According to industry estimates, point of sale (POS) financing is a 500 billion dollar business. The auto industry is clearly the leader with an estimated 80 percent of the sector sales going through POS financing. Contrast that with home improvements, which is another high ticket item, but POS financing falls to 10% of sales. Traditionally, point-of-sale financing has been complicated for merchants due to the heavy paperwork process and is mostly accessible to national level retailers. There is a massive opportunity available to push customer behaviour towards the Auto POS financing way. Financeit saw the potential in this space and established a platform that allows businesses to offer consumer financing to their customers through multiple avenues.
Canada’s first P2P
Financeit came to life in 2011 and is headquartered in Toronto, Ontario but was originally started in 2008 under the name of CommunityLend. It was Canada’s first P2P lending platform at that time. But due to lack of interest in funding credit card debt consolidation amongst prospective lenders and a difficult regulatory process, they pivoted to POS financing. Over the years, it has been able to raise $21.4 million in various rounds of fundraising from high profile investors (Fidelity National Information Services, FinSight Ventures, FIS, IA Capital Group, Goldman Sachs Merchant Banking Division, Michael Garrity, Second City Capital, TTV Capital). Michael Garrity (Co-Founder and CEO) was the VP of Sales and Marketing at epost, a world leader in the electronic bill presentment and payment industry. Casper Woong (COO and Co-Founder) was earlier with Easyhome, Canada’s largest publicly traded merchandise leasing and non-prime lending company and before that he was working at BMO Capital Markets in their Merger and Acquisition team. Paul Sehr (CTO and Co-Founder) was CTO at Momentville, an online wedding planning website.
When the team started CommunityLend, the company ran into frosty waters. As P2P was a new concept in Canada back then, not many understood the industry. A lot of time was wasted in executing the compliance, security, insurance, regulations associated with operating an online lending platform. In the beginning, the company had more legal and compliance personnel than developers but this gave them the insight on the how to build an application for the financial service industry. During that time, while talking to businesses they realized the potential in POS lending space and they shifted their focus to POS lending and Financeit came to existence.
Point of Sale
Usually while granting credit to an individual at POS, the lending company asks the merchant to provide documents on behalf of the customer. That creates unnecessary hassles for all involved as documentation is not the primary business or trade skill of a merchant. This step was a deal breaker as it inconvenienced all involved. Therefore, Financeit created a platform where credit approval can be given right away and the customer can directly fill out the application, making it easier for all the parties involved.
Financeit is a cloud- based point –of-sale platform; therefore there is no paper chaos. The whole process takes just a few minutes; the customer has to provide little information upfront and the system automatically runs various analytics in the background. Since Financeit works with numerous lending partners, the rate of approval is relatively high as compared to others. The platform is aimed at consumers but its marketing campaigns are focused on retailers. Adding a POS financing option can help a business convert leads being lost due to the big ticket size. IN return, the startup gets an exclusive catchment area.
The startup uses three stats to measure its traction:
- Number of merchants recruited and qualified- In its first year of operation, it had 200 merchants and now till date, it has 6000 merchants on board. Each unique location is considered as a merchant and is a POS for the company.
- Loan Origination- Since 2011, it has processed over $1.5 billion in applications and has originated loans worth almost $375 million.
- Capital- Right now it has over $300 million in lending capital and plans to raise it to $500 million for lending in 2017.
Financeit wants people to consider them as a bank and not a private money lender who charge steep APR. Therefore, it provides very bank like APR’s starting from 6.99% and going as high as only 12.99%. It wants its merchants to sell more and banks to earn high yield from good quality loan by using the Financeit platform. Its rate of default is under 1% and arrears are under 2% per annum. Though the average FICO score of its customer is around 730 but it is still not enough to explain such an amazing statistic for a company of this size. The CEO, Michael explains that the secret sauce is that they are not offering credit to a customer with an existing credit card debt, looking to consolidate. The platform is financing a transaction in which homeowners were looking to spend money on home improvements. This nuance of understanding the customer behaviour is an important part of why the company has been able to grow so aggressively.
Affirm and Bread
With its innovative product line and dedicated service, Financeit has been able to create its own niche. Looking at a broader spectrum, its closest competitors are Affirm and Bread. But since they both concentrate on e-commerce businesses, the size of their transaction and loan duration is usually very small. Financeit’s average loan size is usually 20 times larger than Affirm and Bread (average loan amount for them is about $500 whereas for Financeit it is $10,000) and duration of the loan on average is 5 years versus 3-6 months for its rivals.
In an effort to expand its horizon, Financeit recently partnered with Concentra (a wholesale financier) to acquire TD Bank’s indirect home improvement financing business for $339 million. As a part of the agreement, about 45,000 TD loans were purchased by Concentra and 800 merchants were assigned to Financeit. In April it also struck a strategic partnership with Concentra for debt funding worth $100 million.
No business can be successful without understanding the needs of it customer and Financeit has leveraged its unique insights into the big-ticket home improvement industry to become the clear leader in its niche. Since the majority of its customers are small businesses, it has set up its underwriting process keeping that in mind. Fintech is still in its infancy in Canada but it is the future of the financial service sector, particular the POS lending space. Financeit has the foundation to take advantage of the market in coming years.
Author: Heena Dhir and George Popescu