Inside Australia’s roaring fintechs
Their numbers have soared from 100 in 2014 to more than 700 today – some firms will consolidate or be taken over, but most of them will fail; Asiamoney meets three startups that seem likely to stay the course.
It took a fateful dinner party in Hong Kong for Aris Allegos to realize he was overdue a career change.
Allegos had been working for more than a decade in international debt markets; four years with Dresdner Kleinwort Wasserstein in London, and then in Hong Kong with Nomura and Credit Suisse. These were high times for the London Business School graduate, much of it spent at the peak of the credit boom. A fixed income specialist, Allegos had structured deals for some of the world’s biggest companies and enjoyed the fat fees that came with them.
But after seven years in Hong Kong, Allegos was feeling burnt out and increasingly disconnected from real life. A dinner party in 2012 crystallized all that.
“My friend’s teenage daughter complained that she didn’t have the same Prada handbag as her schoolfriends,” remembers Allegos. “You don’t get that in Wheelers Hill,” he says, referring to the unremarkable Melbourne suburb where he grew up.
“I just pulled the ripcord and came home… without a job, looking for something different.”
That moment would lead Allegos to found Moula, considered one of Australia’s buzziest fintech lenders.
Moula (the name is Australian vernacular for cash) is one of a bunch of Australian fintech startups offering capital to small and medium-sized businesses through proprietary apps.
Australia is the most active fintech lending market in Asia-Pacific after China, according to a KPMG study of the region’s fintech market published in November.
In 2017, the most recent year reviewed, Australian lenders raised $1.14 billion, up from $610 million in 2016. KPMG noted that balance-sheet business lenders accounted for the biggest share – $574 million in 2017 – ahead of peer-to-peer consumer lending and invoice trading.
Common to the sector, Moula’s lending is all unsecured, an area once considered the wild side for commercial financiers. Allegos insists his background “as a credit guy” keeps Moula’s books in order. In the four years since Moula made its first deal, it has disbursed a total of about A$250 million ($183 million) – roughly the size of a single bond deal when he was working at Dresdner or Nomura. But Allegos has no regrets about walking away from his international banking career. “I’m having the most fun I’ve ever had in a job,” he says. “It’s very invigorating.”
While working abroad, Allegos had been intrigued by the way that technology was transforming the banking industry, and he kept up with industry trends, even studying platforms that he considered outside his remit, such as M-Pesa in Kenya.
Moula’s Aris Allegos, Piers Moller and Andrew Watt
Back in Melbourne in the middle of 2013, he connected with another Australian he knew from Dresdner, Andrew Watt, who had returned home from manning Royal Bank of Scotland’s corporate credit desk in London.
The two were joined by Piers Moller, a British techie with a history of building in-house bank backbones.
Allegos’ target is small businesses: a costumier who needs to stock up ahead of a Halloween rush; an importer who has lucked onto a cheap source abroad and needs cash quickly to clinch the deal; a self-employed tradesman tooling up for a new contract while waiting for a backlog of invoices to clear.
Roughly 80% of Moula’s loans are for less than a year.
Financing SMEs is a no-brainer, says Allegos.
“It’s probably because I’m an immigrant,” he says, self-mockingly. “What else am I going to do? It’s just in the DNA; Greek immigrant family, my parents were small business owners, my aunt is a small business owner. Small business is clearly where we were going.”
Unlike pioneering Australian fintechs, such as Sydney-based P2P matching lender Society One, Moula takes on the credit risk itself.
“We’re lending off the balance sheet,” says Allegos. “I think it has enabled us to scale up quicker.”
Unlike its peers, Moula isn’t run out of a funky converted warehouse at a hipster address. Moula’s 55 staff toil away at an office in the besuited heart of Melbourne’s central business district, barely a minute’s walk away from the headquarters of National Australia Bank, one of the big four that the fintechs are taking on.
Ten floors above Moula is the head office of Sherman Ma’s Liberty Financial, which led an A$30 million debt-and-equity funding round into the young fintech in 2015.
Moula’s first deal in June 2014 was an A$20,000 loan to a Melbourne business selling fancy dress costumes, a punch-the-air moment for Allegos.
“It was very exciting,” he recalls. “The deal went through the platform, not perfectly but good enough, and it was happy days. He paid us back within a month, and then he came back again.”
