Wisr than the big banks?

Alan Kohler here with today’s CEO and it’s Anthony Nantes who is the CEO of Wisr (WZR). It’s a non-bank lender for personal loans. Started off as Direct Money, which is a peer to peer lender, but when Anthony Nantes joined three years ago it pivoted, changed to become a non-bank lender taking money from institutions mainly. But it does still have a personal loan fund where it takes money from individual investors but it’s only providing less than 10% of the money that’s being used for lending. It’s an interesting business, a year ago shares were 4 cents, now they’re 14 cents or so, so it’s had a bit of a run and he reckons they’re about to, as he put it, significantly increase their net lending margin from 2% to something else. He didn’t say what exactly but he reckons it’s going to go up because they’re now more mature and they’re getting lower cost of funds from the institutions that provide the money.

But the key to this and the interesting thing about the business, which sort of says a lot about what’s going on in the banking market, is the key to their business is that they provide risk-based pricing. That is to say, the interest rates on their loans varies according to the quality of the borrower, the credit score and how good a lender they are. What they’re doing is, because the banks don’t do that, the banks have a problem. They’re stuck with non-risk based pricing because of, as he puts it, their back book. They can’t start offering their best borrowers, 9% interest on personal loans because all of their existing lenders are on 14% and 15% and it would cost them a fortune.

It's really ripe for a disruptor to come along and to offer 8% and 9% personal loan interest rates for really good borrowers, and they’re basically taking them off the banks, so I think it’s a really interesting business, one worth having a look at and listening to the interview. Here’s Anthony Nantes who is the CEO of Wisr.

Anthony, I always talk about cash with companies that are still burning cash to start with before we get onto the nuts and bolts of the business. I was wondering if perhaps you could help me read the latest quarterly Appendix 4C, and I just don’t understand how it works here. It says, receipts from customers and then net of lending and loan repayments, -$20 million, net receipts from institutions $19 million. What does that mean, can you explain what that is?

The 4C is particularly a great tool to really analyse a company with all the time. Movement of cash doesn’t always equal everything that’s going on in the company, particularly in a lending company it’s a bit more complex when we’re moving loans in and out of the business off and on balance sheet, that’s where it gets a bit confusing. The good way to think about the last quarterly, we had an operating cash loss of around about $2.8 million, which we addressed in the commentary that we put out with the 4C and we typically think that’s a pretty good way to go about it, so we put the cash position and all the cash accounts out in the 4C and then we put associated commentary – put that flavour around it for investors to really be able to understand it, interpret it.

Where does your revenue come from? The cash revenue you get, is that interest or is it some sort of spread on your loans?

We make revenue in a couple of key ways on our lending book at the moment. We make a fee upfront that’s kind of charged to the customer and capitalised into the loan and we realise that pretty much immediately. The current way the structure works in the company is we write loans and then we on-sell those loans pretty much immediately. We might write a loan off our own balance sheet and the next day, sell that to a capital partner, and we realise a fee difference in that straight away. We then also make on top of that fee, an ongoing management fee across the book itself, which is a bit like the typical kind of net interest margin that you’d see across the loan book. That has been relatively skinny, we’ve been making around about 2% as a fee across the loan book ongoing.

As we went out to market recently, that margin’s about to significantly increase as we move to more mature kind of funding models, which includes our own kind of debt warehouse, which will significantly that net interest margin available to us.

Explain how that’s going to work, why is that going to happen?

It’s the standard kind of maturity curve for early growth lending companies and we rely on the capital markets to provide a lot of the capital that we lend out. The way we started the company a couple of years ago, and whilst we’ve got a really great management team with some great experience and expertise, we went to the capital market and said, ‘We’re going to write bank level credit for these bank style products, bank style personal loans…’ and we went to the capital market to get that access to kind of debt funding. The capital market is not a strong [Inaudible 0:05:07.3] base, so you might do that or you might not.

We’re able to negotiate a certain fee at the time, which is kind of a proof of concept fee. Let’s go away for a couple of years, let’s run the book, let’s build our customer base and let’s prove that we’re going to write bank level credit here, we’re going to attract bank level customers. A couple of years down the track we’ve done $110 million dollars’ worth of loans, we’ve really proven out the maturity in our processes and controls, the quality in our book where the average credit score for why the customers is pretty much higher than the big four banks. We’re keeping our arrears and our bad debts down at levels below the big four banks and so that puts us in a position now over the last couple of quarters to really go back to the capital market and say, ‘We’ve proven out this context, we’ve proven out the model, we now want to move to a more mature capital structure.’ Which is what we’re moving to now.

