Press and blogs

Finance is the sector with the highest potential for disruption

unfair Interesting perspectives in The Australian this week:

Ever since Clayton Christensen wrote The Innovator’s Dilemma almost 20 years ago, institutions have been wrestling with the concept of sustaining technologies and disruptive technologies. Sustaining technologies enable existing companies to improve existing businesses. Disruptive technologies usually destroy existing businesses. For taxis, GPS was a sustaining technology and Uber is a disruptive technology.

All those who wore red t-shirts to the party are targets for disruption. A KPMG report on the Australian financial services industry released last year said that disruption threatens 25 to 30 per cent of existing banking revenue and, further ahead, it will endanger 50 per cent of bank revenue.

Rachel Botsman, who identified the new economy earlier than most, says finance is the sector that has the highest risk of disruption because it has so many retail outlets and middlemen, trust in the system is low, there are many restrictions on access to money and there are complex fees and processes around it.

Yet, she says, “banks still see this as fringe and they think many of their core businesses will remain intact. They’re not asking, what is going to be the role of the bank in five years time? They don’t see that they’re losing control of the distribution of value. They see it as digital or techie but not as a system change.”

Australia's Only Online Platform For Trading Invoices Confidentially Is On Track To Hit $20m This Year

Hobart – 15th June 2015 – InvoiceX (IX), a new entrant to marketplace lending, has been set up to offer firms short-term finance by allowing them to trade outstanding invoices confidentially to investors. It is on target to finance over $20 million in invoices for Australian companies this year. Dermot Crean, co-founder of IX, has focused on financing growth companies for over 30 years, having worked as a chartered accountant with Pricewaterhouse in London, held senior positions with HSBC and NatWest across Europe and having co-founded and built a successful private equity advisory firm in London over 10 years. On moving to Australia in 2011 with his family, he began to realise that local banks were not set up to use their balance sheets to help growing companies.

Coupling his experience with Steve Yannarakis’ 25 years in Australian investment, Crean said: ‘There are over 2 million small-medium sized businesses in Australia, and yet funding and cash flow continue to be the biggest hurdles for SMEs and InvoiceX is able to fill this gap in the market. Our product has a high degree of automation to make it possible commercially.’

‘Over the last two years that we have been developing IX, we've spoken to many business owners that use invoice finance. Standards vary a great deal and businesses are being locked into long contracts with hidden fees that they’re not expecting,’ said Yannarakis.

InvoiceX is very different to factoring, the main short-term source of working capital finance. Companies can confidentially trade invoices online to investors on their terms when required. With no set-up fees, lock-ins or costly contracts, InvoiceX provides a solution to late payments, with a form of alternative online invoice discounting where you pay as you go.

The total debtor financing market in Australia is worth $62.9 billion according to recent statistics released by the Debtor & Invoice Finance Association for companies using cashflow/invoice financing.

Having started slowly to make sure the platform was working well, volumes are now building. A deep pool of capital is also building with the involvement of experienced investors on the platform.

Co-founder, Crean continues: "We have yet to turn down an application. If a small-medium sized company has blue-chip customers – large corporates or government entities – and annual revenue of $3–100m, their application is likely to be approved by our platform. It is easy to screen potential customers before they fill in their application form to avoid wasting time– they should know themselves whether they are likely to be accepted."

"No matter how good a business it is, without collecting cash for your work done, you can't take on any more business. Growing slowly is the only option, which is not good for Australia right now,” concluded Crean.


For further information please contact:

Katie Olver PR – InvoiceX


Get tomorrow's cashflow today. Confidentially. On your terms

InvoiceX (IX) offers a revolutionary type of invoice finance, built for ambitious growing businesses - a first for Australia.

  • Completely confidential
  • Instant hassle-free working capital
  • No lock-ins or surprises
  • Buying power
  • No personal guarantees, no real estate security

IX is an online marketplace for working capital finance. We connect sophisticated investors with creditworthy borrowers who want finance on better terms.

IX provides a trusted alternative approach to the daily cashflow headache faced every day by Australian businesses - the smart way for ambitious businesses to fund growth.

About us

We specialise in helping small-medium sized businesses trade with big businesses, government and other large institutions. We are a privately owned and operated Australian business run by experienced professionals with a long term approach. All our clients have come through referrals and word of mouth.

Advanced technology + more efficient model = better rates + more convenient process

Re-inventing Australian Business Finance

Is 'P2P' Lending a thing of the past?


19th May 2015

Looking at the webpages of the three largest members of the P2PFA, an interesting observation can be made. Only two of the three platforms, Zopa and RateSetter now call themsleves peer to peer lenders. The third, Funding Circle, has opted for the moniker 'marketplace lending' to describe what it does. Is this as a result of increasing institutional volume? Can platforms that facilitate large amounts of institutional volume continue to call themselves 'P2P'? Opinion is split as to whether the increasing volume of institutional lending through Alternative Finance platforms in the UK is a good or a bad thing. P2P purists are concerned that institutional lenders may crowd out the retail investor and reduce returns. Others argue that the inclusion of institutions is a necessary step in the continued evolution of the industry into a new asset class, rapidly enabling the industry to scale in a way that retail investment could not do alone and also bringing a greater level of professionalism and scrutiny.

Here at AltFi Data we have been tracking institutional involvement at Funding Circle for some time in a series of updates. Now, with Zopa and RateSetter publishing their loanbooks, we are able to investigate institutional activity at these platforms also giving a better picture of what is happening in the overall industry.

