In late January, Israeli fintech company Splitit held its IPO on the Australian Securities Exchange (ASX). Within a short time, it proved to be one of the most successful Israel IPOs in recent years. The company's share zoomed 550%, propelling its market cap to A$352 million (NIS 896 million).
What lies behind the Israeli fintech sensation? The company provides a solution for a problem that does not exist in Israel: conducting transactions with installment payments. Consumers in most countries lack this option, which Splitit can provide for them. The company was founded by childhood friends CEO Gil Don and partnerships executive Alon Feit. Don's background is in IT, while Feit worked in finance and credit.
Where did the idea come from? "It began with a different idea," Don says. "I had an idea that was unsuccessfully tried before in Israel - paying by installments by credit card at a wedding. After checking it out, I realized that I would only lose money, because Israel is a small market. I decided to try it out in the US, but it turned out that they have no installment purchasingg by credit card at all there. I started studying this field, and Splitit came from that. Alon Feit and I wrote a patent for the technology and the business process."
Why is there a problem with installment buying in a credit card transaction? Don explains that in contrast to the situation in Israel (up until recently), where the card issuer and the party clearing the transaction are the same, in other countries, they are separate. "Payments can be made in installments in Israel, because the banks can take responsibility for transactions while all of the payments are being made. There are over 1,000 banks in the US doing clearance, and over 1,000 banks issuing credit cards. The bank that issued the card is responsible for the customer, and the bank doing the clearance is responsible for the business. There is total separation between them.
"Say the customer want to buy something in installments at Best Buy with a Citibank credit card. Best Buy needs a technological connection with Citibank, but it needs 1,000 terminals for 1,000 banks. That won't happen. A second problem is that the issuer's liability is for a limited time."
This is where Splitit enters the picture. Don explains: "Assume that a $1,000 purchase is made in 10 payments. The first $100 is debited, leaving the customer owing $900. We 'close' this $900 from the credit limit, and then they take the next $100, and we close $800. That we we constantly roll forward the assurance that we'll be able to collect the future payments. There is no risk for any of the players."
Splitit does not need the cooperation of the bank in which the account is kept. All it has to do is work under the regulation of Visa and Mastercard (with which it now works; the company is now talking with America Express and Discover, and hopes to work with them also in the future). Splitit is regarded as an authorized solution, and the business can continue working with the existing clearer without any change. If the customer asks to make installment payments, the deal goes through Splitit. "Sometimes there are unexpected or expensive purchases. For example, a washing machine broke down, or they want to buy an engagement ring. Installment buying makes is easier to manage the household finances, and payments are at 0% interest," Don says.
"Globes": Where is your profit from the transaction?
Don: "The business pays for every transaction that goes through us, with payments according to the customer's payment schedule. Our second model includes financial concerns providing financing to a business. They tell it, 'Take the $1,000 up front," and the business pays a financing commission and a service commission."
Splitit discovered that average transaction value for businesses using its solution increases, and the conversion of online customers also rises. "Our big advantage is online, for global customers. For example, Laline and Hazorfim are our customers. Israeli companies can offer installment buying only to customers in Israel, but with our help, they can also offer it online to overseas customers."
In 2018, Splitit's revenue grew 203% to $790,000, and its net loss rose 36% to $4.6 million. When will the company make a profit? Don will not give a date. He says that the company is now investing in growth, but that it is a "very lean company."
What is the size of the market that you address?
"If you take the entire global retail market and see how much is paid by credit card, it's $10 trillion. We're not spreading ourselves too thinly. We have marked six main markets amounting to $4.5 trillion. Even if we take 0.1%, it's still $4.5 billion. That's our target."
In other words, you are a big company in Israeli terms.
"The goal is to be an Israeli company and the global leader, and we're going in the right direction."
Competition for Splitit comes from the option of granting a customer a loan at the sales point, but Don says that if the customer does not pay on time, the interest rate soars to 30%, and the fact that the customer took debt has a negative impact on this his or her credit rating. "There's no solution today like Splitit that accommodates installment buying anywhere in the world, both online and offline," says Don.
Are there entry barriers in this sector? Is it possible that a startup will come along and compete with you?
"It could happen, but it will be taking a risk, because we have a patent for the process of 'closing' from lines of credit. It's a process patent with a technological element."
The idea of holding an IPO arose a year ago through a broker who came to the company. At first, Don told him no, but the broker promised him that Splitit would make a big splash in Australia. There are two listed consumer finance companies in Australia: Zip, with a A$715 million market cap, and AfterPay, with a A$5.8 billion market cap. Splitit thought that investors' familiarity with these companies would help them understand it, while investors would realize Splitit's advantages; in contrast to Zip and AfterPay, Splitit is not subject to regulation, and has "unlimited growth potential." The broker convinced Splitit, which raised A$2 million before the IPO and continued on to the IPO. "It really succeeded beyond expectations," Don says.
Maybe you set the price too low.
"This is a good question. We wanted to be attractive. At a higher price, the IPO might have failed, but there's no way of telling."
Now that the share price has taken off, are you planning another offering?
"Not at the moment. We're concentrating on using what we raised in order to grow. We've grown from 13 to 28 employees, we recruited business development executives, and we're investing in marketing in order to create brand awareness."
Field of business: A fintech company providing a solution enabling buyers to pay by installments with a credit card
Location: Tel Aviv
Market cap: A$352 million (NIS 896 million)
2018 revenue: $790,000
2018 net loss: $4.6 million
Published by Globes, Israel business news - en.globes.co.il - on April 11, 2019
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