In this episode, we bring together experts from across the banking and FinTech spaces to discuss finance issues and trends. We cover subjects such as implementing anti-money laundering processes, the risks of de-risking and the benefits of collaborative banking to SMEs. Our guests for this episode were:
1/ Jakob Pethick, Chief Commercial Officer at YouLend
2/ Adam Sharpe, CEO at Cardstream
3/ Tom Longhurst, Head of Sales – Lending at Banking Circle
Transcript
Russell Goldsmith [00:00:05] Welcome to the Knowledge Circle podcast from Banking Circle, my name is Russell Goldsmith and over the course of the next few episodes, we’ll be bringing together business leaders from across the banking and fintech spaces to discuss the finance issues and trends of the day. We’ll cover subjects such as implementing anti-money laundering processes, the risks of de-risking and, in this episode, the benefits of collaborative banking to SMEs. We’ll hear about the relationship between Banking Circle and Cardstream and how this collaboration was crucial in helping south London restaurant Sidra to survive and thrive. This discussion features Jakob Pethick, Chief Commercial Officer at YouLend, Adam Sharpe, CEO at Cardstream and Tom Longhurst, Head of Sales – Lending at Banking Circle and Tom has more than a decade of experience within banking and fintech. We started the discussion by asking Adam to give a little bit of background on Cardstream.
Adam Sharpe: [00:01:02] Cardstream is at its core an independent payment gateway. Our main focus is connecting with as many payment methods and payment providers as we can across the globe. And that includes so far over 60 acquirers globally and over 100 alternative payment methods, again globally.
Tom Longhurst: [00:01:17] Thank you, Adam. Yep. Tom here. So Banking Circle are a Luxembourg regulated bank, and our sort of primary offering has traditionally been in the payment space. We service a large number of regulated payment businesses, and the sort of genesis of the relationship with Cardstream, Cardstream sits on a vast array of payment data. And it’s that that is critical to us delivering the lending solutions that we’re going to describe in greater detail. And I think that’s a useful segue into my favourite local restaurant, Sidra. This is actually a live worked example of the partnership between Cardstream and Banking Circle operating. This is a small restaurant in Teddington that I probably prop up alone with the amount I go with my young daughter and my wife. They’ve been incredibly successful. They’re a bit of a local institution, and they’re currently in the process of opening another premise in Twickenham. But I think this gives great context to the topic today and it’s something we’ll keep coming back to, to try and to try and illustrate the point that in partnering we can really service and better look after these SMEs.
Jakob Pethick: [00:02:15] Before we get to the actual solutions and the way we work together, we thought we just take a step back and give you our view of the sorts of problems we see SMEs facing today in the financial services. So, first problem we see SMEs facing is what we call the problem of too much, running a small business there’s a lot of things to do just within financial services. You have to be thinking about banking payments, insurance, pension, payroll, and within each of those there’s a lot of niche products. So, in lending, which is where I’m most familiar, a small merchant can be looking at secured finance options, unsecured finance options, and within each one of those there’s a multitude of providers in different products, quite complex to understand what each one of those aren’t. And hence it’s very time consuming for SMEs to make decisions about what to choose in their financial services. Adam, do you see a kind of similar problem in the payment space?
Adam Sharpe: [00:03:04] Yeah, it seems like every 5 minutes there’s a new payment method coming to market or some sort of new brand coming to market that again SMEs are seeing but not necessarily always understanding. I totally agree, it’s an interesting space for an SME to spend that time researching and actually then selecting a provider that they think is possibly the one for them.
Tom Longhurst: [00:03:23] And look, just bring it back to the, to the guys at Sidra when, when they initially started the business and set up the restaurant, they were cash only. And I thinkwithout directly asking the question why, I think there’s some pretty clear reasons, i.e. either not sourcing the necessary tools to take payments that they would wish in a digital sense. But also, if you think about it, these guys are new in from Syria and it’s an utterly bewildering landscape to try and get into, when you’re looking at how best do I take payments for my business. And again, this is a problem that both of our businesses are trying to combine to solve.
Jakob Pethick: [00:03:54] The other problem we see is what’s traditionally or what we think of as the problem of too little really. I’m sure you’re all aware of and I’ve heard many times financial exclusion being thrown around in the lending space with kind of some staggering stats. In a recent white paper, we published at Banking Circle, which shows that more than half of the UK businesses have been unable to access cash in order to grow. That sort of exclusion runs across a lot of financial service products, including in the payment space, right?
Adam Sharpe: [00:04:22] Yeah, absolutely. I think to the point earlier, you know, if a SME looks at the options they’ve got, obviously their bank comes to mind as one of their particular options, but that’s not always the best place for them. They may not be included. They may not be unfortunately accepted by that bank or that financial institution. That’s why our channel partners are so important. Our channel partners really focus on the niche that they’re looking at, the focus that they’re looking at within those particular merchant verticals. I agree, you need to be able to find the right one.