Both the Zopa and RateSetter loanbooks indicate whether a loan is covered by the contingency fund or not. It is not currently possible to invest as a retail investor on these platforms and not be covered by the respective Safeguard or Provision funds. Therefore, if we assume that the lenders on loans not covered by these funds are institutional investors, we can look at the minimum involvement of institutions in the space (minimum because it is possible that some institutions will opt for provision fund coverage and therefore will not be picked up in this analysis).

Chart 1: Estimated aggregate institutional participation in Funding CircleZopa and RateSetter originated loans.

The picture of institutional involvement in these top three UK platforms (together representing a 55% market share) is, unsurprisingly, one of increased institutional involvement. As the aggregate chart above shows, at least 27% of the origination volume for the biggest three UK platforms last month came from institutions. Institutional involvement in the UK market is significantly lower that it is across the Pond. In the US, retail investors account for only 10-20% of volume originations with companies like Orchard seeking to facilitate ease of access and a depth of knowledge in this emerging asset class to match exploding institutional interest.

Since the listing of P2PGI in May 2014, a number of closed funds have launched in the UK (such as Victory Park Speciality Lending and Ranger) and significant amounts of institutional investor commitments have been announced. Might the amount of institutional involvement in the UK be headed a similar way to the US? Could these closed funds end up becoming the medium through which a retail investor accesses the asset class going forward?

Chart 2: Monthly Funding Circle whole loan origination.


Funding Circle’s percentage of whole loans originated has increased since they started providing them in May 2014. As can be seen from the chart above, recently the increase appears to have levelled off around 40% with a slight decrease in April, likely to be a one off ‘blip’ rather than a trend.

Chart 3: Monthly Zopa loan origination with and without Safeguard fund protection.


As can be seen from the above chart of Zopa’s Safeguarded vs non safeguarded loan origination, since June 2014 when Zopa started to once again issue loans that were not protected by their contingency fund, the proportion of non Safeguarded loans has steadily increased. The timing and scale of this increase is similar to that seen with Funding Circle’s whole loans and coincides with the listing of P2PGI earlier in May 2014.

Last month (April), Zopa set a new industry record for monthly origination volume. We can see that almost half (43.5%) of April’s origination volume was down to loans that were not protected by the Safeguard fund (ie institutionally funded).  Just today we learned of a partnership between Zopa and Metro Bank where Metro Bank will fund loans that Zopa originates, adding more fuel to the institutional engine.

Chart 4: Monthly RateSetter loan origination with and without Contingency fund protection.

RateSetter’s non-provision fund protected loan origination is in stark contrast to the trend we see emerging at Zopa. Perhaps institutions investing in RateSetter loans invest in loans covered by their provision fund. Or maybe RateSetter is a more retail lender focussed platform? From RateSetter’s Blog post last December, we can see that over 93% of lending was by individuals. This would confirm our latter theory: RateSetter is a more retail lender focussed platform.

We have seen that mounting institutional interest in the UK has been gradually translating into a greater proportion of monthly originations funded by institutional investors. The launch of several new funds and large institutional commitments in 2015 may mark the beginnings of a shift in the channels of institutional capital directed to marketplace lending platforms. It is worth noting that for all three platforms, volumes from individual lenders continue to grow, albeit not as quickly as those from institutional lenders on Funding Circle and Zopa. However there appears to be a difference of opinion between the UK's three leading platforms as to the best way to grow with Funding Circle and Zopa courting the institutional money and RateSetter seemingly concentrating its efforts on the retail investor’s money. We'll be interested to see how the picture develops over the coming months and, as ever, we'll keep our readers updated.

SMEs bearish about cash flow and sales


Staff Reporter, The Adviser

Almost half of small and medium-sized businesses are finding it harder to manage their cash flow and are more concerned about economic conditions.

According to research by Bibby Financial Services in March, 40 per cent of SMEs are finding it more difficult to manage their cash flow than 12 months ago.

The research showed that 25 per cent of SMEs are forced to tackle cash-flow concerns by ceasing to trade with customers who consistently pay late, while 23 per cent spend more time chasing invoices and 19 per cent offer discounts for early payment.

Bibby Financial Services’ SME Cash Flow Index score for March was -3.3 – down from +5.3 in February – which the company said shows that Australian businesses are concerned about cash flow.

Furthermore, 47 per cent of SMEs are more concerned about economic conditions than they were a year ago, while 29 per cent think the Australian economy will contract over the next 12 months.

Mark Cleaver, managing director of Bibby Financial Services Australia and New Zealand, said these views are reflected in “bearish” sales growth expectations, with 28 per cent expecting a decline in sales over the next 12 months – up from 22 per cent in July 2014.

The research also revealed that two in three SMEs intend to maintain or increase business investment over the next 12 months.

Among businesses that intend to borrow over the next 12 months, 32 per cent said they will borrow to fund growth, while 22 per cent will borrow to fund innovation projects.

“This is a positive sign that some businesses, in an effort to counter a stagnant economy, are becoming more proactive in driving growth,” Mr Cleaver said.

[bctt tweet="Two in three SMEs intend to maintain or increase business investment over the next 12 months"]




Another satisfied customer in Sydney with a growing business and working capital needs

We are thrilled to have funded three high quality invoices ranging from $10,000 to $25,000 each in recent weeks for a leading edge Sydney firm run by a talented Gen Y services business going places.  Once the account was opened at no cost to them, each trade was turned around in minutes. This is another example of what we at IX love doing for our customers!


