MyBucks — Emerging market fintech

Central to MBC’s investment case is its use of technology to overcome barriers that prevent the provision of traditional banking and credit services to a large market in sub-Saharan Africa. The same technology also provides opportunities for MBC in the developed world. Traditional banks need expensive infrastructure to house their operations and execute some transactions; this can be hard to establish and to staff, especially in parts of the developing world. Where there is demand for microloans (generally defined as under c €500 and for less than a year), the cost and inaccuracy of traditional methods of credit rating and fraud prevention may prohibit profitable lending.

MBC uses mobile technology to access markets with low penetration of formal financial services, but where people do have mobile access to the internet. Its products include lending, insurance and banking and it also provides credit reports with education features, financial budgeting and emergency insurance cover. All products and services are designed to be user-friendly and highly accessible via the web. Proprietary artificial intelligence (AI) enables quick credit assessment and the approval of loans within 15 minutes of application. The products are offered under three brands (GetBucks, GetSure and Opportunity Bank) and the company reports under three geographic segments as shown in Exhibits 1 and 2.

Before looking at the products and funding sources in more detail, it is useful to explain the development of MBC and look at two recent acquisitions that have expanded the reach and funding base of the company.

It was founded in 2011 and has been profitable at the operating level since 2013. The original holding entity was GetBucks Mauritius, which traded in South Africa via a licence agreement with a subsidiary there. From 2011 to 2015, the offering was extended to other sub-Saharan African countries and then to Spain and Poland in 2014 and 2015. MBC listed in Frankfurt in June 2016, moving to the Scale segment in March 2017. In 2016, the company entered into talks with Opportunity International, a philanthropic microfinance NGO that aims to reduce global poverty. Opportunity had established six banks in sub-Saharan Africa in the first half of the decade and entered a share purchase agreement to sell them to MBC in 2016, for a consideration totalling c €6.8m so far. As a result, Opportunity became a shareholder of MBC and is represented on the boards of both MBC and the six banks. It will also contribute funding to those banks to enable continued social impact. The acquisition widened MBC’s client base, increased its access to capital and enlarged its geographic footprint significantly, while bringing MBC’s technology and operational expertise to the banks. MBC has gained two banking licences, two microfinance institutions and a presence in three new countries (Mozambique, Tanzania and Uganda). The acquisitions of Opportunity’s Ghanaian and Malawian banks are pending regulatory approvals in those countries and are expected to be completed in the current half year. So far the total consideration paid for the acquired entities amounts to $3.8m in cash and 150,000 shares in MBC. Further adjustments to the consideration are expected to be minimal and the company may recognise a bargain purchase gain at the next reporting date on revaluation of the acquired assets. The acquisition boosted the loan book considerably (Exhibit 3).

MBC’s presence in Australia is through Fair Go Finance (Fair Go), of which it acquired 75% in January 2017. Fair Go is a microfinance and digital financial services provider that had a gross loan book of c €7m and revenues of c €3m in the financial year to 30 June 2016. The consideration of A$3m was paid in shares (117,613 at a price of €17.70 per share and an exchange rate of A$1.44/€).

GetBucks is the leading product consisting of short-term consumer and SME loans, both instalment (6-60 months at c 25% to 40% interest, mainly to government and blue-chip company employees) and single payment (1-6 months at c 20% interest), which have other services attached including budgeting tools and credit reports. GetBucks loans are available in Botswana, Kenya, Malawi, Namibia, Poland, Spain, South Africa, Swaziland, Zambia and Zimbabwe. Loans range from €50 to €12,500, with an average of c €200 and a tenor of six months.

GetSure insurance products provide credit, legal, medical and funeral cover, again to consumers and small businesses. GetSure is available in Botswana and South Africa.

Opportunity Bank (powered by MBC) offers savings accounts, mobile transactions, transaction cards and other financial solutions. Customers also have access to dashboards providing information on their banking, credit and insurance portfolios. The brand currently operates in Kenya, Mozambique, Tanzania and Uganda.

