|09/16/2021||Australia: Prospa's $200M securitization|
|04/14/2021||Square business loans come to Australia|
|03/29/2021||Liberty Financial ramps up in Australia|
|02/16/2021||Ex-Funding Circle CRO heads to Australia|
|02/12/2021||Amex launches SMB loans in Australia|
ODX, OnDeck Canada & Australia
Think you’re well-versed in the SMB finance business? You might want to take advantage of a fast pass being offered to replicate your success in the UK or Australia.
The opportunity stems from a proposal posted on LinkedIn by Capify CEO David Goldin. Goldin’s got two decades of experience in the business itself and 14 specifically in the UK/Australian markets. Now he’s looking to personally select a handful of brokers and/or small funding companies and guide them on expanding their business overseas.
Goldin believes that US operators could bring a certain dynamic lacking in the other markets, complete dedication to a single product where there is a lot of opportunity. “There’s very few MCA shops there,” he said. “Very few of them that are MCA-only companies.”
And so the dedicated MCA broker shop is something uniquely American and could prove to be a potent model if applied abroad. Brokers do play a major role in those markets but they’re a jack of all trades, Goldin explained, offering every product there is, resulting in limited throughput for a single core product. Markets like the UK and Australia offer some unique advantages in that they’re English speaking and the products themselves are already established. Goldin said that there’s an opportunity for US operators that “know how to sell risk-based capital” to come in and leverage the Capify infrastructure and intellectual capital.
To be clear, he’s not talking about sitting in an office in New York or Miami and calling business owners in Sydney and London, but about actually opening up a local office in those markets.
“You got to have a local presence,” Goldin said. “A remote company doesn’t work. You need to actually be there.”
All this would be set up and developed with the guidance of Capify, a benefit that would shorten the learning curve of doing business in a new market. “There’s a lot of stuff to navigate,” he said. “Different regulations, different rules, different clients.”
deBanked first began exploring the Australian market in 2015. At the time, there were about 20 alternative lenders operating in the country. Since then the market has flourished. The population of Australia is only 26 million people, about two-thirds that of Canada, but Goldin said that it’s not as competitive.
“The US is bigger but also 50x the competition,” he said.
Shopify Capital originated $507.6M in merchant cash advances and loans in Q3, up from $416.4M in Q2. The increase was assisted in part by the company’s expansion into Australia, bringing the total countries that Shopify funds in to four (US, UK, Canada, AUS).
Shopify is the largest e-commerce platform after Amazon but the two companies are in the same ballpark when it comes to lending originations, and Shopify is potentially doing more.
Shopify generated total revenue of $1.4B in Q3.
“In Q3, we delivered another solid quarter of GMV, revenue, and gross profit dollar growth against the high inflationary environment,” said Amy Shapero, Shopify’s CFO. “From an operational perspective, we recalibrated our organizational structure, successfully rolled out a new compensation framework, and began integrating Deliverr into Shopify. Looking ahead, the flexibility of our platform, breadth of solutions, pace of innovation, and disciplined investment approach position Shopify well to realize the enormous opportunity ahead.”
“We’re very pleased so far with the OnDeck acquisition and as we view the economic landscape, we continue to believe that it’s an excellent time to be increasing our focus on SMB lending,” Enova CEO David Fisher said on the company’s Q4 earnings call. Enova originated $120 million in small business loans in December and $95 million in November. The October figure wasn’t specified, but back-of-the-napkin math based on other provided statistics suggests it was about $54 million.
Growing those originations will continue to be their primary agenda as the economy improves, the company said, while the ODX side of the business may be shown the door.
“While ODX has been able to sign some high-profile bank clients, divesting ODX will allow for more efficient use of capital as the business has over 70 employees but less than $10 million in revenue,” Fisher said.
OnDeck Canada and OnDeck Australia may also be on the chopping block.
“The Australian and Canadian businesses are viable businesses in their respective market,” Fisher said, “but are small compared to OnDeck US operations and are unlikely to have a significant impact on Enova’s overall growth. In addition, OnDeck only has partial ownership of those two businesses.”