[bctt tweet="Another satisfied customer in Sydney with a growing business and working capital needs"]

A great Australian SME success story - "perhaps we could bottle this mob's blood"

By Alan Kohler

To find the economic green shoot that Treasurer Joe Hockey was talking about yesterday you take Story Bridge across the Brisbane River, go left at Shafston Avenue and then follow Lytton Road to the suburb of Murarrie, where you’ll find NOJA Power.Without even slightly overstating the matter, this business represents the Australian future that the boffins in Canberra and Sydney habitually put into their PowerPoint presentations and Cabinet submissions and the politicians dutifully spruik.

In 13 years, NOJA has become a world leader in high-voltage switchgear. All the products are made in its Murarrie factory and shipped out to 82 countries.The key reason the Reserve Bank cut interest rates yesterday was that non-mining business investment is flagging. The mining boom has ended (again, because it’s a cycle), but thanks to Australia’s high cost of living (specifically housing) and three crushing years of an exchange rate above parity, manufacturing is buggered.According to yesterday’s trade data, manufactured exports fell in March by about half as much as resources exports, and have basically not changed for seven years.

Through all this -- through the GFC and the Dutch disease exchange rate of 2010-2013 -- NOJA Power has quietly built an $80 million a year export manufacturing business on the banks of the Brisbane River.NOJA stands for Neil, Oleg, Jay and Quynh Anh, the company’s four original shareholders and directors. Another joined a couple of years later and the five are Neil O’Sullivan, Oleg Samarski, Jay Manne, Quynh Anh Le and David Dart.Neil is chief executive officer, with 52 per cent of the company; the others own 12 per cent each.

Oleg is quality and service director, Jay is engineering director, Quynh Anh is finance director and David runs R&D.They have pulled off a truly remarkable achievement, creating a global player in high-voltage switches from nothing in 13 years.All five worked for a Brisbane business called Nu-Lec Industries, which was sold by its owner Greg Nunn in 2002 to the French giant, Schneider Electric, for $89m (itself a very fine achievement).Amazingly, Schneider did not lock in O’Sullivan, Samarski, Manne, Le and Dart -- the key personnel in the business -- and they were able to leave pretty much straight away to start their own business.

The first thing they did was to buy a factory, one of five in a block of units, so they would have collateral for bank funding. Then they applied for a START grant for $750,000, which they matched with their own money, and spent the entire $1.5m on research, designing a range of high-voltage switches from the ground up.In 2003 they sold their first piece of equipment to China. And in 2004, two years after starting out, their sales were $5m, almost all of it exports.In 2006, they lined up for another federal grant, this time $2.5m, which they were able to match out of cash flow. More R&D and more innovation, all the while employing more and more people.

They bought the rest of the five units in the block one by one and then a few years ago bought two acres on an industrial estate up the road with $8m in cash.For the past few years, NOJA Power has doubled its turnover every year and now has sales of $80m to 82 countries and is regarded as the world leader in what it does. The company has 200 employees in Brisbane, with another 25 in a small factory in Brazil and full-time sales managers in four countries.

They basically make one product: auto reclosing circuit breakers for high voltage power lines.It’s a specialised, expensive and high-margin line and exactly the sort of thing Australia can get away with as a high-cost country. It will never be a low-cost country no matter how many indentured slaves are imported to pick fruit (see Four Corners on the ABC this week), and no matter when the RBA and APRA try to put a lid on house prices with mythical macroprudential policies while actually cutting interest rates to drive them up.The secret to NOJA’s success was R&D. Neil O’Sullivan says they couldn’t have done it without those two federal government grants.

He and his colleagues invested $20m of their own money on R&D while the government put in $2.25 million. As a part-supplier of that cash, I’d say it was money well spent.O’Sullivan says that apart from the research, the key to success in manufacturing these days is being “globally focused”.“You can be competitive as long as you have a high-quality product that you market well and, importantly, you source components globally as well.“We source our parts in multiple currencies which means we have a natural currency hedge.”He says that at this level of manufacturing, Australian labour is competitive and, in fact, they are better off making the products here than, say, in China.

When asked if they have an exit plan, O’Sullivan says: “No, but I suppose we’ll have to exit one day.“When we do, I’d like to see our young managers take over. We’re very focused on apprenticeships and education programmes and as a result we’ve got a lot of bright young engineers coming who deserve the sort of chance we had.”Australia deserves the same chance. Perhaps we could bottle this mob’s blood.

Queensland company raises over $445,000 of working capital - no red tape

We're delighted to have helped another fast growing Queensland company raise over $445,000 of working capital recently. They had been left in limbo by their bank - 15 years and all they could get was a tiny overdraft and red tape. We solved the problem quickly when they joined our online confidential invoice finance trading platform. Within minutes of listing an invoice for sale, trades are executed with sophisticated investors on very good terms for the seller. And it is all entirely confidential, no lock-ins, no surprises.

We're here to help.

[bctt tweet="Queensland company raises over $445,000 of working capital - no red tape"]

Draft legislation released – unfair contract terms

In August 2013, the Abbott Government announced this important reform to give businesses a fair go. The protections will give businesses access to a level playing field to grow, invest and create jobs.

