Story Series: australia
Capify CEO David Goldin on New $10 Million Equity RoundSeptember 30, 2020
Capify, a leading international small business lending platform, announced a $10 million equity round this week from a new investment group with vast experience in the alternative lending industry.
“[investors were] diligent seeing Capify, the management team, and the opportunity,” Goldin said. “They thought it was a very good investment, particularly how Capify’s portfolio performed during the pandemic.”
Goldin said the capital is a great “restart of the engine” after the cautious approach the company took to lending at the height of the pandemic. The money is not an equity round from current investors, but rather new capital joining the team.
The funding will be directed toward ramping lending back up and extending business partnerships with firms that serve small businesses, as well as direct and indirect lenders.
“So, hindsight is actually better than 2020 vision; no one in our lifetime has experienced the pandemic,” Goldin said. “No one knew what to expect from a risk profile, so we took the conservative approach.”
That approach was to shut down new loans and focus on servicing its current customers. It was a difficult time for the alternative lending industry veteran, but now Goldin said he sees a great demand for capital.
“This was one of the toughest challenges that I’ve experienced ever as an entrepreneur,” Goldin said. “The result really speaks to Capify as a company. People are willing to make that investment, believing in opportunity ahead and not the current times or the past during the pandemic.”
Goldin said that Capify has always been known for its well-performing portfolio, one of the reasons that in 2019 the firm received a $95 million credit facility from Goldman Sachs’ Merchant Banking Division.
Goldin began working in the fintech industry before the word fintech was even coined; in the early 2000s, he started one of the first MCA companies. Amerimerchant started selling loans and MCAs internationally in the UK and Australia in 2008, then rebranded to Capify in 2015. After leaving the US market in 2017 gained Goldman’s attention last year.
“So now that we have the firepower, we believe there’ll be opportunities in these markets as demand picks up for small business lending,” Goldin said.
Snapshot On Australia: Growth In The MakingAugust 30, 2019
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.
Prospa, An Online Business Lender, Goes Public In AustraliaJune 10, 2019
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.
Australia Brimming with Alternative Lending ActivityJuly 18, 2018
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.
Australian Lenders Commit to Best Practices CodeJuly 10, 2018
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.
Alternative Lenders Spread Their Wings InternationallyJune 20, 2017
As alternative lending gains global traction, a growing number of U.S-based alternative lenders are exploring international growth, with large companies like OnDeck, Kabbage and SoFi leading the way.
Some alternative lenders have begun their expedition closer to home by extending their reach into Canada. Others are traveling farther beyond to parts of Europe and Australia, for example, while others are eying eventual growth in Asia.
Propelling the opportunity is the fact that a number of international banks are still unprepared to offer online lending on their own and thus are more amenable to partnerships with U.S.-based alternative lenders, according to Rashmi Singh, senior manager in the wealth management practice at EY.
It also helps that the options for local partners are somewhat limited. “There are not a lot of digital lenders [outside the U.S.] at the same level as some of the folks here,” Singh says.
To be sure, international expansion requires extensive time, money and regulatory know-how, and some U.S. alternative lenders may never reach the critical scale to be able to compete effectively. Nonetheless, as globalization proliferates, industry observers expect that additional forward-thinking companies will push beyond the limits of their current geographical borders.
“The question is not if, but when (and where) U.S. fintech companies will expand internationally,” contends Ryan Metcalf, chief of staff and director of international markets at Affirm, a San Francisco-based fintech that has partnered with Cross River Bank of Fort Lee, New Jersey, to allow shoppers pay for purchases over time with simple-interest loans.
Affirm—which works with more than 900 retailers and recently announced that it had processed its 1 millionth consumer installment loan—has focused on domestic growth so far, but the company is now considering a number of options for international expansion, Metcalf says.
SIZING UP THE MARKET
Certainly, there are numerous opportunities for homegrown lenders to expand internationally given the healthy growth alternative lending is experiencing in other parts of the world. Each market, of course, has its nuances and individual growth patterns.