I get the impression that all of your money that you’re lending comes from individual investors who are basically investing with you and then that money goes and gets lent, but that doesn’t seem to be what’s happening?

The idea of a peer to peer lending model is how we actually started the business and that idea has some good merit, it’s a great idea in theory. In practice, what we’ve seen globally is those models are really challenged and they’re challenged on a whole number of levels and so as we continue to scale and grow, we’re moving to what we call a more hybrid model. In fact, today the vast majority of our debt capital’s been coming from the major capital markets, partners like 255 Finance which is part of Challenger, and Macquarie Bank fund a loan for us. We’ve made amounts around Bendigo and Adelaide Bank previously. Really leveraging the more mature capital market is actually a much more efficient way to run one of these lending platforms and a kind of great idea of peer to peer. We still retain some of that as an option, so we actually have a retail fund that investors can invest into but it’s a very small percentage of the lending we actually do.

Right, well that’s the confusion when I was reading your 4C, where it says net receipts from institutions, I kind of didn’t get that you were getting your money from institutions mostly. I suppose I kind of thought that it was still a peer to peer lender. What proportion of your lending comes from that personal loan investment fund?

It's less than 10% and it’s in that kind of 5-10% range. That’s where we think it would be strategically going forward. Like I said, the business model for a peer to peer lending business is very challenged and we’ve seen globally the model not really work to a profitable level. Ultimately, whilst you deliver a great outcome for customers, which we continue to do, we think through a hybrid model we can continue to deliver that great outcome for customers but actually build a profitable company, a long-term sustainable profitable company and that’s an important part of ongoing values of customers.

Okay. It’s probably because I’m thick or something, but I don’t fully understand how it is that as you become a more mature lender, that you’re able to get your margin up or your fee up from 2% to something significantly more than that. Would you mind taking us through that one more time?

Yeah, there’s a couple of different ways that happens. One is, it’s just a volume play. As you get more volume, you get access to different types of capital in the market. When we originally went to market and say we’re looking for a $25 million dollar facility, there’s a lot of fees and costs and everything that goes into a small facility. Once you’re looking for a $200 million dollar facility, that brings into account the very efficient capital market, and so you just get an efficiency at that level. It also brings in a level of capital like senior tier one Australian domestic banks who are willing to provide capital into a business like this. That significantly reduces your cost of funds. Most early stage lending companies will go through a similar kind of process, starting with a particular margin and as they get to maturity and scale, they’re able to significantly increase that margin.

By reducing your cost of funds? I get it.

By reducing the cost of funds. From the capital markets point of view, when they’re thinking about investing in this asset, removing the risk associated with the company itself and actually just valuing the underlying asset. What happens at the start of the company, two years ago when we got things going, the capital market was pricing in the risk on why the [audio cuts out 0:09:49.1] business as well on top of the asset. Now, with our track record, our history, we’re hitting maturity, they can actually say, ‘Look, the governance is sound, the business is sound, the management’s sound. We can price the actual assets themselves.’ That produces better pricing as well.

And you’ve got a track record of impairments I guess is part of the answer as well?

Exactly right, they can see the performance of your book, of your credit policy and your risk and underwriting processes.

What is your impairments experience?

It’s better than big four banks. If you look at a comparative, we talk about our 90-days-plus write-offs and arrears, and we’re typically in the kind of 1.5 to 2% range for that number, which is what the big four banks would typically talk about as well. They would be in a similar range, closer to 2% and sometimes over 2%. But even that’s slightly misleading because a better comparison is potentially new-to-bank, and actually for the big four banks their new-to-bank customer for unsecured personal loans is often a size of 3 to 3.5%. Whereas, conceptually every customer to Wisr is a new-to-bank customer, so we’re sort of outperforming the big four banks in terms of our impairments and we continue to attract the most prime customers in Australia to Wisr and there’s a whole range of reasons why the very best customers in Australia are going to get a better deal from Wisr than they would get going back to their big four banks.

Can you take us through that, why is that so? And also, your credit processes, to what extent do you rely on a credit score, but then separate to that, the individual circumstances of the borrower?