Consumers have been protected from unfair contract terms since 2010. It is time that small businesses, which often face the same vulnerabilities as consumers, receive strong protections when contending with “take it or leave it” contracts.

Under the new protections, a court will be able to strike out a term of a small business contract that is considered unfair. For example, a term that allows a big business to unilaterally change the price or key terms during the course of the contract could be considered unfair.

The protections will apply to businesses that employ less than 20 persons for transactions under $100,000, or $250,000 for contracts that last longer than 12 months.

These changes will support small businesses in their day to day transactions, but still encourage operators to conduct their own due diligence on large contracts fundamental to the success of their business.

Businesses that offer contracts in these circumstances will be required to comply with the new law.

The Government has provided $1.4 million to the Australian Competition and Consumer Commission (ACCC) to support implementation of the new law, including conducting an information campaign.

The draft legislation builds on extensive consultation undertaken in mid-2014, and follows confirmation that the Commonwealth has the necessary support from state and territory governments to implement this important policy reform.

The draft legislation and explanatory materials are available on the Treasury website for a consultation period ending 12 May 2015.

Treasury officials will also hold targeted consultations following the end of the public consultation process.

With this legislation, the Government is restoring time and resources back to small business to invest in their business success rather than navigating a costly and time consuming maze of red tape.

It is part of our strategy to ensure Australia is the best place to start and grow a business.

Dermot Crean

Director, InvoiceX


(03) 9020 4161

Peer-to-peer lenders claim to be recession proof

IX view: commentators with a bank perspective tend to miss the key fact that assets and liabilities are perfectly matched on peer-to-peer platforms like ours - unlike banks. And in our case, the average exposure is less than 60 days.
The charge that the growing number of non-banks that use online platforms to directly connect borrowers with lenders might not survive a recession is rejected by these new entrants.This group claimed that peer-to-peer lending, crowdfunding and other alternative financing methods rose to prominence during the global financial crisis.

In the last seven years they have plugged a gap left by banks whose credit models prevented them from lending to some customers.

Yet, ANZ boss Mike Smith and Commonwealth Bank chief, Ian Narev, have slammed peer-to-peer lending as untested in an economic downturn or when interest rates were high.

Both questioned who would be responsible if customers were burned and both raised the issue of liquidity risk.

Products of the GFC

According to MoneyPlace chief executive, Stuart Stoyan, the high-profile bankers' comments were not only wrong but short-sighted.

He said the peer-to-peer lending model is better able to cope with changing economic conditions than incumbent banking systems.

Stoyan acknowledged that peer-to-peer lending is a new banking model and has not endured a downturn in Australia. But he also noted that Australia has not suffered a significant recession for over a quarter of a century.

“On the same logic, since the last serious recession was 25 years ago, it would be also fair to argue that the management teams of the major banks are also untested to manage during a recession," he said.

Test of business models

Three of the world’s largest peer-to-peer lenders were operating during the last financial crisis and each proved their ability to provide investors with positive returns on a through-the-cycle basis, according to RateSetter chief, Daniel Foggo.

“They have found ways to help ensure positive returns can be delivered in any economic environment. In the case of RateSetter, we pioneered our Provision Fund, which is a pool of capital available to compensate lenders if they are exposed to a borrower default," he said.

"Our first priority is ensuring that enough money goes into the Provision Fund to protect investors, in good economic times and bad.

“Our business model is very efficient, and we pass on the savings to borrowers in the form of substantially lower rates. If interest rates went up significantly, it’s very unlikely there’d be an impact on our business”.

Another claim is that peer-to-peer lenders have less expertise than the major banks and are therefore more vulnerable to financial instability.

“That is wrong,” said Stoyan. “Peer-to-peer lenders in Australia are mostly led by former bankers who understand the deficiencies in the outdated banking system.”

Liquidity not applicable

MoneyPlace is managed by four ex-National Australia Bank executives; its chief risk officer previously ran unsecured lending for NAB.

Prior to joining RateSetter, Foggo ran Barclay Capital’s investment arm and worked for NM Rothschild in London. SocietyOne has hired an Investec operative.

Stoyan dismissed suggestions of liquidity risk, saying that a liquidity event is not applicable to P2P lenders since an event can only occur there is a surge in demand for deposits.

For example, a run on a bank occurs when bank customers withdraw their deposits because they believe the bank might fail. This is an issue because the banks do not hold a dollar in cash reserves for every dollar they have on deposit, they lend it out.

“Peer-to-peer lenders directly match investors’ money to a loan. This means that these lenders are fully funded 100 per cent of the time," said Stoyan.

“Further, banks run complex treasury functions that try to minimise the amount of cash they hold so they can earn more profit lending it out. However, peer-to-peer lenders do not have a treasury function.

"If they don’t run a book, they do not need to manage liquidity. In fact, because we directly match investors and borrowers, we will never face a liquidity event. To suggest otherwise is scaremongering."

Level of transparency

“The concept of illiquidity for a peer-to-peer lender would only arise if investor expectations for the term of the investment were not matched by the term of the loan," said Leo Tyndall, chief executive and founder of Marketlend.

"In peer-to-peer lending, it is the investor who chooses his term and it is matched to the loan's term so there is no issue."

Foggo said RateSetter extensively stress tests its loan book as well as any bank, but more importantly, it provides a level of transparency to investors so they can make their own assessments.