The money-making bit is that we still charge interest but we are getting these repeat borrowings. Because we price further down the curve, our defaults are always going to be lower - Aris Allegos, Moula
Why didn’t Moula’s first borrower, that costumier, use a traditional bank?
“Because his ability to obtain that level of funding, even in 2018, is really challenging. The big banks won’t do that type of business as easily as we can. That’s our opportunity. We can provide an answer and disburse the money inside a day.”
A Moula loan is fee-less.
“The money-making bit is that we still charge interest but we are getting these repeat borrowings,” Allegos says. “Because we price further down the curve, our defaults are always going to be lower.”
Allegos claims Moula’s loan default ratio is lower than conventional banks.
The bulk of Moula’s portfolio is for short-term growth capital, and Moula’s rates are on a par with bank lending.
“Our pricing is (in the) teens within our prime portfolio, well within the consumer code caps rates,” Allegos says, referring to federal legislation that limits the level of interest rates charged to Australian borrowers.
Customer lending data has been jealously protected by Australia’s big four banks – NAB, Westpac, CommBank and ANZ. Allegos says this dearth of credit information provides an opportunity.
“I said to myself, I know a little bit about credit, I should build my own credit model,” he says. “If you were to bring out a lending platform that relied on bank transaction and (credit) bureau data, you are effectively going to have too limited a data source, so you are always going to be playing at the riskier end of the curve.
“It sounds really obvious, but where we ended up was that we needed the accounting data of borrowers – balance sheets, P&Ls,” he says. “That enabled us to come down the risk curve and lend into a more mainstream segment at better prices.”
Allegos says Australian fintech is evolving rapidly, to the point where there is now segmentation with fintechs operating at different pricing points along that risk curve.
Although he praises Australia’s current conservative government for taking steps to open credit records beyond traditional lenders, Allegos is no fan of the four pillars policy that has protected the big four lenders for almost 30 years.
“It’s a joke, the fact that the government has let it run like that,” he says. “We have this royal commission where everyone says: ‘Oh all this misconduct is terrible’. But it’s like ‘f*** you government’, you are the ones that created this, you’re the ones that gave them too much power.
“Years of policy created this beast,” he adds. “But I shouldn’t complain. It’s the reason we exist, why our platform is what it is.”
Four years on, Allegos reckons Moula is here to stay. His investors are happy, he claims, and the business is profitable. So, is this disruptor a seller, perhaps to one of the big banks?
“I can’t see that happening,” he says. “We might be a buyer, but a seller? It’s not part of the discussion.”
When Jamie Osborn launched Sydney-based fintech lender GetCapital four years ago, his responses to the inevitable ‘what-do-you-do?’ questions about his job reveal how far Australian fintechs have come.
“I used to say I was a banker,” says Osborn, now 46; it was a holdover instinct from his 15-year international – Singapore/London/New York – investment banking career with JPMorgan and Macquarie, Australia’s home-grown, millionaire factory.
Then his rejoinder progressed to an altruistic: “I work for a financial company helping small business.”
More commonly, Osborn tells anyone asking that he works in technology-enabled finance. And, increasingly, it’s: “I help run a fintech,” he says.
“That’s getting more recognition,” he admits.
Osborn’s evolving small talk is a measure of how fintech lenders such as GetCapital are making inroads into an Australian lending market dominated by the big four.
Launched in Singapore in June 2014, GetCapital has since lent a total of A$350 million to SMEs in Australia. Osborn claims that makes GetCapital number two in Australia’s fast-expanding, fintech SME lending space behind Prospa, which pre-dates GetCapital by three years.
“We’ve reached critical mass,” Osborn says. “The bank funding doesn’t come in until you do. They want to see three to four years of strong performance and they want to see scale.”
Tie-ups with National Australia Bank and investment manager Challenger seem to prove that point.
A balance-sheet lender, GetCapital offers trade finance, asset capital and working capital. Osborn’s lending sweet spot is the niche between A$75,000 and A$200,000, but his average disbursement is closer to A$40,000, and he has a lending limit of A$500,000.
“We are focused more to the prime end of the spectrum,” says Osborn. “We see ourselves as playing a role somewhere between the banks and the fintechs.”
Osborn says his clients can’t find credit with traditional banks at GetCapital’s optimal funding niche without “providing them the keys to their house”. GetCapital’s loans are unsecured but borrowers are required to commit to guarantees.