Europe, for instance, has seen substantial growth over the past few years, with the U.K. leading the way in alternative finance. It has four times higher volumes in aggregate than the rest of Continental Europe, according to a 2016 report from KPMG and TWINO, one of the largest marketplace lending platforms in Europe. (P2P consumer lending is the largest component of alternative online lending in Europe, capturing 72 percent of the total in the first through third quarters of 2016, according to the report.)
After the U.K., France, Germany and the Netherlands are the top three countries for online alternative finance by market volume in Europe, according to a September 2016 report by the Cambridge Centre for Alternative Finance.
Asian markets, meanwhile, show significant promise for alternative finance players to make their mark due to the sizeable population of digitally savvy consumers who are still largely underbanked. China is by far the largest market for alternative lending in Asia. It’s also the world’s largest online alternative finance market by transaction volume, registering $101.7 billion in 2015, according to the March 2016 Cambridge Centre for Alternative Finance report. This constitutes almost 99 percent of the total volume in the Asia-Pacific region, the research shows. To date, most of the growth in China specifically has been from local firms, but that could change as the market there continues to develop.
Although there are many possible international markets to explore, U.S. lenders have to tread carefully before planting roots elsewhere, observers say. Some smaller U.S. lenders may find domestic expansion easier and more cost-effective because of the time, regulatory and financial commitment that goes along with exploring international markets. It’s a lot easier, for instance, to expand from New York to California, than it is to build out internationally.
“Why take on all the added costs and regulatory pressures, when you haven’t fully explored your home market, unless the business that you’re in deems it necessary,” says Mark Abrams, partner with Trade Finance Global, a London-based international corporate finance house, specializing in crossborder trade.
“It doesn’t make sense to start as a U.S. lender, do a few loans and then jump over to the U.K,” he contends.
What’s more, foreign banks looking for alternative lending partners typically prefer to work with larger, more established players. Even though new players’ technology may be ahead of the curve, the banks still want a longer track record. “It’s reputational for these banks,” says Singh of EY.
MANY CHALLENGES TO INTERNATIONAL EXPANSION
Several alternative lenders say they see significant growth opportunities by expanding internationally. At the same time, however, they are mindful of the substantial headwinds they face.
Regulation is among the biggest, if not the biggest, challenge. A lot of firms in the U.S. have invested a lot of time and money to get up to speed on U.S. regulations. When they look to Europe or to Canada or Mexico or elsewhere, there are different regulations. “If you’re speaking to folks in three continents, now you are looking at regulations times three,” says Singh of EY.
Certainly there’s a time commitment involved; it can take six to eight months for a U.S. lender to get their U.S.–based platforms compliant with regulations in another country, she says.
What’s more, regulatory barriers can vary greatly country to country, notes Metcalf of Affirm. Take Canada for example where very low barriers to entry exist with some provincial exceptions. In the U.K., on the other hand, it can take eight months or more to receive a lending license, he says.
That’s why it’s so important for online lenders to make strategic decisions about where they want to invest their time and resources—even if they have sound technology that’s easily adaptable outside the U.S. “The minute you throw in cross-border regulations, it gets very complicated,” Singh says.
Understanding the local culture of the market you’re trying to tap is also crucial, according to Rob Young, senior vice president of international at OnDeck, where he oversees all aspects of the company’s non-U.S. expansion efforts.
Within the past several years, OnDeck has begun offering small business loans to customers in Canada and Australia. Frequently Canada is a first step for U.S. companies that want to expand internationally because of the shared language and similarities between the economies, Young explains.
After the Canadian operation was successfully underway, the opportunity arose for the online lender to expand to Australia—which shares several similarities with the Canadian market. OnDeck doesn’t break out how much of its overall loan portfolio comes from these two markets, but it has announced publicly that it’s delivered more than CAD$50 million in financing to Canadian small businesses since 2014.
“So far we’re very satisfied with the performance,” Young says, referring to its expansion into both Canada and Australia.