There’s a couple of questions in there. Why would someone come to Wisr? We would argue that we think we win on any kind of metric against the big four banks. We’re often priced better, we have risk based pricing for unsecured personal loans starting as low as kind of 8% or thereabouts, whereas the big four banks are typically in that 14 to 16% range. And for a credit card, which is their other unsecured consumer product, they’re at 19-23%. Price is a big one, with our risk based pricing model we can attract the very best customers to Wisr. We’re faster, we’re significantly faster than the big four banks in terms of turnaround time. We have a better kind of CX and UX, a better kind of overall customer experience.

Our net promoter score, which is kind of the industry benchmark for measuring customer satisfaction, has been in the 60s and 70s, 60 and 70 across our business. And again, compared to the big four – CBA came out last week with a -10 as their net promoter score and that’s illustrative of the way customers are feeling the big four banks treat them. On any metric, we think we outperform the big four banks and an Australian is going to get a better deal from Wisr than they’d get going to the big four banks. In terms of the credit and the underwriting, there are some things we do differently. One of the things that we do is analysis around bank transaction data.

For every customer that applies for a personal loan and we look through their transaction data, we use that to help us verify income, to verify other liabilities and confirm living expenses and a few other bits and pieces, which makes the process more seamless. It’s a fully digital end to end experience, digital contracts, no need to turn up to a bank branch and ID yourself or anything like that, it’s all done fully online with very, very little friction.

Why don’t the banks do risk based pricing? Are they not allowed to or what?

I think it’s an interesting question. I can’t speak on behalf of the banks but I think there’s a few impediments for them and one is just the pressure on their back-book. If you’re Westpac Bank and you’ve been writing personal loans at 15% for the last five years for example, and all of a sudden you come out with loans at 8-9%, there’s a huge amount of pressure on your back-book to kind of move towards that and so there’s a short-term kind of position where they’re between a rock and a hard place to do that. I think secondly, with the banks kind of customer base, they do find the idea of pricing individual risk challenging, both from a systems point of view and some of their tech which might not enable that. Where, we estimate advantages in building some of this in a native tech way, it’s brand new tech so we can build some of this functionality from the ground up.

I can see how risk based pricing is going to attract some of the best risk obviously, the safer borrowers are going to come to you because they’re going to borrow more cheaply.

That’s exactly right, and if it’s the best borrowers in Australia they might be up to 5-6% cheaper than a big four bank potentially, which on a $40-50,000 dollar loan can be material. But again, pricing’s just one part of it and if all you needed to do to win in this market was have better pricing then the community banks would have a significantly bigger market share than they have. They’ve proven the multiple failures in taking market share, even though the reality is they’ve had better pricing on every product than the big four banks for the last few decades. Getting slightly better pricing is important and that does definitely help attract customers, but you’ve got to do more than that. And that’s where the whole package of what we’re providing beyond just better pricing becomes really, really powerful.

What are the community banks doing wrong that you do right?

I think there’s a few things in common here. We talk about building a purpose led company and I think we’re really going about filling a whole there where the community banks have kind of dropped the ball in Australia and really looking after customers. But we’re a tech company first and foremost, so we’re building out incredible tech that’s focused around the financial wellness of Australians beyond just lending. We firmly believe we’re building the consumer lending company of the future. If you kind of imagine, Alan, what would the best lending company look like in the year 2025, that’s what we think we’re building now, which is much more holistic around looking after our customers, around providing other financial wellness tools, products, apps to help them paydown debt faster, to help them maybe manage and be aware of their credit scores and [gamify] those so they can get access to more prime credit and better priced credit.

We do a full range of services beyond just really fair pricing in finance, and that’s something really unique that we’re building, not just in Australia but actually in a global context, what we’re building is pretty unique.

I suppose one of the things is that you’re focused on personal loans averaging $25,000, I think your maximum is $50,000, is that right?

Yeah, that’s a great place to start. One of the things to look at in terms of – I think there’s a bit of a perfect storm right now in Australia for fintech and there’s never been a better opportunity to build a consumer finance company than there is in Australia right now. We have these massive tailwinds of open banking, of positive credit reporting, or Royal Commission into banking and finance. And the reality is, the big four banks are being attacked on their incumbency on every single product and every margin they have. That being said, a lot of those products are very, very high friction. Very hard to get a customer to move. It’s very hard to get an Aussie to move where they put their savings. It’s exceptionally hard to get an Aussie to move their mortgage.