GetCapital’s platform means it is nimbler than a bank, he says: “Borrowers could possibly go to a bank, but it’s going to be a lot of red tape and it’s going to maybe take three weeks, at least a week. We can have money in your account the same day.”
I’ve been surprised how quickly our business and the sector has been embraced. It’s happened much faster than we first imagined, and with that has come more regulatory scrutiny - Jamie Osborn, GetCapital
While GetCapital’s raison d’être is its proprietorial cloud-based online platform, Osborn is no tech snob.
“If a potential client wants to talk to someone here or send in paper-based statements, we’ll find a way to manage that,” he says. “We’re a finance provider first, then a technology company.”
A typical GetCapital user, Osborn says, is an online retailer of bicycles who has sourced a supplier for an A$200,000 batch in China.
“We’ll fund that deal, and we’ll also fund the supplier in China,” Osborn says.
That client will likely have applied for a loan through the platform at 7am before going to work, to seize an opportunity that might have arrived in his inbox overnight.
“If we wait until 6pm that day to give him an answer, he could’ve lost that deal. He’ll want an answer that day to make that order at that price, and we are mindful he could be on the shop floor for much of the day.”
Even though its focus is Australia, GetCapital was conceived and started operating in 2014 from Singapore, where Osborn was based with Macquarie.
“Investment banking can be a tough grind,” says Osborn, “but I spent a number of years looking for an opportunity in fintech. I toyed around with various niches, before alighting on the SME offering.”
From Singapore, Osborn had covered India’s call centre and data-outsourcing sector for Macquarie, advising on mergers and takeovers in the area.
That brought him in touch with Amba Research, which had pioneered outsourced equity research in Asia, from facilities in India and Sri Lanka.
“I wanted to try to replicate what Amba built and apply it to SME lending,” he says.
By 2016 he had left Macquarie and with co-founder Frank Sterle, a former investment banker at Deutsche Bank Singapore, had re-based the company in north Sydney. A third founder, Kamlesh Singh, came on board from Amba and today runs GetCapital’s credit analysis team from Bangalore.
“The original plan was for a pan-Asian play,” says Osborn, “but we saw such strong growth in Australia and New Zealand that we decided to concentrate on these two markets.”
Four years on, GetCapital has 105 staff, of which 60 are in Sydney and the rest are in Bangalore. “We boot-strapped it early on. It was largely my money and some friends and family,” Osborn says. “We ran the business for 18 months before taking any external equity.
“I’ve been surprised how quickly our business and the sector has been embraced,” he adds. “It’s happened much faster than we first imagined, and with that has come more regulatory scrutiny.”
To that end, Osborn has taken a prominent profile as an industry booster and, in part, advocate for its regulation.
It’s a natural evolution, he says, an insurance policy as fintech gets taken seriously and is more widely adopted. With fellow fintechie Lachlan Heussler of Spotcap based just a few blocks from GetCapital, Osborn has been active in getting industry peers to sign up to a fintech best-practice code of conduct.
“We actually wanted something that is clear, in black and white, and says this is what we are going to do,” he says.
Australia’s painful royal commission into banking misconduct has prompted some fintech navel-gazing. While the commission’s findings have not directly involved the fintech sector, Osborn sees the code of conduct as crucial to help ward off a possible market backlash.
“I think if we line up our code against the (traditional banks’) code of banking practice, we go a few steps further,” Osborn says.
Signatories to the code so far include GetCapital, Capify, OnDeck, Moula, Prospa and Spotcap.
Osborn says a best-practice code will also help as the fintech industry really starts to eat into the market share of the big banks, which currently operate under the government’s four pillars policy, and this will inevitably prompt a bite-back from conventional banks.
He also expects consolidation in fintech as laggards struggle.
“I think you will start to see some activity, with smaller players selling their loan books when they can’t scale, potentially some players buying capability, for example a merger of a debtor finance player and a fintech lender,” he says.
But four or five years down the track, he predicts that fintechs will command a market share of between 10% and 15% of all SME lending.
At that point, Osborn says, “I’m not sure you’ll hear much about the four pillars policy anymore.”
Prospa is the fintech that other Australian fintechs love to hate – whether that’s because of Australia’s tall-poppy syndrome, or plain envy.
Prospa was the first Australian fintech to attain critical market mass, the first to book A$500 million in loans, the first to post A$100 million in revenue, the first to make a genuine profit and the first – almost – to float on the Australian Stock Exchange.