Young notes that while a U.S.-based alternative lender can leverage certain things like technology from a central location within its home country, having dedicated teams on the ground in local markets is also critical. Marketing and pricing all have to be competitive with the needs of the local market, he says.
In Canada and Australia, for example, OnDeck has found that the “personal element” is really important. Young says customers there expect to interact with sales representatives who have ties to the community, understand the local market and can relate to the issues small businesses there are facing.
“I don’t think you can establish that rapport if you are trying to serve them with a sales team overseas,” he says.
U.S.-based alternative lenders also need to be careful to create products that fit the culture and needs of a particular market. For instance, alternative players that focus on luxury asset-based lending would want to look at countries with high concentrations of wealth. “It doesn’t make sense to grow to a country where there’s very little wealth because you’re not going to have much success,” says Abrams, of Trade Finance Global.
Even knowing the market well doesn’t guarantee results, which Lending Technologies, a white label technology provider for the MCA space, has discovered first hand.
Markus Schneider, the company’s chief executive, is originally from Switzerland and he knows the market there well, so he set out to fill a void he saw for an MCA-like product. However, Lending Technologies, which has offices in New York and Zurich, has hit some roadblocks along the way.
“It’s a very different mind-set there. People are more risk-adverse,” Schneider says.
The company already has a Swiss distribution partner in place, but has had trouble finding a lender willing to underwrite the funds. Schneider would also be willing to work with a U.S. lender that wants to partner with Lending Technologies to provide MCA services to merchants in his home country.
“We’re going to do this. It’s just a matter of time,” he says. “There’s a tremendously underserved segment of the market there.”
FINDING THE RIGHT FIT
To be successful internationally, U.S. companies also have to be willing to shift gears as needed when things aren’t working out as expected.
Take Kabbage, for example. The small business lender expanded into the U.K. in 2013, two years after its U.S. debut. But the company found that having its own small business lending business in the U.K. was too challenging for regulatory and capital reasons. It no longer offers new loans from this platform.
Instead, the funding company decided that a better global strategy was to license its technology to financial institutions in international markets a less capital-intensive, yet economically sound way of doing business.
Kabbage—which recently announced the establishment of its European headquarters in Ireland—has licensing arrangements with Santander in the U.K., Kikka Capital in Australia, Scotiabank in Canada and Mexico and ING in Spain. The company plans to launch operations in several additional countries this year where banks use Kabbage’s technology to offer online loans to their clients, says Pete Steger, head of business development at Kabbage.
“We are partnering with local experts. That’s our strategy,” Steger says.
Funding Circle has also made changes to its international strategy. Earlier this year, the company—which got its start in the U.K.—announced that it would stop issuing new loans in Spain. The Spanish version of the company’s website says that it continues to monitor ongoing loans so investors receive monthly payments for the projects they have invested in.
A spokeswoman for Funding Circle said the company continues “to look at new geographies, but we have no immediate plans for expansion and are focused on building a successful business here in the U.S., U.K., Germany and the Netherlands.” She declined to comment further.
Without divulging too many details, a handful of U.S.-based alternative financiers say they continue to look at additional markets outside their home turf.
For its part, SoFi has announced plans to expand to Australia and Canada this year. The company’s chief executive has also talked about European and Asian expansion in the future.
On the international front, Affirm is currently evaluating markets that make the most sense for its business model, Metcalf says. Affirm is also looking at possible acquisitions in developed markets such as the U.K. and Sweden as well as considering “serious investment” in new distribution models in southeast Asia, Mexico and Brazil, he says.
LendingClub, meanwhile, last November announced a significant partnership with National Bank of Canada and its U.S. subsidiary Credigy. The agreement provides for Credigy to invest up to $1.3 billion over the subsequent twelve months. A spokeswoman for LendingClub said the company has nothing to share about plans for international expansion.
As for OnDeck, Young says the company is exploring a number of options; it’s a matter of finding markets where gaps exist in small business lending and where potential customers have a willingness to borrow online.
