Originally from the Australian Financial Review
Investment banker John Wylie has backed a plan for struggling consumer finance group Flexigroup to reclaim ground in the buy-now, pay-later sector by throwing down the gauntlet to Afterpay.
Wylie’s investment vehicle Tanarra Capital will pump $21.5 million into Flexigroup to support the turnaround plan of chief executive Rebecca James, who was appointed in October following a three-year period in which Flexigroup’s stock more than halved.
James’s plan centres on Flexigroup consolidating its existing buy-now, pay-later business – which is large and profitable, but almost invisible – under a new brand, to be called Humm.
The new brand will offer a sort of super-sized version of the Afterpay product – and one that could eat into the market leader’s margins.
“We are a leader in this space – and we are not dead in the water,” James said.
Humm’s point of difference will be its ability to be used for purchases up to $30,000. At Afterpay, credit is capped at $2000 and average transactions are about $200.
Humm customers spending less than $2000 will get 10 weeks to pay it back, rather than the eight offered by Afterpay. After that, customers can pay a monthly fee of $8 to extend their payment period, subject to approval from Humm.
James emphasises that Flexigroup will maintain its prudent credit policies and will have some level of income verification for larger purchases.
To further win over retailers, some of whom have reported concerns that Afterpay has pushed down average transaction values because it is used by relatively low-spending Millennials, James promises to undercut the fees Afterpay charges retailers to use its platform.
Retail giant Premier Investments, home to brands including Peter Alexander, Just Jeans and Smiggle, will be the company’s fashion launch partner.
James will also chase the market for larger purchases, such as dental and medical expenses, furniture, trade services such as electronic and plumbing, and hardware.
Under its current brands, Flexigroup’s biggest industries are solar and jewellery, and its average transaction is about $2000.
Despite the near invisibility of Flexigroup in the sector’s brands, Oxipay and Certegy Ezi-pay, they have about $550 million of receivables.
That’s actually more than Afterpay, which also released a strong set of interim earnings on Tuesday showing revenue growth of 85 per cent and receivables of $408 million. Zip has $489 million in receivables.
Flexigroup also has 1.3 million buy-now, pay-later customers in Australia; more than Zip’s 1 million customers, but a long way from Afterpay’s market-leading 3.5 million.
But what Flexigroup has that neither Afterpay and Zip has is profit.
The $75 million in earnings Flexigroup expects for the full year across the group – about $35 million from the sector based on current run rates – will help fund Humm’s marketing push and those lower fees for retailers.
The Humm launch is part of a broader turnaround plan from James, who has inherited a mess of a business with 20 products sold under 21 different brands. It is understood there has been little consolidation across the back end of the group’s buy-now, pay-later, consumer leasing and credit-card businesses.
The company’s results on Tuesday were unsurprisingly weak, given Flexigroup’s updated guidance provided early this month: net profit fell 22.1 per cent to $31.9 million.
James is hopeful a turnaround of the business can be relatively fast. Brands will be consolidated across the company’s credit-card and leasing businesses in the coming months, and costs will be stripped out as back-end functions, such as customer service and credit processing, are consolidated.
The launch of a brand is tough and expensive, although at least Flexigroup has an expert in this area in James, who previously was chief marketing officer at Prospa and ME Bank.
The simplicity factor
This column also wonders whether the model, with its monthly fees and sliding scale of repayment periods depending on the size of the purchase, will resonate quite as easily with consumers as Afterpay’s very simple model does.
The ability to super-size transactions will also be a double-edged sword – very attractive to consumers, but also likely a red flag for consumer advocates worried about household debt levels.
Will Afterpay be overly worried by this challenge, given the size of its customer base, its surging US business and its soaring share price, which sits near record highs having jumped almost sevenfold in less than two years?
While the US looks exciting, Australia remains the main game for Afterpay, and any challenger that tries to grab a foothold by cutting merchant fees could eventually force all providers to cut fees.
The prospect of a competitor willing to finance bigger amounts may also pose strategic questions for Afterpay.
If nothing else, it’s a reminder that providing credit is always the industry with the lowest barriers to entry.