Meanwile, OnDeck’s portfolio outlook is improving.
“The percentage of OnDeck receivables past due 30 days and more declined during the quarter from 23.2% in closing to 15.6% at December 31,” said Enova CFO Steve Cunningham.
On the call, JMP analyst David Scharf asked when OnDeck would return to quarterly origination levels of $550M to $650M as it had been enjoying prior to the pandemic.
“I mean I think there’s just way too much uncertainty to be able to answer that,” Fisher replied. “I mean, does the vaccine work great and the economy opens up soon or is there a new strain of the COVID virus that requires lockdowns during the summer? I mean, there’s no way to know. But I think there’s a couple trends that are super encouraging for us and we saw great sequential growth as we talked about throughout the call.”
Fisher also added that they’ve seen a bunch of competitors go out of business. “We think we have a lot of share in the market that we don’t think has shrunk and so we think we’re really well positioned as this pandemic winds down,” he said.
The Australian alternative lending market continues to gain momentum, bolstered in part by increased awareness, heightened competition and growing dissatisfaction with the status quo.
Indeed, there’s been significant growth in the few years since deBanked first wrote about the nascent alternative lending business down under. Notably, Australia’s alternative funding volume surpassed $1.14 billion in 2017, up 88 percent from $609.59 million in 2016, according to the latest data available from KPMG research. It’s the largest country in terms of total alternative finance market volume in the Asia Pacific region, excluding China, according to KPMG.
To be sure, the Australian market is still relatively small—at least compared with the U.S. Digging deeper, the largest share of market volume in 2017—the latest data available—came from balance sheet business lending, accounting for more than $574 million, according to KPMG. P2P marketplace consumer lending had the second largest market volume at $256 million. Invoice trading was the next largest segment of the Australian alternative finance market, accounting for $142.65 million, according to the KPMG report.
Its small size notwithstanding, what makes the Australian market particularly interesting is the potential promise it holds for the companies already established there and the opportunities it may offer to new entrants that find ways to successfully compete in the market.
Certainly alternative lending opportunities in Australia are growing, as awareness increases and the desire by consumers and businesses for favorable rates and faster service intensifies. The Australian alternative lending market is similar to Canada in that a small number of large banks dominate the market both in terms of consumer lending and small business lending. But, like in Canada, alternative lenders are gaining ground amid a changing customer mindset that values speed, favorable rates and a digital experience.
Equifax estimates that alternative finance volume in Australia is now growing at about 10 percent to 15 percent per year; that compares to a decline of approximately 20 percent for some major traditional lenders in terms of credit growth, says Moses Samaha, executive general manager for Equifax in Sydney. This presents an opportunity for alternative lenders to serve parts of the market the banks don’t want and those that are more attuned to a digital experience.
Even so, challenges persist. For instance, digital disruptors are still working on gaining brand awareness, and the market is only so big to be able to accommodate a certain number of alternative players. Time will time whether there will be consolidation among alternative lenders and more bank partnerships, which haven’t been so successful to date. “It doesn’t feel like they are as active as they were announced to be,” Samaha says.
At present, the Australian market consists of a few dozen alternative lenders pitted against four major banks. RateSetter, SocietyOne and Wisr are among the largest alternative players in the consumer lending space. On the small business side, Capify, GetCapital, Moula, OnDeck, Prospa and Spotcap are some of the leading companies. PayPal Working Capital also has a growing presence in the Australian small business lending market.
New lenders continue to eye the Australian market for entry, but it’s not an easy market to crack, according to industry participants. The market consists of mostly home-grown players and that’s not expected to change drastically. (Capify, OnDeck and Berlin-based Spotcap are notable exceptions. Another U.S. major player, Kabbage, previously provided its technology to Australia’s Kikka Capital, but that agreement is no longer in force.)
There can be a steep learning curve when it comes to outsiders doing business in Australia. What’s more, there’s no longer the first-to-market advantage that existed a decade or so ago. It’s also a relatively limited market in terms of size, which can be off-putting. Australia has a population of around 25 million, making it less populated than the state of California, with an estimated 39.9 million residents.