“We want to be the preferred choice for small businesses. It’s not necessarily defined geographically,” Young says. “We review markets all the time. There are a number of markets that are interesting to us.”
Alternative Funders Continue to Look Down UnderJune 29, 2016
Add CapRock Services to the growing list of US-based small business funders that have joined the scene in Australia.
CapRock has formed Sprout Funding as part of a joint venture with Sydney-based family office Huntwick Holdings. Together, they will provide small businesses with loans or revenue-based MCA products up to $100,000.
What’s truly unique is that CapRock will actually be underwriting the deals from their Dallas-based office. And they hope to fund $20 million in two key Australian markets in their first year. Luke Schmille, CapRock’s CEO, told the Dallas Business Journal that he believes the Australian market is very similar to the US. “70 percent of the population is employed by small to medium sized businesses,” he said.
Other funders in Australia that have US-backing include Capify, Prospa via Strategic Funding Source, Kikka Capital via Kabbage, and OnDeck.
Last Fall, John de Bree, the managing director of Capify’s Sydney-based office, told deBanked that he was surprised of the American interest in Australia. “The American market’s 15 times the size of ours,” he said.
One of his competitors, Lachlan Heussler, managing director of Spotcap Australia, was not so shocked. “This is a market that will evolve over time, and we think the opportunity is enormous,” he said.
In an email, CapRock’s Schmille, wrote that they were excited about the expansion abroad.
Alternative Funding: Over The Top Down UnderSeptember 2, 2015
San Francisco had its gold rush, Oklahoma had its land rush and now Australia is experiencing a rush of alternative funding. After a slow start a few years ago, foreign and domestic companies have been flocking to the market down under in the last 18 months.
As many as 20 new alt-funders are doing business in Australia, but that number could swell to a hundred, said Beau Bertoli, joint CEO of Prospa, a Sydney-based alternative funder. “The market in Australia has been very ripe for alternative finance,” Bertoli, said. “We see an opportunity for the alternative finance segment to be more dominant in Australia than it is in America.”
Recent entrants to the embryotic Australian market include Spotcap, a Berlin-based company partly funded by Germany’s Rocket Internet; Australia’s Kikka Capital, which gets tech backing from U.S.-based Kabbage; America’s Ondeck, which is working with MYOB, a software company; Moula, which began offering funding this year but considers itself ahead of the curve because it formed two years ago; and PayPal, the giant American payments company.
The new entrants are joining ‘pioneers’ that have been around a few years, like Prospa, which has been working for three years with New York-based Strategic Funding Source, and Capify (formerly AUSvance until it was consolidated into the international brand Capify), which came to market in 2008 with merchant cash advances and started offering small-business loans in 2012.
Some don’t take the newcomers that seriously. “There are small players I’ve never heard of,” said John de Bree, managing director of Capify’s Sydney-based office, in a reference to local Australian funders. “The big ones like OnDeck and Kabbage don’t have the local experience.”
But many players view the influx as a good sign. “I think it’s an endorsement of the market,” Bertoli said. “There’s more publicity and more credibility for what we’re doing here in terms of alternative finance.” It’s like the merchant who gets more business when a competing store opens across the street.
Besides, the market remains far from crowded. “I’m not concerned about the arrival of OnDeck and Kabbage because it really does validate our model,” maintained Aris Allegos, who serves as Moula CEO and cofounded the company with Andrew Watt.
The market’s relatively small size – at least compared to the U.S. – doesn’t seem to bother players accustomed to the heavily populated U.S., a development some observers didn’t expect. “I’m very surprised,” de Bree said of the American interest in Australia. “The American market’s 15 times the size of ours.”
Others see nothing but potential in Australia. “This is a market that will evolve over time, and we think the opportunity is enormous,” said Lachlan Heussler, managing director of Spotcap Australia.
Some view the Australian rush to alternative finance not so much as a solitary phenomenon but instead as part of a worldwide explosion of interest in the segment, driven by banks’ reluctance to provide loans since the financial crisis, de Bree said.