Regulators are ensuring an appropriate level of regulation and oversight for peer-to-peer lending, Stoyan added.

Dermot Crean

Director, InvoiceX

Growth Capital on Demand.

(03) 9020 4161

Risk is wise but don't stick all eggs in the bank basket


A sure way for a conservative central banker to grab a headline is by urging "a lot more" risk-taking if you want a decent retirement.

Especially when he's about to pull the trigger on another rate cut. Even I'm impressed.

To be exact, Reserve Bank governor Glenn Stevens specified "those on the brink of leaving the workforce" need the extra risk for "the expected flow of future income they want" and  "it's important people realise how much risk is being taken (in the financial space) and are appraised of it".

Or maybe he's really saying don't be so greedy.

The old rule of thumb that you need $1 million at 65 for a comfortable retirement no longer holds because it was based on returns of 8 to 10 per cent and we're living longer. Sorry, but being a millionaire doesn't cut it anymore, not that I'm saying that was ever in prospect.

You can see the huge difference lower returns make in just five years from a comparison by Martin Currie Australia and subsequently quoted by fund manager Legg Mason from a $500,000 lump sum. The annual income from an annuity or term deposit shrank from $30,000 to $13,000.

But get this. Invested in the sharemarket, a beneficiary of falling rates, your retirement income would have risen from $37,000 to $44,000, counting the 30 per cent tax credit from franking.

Which brings me to Stevens' other point about taking more risk, probably without realising it. A good part of the returns of the average super fund is coming from rising bank shares and their dividends.

[bctt tweet="A good part of the returns of the average super fund is coming from rising bank shares"]

Three big banks are about to report their results for the half year to March. Ho hum,  more record profits. But look at why: it's the boom in housing where they're lending proportionately more, coupled with rock-bottom bad debts.

While neither is under immediate threat, especially while rates are being cut, they're not sustainable either.

Even if, fingers crossed, we avoid a recession, the banks will have to face higher capital ratios which ties up money earning next to nothing – call it poetic justice  considering what they're paying on term deposits – that could more profitably be lent out.

But my worry is how high their shares have already gone. Talk about a correction waiting to happen.


A Market “Plagued by Bad Practice”


The UK's leading online invoice financier has produced some telling research into the excessive cost structure of the traditional invoice finance product.

The invoice finance market is not currently regulated, meaning that its leading providers are not subject to uniform standards in terms of communicating price. MarketInvoice has itself had to overcome this lack of transparency in order to scrutinize the services  of the incumbent banks. The platform compared the revenues that the banks’ invoice finance divisions reported to Companies House with the banks’ self-reported advanced volumes within the invoice finance space – offering an insight into the average cost-per-round of the banks’ invoice finance product. It is reportedly the first time that this data has been exhumed.

MarketInvoice reveals that the nation’s banking sector has been fleecing businesses for £758m each year for invoice financing – an overcharge of £425m. That markup is reportedly the work of a complex maze of hidden fees. 50,000 businesses in the UK borrow £20bn every 3 months via invoice finance – predominantly from the leading banks (RBS Invoice Finance, Lloyds Invoice Finance and HSBC Invoice Finance). It’s the largest invoice financing market in the world.

MarketInvoice suggests that 26,000 of the UK firms using invoice finance from the leading banks are ending up on the receiving end of up to 35 different hidden fees. Based on a MarketInvoice survey of 1,000 UK business owners, two-thirds of businesses do not trust their bank not to overcharge them.

But how do MarketInvoice's services stack up in relation to this backdrop?

 The platform’s research suggests that the banks charge their customers 6.4p for every £1 advanced. MarketInvoice by contrast charges 2.8p for every £1. That equals out to an average saving of £16,000 per year for MarketInvoice customers – a collective saving to date of over £10m.

Anil Stocker, Co-Founder and CEO of MarketInvoice, explained:

“Thousands of UK businesses are being over-charged for short-term finance. This is costing thousands of businesses £16k per year on average and hundreds of millions in total. Businesses are afforded very little protection from hidden fees and long contracts because invoice finance is not regulated, as a result the market is plagued by bad practice. For now, the onus is on businesses to get free of their bank and explore alternatives."  

“At MarketInvoice we represent a way out - we’re helping businesses break-up with their bank and avoid this kind of over-charging. Since launch in 2011 we’ve saved UK businesses over £10million and will do more than that again this year alone. We have no hidden fees whatsoever and companies can leave with no notice.” 

The picture painted by MarketInvoice’s research has been in part corroborated by the actions of a group of individuals that are operatingunder the name RABF, who recently kicked off a campaign to “stop the abuse that is being carried out daily by a significant number of factoring companies at the expense of their clients”. The group is calling for a robust regulatory framework to be applied to the factoring industry.

Disruption thrives best in the wake of bad practice. MarketInvoice's research hammers home the need for an alternative.


What do you buy, when you buy a bank stock?

Valuing (Greek) Banks: A Sum-Of-The-Parts Approach

What do you buy, when you buy a bank stock? You effectively buy the constituent parts of a bank, which are:
  1. its existing book; and
  2. its future business,

the latter of which can further be broken down to:

  1. its deposit-gathering line-of-business;
  2. its loan-servicing business; and
  3. its loan-origination/distribution business

Don’t think we are forgetting something here, so let’s give it a shot at valuing them one-by-one.