MBC has increasingly diverse funding, including bank debt and deposits taken through its banking operations and funding from shareholders and related parties, summarised in Exhibit 4.

The acquisition of the Opportunity banks has given MBC access to considerably more customer deposits funding, changing the composition of liabilities materially.

MBC’s products are designed for people who are underbanked and therefore have no credit scores or access to lending. MBC’s ability to provide these services is based on its proprietary credit decision platform, Jessie, and Watson, the fraud detection system. These form a key part of the wider fintech platform, called Fincloud. Essentially the platform receives data from a variety of sources, including the applicant or customer’s own devices, network operators, banks, government departments, credit agencies and employers, and uses them to inform the two AI platforms and to help provide management information and data for the customer’s dashboards.

Jessie uses 45 data features (comprising thousands of individual data points) to build a picture of an individual’s spending and earning history and habits, and Watson compares the applicant’s previous behaviour with that of known fraudsters to provide a fraud risk rating. Both are able to use the records on applicants’ mobile devices, which often contain detailed records of spending and earnings. Jessie is used to predict a probability of default for each applicant for a given range of rates, loan amounts and repayment profiles, and enables MBC to offer an applicant the products that best suit MBC’s risk appetite, with a trade-off between sales and collections: higher sales means taking on more risk and usually equates to lower collection rates, and vice versa. This enables accurate credit scoring and helps MBC to effectively set a default rate that management expects to maximise profitability. This is c 7% (the default rate was 7.12% in H117).

The level of detail also enables MBC to set direct debit collection dates soon after an applicant is paid by their employer and before they typically start to spend their wages, and to do so automatically. The automation of the process makes it very fast, with disbursement possible within 15 minutes of application. Both Watson and Jessie learn from experience, increasing the accuracy of their prediction and the ability of MBC to provide sustainable returns, as well as helping keep collection rates high. The MBC app can prompt and remind people of payments when they are due, if collection at source is not available.

A successful applicant will be sent their funds quickly, and in most territories repayments can be taken from their salary at source. Where collection at source is not possible, prompts can be sent to the customer, and if necessary external collection agents are employed. MBC’s debt collection software is again proprietary, and based on Microsoft.Net technology. It optimises collection timing to suit the customer and the company, making collection efficient, despite the markets it operates in, and encouraging loyalty. An analysis of impairments is given on page 7.

Sub-Saharan Africa in particular offers opportunities for virtual banking because the infrastructure challenge faced by traditional, bricks-and-mortar banking makes establishing a presence in some areas difficult, and hard to justify financially given the banking needs of the population. World Bank data indicate that 34.2% of sub-Saharan Africans in developing countries had bank accounts in 2014, up from 23.9% in 2011, but the percentage whose account was at a financial institution only rose from 23.9% to 28.9%, indicating significant growth in the non-institutional sector. Mobile accounts make up over one-third of all accounts and although older data is not readily available, the rise of transaction services such as M-PESA1 and companies like MBC suggest that this sector has seen considerable growth. With a platform in place and mobile telephone coverage relatively extensive compared with other infrastructure, MBC is well placed to grow.

It intends to do this both organically and by acquisition, expanding its customer base in territories where it already has a presence and moving into new ones. Management also continually assesses the need for new products and looks to cross-sell its existing offering. The principles of management’s strategy are to provide simple and user-friendly products that are delivered quickly, with dashboards, education and budget planning tools make the customer more engaged and encouraging loyalty; as well as attract new clients, using the scalable Fincloud platform and flexible AI credit and fraud checking processes.

So far, MBC has only served 0.1% of the population in its areas of operation. The opportunity to grow by gaining both market share and as the banking market grows is significant.