Viewed independently or in a larger context, the flurry of activity in Australia is new. “The boom is probably only getting started,” Bertoli maintained in a reference to the Australian market. “Right now, it’s about getting the foundation of the market established.”
To get the business underway in Australia, alternative funders are alerting small-business owners and the media to the fact that alternative funding is becoming available and teaching them how it works, de Bree said. “Half of our job is educating the market,” noted Heussler.
New players are building the track record they need to bring down the cost of funds, according to Allegos. “Our base rate is 2 percent or 3 percent higher than yours,” he said, adding that the cost of funds is more challenging than gearing up the tech side of the business.
Although the alternative-lending business started later in Australia than in the United States and lags behind America in in exposure, it’s maturing rapidly, said de Bree. Aussie funders are benefitting from the lessons their counterparts have learned in the U.S., he said.
But the exchange of information flows both ways. Kabbage, for example, chose to enter the Australian market with a local partner, Kikka. Kabbage learned from its earlier foray into the United Kingdom that it makes sense to work with colleagues who understand the local regulatory system and culture, said Pete Steger, head of business development for Atlanta-based Kabbage.
Such differences mean that risk-assessment platforms that work in the United States or Europe require localization before they can perform effectively in Australia, sources said.
Sydney-based Prospa, for example, got its start three years ago and has been working ever since with New York-based Strategic Funding Source to localize the SFS American risk-assessment platform for Australia, said Bertoli, who shares the company CEO title with Greg Moshal.
Moula, which has headquarters in Melbourne, sees so many differences among markets that it decided to build its own local platform from scratch, according to Allegos.
One key difference between the two markets is that Australia does not have positive credit reporting. “We have nothing that even comes close to a FICO score,” said Allegos. The only credit reporting centers on negative events, he said.
Without credit scores from credit bureaus, funders base their assessments of credit worthiness largely on transaction history. “It’s cash-flow analytics,” said Allegos. “It’s no different from the analysis you’re doing in your part of the world, but it becomes more significant” in the absence of positive credit reporting, he said.
Australia lacks credit scores at least partly because the country’s four main banks control most of the financial sector and choose not to release credit information, sources said. The banks have warded off attacks from all over the world because the regulatory environment supports them and because their management understands how to communicate with and sell to Australian customers, sources said.
The big banks – Commonwealth Bank, Westpac, Australia and New Zealand Banking Group, and National Australia Bank – set their own rules and have kept money tight by requiring secured loans and long waiting periods, Bertoli said. It’s difficult for merchants who don’t fit into a “particular box” to procure funding, he maintained. “It’s almost like an oligarchy,” Allegos said of the banks’ grip on the financial system.
Eventually, the banks may form partnerships with alternative lenders, but that day won’t come soon, in Allegos’ estimation. It could be 12 months or more away, he said.
Even as the financial system evolves, deep-seated differences will remain between Australia and the U.S. Most Americans and Australians speak English and share many views and values, but the cultures of the two countries differ greatly in ways that affect marketing, Bertoli said. “In your face” advertising that can work well with “loud, confident” Americans can offend the more “laid-back” Australian consumers and business owners, he said.
Australians have become tech-savvy and comfortable with online banking, but they guard their privacy and often hesitate to reveal their banking information to a funding company, Allegos said. The entrance of OnDeck and Kabbage should help familiarize potential customers with the practice of sharing data, he predicted.
Cost structures for businesses differ in Australia from the U.S., Bertoli noted. Australian companies pay higher rent and have to pay minimum wages set much higher than in the United States, he said. Published reports set the Australian minimum wage at $13.66 U.S. dollars. The higher costs down under can take a toll on cash flow. “Take an American scorecard and apply it to Australia?” Bertoli asked rhetorically. “You just can’t.”
Distribution’s not the same for commercial enterprises in the two countries, Bertoli maintained. Despite having about the same geographic area as America’s 48 contiguous states, Australia has a population of 23 million, compared with America’s 322 million.