Still, for alternative players that are able to successfully navigate the challenges the Australian market presents, there’s ample opportunity to grab market share away from traditional players—similar to the pattern that’s emerged elsewhere around the globe.
Take consumer lending, for example. The unsecured consumer lending market in Australia sits at about $70 billion, with the large banks occupying maybe a 90 percent share of that, says Mathew Lu, chief operating officer of Wisr (previously known as DirectMoney Limited). Compared with other markets such as U.K. and the U.S., who went through a similar journey around a decade ago, “Australia is probably three or four years into that same journey of growth. It’s shifting and changing,” he says.
Alternative lenders have made strides in undercutting the large banks by offering generally lower rates and typically faster loan times. Unfavorable press related to bank lending practices has also benefited alternative lenders. Lu refers to these conditions as “a perfect storm” for growth.
Wisr, for instance, saw loan origination volume spike 409 percent in fiscal year 2018. The company secured $75 million in loan funding agreements last year and boasts more than 80,000 customers, according to a company presentation.
Marketplace lender, SocietyOne, which in March reached $600 million in loan originations, is another example of an alternative lender that has benefited from the momentum. The company— celebrating its 7th anniversary this summer—is hoping to reach $1 billion in loans by 2020, according to its website.
RateSetter—another major player in this space—has also experienced significant growth since launching in Australia in 2014, and is now funding over $20 million in loans each month, according to its website. In April, the company soared past $500 million in loans funded and in May it saw a record number of new investors register. The company has more than 15,000 registered investors by its own account.
One question for the future is whether the consumer alternative lending space in Australia will ultimately be too crowded amid a spate of new entrants. Wisr’s Lu says “there’s a big question mark” regarding how many alternative lenders the market can sustain. “Will there be a level of consolidation or amalgamation? These are questions ahead of us,” he says.
For its part, alternative lending to small businesses is also a growing force within Australia. As a testament to the development of this market, in June 2018, a group of Australia’s leading online small business lenders released a Code of Lending Practice, a voluntary code designed to promote fair terms and customer protections. Currently, the Code only covers unsecured loans to small businesses. Signatories include Capify, GetCapital, Moula, OnDeck, Prospa and Spotcap.
Capify—an early entrant to Australia—has been pursuing businesses there since 2008. The company, which integrated its U.S. business in 2017 to Strategic Funding Source (now called Kapitus) is now operating only in Australia and the U.K. In Australia, it has executed more than 7,500 business financing transactions for Australian businesses and has more than 50 staff members in its Australian offices.
The company recently closed a deal with Goldman Sachs for a $95 million line of credit for growth in Australia and the U.K., which includes building out its broker program to increase distribution and technology investment.
David Goldin, the company’s chief executive, says Capify is hoping to grow its Australian business between 25 percent and 30 percent in 2019. The company is looking at M&A activity as well as organic growth.
Since Capify has been in the market, he has seen a number of new entrants—some more successful than others. One concern Goldin has is the lack of experience by some of these competitors. Many aren’t pricing the risk properly and not underwriting prudently to be able to weather a downturn, he says. They are so new, he questions whether they have the expertise to be able to survive a downturn given what he characterizes as pricing and underwriting missteps.
“You can’t go out 24 months on a 1.25 factor rate – that’s crazy,” he says, referring to some contracts he’s seen. “I’ve seen this movie in the U.S. before and it doesn’t end well.”
Meanwhile, competition has driven down prices and made moving quickly on potential leads more of a necessity. When leads come in today, if you’re not on the phone in 30 minutes, you could lose it to a competitor, he says.
While the small business market is an enticing one for alternative lenders, raising awareness of their offerings continues to be a challenge.
“The small business market is fragmented and raising awareness is expensive,” says Beau Bertoli, co-founder and co-chief executive of Prospa, another prominent small business lender in Australia. “There hasn’t been much innovation in small business banking, but many Australians still don’t think of switching from banks and traditional lenders,” he says.
That said, more small businesses are turning to alternative lenders and these companies say they expect growth to increase over time. Recent research commissioned by OnDeck found that 22 percent of small and medium-sized businesses would consider an online lender, up from 11 percent in the past. This could be buoyed further by the introduction of Open Banking in Australia, which was set to be introduced in Australia in 2019, but this was pushed back to early 2020.