Jakob Pethick: [00:04:50] You look at the market today, it’s really changed a lot in the last 20, 30 years. A lot of new products have come to market and are being delivered in a robust manner by very large players today. So, both across payments and banking services, you’ll find that there’s been a real wave of innovation in the last 20, 30 years. Does also mean that we’ve ended up with a couple of very large institutions who do a lot of things today. So, they serve both very wide product sets, and they cover a wide range of the value chain. So, take that kind of traditional bank. They’ll be serving both retail customers, commercial business customers, maybe some corporate customers. They’ll be trying to cover the whole range of products from lending to accounts and sometimes even making payments, referrals. And it’s just quite difficult to do all of those things well.
Tom Longhurst: [00:05:37] Yeah, and I think that’s what we’ve seen with, particularly in the UK, you see a sort of splintering of that space to try and better serve the underlying SME. When you’re trying to look for finance, it’s traditionally very, very difficult with a traditional bank. They have the balance sheet to deploy to offer you working capital. They just don’t have A – the underwriting mechanisms or B – the appetite. And I think there’s a lot of commonality in the payments space where they have the necessary technology, they have the ability to provide that service downstream. But actually, when it comes to the delivery of those services, they lack expertise, and they lack appetite to actually own and manage that relationship.
Adam Sharpe: [00:06:10] Absolutely. And that’s where, again, where a lot of our channel partners come into play. They’ve got that focus. They understand their essence. In this case, the SME market, delivering those services, whether it is payments or value-added services or finance and lending.
Jakob Pethick: [00:06:24] So what we really see happening in the market now is a bit of a break of the value chain. So, I think seeing a bit of a split in these organizations into organizations that are really focused on serving the customer well on demand, personalized services, smooth customer experiences and organizations that are more heavily focused on delivering the infrastructure and a particular product. We see that happening both in the bank space and the tech space. So, the bank space, a couple of new neo banks and more forward-looking banks really trying to build a clearly customer focused organization and then relying on other providers for the actual product. Similar in the tech space. When we see a couple of players entering financial services as a way to create more value for their customers, but again, relying on third parties to deliver the actual product experience.
Tom Longhurst: [00:07:10] And I think if you look at both what Cardstream and Banking Circle are trying to achieve, we would both position ourselves as financial infrastructure providers. So, while we aren’t necessarily directly owning relationship with SMEs, what we are trying to do is bring best in class, product and service to those partners that have a wide merchant set and own the relationship well with an SME. We’re trying to empower them better to service those underlying businesses like Sidra. Further context for Sidra, the guys that, as I mentioned, came over from Syria, they actually came over as a result of fleeing the well-known conflict that’s going on there and continues to rage. One of the challenges, primary challenges in them securing finance has actually been the fact that the ownership don’t have indefinite leave to remain, which is an interesting sort of challenge that I don’t think most lenders, when presented with, would ever be able to circumnavigate or solve. So, we have actually now been able to provide loans to Sidra. I think we’re on our second loan. First one was for some refrigeration equipment. The second one is now for the expansion that I mentioned into Twickenham. And just as a bit of a heads up, they sort of went round a number of providers again back to that to many piece around choice. They had so many different touch points to go through to try and secure lending their bank were of no assistance. I won’t name names, but there was a certain employer that Jakob used to work for that was that was unable to provide the lending as well. We now, through the partnership that we have with Cardstream and one of Cardstream’s network partners, so that is an ISO, we have been able to deliver a number of loans to Sidra. So quite a nice story of how we really have plugged the gap for a business that otherwise would not have been able to secure lending and would not now be opening their second restaurant.
Jakob Pethick: [00:08:50] So from Sidra’s perspective, they already had a touch point with one of Cardstream’s partner organizations, an ISO, and when they were going through the funding process, they reached out to understand to what extent the ISO could help them. This is where Carestream had a good relationship with the ISO and based on looking at the payment data that the ISO could see, and Banking Circle’s algorithms were able to pre-qualify this particular merchant Sidra and offer them finance.
Tom Longhurst: [00:09:16] Yeah. If we sort of boil it back down to the partner/ client journey, if we look at from the kick off of our discussions with Cardstream, what Cardstream have is good, robust and up to date data, which is really critical for our lending decisions. So Cardstream presented that data to us in an anonymized manner and that was at partner level. And what we were then able to do is approach partners of Cardstream to essentially provide them with an out of the box working capital solution. What we then work with the partners to do is utilizing that same data, preapproved their entire merchant portfolios, in this particular partner’s case there were circa 30,000 merchants, Sidra being one of those merchants. We then presented those offers back to Cardstream’s partner for them to market downstream via direct mail, via email, but also within Cardstream’s white label portal. So these merchants that are logging in are seeing live offers presented to them in an environment that they are familiar with and comfortable with. The downstream impacts we have from this is that we see these merchants very, very keen to take what is a very flexible working capital solution via a partner that they have already bought into and that they already trust.
