Which-50 sat down with Beau Bertoli, Co-founder and Chief Revenue Officer of FinTech small business finance platform Prospa (ASX:PGL), after releasing their results for the final quarter of the financial year.
Prospa announced that revenue rose 17.4 per cent for the quarter to $33.4m, and they highlighted record loan originations of $182.7 million, up 51.2 per cent on the prior quarter’s $120.9 million.
Demand for Prospa’s Small Business Loans drove 74.2 per cent of origination volume, while the recently enhanced Line of Credit saw a record 25.8 per cent of total originations.
Management said they were particularly pleased by the high rate of repeat customers, who make up 50 per cent ($91.6million) of the $182.7 million originations during the quarter. Repeat customers are more cost-effective for the business, as their data and credit history are readily at hand.
Bertoli told Which-50, “We’re really pleased with this quarter’s results. You know, we’ve been working very hard over the last 12 months. Obviously, navigating through last year was quite interesting with all of the lockdowns and restrictions and not really knowing what kind of impact that might have. We’re really pleased with the mix of business across our new and repeat across Australia and New Zealand. New Zealand also hitting a record high and very pleasing and our margins held up as well. So, not withstanding that, we’re riding record volumes and maintain our operating margins throughout this period. So so it was a really good way to end the financial year.”
Prospa says it increased its investment in technology, product, sales, and marketing during the quarter. This investment includes research, development and technology capabilities to build and trial new payments solutions to accelerate customer engagement.
A technological highlight has been introducing the customer digital qualification journey that has automated thousands of customer interactions, resulting in a significant reduction of call volumes. In addition, a revised discretion approach has streamlined the credit escalation process and systemised controls, which has further enhanced and accelerated Prospa’s credit approval process.
Bertoli adds, “It’s worth noting that our average loan term is around about 15 months. So as you can appreciate, we’ve actually had multiple vintages throughout our lifetime. And that’s allowed us to now have multiple data points where we can see the patterns of behaviour again across wide swaths of the Australian and New Zealand economy. And that’s what gives us confidence to move quickly. Then we’ve turned that into our technology platforms.“
With enhanced functionality, including pay anyone capability, Prospa experienced increased drawdowns under its Line of Credit product as customers take advantage of the flexibility this offered.
Greg Moshal, Prospa’s CEO and other Co-founder said in a release, “Prospa’s success and identity is built on the power of technology. It enables us to efficiently and rapidly service the financial needs of SMEs both within Australia and New Zealand, particularly as many are now reinvesting in the growth of their businesses. We have further increased our investment in technology this quarter to support our strategy to provide a broader suite of cashflow management products meeting the needs of our customers.”
Investors have been concerned with Prospa’s risk management and credit assessment methodology. The results update this aspect of the operations. They show that for the fourth quarter, the total coverage required for expected credit losses as a percentage of receivables has decreased from 10.4 to 7.9 per cent.
Prospa says the reduction is due to the improving business conditions and the Group’s proactive management of credit risk on new lending using the purpose-built credit decision engine (“CDE”) and leveraging its extensive data and industry insights.
“We’ve been trading now for nine years as a business. So as a company, we’ve got a long tenure now in lending money to Australia, small businesses and more recently in New Zealand as well. In our data set, we have well over a hundred thousand datasets on individual small businesses across every pocket of the economy. Pretty much we’ve got almost four hundred and fifty data points per credit application that comes in. So you can appreciate we’re now sitting on millions and millions of data points and we’ve also had an experience. We’ve had over two billion dollars on our risk models and we’ve got a very good pattern over payment from a portfolio management perspective. Last year really was the ultimate test of how does a small business lending portfolio perform,” said Bertoli.
Prospa’s management remains confident in the economic recovery nationally and says that potential future losses remain adequately covered within the Company’s provisions for expected credit losses.
“Static loss rates remain within the Board mandated 4 – 6 per cent tolerance range supported by the Group’s proprietary Credit Decision Engine,” said Bertoli.
The Company reiterated that the loan deferral period offered to Prospa’s customers during the height of COVID-19 concluded in December 2020. The closing gross loans of $427.1 million on 30 June 2021 include $29.0 million related to COVID-19 loans previously deferred. Of that, $18.5 million are performing, with just $10.5 million showing increased deterioration in credit risk.
Commenting on the recent lockdowns, Prospa has adopted its standard hardship program offering up to 4 weeks of 50 per payment or no repayments. As of 20 July 2021, the Company has received 187 requests for support (1.5 per cent of active customers).
Moshal stated, “Whilst we are all too aware of the challenges currently faced by small businesses in the Greater Sydney metropolitan region, Victoria and South Australia, the SME sector generally has been on a solid recovery path this past financial year. Research undertaken on our behalf by RFi Consulting in May 2021 shows that one in four SME business owners expect their FY21 turnover to increase. This compares with just 7% who expect it to decrease for the period.”
Loan book funding
Prospa funds its loan book through a combination of local and offshore financial institutions, including Australian superannuation funds. Superannuation participation makes sense on several levels. Prospa’s cost of funds is approximately 5.7 per cent, which for a super fund is very attractive.
Bertoli says, “It makes a lot of sense, particularly when you’re getting capital into the hands of small business owners, that they invest, that they spend. And then we did some economic research about 18 months ago where we looked at the economic impact of our lending. Every dollar that crossed the lens has a four times multiplier in GDP and 30 million dollars we lend. It sustains about fifty seven jobs. So the economic impact of getting money into small business owners is is pretty pronounced. And when you think about the super funds, in particular, the custodians of our nation’s future and a lot of the capital that drives the prosperity of our future, what better way to look to deploy that than via people like Prospa?”