Let’s start by looking at Eurobank’s existing book as an example [Greece]. The market value of the bank’s equity and debt is around €72.5bn (liabilities are valued at par, as they mainly comprise deposits and Eurosystem funding). With that, one buys tangible assets of a book value of €71.5bn. In other words, holders of Eurobank equity are valuing the existing book and the future business almost on a par with the book value of the existing assets.

Let’s see then how some of these assets are valued on their own. Take, for example, Themeleion IV, Eurobank’s largest outstanding RMBS issue (placed, not retained). The A tranche currently trades at around 78 cents (if anything, the price of Themeleion IV is supported by purchases form Eurobank, which can book a capital gain by buying Themeleion paper and putting it in its hold-to-maturity portfolio). Also taking into account the B and C tranches, this translates into buying the underlying loans at 76 cents.

Let’s compare that with Eurobank’s residential mortgage book, just north of €18bn in size. According to its Q4 2014 presentation, 22.5% of it was 90dpd, while provision coverage was 36%. This translates into a book value for the mortgage book of Eurobank of 92 cents (1?22.5%*36%). Also applying the very small discount-to- book value at which holders of Eurobank equity value the bank’s assets, we arrive at an implied valuation for Eurobank’s mortgage book of just over 90 cents. The difference of 14 cents between the RMBS pricing and this implied valuation can only be justified by means of assigning substantial value to the future business of the bank.

For the mortgage business, this value is around €2.5bn. By applying the same discount across the bank’s other loan classes, we arrive at a back-of-an-envelope valuation of the future business of Eurobank of around €7.5bn. This is more than four times the current market cap.

Let’s look at the future businesses of Eurobank one-by-one then, starting with the deposit-gathering one. How much is this worth in today’s interest-rate environment? Well, certainly not a whole lot to JPMorgan, which plans to cut as much as $100 billion of some clients’ excess [sic] deposits. Eurobank’s most recent deposit spread is 138 bps. For comparison purposes, ELA costs 155bps, versus 5bps for regular ECB financing.

Then we have the loan servicing business. Well, we could estimate what the value of that is. Total (gross) loans are €51.9bn; let’s further assume Eurobank outsourced the servicing of its assets to someone like Nationstar Mortgage Holdings (NYSE:NSM).

Let’s look at some Nationstar metrics. It generated just north of $1bn in servicing revenue from an UPB of $386bn, had a core pre-tax income margin of 30% and a P/E of 10.50. Running the same metrics on the Eurobank loan book we arrive at a revenue figure of €144m for the servicing business of Eurobank and at a valuation of less than half-a-billion euros. This is around a fifth of the implied value of the future mortgage business of Eurobank, and one-fifteenth of the implied value of its entire future business. Which in turn means, the market relies predominantly on the future origination business of Eurobank to underpin its current valuation.

Right, the origination business, then—shall we just mention that credit to the Greek private sector contracted by 3.1% in 2014? But of course, it will recover, no?

It will. But let’s see what Eurobank’s starting position will be in that race. Let’s not talk about (marginal) cost of funding at this stage—this is a lengthy discourse. Let’s just focus on Eurobank’s cost of origination.

Of Eurobank’s total opex of €1.054bn, we could allocate €144m to its servicing function (approximately how much a third-party servicer would charge). That leaves just over €900m to allocate to the other (profitable) businesses of Eurobank. We just mentioned that the deposit gathering business is not exactly profitable. But let’s allocate enough opex to that function, so that the total cost of deposits (interest expense plus opex) is equal to the (hefty) cost of ELA. To do that, we would need to allocate another €60m to Eurobank’s deposit gathering function. That leaves another €850m to allocate to Eurobank’s loan origination/distribution business.

Now let’s assume things don’t just improve, but they go back to 2008—the best year for loan origination in the history of Eurobank (and the Greek banking system in general). That year Eurobank’s loan book increased by €10.6bn. If one were to allocate the €850m of Eurobank’s opex to a loan origination volume of €10.6bn, this means an additional cost of 8% to Eurobank’s new origination. For Eurobank’s origination business to be profitable, therefore, it needs to be able to charge its customers an additional 8% for its opex.

How much would a third-party loan origination business charge to originate the same loans? Probably around 1% (that’s the standard in Greece—as far as we know, the maximum that has been ever paid is 1.4%), but since Lending Club charges between 1% and 2% for loans with an interest rate below 5.9%, let’s go with 2%. Assuming we go back to the 2008 party (on top of making a few other wildly optimistic assumptions), Eurobank will need to decrease its opex by 75% just to be able to hope that it remains competitive.

Which it probably won’t. Because other competitors will crop up. Aktua, the Spanish servicing arm of Centerbridge, is already in Greece. It’s not terribly difficult to go from servicing to loan origination—funding is not exactly scarce these days (more on that point in particular in a future post). If they do move into origination, these guys will also have zero cost of regulatory capital (being non-bank lenders).

Speaking of regulatory capital: Eurobank’s fully-loaded Basel III CET 1 capital is €4.1bn, of which €3.6bn is DTA. For DTA to remain an asset, of course profitability needs to materialize.

To summarize: traditional banks were built to gather deposits. Their design and infrastructure is geared towards that; they are maladapted to today’s interest rate environment. P2P platforms and other non-bank lenders are eating their lunch. Absent some radical rethinking of their operations model, they are about to go the way of the dodo.

