to be well into our profit-making phase at that point.