New products expand the offering and MBC’s potential market: Haraka (meaning quickly in Swahili) was launched in Kenya, making loans of €4 to €40 via mobile phone. Applicants need a Facebook and an M-PESA account, which are mined for credit data, and can apply for larger loans on repayment of their previous loans. The app was downloaded 20,000 times within two months of launch. MBC, along with its partner, Opportunity International, is looking at possibilities to expand in the education and agriculture sectors.

MBC reported its H117 results on 3 March 2017, showing an operating profit of €10.2m, which represents almost 90% of the operating profit for all of FY16 (€11.4m), and management expects to report earnings above previous levels for the financial year as a whole. The company has also recently expanded into Australia and has several acquisitions (including two banks in Ghana and Malawi) and applications for banking licences pending. All of these should enhance earnings in the medium term and the full year results can be expected to reflect how successful these and recent developments have been.

Microfinance is a highly fragmented market with large numbers of charitable and philanthropic providers in Africa, as well as local institutions in all countries that will make small loans, payday lenders, and also some online and fintech competitors. Market dynamics vary considerably from country to country for a variety of reasons, which include:

As well as philanthropic lenders, mainstream commercial banks are moving into microfinance and many have launched mobile banking products. In Europe and Australia, payday lending is common, but we would highlight a few companies that target similar markets to MBC:

The fundamental market driver behind all these companies is that sub-Saharan Africa has a population of c 1bn, which is under-serviced by traditional financial institutions. The provision of credit may help alleviate poverty, and potentially create profits for the providers, on a large scale. Obstacles to the development of financial infrastructure may now be overcome by technology and by the maturing economies of many African countries. The inroads made by services such as M-PESA show what can be achieved, and the size and relative youth of the population mean that the opportunity is both large and likely to be long-lasting.

MBC has a non-executive board of six led by the non-executive chairman, Gerd Alexander Schütz, plus the chief executive and deputy. The company was founded by the CEO, Dave Van Niekerk, who remains a significant shareholder with 23% of the shares. Short biographies of Mr van Niekerk and his deputy, Tim Nuy, are below. Details of the directors and country and product managers are available on the company’s website.

CEO: Dave van Niekerk – Mr van Niekerk founded MBC and has nearly 20 years’ experience in the microcredit industry, having begun at African Bank. He founded Blue Financial in 2001, which listed in 2006 and where he was CEO and chairman until July 2010. As well as his responsibilities as CEO of MBC, he oversees a number of business areas directly, including Technology, Operations, Innovations and Credit.

Deputy CEO: Tim Nuy – Mr Nuy was an investment director at the African Development Corporation (ADC) in Frankfurt from 2011 to 2014 (when he joined MBC). There, he was responsible for acquisitions, disposals and day-to-day operations of the group’s Mauritian entities, including several complex transactions. Among these were the investment in ABC Holdings, the disposal of RSwitch and the takeover by Atlas Mara. Before ADC, he worked at KPMG in transactions and restructuring, and holds a degree in international economics from the University of Maastricht. He is responsible for Risk, M&A and Corporate Finance.

MBC has two shareholders that each own 22.3% of the shares, Tailored Investments and Sunblaze Holdings (through which the Van Niekerk family holds its stake). Escponent Projects holds 17.1%, Redwood Capital holds a further 12.1% and Bluehill Capital has 3.2% (the last two are controlled by Christopher Rokos). Opportunity Inc now holds 3.4% of the shares and shareholders of Fair Go Finance now hold 1.0%, leaving a free float of 18.5%. Members of the management team and all shareholders holding over 10% of the shares have agreed to a lock-up prohibiting them from disposing of their shares before 31 December 2017, meaning that only the free float can be traded before then.

MBC’s loan book has grown rapidly in recent periods as it has entered new markets and acquired businesses. Exhibits 5 and 6 show the gross loan book split by country at 31 December 2016 and its breakdown by term (at 31 December 2016). The average loan term is currently c six months, and loans support annual revenues of around 100% of the average loan book. Impairment expenses run at c 20% of revenues. Cost and other ratios are discussed in more detail below.