Of course, markets are not efficient; it will take time for competitors to move in. Traditional banks, however, have few weapons to fend them off: their brands (much less valuable for loan-origination than for deposit-gather purposes) and their (hugely expensive) legacy infrastructure.

It took almost a century for the dodo bird to become extinct. That said, equity markets are, theoretically at least, discounting future events. At today’s interest-rates, even events much further into the future affect values a lot.

Oh, and if you think interest rates will rise again: go short some long-dated Bunds. A lot less complicated.

Westpac's Jason Yetton signals potential of peer-to-peer lending and crowdfunding

Senior Westpac banker Jason Yetton has flagged the potential for online forms of financing outside traditional banking, such as peer-to-peer lending and crowdfunding, to play bigger roles in funding small businesses.

With chief executive Brian Hartzer putting technology at the centre of Westpac's strategy, Mr Yetton, who runs retail and business banking, also backed a taskforce with government to explore alternative financing options for small and medium enterprises.

Banks face growing competition from nascent online industries including peer-to-peer (P2P) lending, which allow savers to directly fund borrowers via a digital platform, and crowdfunding, which raises an amount from a large number of funders.

Some bankers have recently highlighted the risks of P2P lending.

Westpac has a $5 million equity stake in P2P lender SocietyOne.

He argued there was more to be done to improve the financing of start-ups and small firms, noting that P2P and crowdfunding were growing quickly overseas, with $2.7 billion raised in these markets in 2012.

Given this overseas growth, he said there "may be opportunities for equity-based and peer-to-peer lending to be increased both domestically and globally".

Mr Yetton said the investment in SocietyOne – whereby Westpac is financing a potential rival – was believed to be the first equity investment by a bank in a P2P lender in the world.

"We could fight and defend against these new entrants, but we know partnering will provide insight into the development of financial products and online creditworthiness algorithms that would otherwise be blind to us," Mr Yetton said.

"We choose to embrace innovation as an opportunity rather than rely on scale and incumbency."

Mr Yetton also noted many small and medium businesses' concern that they faced difficulties in accessing finance; an issue also raised by the financial system inquiry.

He said Westpac would support a taskforce to explore alternative financing options for this large part of the economy.

Since Mr Hartzer took over from Gail Kelly in February, he has promoted the central role of technology in banking, as competition emerges from technology firms eyeing banks' huge profits.

Mr Yetton also emphasised that "tie-ups" between banks and firms in other industries would play a bigger role, noting that online retail giant Amazon had in recent years started to offer loans to small businesses.

Products that crossed industry boundaries – such as a product aimed at retirees that combined travel bookings, retirement income, insurance and currency exchange – would become "the norm", he said.


What you need to know about peer-to-peer lending

Peer-to-peer (P2P) lending is a fast developing market for individuals and small businesses looking to lend or borrow money. It has the potential to challenge the dominance of traditional financial institutions like banks, but involves new risks for both lenders and borrowers. In its simplest form, P2P uses a web platform to connect savers and borrowers directly. In this form, the saver lends funds directly to the borrower. Few providers offer such a “plain vanilla” product. A P2P platform matches individuals using proprietary algorithms. It works like a dating website to assess the credit risk of potential borrowers and determine what interest rate should be charged. It also provides the mechanics to transfer the funds from the saver to the borrower. The same mechanics allow the borrower to repay the money with interest according to the agreed contract.

Local players in the P2P market (not all yet operational) include Society One, RateSetter, Direct-Money, ThinCats and MoneyPlace.

There are many ways that the basic framework can differ. This affects the types of risk faced by both lenders and borrowers. Protecting the borrower’s identity from the lender is important. What if the lender is a violent thug who takes umbrage if payments aren’t met? Protecting the borrower brings another risk. The lender must rely on the operator to select suitable borrowers and take appropriate action to maximise recoveries.

The operator can provide a wide range of services. For example, lenders might have a shorter time frame than borrowers, or discover that they need their funds back earlier than they thought. The operator may provide facilities to accommodate that. Or, rather than lenders being exposed to the default risk of a particular borrower, the operator may provide a risk-pooling service, whereby exposure is to the average of all (or some group of) loans outstanding.

The further these services extend, the more the P2P operator starts to look like a traditional bank – but not one reliant on bricks and mortar, nor on the traditional mechanisms of credit analysis relying on customer banking data. The explosion of alternative sources of information (including social media) about an individual’s behaviour, characteristics, and contacts for instance, provide new opportunities for credit assessment analysis based on applying computer algorithms to such sources of data.

While the traditional three C’s of loan assessment (character, collateral, cash flow) remain important, new data and ways of making such assessments are particularly relevant to P2P operators. Indeed P2P operators go beyond the credit scoring models found in banks in their use of technology and data, unencumbered by the legacy of existing bank technology and processes. It is partly this flexibility which explains their growth overseas and forecasts of substantial market penetration in Australia. Much of that growth can be expected to come from acceptance by younger customers of the technology involved – and about whom there is more information available from social media to inform credit assessments.

But also relevant is, of course, the wide margins between bank deposit interest rates and personal loan rates. With - arguably - lower operating costs and ability to match or better bank credit assessment ability, P2P operators are able to offer higher interest rates to lenders and lower rates to borrowers than available from banks.

For lenders, higher interest rates are offset to some degree by the higher risk to their funds. Unlike bank deposits, P2P lenders bear the credit risk of loan defaults – although P2P operators would argue the risk can be relatively low due to good selection of borrowers and mechanisms for enabling lenders to diversify their funds across a range of borrowers.