Every Aussie knows they can get a better deal down the road or with a community bank or somewhere else, but by and large they don’t because the friction is still pretty high. One of the beautiful things about personal loans is they are very low friction, very low friction for a customer to move. To the point where we were seeing in the US as an example, in the last 4-5 years, we’ve seen the personal loan market go to the point we’re now almost 40% of all personal loans are now written by a fintech provider that didn’t exist 10 years ago. The fintech’s in the US who are providing personal loans, they’ve taken almost a 40% market share of personal loans because it’s a great banking product but it’s very low friction and very easy for a customer to switch.

I saw that portion of that percentage in one of your presentations, I found that astonishing. I had no idea that the fintech’s were doing that much business in the personal loans. What about in the UK, what’s it like there?

I think we’re seeing similar trends not just in the UK and US, but in Germany, France, Spain, where they’re taking 10-20-30% market share, these pure-play personal loan providers who are providing a fairer priced, a risk based price, a faster turnaround time for personal loans. Because it is a standard banking product – Alan, one in five Aussies have a personal loan and there’s a million Australians every year who apply for personal credit. The market opportunity here is huge. What we’ve seen globally is fintech providers like Wisr who are really amazing at doing personal loans, are able to take a really big significant market share. We got maybe 4,000 customers last year for about $100 million in personal loans in the last little while, but that’s really just a drop in the ocean. We’re just at the beginning of a journey to really go and make a big difference in this market.

One way to think about your business and what you’re like is – obviously I’ve become aware over the recent years of a lot of non-bank lenders lending for property, to developers and so on, because the banks won’t touch that area. Are you like that, you’re basically a non-bank lender like those lenders except you’re focused on personal loans?

Where I’d say where I think we’re different is that I think historically, if you look at big non-bank lenders in Australia, they’ve almost [Inaudible 0:20:04.1] the 80-85% market share to the big four banks, and said – pardon the euphemism – kind of ‘the fish that John West rejects’ model. We’ll fight over the last 10-15% market share. Whatever the big four banks don’t want to do, whether it’s some property lending, whether it’s some SME lending, whether it’s sub-prime lending, that’s where we’ll play. Wisr’s significantly different. We’re unique in a sense that what we’re doing is saying, ‘Actually, we’re not going after the fish that John West rejects, we’re going after big four bank customers. We’re going to take the very best customers in Australia who are not getting a good deal from the big four banks and we’re going to win those. We’re going to go after that 70-80% market share of real prime customer and give them a better outcome through Wisr.’

You said before, personal loans is a good place to start, what are your ambitions?

We haven’t made a secret of the fact we’re planning to build the biggest non-bank lender in Australia. That’s the track that we’re on, we’re starting with unsecured personal loans, it’s a fantastic place to start. We’re really starting to show some amazing growth in that 281% growth over the last financial year, for example, in a loan rich nation and we’ll continue to grow that. But over time we want to expand that product range beyond unsecured personal loans and we think that we can provide a whole range of amazing products and services for Aussies, not just in lending. We have a whole financial wellness suite of products as well, an app that helps Aussies pay down debt, other products that are in different phases at the moment of innovation or testing that we’re taking to market to really help Aussies more holistic around financial wellness and then provide amazing lending solutions that go alongside those.

What comes next, is it secured lending or business lending?

Yeah, I think we’re looking at all those. I think there’s some natural next steps beyond an unsecured personal loan which make a lot of sense. I think in this financial year we’ll have that next product in market and then we’ll give it time, like we have with unsecured personal loans, we’ve let that run to about $100 million and will continue to go up from there. We’ll do the same with the next lending product, we’ll give it time to kind of bed down, scale it and grow it before we rollout the next one, and we’ll continue to scale them out over the next three to five years.

Do these ambitions mean that you’ll probably be burning cash for a while and does that mean that you’ll have to raise some more? You’ve got about $12 million I think in the bank at the moment.