“We look forward to the introduction of Open Banking in Australia as it should allow lenders to use incremental data points to improve risk modeling, and increase competition in the SME lending space, ultimately providing SMEs with improved access to cashflow solutions to grow and run their businesses,” says Cameron Poolman, chief executive of OnDeck in Australia.
Bertoli of Prospa, which recently listed on the Australian Stock Exchange, says the Australian alternative lending market will also benefit from strong support from industry and government to increase competition and improve consumer and small business outcomes. The government recently established a $2 billion Australian Business Securitisation Fund, which is a huge win for small business, he says, that will ultimately make the finance available to small business owners more affordable by lowering the wholesale cost of funds for alternative lenders. “We expect this will boost credibility and consideration of alternative lenders among small business owners,” he says.
Declining property values is another factor helping alternative lending. “In November 2018 we saw the largest annual fall in property prices in Australia since the global financial crisis in 2009,” says Simon Keast, managing director of Spotcap Australia and New Zealand.
“As property prices decline, business owners find it more difficult to use their home as loan security and as such, turn to alternative lenders such as Spotcap that can provide them with unsecured loans for their business,” he says. What’s more, the SME Growth Index in March showed for the first time that business owners are almost as likely to turn to an alternative lender as they are to their main bank to fund growth, says.
Overall, the market opportunity for alternative lending to small businesses is compelling, says Bertoli of Prospa. “We estimate the potential market for small business lending in Australia is more than $20 billion per annum and we’ve penetrated only about 2 percent of the market so far. There are 2.3 million small businesses in Australia, and they’re crying out for capital,” he says.
Keast of Spotcap says he expects to see more banks and non-financial enterprises looking to leverage the technology fintech lenders have built to provide swift and digital lending products to small businesses. He offers the example of a partnership Spotcap, a German-based company, has with an Austrian Bank to provide same-day finance to SMEs in Austria as an example of the types of partnerships the company could also seek in Australia. “We have already partnered with an Austrian Bank that is leveraging our lending platform to provide same-day finance to SMEs in Austria, and there is plenty of interest for similar partnerships on the ground here,” he says.
OnDeck, meanwhile, expects to see a shake-out within the alternative finance sector, which will result in a smaller number of bigger players, with the ability to scale and serve multiple customers with a variety of products, according to Poolman, the company’s chief executive.
For his part, Goldin of Capify is bullish on the Australian small business market, but he cautions others that it’s not a gold rush type of place where everyone who comes in can make money.
“The state of California has more opportunity than the entire continent of Australia,” he says.
Another online small business lender has gone public. This time it’s Australia-based Prospa, a company founded in Sydney in 2012. Prospa offers daily and weekly payment business loans with terms from 3-24 months and competes with companies like OnDeck and Capify.
Earlier this year Prospa surpassed $1 billion in loans funded to 19,000 small businesses. In a 2015 interview with deBanked, cofounder Beau Bertoli said, “The market in Australia has been very ripe for alternative finance. We see an opportunity for the alternative finance segment to be more dominant in Australia than it is in America.”
Prospa was slated to go public on the Australian Securities Exchange last June but it was cancelled in dramatic fashion 15 minutes before being listed as rumors swirled that the Australian Securities and Investments Commission (ASIC) had questions about their business practices. By September, Prospa agreed to revise its loan disclosures to be more fair. Those revisions were published by ASIC.
Prospa’s IPO raised AUS $110 million and was valued at AUS $610 million. The share price jumped nearly 20% in early trading on Tuesday.
OnDeck announced today that it has closed on a $75 million (AUD) asset-backed revolving credit facility with Credit Suisse for its business in Australia. This will be used to refinance OnDeck Australia’s current loan book at a significantly lower cost, as well as to fund future originations there.
This comes shortly after Lending Express CEO Eden Amirav told deBanked that the success his company had in Australia in just a little more than a year gave them the confidence to enter the U.S. market.