Adding insult to competitors’ injury, neither of Prospa’s joint bosses, Greg Moshal and Beau Bertoli, had conventional banking backgrounds, unlike the founders or executives at other fintech promoters such as Moula and GetCapital.
Moshal ran his own laundry chain in his native South Africa, while Bertoli was in the business of car-fleet services and logistics, among other pursuits.
While competitors toil from utilitarian offices in unfashionable locations, they envy Prospa’s workspace in Sydney’s hip Darlinghurst, with its work pods, themed after-work drinks and karaoke and, of course, a mascot dog with a Latino name, a cavoodle called Carlos. MTV is a neighbour – yet another reason for rivals to be jealous.
So, when Prospa’s much-hyped A$576 million IPO was pulled in June, just 15 minutes before Bertoli and Moshal were due to ring the Australian Stock Exchange’s debut bell, rivals could barely conceal their schadenfreude.
The attempted float was a disaster. A few days earlier, Australia’s market regulator, the Australian Securities and Investments Commission, had demanded that Prospa provide more clarity on the terms of its trademark SME loan contracts.
It also seemed an odd time to be floating a financial-services firm of any stripe. The wider industry was – and remains – under reputational siege from the near-daily revelations of the royal commission into financial-sector misconduct, which has inevitably prompted tighter across-the-board scrutiny from regulators.
Prospa initially sat on Asic’s enquiries and attempted to brush away doubters. But as speculation grew around the health of a float – backed by UBS and Macquarie – that had already raised eyebrows for its expensive pricing, Bertoli and Moshal decided to pull the plug on a deal that would have made them millions.
Co-chief executive Bertoli tells Asiamoney that halting the float “was the most difficult business position I’ve ever been in.”
We are very focused on helping our clients grow their business, providing expansion capital. That way we grow too - Beau Bertoli, Prospa
The Prospa float was notionally postponed for 48 hours, but more than six months later, the bungled listing still has not happened. Competitors are watching closely, after poring over Prospa’s abandoned prospectus for a rare peak inside a fintech startup.
“We were looking for their secret sauce,” says a competitor.
In September, three months after scrapping its IPO, Prospa responded to Asic’s probe by removing what Asic described as ‘unfair’ terms in its loan contracts. That aligned it with the big banks, with the result that the Asic directive has become something of a model for the fintech sector.
Prospa’s failed float was a pivotal moment for the Australian fintech sector. With its ubiquitous advertising, notably on the sports radio stations that are popular with tradesmen, Prospa has the highest profile of any Australian fintech.
Prospa says it accounts for about half of what would be described as fintech lending in Australia. A successful IPO would have flagged the arrival of the sector into the corporate establishment, whereas its failure reveals that the industry has some way to go.
“A lot of their recent problems have been hubris,” says one rival. “There’s a feeling that they are too big for their boots.”
Bertoli is quick to point out that acquiescing to Asic has had no impact on Prospa’s business.
“We could’ve pushed it (the float) through,” he insists. “But if (the shares) traded down, it would not have been a good start. We decided the prudent course was to pause.
“We also didn’t need the capital,” he says. “We wanted the capital but we didn’t have a requirement for the capital.”
In October, Prospa secured A$43 million in new funding, led by Australia’s biggest pension fund AustralianSuper, which joined earlier backers such as Israel’s Entrée Capital and Australian venture capital firms AirTree Ventures and Ironbridge Capital.
Since inception in 2011, Bertoli says Prospa has lent A$750 million to more than 15,000 small businesses. The average size of a Prospa loan is about A$25,000, and the company has been aggressive in targeting the hospitality sector, particularly cafes, restaurants and clubs. About 20% of its loans are believed to be hospitality related.
Its loans are mostly unsecured and from its balance sheet, charging interest rates of between 10% to 25%, depending on the deal. In keeping with its upbeat vibe, the company baulks at what it describes as negative loans, such as the consolidation of credit card or debts incurred at other lenders.
“We are very focused on helping our clients grow their business, providing expansion capital,” says Bertoli. “That way we grow too.”
Bertoli is keen to put the float setback behind him. He says Prospa quickly bounced back, selling record loans in the month after the aborted float.
“We didn’t miss a beat,” he says. “We ended up being 9% above our prospectus forecast.”
But even if egos were bruised by the float disaster, they were salved in October when local media added Moshal and Bertoli, both 35, to the national young rich list, with notional worth of A$101 million and A$45 million respectively, based on their Prospa stakes.