Why Splitit chose to go public in Australia

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The installment loan provider Splitit, which recently raised A$12 million on the Australian Securities Exchange to fund its Asia-Pacific expansion, faces strong competition from Australian incumbents — and the prospect of stiffer regulation.

Splitit’s stock has proved popular with investors hoping to profit from Australia’s buy-now-pay-later lending market, which is already served by the likes of AfterPay and Zip. Splitit’s stock rose from 20 cents a share for its IPO offer price on Jan. 29 to 76 cents by Feb. 12 after reaching a high of 99 cents on Feb. 8.

After its IPO, Splitit will establish a physical presence in Australia to expand across the Asia-Pacific region. It will also use the IPO proceeds to develop a new mobile platform and a mobile wallet.

Splitit enables merchants to provide installment loans to their customers’ existing debit and credit cards on mobile, online and point-of-sale channels. Loans are repaid on a monthly basis free of interest charges and fees. Customers don’t apply for a new credit line, and merchants just integrate their POS system with Splitit’s platform.

Merchants pay Splitit 1.5 percent of the transaction amount, plus interest for up-front financing for customers’ purchases. To ensure repayment, Splitit places a hold for the total purchase value on consumers’ cards.

Splitit is based in New York and has an Israeli R&D center and a London office. For its U.S. expansion, Splitit has hired Nathan Mairs, former director of business development at the Swedish installment loan provider Klarna, as vice president of sales for the U.S. Mairs led Klarna’s push into the U.S. with its Slice It installment loan.

Launched in 2016, Splitit had processed A$94 million in 118,000 transactions worldwide by Dec. 31, 2018. It has 380 active merchants operating in 27 countries.

Gil Don, Splitit’s CEO, said 80 to 85 percent of Splitit merchants are e-commerce retailers and the rest are brick-and-mortar stores.

“Sixty percent of our merchants are North American, 30 percent are European, and 10 percent are Asian,” he said. “We’re focused on merchants who sell high-ticket items. Some of our merchants need upfront financing, but others have sufficient cash flow that they can wait for their customers’ installment payments.”

In Asia, Splitit targets countries with high credit card use such as Australia, Indonesia, Japan, Malaysia, Singapore and Thailand.

“We already have some leading merchants in Singapore, and are starting to see more traction in Australia,” Don said.

Splitit chose an Australian IPO, as AfterPay and Zip’s successful IPOs showed there was a window of opportunity on the Australian Securities Exchange, Don said.

AfterPay, OpenPay and Zip are the main providers of buy-now-pay-later loans in Australia. Unlike Splitit, they require consumers to repay their loans via direct debits from their bank accounts.

“There’s a lot of innovation and players in the Australian buy-now-pay-later space,” said Brad Pragnell, an Australian payments industry consultant. “AfterPay has very strong brand recognition in Australia. Other entrants such as Splitit will go up against its dominant brand. However, Splitit’s impressive debut” on the Australian Securities Exchange “suggests investors think there is a lot more room for growth.”

AfterPay and Zip have different business models. AfterPay arranges for consumers to repay purchases in four installments, while Zip does credit checks and issues credit lines to consumers. Its ZipPay service is for purchases under A$1,000 and ZipMoney for A$1,000-A$30,000.

“AfterPay collects most of its revenue through merchant fees, while Zip makes more from customer fees,” Pragnell said. “Neither charges interest, but both charge late fees.”

Don said Splitit targets a different demographic than AfterPay. “It focuses on millennials buying low-ticket items,” he said. “Our target is older users, most of whom have credit cards. Splitit’s average order value is US$700, while AfterPay’s order value is US$100.”

Zip and AfterPay are popular stocks.

“AfterPay was trading recently at 983 percent higher than its listing at A$1.50 last year,” said Steve Worthington, adjunct professor in the marketing and management department at Swinburne University of Technology in Melbourne.

“There’s obvious investor interest, and AfterPay has already entered the U.K. and U.S. But there are two danger signs in Australia," Worthington said. "Firstly, regulators and consumer groups are looking critically at these payment tools, and there is an Australian Senate enquiry into their terms and conditions for both consumers and merchants. Secondly, just how many payment options can merchants afford to offer? Cash; credit and debit cards; interest-free loans/cards; and now AfterPay, Zip, OpenPay and Splitit, and at what cost to merchants in fees?”

According to the Australian Financial Review, the Australian buy-now-pay-later sector has 2 million customers, compared with 10 million customers using credit cards.

Australian politicians, journalists and consumer advocates have criticized payday lenders, debt negotiation and credit repair providers, consumer leasing firms and installment loan providers. The concern is that these lenders enable vulnerable consumers to become overindebted, and charge exorbitant fees. They are either unregulated or subject to considerably less regulation than Australian banks.

“Zip has opted to be a credit provider, while AfterPay has been reluctant to do so,” Pragnell said.

In 2018, the Australian Securities and Investments Commission undertook a review of the buy-now-pay-later market.

“ASIC wanted to get a better understanding of the market and any potential risks,” said Michael Swannell, managing director of KeyOne Consulting. “One of its main concerns was affordability and the likelihood that buy-now-pay-later arrangements may contribute to consumers’ overcommitting.”

“While nonbank consumer credit and installment payments weren’t specifically named in the Final Report of Australia’s Banking Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, there’s a strong possibility this type of activity will be subject to tighter regulation after the implementation of the Royal Commission's recommendations,” Worthington said. “A likely change in Australia’s government means the [consumer credit] sector should be facing stronger regulatory headwinds throughout 2019.”

Swannell said the fact that Splitit uses already-approved credit cards rather than extending new credit addresses the regulator’s major concern — the affordability of purchases made through buy-now-pay-later arrangements.

“This feature gives Splitit a unique benefit that limits consumers’ propensity to overspend and get into financial difficulty,” he said. “But it remains to be seen whether consumers will want to use up their cards’ credit limits by using Splitit.”

Once Australian banks implement Open Banking, subject to a customer’s consent, lenders could access their banking information in accordance with the Open Banking framework, and make credit decisions based on actual spending behaviour.

“This will go a long way to addressing the regulator’s concern that consumers may overcommit by taking advantage of easy credit,” Swannell said.

Grant Halverson, CEO of the payments consultancy McLean Roche, said the strategic challenge for the buy-now-pay-later segment is the threat of bank competition.

Commonwealth Bank of Australia launched SurePay installment loans for its credit cardholders in November 2018. The minimum balance or purchase value for SurePay installment loans is A$600, and there is no maximum limit.

“Visa, Mastercard, Amex, and eftpos Australia are looking at the installment loan area and have made investments,” Halverson said. “If I were CEO of Visa, etc., I would undercut AfterPay’s revenue model at the retail level.”

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