For borrowers, the main risks arise from the consequences of being unable to meet loan repayments. There is little experience available in the Australian context to understand whether P2P operators will respond to delinquencies by borrowers in a different manner to banks.

It’s important that P2P isn’t confused with payday lending where low income, high credit risk, borrowers unable to meet repayments can quickly find themselves in dire straits by rolling over very short term loans at high interest rates.

The two business models can overlap – with payday lenders offering loan facilities via web based platforms. One challenge for P2P operators is to ensure the community and regulators accept their model as one of being responsible lenders to credit worthy clients. They also need to convince regulators that these unfamiliar business models do not pose unacceptable risks to potential customers.

P2P lending could have major benefits to individuals who want to invest, lend or borrow money. Hopefully regulators will be able to distinguish between good and bad business models. If they can’t, they could prevent a profound challenge to traditional banking.

via What you need to know about peer-to-peer lending.

Debtor Financing - Confidential v Disclosed

 Here's a recent article from an experienced Australian expert on debtor finance. IX beats all of these conventional sources of debtor financing.  “Will my customers need to know?” is one of the first questions asked by people considering debtor financing.

It’s a reasonable question because in the past debtor financing aka factoring, or invoice finance was associated with struggling companies and no business owner wanted customers to think they were  “going broke”. However,  these days debtor financing is aimed at helping strong businesses grow stronger. So, there shouldn’t be a stigma attached to using this valuable business tool – at least in a logical sense. The fact that it is a $60 billion industry and some very successful companies use it supports that view.


In Australia, 90% of all debtor financing arrangements are discrete. Which means your customers don’t know that you are financing your invoices. However, discretion comes at a cost [not with IX].Because it is riskier than disclosed lending you will pay more for the service. The hurdles will also be higher [not with IX]. Companies providing this facility – generally known as invoice discounters - will want you to be an established business with an annual turnover of more than $750,000.


You also need to be profitable with a record of good management and no major credit issues. Your business must have a minimum number of customers and, if payments are overdue, you’ll be expected to act very quickly to recover the debt. Most lenders will require you to sell all your invoices over a 12 month period [not with IX], though some will consider selective invoice discounting – which means you can choose which invoices you want to sell. Your customers will pay the invoices into an account controlled by the financier.


Not all businesses meet the criteria for a discrete facility, so your customers will need to be told that your invoices are being financed. There are two types of disclosed products. In the first type, you retain control over your ledger, accounts and credit functions. The second type involves handing these functions to the financier. This is commonly known as factoring and is suited to younger companies with a relatively small number of employees. In this case, the financier will issue invoices, collect payments and chase slow payers. While your customers will know that you are factoring invoices, you can be confident that someone is making sure you get paid for your work in a timely manner.

Lenders in this space will also insist you have multiple debtors, a reasonably strong turnover and good financials.


Recently, there has been a growth of hybrid facilities such as single invoice finance.  In this type of arrangement, you can sell a single invoice to a financier without any commitment to continue the relationship once the invoice has been paid. It’s great if you just need a one-off hit of cash to get through a rough period. The facility will be disclosed to your customer [not with IX] and payment will be made into the financier’s account, but you are responsible for managing the debt.

via Debtor Financing - Confidential v Disclosed.

Get your customers to fund your growth

One of the reasons businesses run out of cash – and generally go broke – is that they grow too fast.

What a paradox – the business is growing too quickly and is therefore too successful for its own good!Not surprisingly, in situations like these you also find that the largest “creditor” of the business is the Australian Taxation Office, due to either unpaid GST, PAYG withholdings, employee super or all three. In other words, the business has used the ATO as a banker. The obvious question is – why?

The broader answer is very simple – lack of access to alternative funders.

Sources of funding for your business

A typical family-owned business usually only has two sources of funding – the owners or the bank – and the latter option is generally only available if the owners have “bricks and mortar” security (i.e. their home).

Where the business owner has little or no equity in their home and/or the funding needs of the business exceeds the amount they can borrow against their home, the options tend to be very limited. Banks may still lend something against the assets of the business (e.g. stock and debtors), but the size of this facility is often a fraction of the assets pledged as security and the facility may not increase as the cash flow needs of the business increase.

Children taking over a business from their parents may also lack the amount of capital (or property security) needed to grow the business.

Family-owned businesses are also reluctant to call in a “white knight” (a friend with cash) or venture capital provider. In any case, the latter are generally not attracted to smaller “mum and dad” family businesses. This therefore only leaves two sources of funding – business creditors and the ATO. Business creditors tend to get looked after as the business owner wants to ensure

supply of raw materials to their business, which just leaves the ATO.

One often overlooked source of funding may be to “borrow” against the debtors of the business through a debtor finance arrangement (previously called factoring).

Challenging credit conditions are a barrier to growth

More than six in 10 Australian SMEs identified challenging credit conditions as a key barrier to growth, which could create big opportunities for brokers. Findings from the latest Scottish Pacific SME Growth Index revealed that 63.8% of Australian SMEs saw challenging credit conditions as a major barrier to business growth. Over half (54.7%) even admitted that the outright availability of credit is impeding growth prospects.

Scottish Pacific CEO Peter Langham said the Index reflected the tough landscape facing many SMEs, who were so focused on daily issues around cash flow and funding, that they may not make time to look at the big picture.