Latitude Financial Services chief executive Ahmed Fahour says the major banks are surrendering the personal loan market, allowing the non-bank lender to rapidly grow market share ahead of a potential ASX listing.
Revealing a new buy-now, pay-later product for Harvey Norman that will challenge Afterpay and Zip, Mr Fahour said Latitude – which could be valued at over $4 billion on the public market – had become the third-largest provider of new personal loans.
This saw it leapfrog two of the major banks over the past year, as its market share lifted from 8 per cent to just under 13 per cent, while the total market contracted by a third.
“That’s phenomenal in one year. What happened in the last 12 months is the major banks have pulled back; there is 30 per cent less new money for unsecured personal loans. Clearly the majors have pulled back in a major way,” Mr Fahour said after the launch of LatitudePay at the Harvey Norman store in Auburn, Sydney.
“We are seeing huge amounts of applications of better quality than we have seen in the past, which is great for us, but an ominous sign for others.”
He said the big banks were delaying due to a more conservative risk profile since the banking royal commission, which had increased the time to get applications approved as more information was sought from borrowers.
The comments came after Mr Fahour announced with Harvey Norman executive chairman Gerry Harvey and CEO Katie Page a new buy-now, pay-later service, first revealed by Chanticleer.
It will allow approved Harvey Norman customers to pay for goods under $1000 in 10 instalments. Like Afterpay, it’s free for customers who pay on time. But it’s being pitched as a cheaper option for merchants: there is no fee for transactions under $250, and about 2 per cent of the cost of goods for amounts above that up to $1000. Afterpay charges about 5 per cent of the cost of goods sold, for mostly small purchases.
Latitude expects to name more big retailers as accepting the product in the coming months. It is not expecting to make material revenue from it but sees it as a way to acquire future customers for more profitable personal loans and credit cards.
Mr Harvey said he expects the payments deal to support sales in a soft retail environment, and he was forced to support buy-now pay-later, given the massive take-off in younger customers paying via smartphones with instalment plans.
“To me, it’s amazing how many people have embraced this. We have no alternative to embrace it. We will see what happens to our sales – we will promote the daylights out of it, we will be telling people this is a good deal,” he said. During a three-minute segment on Sunrise with Mr Fahour on Tuesday morning, 300 customers signed up.
Revealing how the pitch for any Latitude float has been influenced by rising community expectations on all lenders after the banks suffered at the Hayne royal commission, Mr Fahour said Latitude was all about “responsible shopping”.
Unlike Afterpay, he said it would conduct checks of prospective customer credit files before providing credit. (Zip also conducts credit file checks.) The credit checks will take Latitude 90 seconds.
“This is credit,” he said. “Some people call it a budgeting tool. That’s a fancy marketing word. They are borrowing money. It’s a small amount, I grant you that, over a very short time period. But I as a parent, I want to know when my children are accessing this credit, the person giving them the credit is bothering to check if they can pay it back. That, for me, is the single biggest difference between Latitude and [Afterpay].”
Community groups are cautious about another ”buy-now, pay-later” offer entering the market. “This business needs to be regulated. The facts are, buy-now, pay-later providers are giving loans to people who can’t afford them, they are not doing income verification,” said Peter McNamara, CEO of Good Shepherd Microfinance. “We deal with low income earners, our clients are living below the poverty line on welfare or Newstart, and 89 per cent of the clients in one of our programs have two or three buy now pay later facilities.”
Latitude has capped its late fee at $10 for purchases less than $50, and at $50 for transactions up to $1000, which is lower than Afterpay. “I don’t want that revenue – that is a bad sign,” Mr Fahour said. “Young people make mistakes and you have to look after them.”
When Latitude tried to float in late 2018, sceptical investors suggested it was lending to more risky customers, but Mr Fahour said on Tuesday the numbers suggest otherwise. “Our credit quality is excellent,” he said. He described the 2.6 million customers as “middle Australia”.
“Our 90-day delinquencies and default rates are at an all time low. Where we are today is slightly better than we were three years ago. That’s telling you all the business we are taking on now is a higher quality than we had. Which means traditional bank-like customers, who are not able to get a credit card, personal loan or car loan – and they are not as brand-loyal as our parents’ generation used to be.”
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Responding to Treasurer Josh Frydenberg’s call for companies to lift investment to support the economy, the former Australia Post chief fully endorsed it. “We have doubled capex in the last 12 months, because we see so much opportunity,” he said.
Ms Page said Harvey Norman was confident that LatitudePay would not extend credit to customers who should not be receiving it. She said Harvey Norman in New Zealand had been using Genoapay, which Latitude bought a year ago, for five months and “it is really important that our partner in this space is doing the right thing by the consumer”.
The technology has also improved Harvey Norman sales in New Zealand. Mr Fahour said there was a 20 per cent to 30 per cent increase in the sale basket for online sales for customers using the Genoapay app, and 90 per cent of customers were new customers to the Harvey Norman website.
Mr Fahour declined to provide any clear details on a potential float, saying that was a decision for the three major shareholders – KKR, Varde Partners and Deutsche Bank – to make at the timing of their choosing.
Sources close to the advisers say Brexit is a concern, and any deal would need to get it away by the end of October to avoid the situation of it launching into market volatility should there be a hard Brexit.
“My job is to make this company IPO-ready so when they make that decision, we are ready to go,” Mr Fahour said.
“Do we need more time? No – we have been doing this for 30 years, we know exactly what we are doing. We are modernising, and making it digital.”
He said Latitude will continue to price aggressively to cut into the majors’ market share, flagging coming announcements are “that are going to further to show we are open for business, and we would love to do business with anybody who is rejected by their bank”.
As it relates to the new payments products, brokers may be interested in whether Latitude has plans to create a revenue stream from retailers for purchases under $250 in a few years, given it said on Tuesday there will be no merchant fees for purchases under this amount “until 2021”.
This article was first published by The Australian Financial Review. Read the original here.
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