“After the immense success we’ve had in the Australian market, we knew that our platform was ready to take on the U.S.,” Amirav said in June.
And several large fintech companies, including OnDeck, joined forces this month to create a set of best practices, called The Code, that would regulate how fintech companies operate in Australia. The market down under has seen a fairly rapid expansion over the last several years.
Some of the major fintech companies there include Prospa, OnDeck, Capify, GetCapital, Moula and Spotcap.
Six small business fintech lenders operating in Australia, including OnDeck, have signed a self-imposed “code of best practice lending principles,” according to a recent statement from Prospa, one of Australia’s largest online small business lenders. This comes shortly after Prospa paused its June IPO, having received a letter from the Australian Securities and Investments Commission (ASIC) requesting information.
Possibly in response to ASIC’s inquiries into the Prospa IPO, what has emerged is a code of best practices signed by Prospa, OnDeck, Capify, GetCapital, Moula and Spotcap. This set of self-imposed rules, referred to as the Code, has not yet been solidified, but it already includes a number of constituents in a highly collaborative effort.
The six small business signatories will be contributing to the Code, along with a trade group for the Australian finance sector, the Australian Finance Industry Association (AFIA), the Australian Small Business and Family Enterprise Ombudsman, Kate Camel, the Bank Doctor, an SME advocate, and FinTech Australia, an industry association. According to the Prospa, the Code will be fully operational and enforceable by December 31, 2018.
“Our Online Small Business Lender Group members have embraced the sentiment of improving transparency and disclosure and took proactive action to come together quickly and collegiately to develop a Code,” said Helen Gordon, CEO of AFIA.
Acknowledging that small business lenders are already subject to rules from a number of regulatory bodies, the Prospa document stated:
“This Code is a proactive move to pull the obligations of online small business lenders together into one document. This makes it easier for current market participants and will also help new entrants understand their obligations.”
Already, some of the central elements agreed upon in the Code include:
- The introduction of a pricing comparison tool providing key metrics that will allow customers to compare the cost of unsecured loans from the signatories (including the total repayment amount, APR, simple annual interest rate)
- An easy-to-understand loan summary
- A glossary of key terms in accessible language that applies directly to online small business loans
- Signatories must attest their compliance with the Code on an annual basis
According to the Prospa statement, the Code was modelled after best practice examples and feedback from the US and UK, where the online lending industry is more developed.
This list of tenets already seems quite progressive, or onerous, depending on who you ask. The notion of introducing or requiring a price comparison tool is a hot button topic here in the US. Requiring that loans and merchant cash advance products be labeled with an APR or an Annual Cost of Capital (ACC) is what the state of California is moving towards with a highly contested bill that passed in the state assembly committee in June.
Proponents of the bill SB 1235, introduced by California State Sen. Steven Glazer, want to make certain that all small businesses can easily understand and compare the cost of loan and finance products. Opponents of the bill, many in the merchant cash advance industry, insist that a requirement like this amounts to shutting down their industry because a precise APR or ACC cannot be applied to a cash advance product given that the product depends on the duration of the deal, which is variable.
While not as formal, some efforts in the U.S. are also being made by alternative finance industry players to self-regulate. In May, the Small Business Finance Association (SFBA) announced the launch of an initiative called the SFBA Broker Council, which has a mission to create standards and best practices for brokers.
PayPal didn’t offer precise quarterly origination figures for its “Working Capital” loan product on Tuesday, but it did reveal total originations since 2013. The number? 1.3M loans for a total of $25.6B across the US, UK, Australia, and Germany. Though there is an international component, the totals are higher than rivals OnDeck and Square Capital over the same time period.
“PayPal Working Capital (PayPal Funding Pro) expanded to France and the Netherlands,” PayPal said in its Q2 announcement, “providing SMBs with simple and flexible funding in minutes.”
The company’s small business lending operations draw little attention given that its payment business, which includes Venmo, is so massive. The size of it first became known in 2019 when it offhandedly claimed $4 billion in annual business loan origination volume for the year. That number shrank to $2.6B in 2020 during the pandemic, which was still more than all of its competitors.
In the US, its loans are actually made possible through WebBank.
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