Two new Diversified Financial offerings listing on the ASX have the potential to shake things up for money lenders in both the consumer and commercial space.

The companies are Directmoney (DM1) – a Peer to Peer (P2P) lender with a twist; and zipMoney  (ZML) – a unique online credit provider for consumers and businesses.  Both are prime examples of one of the hot long-term trends in technology – FinTech, or financial technology.  

FinTech companies are disrupting traditional financial services with the use of software and online platforms.  In truth, disruptive activity in financial services pre-dates the Internet and the extensive use of sophisticated financial software.  Dealing with traditional banks for loans has been and still is an arduous process at best.  You know the saying – you have to prove you don’t need the loan before the bank will give you one. For many, getting a loan was virtually impossible, or at best, very difficult.

Payday loans began appearing in the US in the 1980s as a means for the underserved credit-challenged to get short term loans.  Although some criticise these providers, the fact is there is a huge market of both consumers and small businesses that simply cannot turn to the traditional banking system for help.  

Even amongst the credit-worthy, getting a loan from a bank can be difficult and is far from quick.  Who would go through the hassle of going to a bank to borrow a few thousand dollars to buy the latest in HDTV technology?
For decades savvy financial service providers have been coming up with new ways to meet the needs of not only the credit challenged, but also the “buy-now, pay-later” market.  In 2006 two such companies went public on the ASX on the same day.

FlexiGroup Limited (FXL) changed its name from FlexiRent as it began offering credit services online and in major retail outlets for special financing offerings.  Money3 Corporation (MNY) offers short term loans online for personal use and vehicle purchase to a market Money3 says is ignored by traditional credit providers.  Let’s look at some numbers for these two companies:




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16 Aug 2006

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Going into this year Money3 had a better performance record than FlexiGroup, but the company is under the microscope of increasing scrutiny regarding the practices of the Payday Lending industry.  MNY has seen a bitter battle at the corporate board level over a decision to exit the Payday market, which the company has announced it will do.  This will be a phase-out, to be completed by July of 2016.  Although this remains a profitable segment, the company states its secured lending now is its highest revenue generator and has ‘significant prospects for future growth and expansion’.

While the formal announcement of the decision to exit the Payday market came on 18 November, market participants were well aware this was coming.  Despite the loss of that revenue generator, analysts are still bullish on MNY, with a consensus BUY recommendation.  On 20 November the company announced a series of capital raisings expected to net $19.3 million (before costs) with the proceeds directed at growing Money3’s secured loan business.  MNY has a trailing twelve month (TTM) P/E of 8.69 with a Forward P/E of 6.14 and its dividend yield is fully franked.  The average P/E for the Diversified Financials Sector is 16.5 with an average dividend yield of 4.5%.

FlexiGroup is broadly diversified with four operating divisions – Consumer & Commercial Leasing; Mobile & Broadband; Interest Free Finance; and No Interest Ever.  The company started in the equipment leasing business but has expanded into the mobile/broadband space and now offers financial services not available through the big banks.

FlexiGroup partners with major Australian retailers to offer their customers onsite easy credit programs.  These special financing offers are often interest-free if paid off within a specified time.  FlexiGroup also provides its merchant customers with Lay-By programs for their customers that allow customers to pay over time, with no interest charges.

Earlier in the year FlexiGroup expanded its presence in New Zealand through the acquisition of Telecom Rental NZ, and as of mid-November completed a successful capital raise to fund another New Zealand acquisition – Fisher & Paykel Finance – which will significantly expand its current New Zealand operations. The company’s dividend is fully franked.  FlexiGroup has a trailing P/E of 10.7 and a Forward P/E of 9.06.
FlexiGroup’s share price this year has been hampered by the gloomy outlook for the Australian economy, but investors liked the news of the Fisher & Paykel acquisition.  The following price chart shows the reaction to the news the deal was finalised on 27 October.

The majority of the special financing programs FlexiGroup provide its merchants go to brick and mortar retailers, with online financing available with larger retailers like Harvey Norman. 
One of the new FinTech players on the ASX, zipMoney, is about to change that. The company went public through a back-door listing on 22 September with an issue price of $0.20 per share.  The share price has been climbing ever since and now has more than doubled in price.  The closing price on 16 December was $0.42. Here is the chart.

zipMoney is going after online retailers of all sizes.  Technically zipMoney is in the loan business, but the “loans” can only be used to purchase goods from the company’s retail partners.  On checkout customers are offered a credit payment option, interest free for periods ranging from 3 to 6 months. In addition, online retailers can use the zipMoney platform to offer customers special financing deals with 6 or 12 months without interest.  zipMoney reportedly receives 2.4% of the purchase price from the online retailers.

The company also offers consumers a digital line of credit, eliminating the need for credit cards and the time-consuming task of entering card information on transactions.  zipMoney’s initial focus will be on smaller retailers but the company is not willing to cede the major retailer market to the likes of FlexiGroup.  zipMoney has a lower cost of doing business that enables lower interest rates charged to consumers.  If a purchase loan is not repaid within the specified time frame, the interest rate paid by the consumer ranges between 19.9% and 23.9%, compared to interest rates close to 30% for loan purchases at major retailers.

The company has been in business since 2013 with approximately $4 million in loans made to date.  The co-founders maintained 80% ownership following the IPO.

The other newcomer is Directmoney Ltd (DM1).  The company is a P2P (peer to peer) lender with a different business model that has huge potential.  P2P lending has been around since about 2005 and software and online platforms made it all possible.  Think of P2P lenders as matchmakers between investors looking for higher yield without the risk of equities and consumers looking for a painless way to get a loan.  The lenders recruit investors and then match them with borrowers who meet their risk criteria.  These investors build portfolios of loans to multiple borrowers.  The risk here is the investor is on the hook should the borrower default but the portfolio concept helps lessen the risk.

Directmoney pools investor funds and then makes the loans out of the funds.  In effect this spreads the default risk across all investors.  The Executive Chairman of the company has already disrupted the traditional way of doing things in the mortgage loan sector – Stephen Porges was at the helm of Aussie Home Loans whose aggressive lending practices reportedly forced the big banks to lower mortgage rates.

Directmoney has been using institutional investors for funding and now has approval to begin recruiting retail investors.  With no brick and mortar overhead, P2P lenders like Directmoney can pay investors a handsome interest rate and offer consumers a lower interest rate than traditional banks.  The company claims borrowers with good credit can get loans at 10.75%.  Credit challenged borrowers obviously pay more but Directmoney says its average rate is approximately 14.75%.  Investors reportedly earn between 8% and 10%.

The stock price has lagged after a hot start, with an opening price of $0.24 and a first day of trading close of $0.18.  The stock closed on 16 December at $0.08, a significant discount to the issue price of $0.20. 

Directmoney is the first P2P lender to hit the ASX. There are six other lenders in this market, but P2P lending is relatively new here and the size of the personal loan market is substantial.


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