No matter how many people are involved, changing their habits takes time. Australian merchants prefer fixed-term loans or lines of credits instead of merchant cash advances, Bertoli said. In many cases Australian merchants simply aren’t as familiar as Americans are with advances, Allegos said.
Besides, the four big banks in Australia tend to solicit merchants for credit and debit card transactions without the help of the independent sales organizations and sales agents. In the U.S., ISOs and agents play an important role in explaining and promoting advances to merchants, Bertoli said. Advances make sense for merchants because advances adjust to cash flow, and they help funders control risk, but just haven’t caught on in Australia, Bertoli said. Australians resist advances if too many fees are attached, said Allegos.
Pledging a portion of daily card receipts might seem too frequent, too, he said. Besides, advances are limited to merchants who accept debit and credit cards, while any business could conceivably choose to take out a loan, said de Bree.
Advances have to compete with inventory factoring, which has become a massive business in Australia, according to Heussler. The business can become intrusive because funders may have to examine balance sheets and talk to customers, he said.
Australia’s reluctance to turn to advances, leaves most alternative funders promoting loans and lines of credit. Prospa, for example, uses some brokers to that end but also relies on online connections, direct contact with customers, and referrals from companies that buy and sell with small and medium-sized businesses.
“Anyone that touches a small business is a potential partner,” said Heussler, including finance brokers, accountants, lawyers and even credit unions, which have the distribution but not the product.
Moula finds that most of its business comes from well-established companies and that loans average just over $27,000 in U.S. currency and they offer loans of up to more than $77,000 U.S. The company offers straight-line, six- to 12-month amortizing loans.
Using a model that differs from what’s common in the U.S., Moula charges 1 percent every two weeks, collects payments every two weeks and charges no additional fees, Allegos said. A $10,000 (Australian) loan for six months would accrue $714 (Australian) in interest, he noted.
Spotcap Australia offers a three-month unsecured line of credit and doesn’t charge customers for setting it up, Heussler said. If the business owner decided to draw down, it turns into a six-month amortizing business loan for up to $100,000 Australian. Rates vary according to risk, starting at half a percent per month but averaging 1.5% per month.
If companies have all of the necessary information at hand, they can complete an application in 10 minutes, Allegos said. Moula has to research some applications offline if the company’s structure deviates too greatly from the usual examples – much the same as in the U.S., he maintained. The latter requires strong customer-service departments, he said.
Kikka uses a platform based on the Kabbage model, which gives 95 percent of customers a 100-percent automated experience, Steger said. “It goes to show the power of our automation, our algorithms and our platform,” he maintained.
Spotcap prefers to deal with businesses that have been operating for at least six months, Heusler said. The funder examines records for Australia’s value-added tax and other financials, and it likes to connect with the merchant’s bank account. Spotcap can usually gain access to the account information through cloud-based accounting systems and thus doesn’t require most companies to download a lot of financial documents, he noted.
Despite the differences between the two countries, banking regulations bear similarities in Australia and the United States, sources said. In both nations the government tries harder to protect consumers than businesses because they assume business owners are more financially savvy. For consumers, regulators scrutinize length of term and pricing, sources said, and on the commercial side the government is concerned about money laundering and privacy.
Regulation of commercial funding will probably intensify, however, to ward off predatory lending, Bertoli said. Government will consult with businesses before imposing rules, he said. A couple of alternative business funders aren’t transparent with their pricing and they charge several fees – that sort of behavior will encourage regulation, Allegos said.
“I know they’re watching us – and watching us very closely,” he added.
In general, however, the Australian government supports alternative finance, Bertoli said, because they want there to be options other than the four big banks and wants small business to have access to capital. Small businesses account for 46 percent of economic activity in Australia and employ 70 percent of the workforce, he noted, saying that “if small businesses are doing badly, the economy is doing badly.”
Hence the need, many in the industry would say, for more alternative funding options in Australia.