We reproduce a summary income statement in Exhibit 7, showing that revenue has risen every year although profits have fluctuated, mainly as a result of finance costs (operating profit has been more consistently positive). The default rate is managed using Jessie’s actuarial provisioning model, aiming to keep the default rate below 8% and as close to 7% as possible (7.12% in H117). The operating margin was 29% in FY16 and 40% in H117. As banking operations bed in, with licences expected to be granted in Ghana and Malawi in the coming months, underlying margins may settle as the cost base changes less from period to period, and the opportunity to improve profitability by cross-selling will increase.

Revenue as a percentage of average net loans has reduced from over 130% in FY14 to c 90% in H117, while impairment expenses have remained steady around 20%. Operating expenses rose in relation to revenue in H117 to 61% vs an average of 46% in the previous three full financial years, affected by the Opportunity Banks acquisitions. This may fall again as they are integrated. Finance costs have been c 32% of revenues in FY16 and H117 and this may fall too as the less expensive deposit funding available from the acquired banks comes through.

As was seen in Exhibit 4 above, MBC’s funding has historically come mainly from loans, either from shareholders or other related parties. To manage interest rate risk these have mostly been based on fixed rates and where local currency facilities have used a prime rate, shorter-term loans have been used to manage the risk. In H117, the acquisition of the Opportunity banks changed the composition of funding in favour of deposits as noted above, and although the breakdown of the loan book by country at the half-year is not available, it can be expected to diversify further as new territories are added. Impairments have fallen in proportion to the gross loan book in H117, following the Opportunity deal and coverage of non-performing loans had risen from 39% in 2013 and 2014 to 65% in December 2016 (Exhibit 10).

The progression of the loan book by country to date is shown in Exhibit 11. Impairments as a percentage of net loans vary considerably from country to country, with Spain, South Africa and Kenya having relatively high rates at 71%, 34% and 25% respectively at 31 December 2016; and Botswana, Malawi, Zambia and Zimbabwe having lower ones (all 8 or 9%). The interest rate risk on customer deposits is managed by fixing rates where possible, as with other sources of funding, and the same is true with the interest rate risk on customer loans.

As can be seen from the summary balance sheet in Exhibit 12 below, as MBC has deployed its lending capacity, the ratio of equity to total assets has fallen from 90% at 30 June 2016 to 21% at 31 December 2016. Gearing (net debt to total capital) was 77% at the end of FY15 and has fallen to 65% at 31 December 2016.

At this early stage, and with new operations being added in every reporting period, valuation is difficult, especially in the absence of forecasts, which would anyway be more uncertain than for mature companies operating in mature markets.

We have compared MBC with a basket of peers with microlending operations in emerging markets as shown in Exhibit 13. Arguably, the closest peer is Letshego, which has a similar footprint and product suite, but which has been established for 20 years and is less technology-led.

Until the recent acquisitions have been fully integrated (and MBC has completed the acquisitions of the Ghanaian and Malawian banks), earnings may not be an especially good guide to value and it will likely be some time before MBC pays a dividend. Although forecasts are not available, on the H117 book value, MBC trades broadly in line with Ferratum, which is also listed in Frankfurt and technology-led, but above the peer average, possibly reflecting the growth potential in the markets it is addressing.

As has been noted above, MBC’s performance is sensitive to the economic health of the countries it operates in, with the diversity of its geographic presence mitigating risk in any one country, although country and political risks exist in several of its areas of operation. Other factors to consider include currency and interest rate risks, which the company seeks to mitigate by using funding in currencies matched to its assets and by fixing interest rates on both assets and liabilities where possible, as described above.

MBC has access to funding from several sources, including from Opportunity International, which has committed to provide a minimum of $30m to banks to fund financial products, and MBC has also raised €8m from FinTech Group AG. The recent addition of four Opportunity banks has brought considerable customer deposits, and the success of the applications in Ghana and Malawi, together with other organic banking licence applications, would provide further access to deposit funding.