Yeah, it’s actually closer to $15 million for cash available at the moment. We just completed a raise in March or April this year. We went to the market looking for $10m, that was heavily over-subscribed, we ended up taking $15m into that round. We’re a high growth company and we’ve got some big ambitions, but we’re very, very prudent in the way that we manage that capital and it’s actually very, very easy in this space to burn a lot of capital very, very fast. I think one of the things that sets us apart is just the prudent way in which we manage capital. One of the great examples of that is if you look at our marketing spend the last half on half, we’ve actually kept our marketing spend pretty much flat but over the same period we’ve increased our loan originations by over 220%. There’s not many companies on the ASX could say that they’re going to increase the product sales over 220% but actually not spend a dollar more on marketing. That goes into the efficiency of the model that we’re starting to build. We focus really strongly on those loan unit economics, so that we’re leading the market in terms of actually profitability per product and per customer transaction and really trying to grow the business on those really strong fundamentals.

What do you spend your money on in marketing?

Well we don’t spend a lot of it on marketing, that’s the key thing. We obviously want to have some brand presence and we do some of that, but our go-to-market strategy is fairly unique in the way we’re building out both partnerships and a more holistic financial wellness suite. We’re starting to bring a strategy into our financial wellness ecosystem, doing things like helping them understand their credit scores or gamify their credit scores, bring them onto an app where we can help them paydown whatever debt they have with whatever bank in Australia. And so, bring Aussies in to the Wisr experience through other touchpoints so they get to know it, and that model really drives down our cost of acquisition and our marketing spend.

Where we do spend on marketing, we spend it ways where we can find channels which support our kind of loan unit economics, to make sure that actually there’s strong fundamentals that support the growth in the company.

Can you just give us a brief burst on the history of the business? It used to be called Direct Money, why change the name from something that was clear as to what you did to something that was completely unclear?

I think the fundamental reason is we don’t do that anymore. As we talked about at the beginning, the idea of the company in the beginning was a peer to peer lending platform, but when we really analysed the underlying business model we were not convinced that there was a profitable business model underlying a peer to peer lending company. Without being profitable, you can’t provide amazing customer outcomes. Beyond that, we also recognise that if you look at most non-bank lenders, and all the successful non-bank lenders have some real structural issues in how they’re going about building their businesses and their ability to really own a customer to get more data from a customer is very, very challenged. Traditionally, non-bank lenders can win a customer on a single transaction when you want a personal loan, but all the do for the next four years is debit your account once a month.

We don’t really have that relationship. Unlike say a big four bank customer where they’ve got four or five products, it’s a very sticky customer relationship. And what we recognised is we can actually build something that kind of bridged those two worlds, where we could build something brand new that’s never existed before with an ecosystem of financial wellness products where our lending and our fairer and our smarter kind of lending product is very complementary to a whole financial wellness suite, which gives us a much stickier relationships with the customer over many, many years. We recognise that when we identified that model, no one else in the world had actually built something like this before.

And so we were building something brand new and we were building something very, very different to what we started building which is that peer to peer lending platform and building something that really had that long-term, sustainable, profitable model underlying. That’s what drove the name change and the reorientation of the business. What in tech we’d call a pivot, was a bit of a pivot moment, we said, ‘Actually, there’s a better way to do this, there’s a smarter way to build a company like this and we think we can lead the world in building a company in this space.’

Were you brought on because of the pivot or did you drive the pivot when you came on three years ago?

I probably drove the pivot, I came on as part of that decision to say, ‘Look, there’s probably a failed business model here.’ The original Direct Money float and the idea of a peer to peer platform wasn’t really working and so the shareholders and the bankers kind of identified that and together we went about saying, ‘Well, what would work?’ There’s no doubt about the opportunity in consumer finance, particularly in Australia. There’s no doubt about the opportunity to build an incredibly large personal loan company in this market given it’s over $100 billion dollar market opportunity. The market opportunity was clear there, the original model wasn’t going to deliver success, and so we went about identifying what would work, and that’s where we started to build something pretty new and really exciting.

Just finally, are you going to continue to take money from investors with your personal loan fund or is that going to just gradually wither and die?

It’s part of our ongoing strategy and I think it’s part of that nice financial wellness component as well, I think it plays a role over the medium to long-term for us. Like I said before, there’s some really difficult constraints. If that’s all we were doing, it’s very hard to scale that business model, it’s very hard to deliver exceptional customer outcomes relying on a retail fund providing capital for you. But I think it continues to be part of our nexus as we grow. We want to be providing a whole range of financial wellness outcomes for Australians and that investment opportunity is a really nice part of that.

Good to talk, Anthony, thanks.

Thanks, Alan, good to chat with you.

That was Anthony Nantes, the CEO of Wisr.