Russell Goldsmith: [00:10:29] Tom, this is a lovely example from the UK, but does Banking Circle also lend to other countries outside the UK?
Tom Longhurst: [00:10:32] Yeah, absolutely. I think from our perspective, we’re very, very strong in the UK. That’s been the sort of origination of our main partners and accordingly client base. But we are live in Ireland, Denmark. Unregulated markets for us are very easy, such as the Netherlands, Belgium, Spain. We are looking to go live in France, Germany later this year. And we have some other markets such as Greece and Italy that we’re looking to launch either end of year or beginning of next year as well.
Jakob Pethick: [00:11:00] Just coming back to Sidra here, I’m kind of conscious that there seems to be quite a lot of players involved in delivering the lending experience with Sidra. But from their perspective, all the branding they’ll see is in the name of Cardstream’s partner, ISO partners, a trusted brand. And all the infrastructure, all the branding is delivered within a couple of days by Cardstream and Banking Circle. So, we sort of thrive off spinning off these white labels journeys quite quickly to make it simple from Sidra’s perspective. Also, a little bit of technical detail on what Sidra actually can can obtain. So, the sort of financing that we often find is a good market fit here is financing that’s between 6 to 12 months, really focused on working capital and a flexible facility that gets repaid as merchants earn money, so very well suited for seasonal businesses or businesses with unpredictable cash flow. And we really see that being a product that has wide applicability across the partner portfolios we work with.
Tom Longhurst: [00:11:53] And I think talking about the practicalities, you know, for Sidra, that application journey was incredibly quick. I think it’s circa 10 minutes we usually look at for merchants that are applying. And the issuance of the loan, similarly, I think this happened in three days in that case. They have they have a nice portal service by of course Cardstream and ourselves in a white label environment for viewing the repayments on the loan.
Jakob Pethick: [00:12:13] And final few numbers. That sort of journey brings you to this 85% number, which is the number of merchants who are pre-qualified who end up actually getting that loan. So, it’s very important for our algorithms to identify merchants who are eligible correctly so that you don’t create a bad customer experience. And then this 80% number, which is the number of merchants who end up renewing their facility after a couple of months, just demonstrating the strength of the experience, but also the kind of stickiness and recurring revenue stream that our partners would see.
Adam Sharpe: [00:12:41] And the recurring data, obviously, that flows between the two platforms. Right. That allows us as the merchant get stronger, you’re allowed to, able to loan more and more.
Tom Longhurst: [00:12:49] Yeah, yeah. And I think going back to Sidra and what this means for their experience, because I think this is core to this and I can speak sort of anecdotally, the data we have where we’re working with payment partners is that if a merchant has taken a loan through ourselves in partnership with a payment partner such as the ISO in question here or directly with someone like Cardstream, we actually see 100% retention on those merchants, i.e. if they have that loan open and they have a working capital facility with ourselves and the payment partner, they don’t leave. And then 80% at the time they retake that loan. So, it’s incredibly, incredibly sticky. And I think more importantly, if you actually look at the experience for Sidra and what they’ve achieved here, and the retention numbers and renewal numbers are testament to that fact. We now have a business that is able to secure funding in a flexible and affordable manner that they were never able to take before and are continually able to grow, thrive, survive. So yeah. I mean, look, I’m single-handedly trying to pay down the loan myself at the moment by going there more regularly. But I think all in all, they’re a very, very satisfied customer. I think one of the things we’ve tried to do with partners such as Coldstream that are particularly strong on data and technology, is utilize raw transactional data to speed up the settlement process for a merchant such as Sidra. Now when we first started our journey in lending, I think we were very, very surprised by the demand we saw at merchant level for speeding up a sort of three-day typical settlement cycle with acquirers and PSPs. However, when you actually boil down the sort of cash flow implications for some of these businesses that maybe work on 30-day invoicing terms for when they’re paying their suppliers. Actually, if you’re improving it by three days, even, you’re improving their cash flow by 10%. I think at a more practical level, however, what we see with these kind of merchants is they need to stock up at the weekends as an example. Their big days are on a Friday, Thursday or Friday night, and they’re not going to get to see those funds until Wednesday the following day. We’re again trying to solve that problem by providing them with funds faster that they can utilize to allow them to just continue their business.
Russell Goldsmith: [00:14:53] Adam does the merchant needs to use a certain provider to get these instant settlement as in a certain acquire or e-commerce platform?
Adam Sharpe: [00:14:58] I think that’s the beauty of and banking so-called coming together because the answer is no. We at Cardstream obviously worked with all of the UK acquirers, a number through Europe as well to Tom’s point earlier. So no, the ability to use any acquiring bank and any e-commerce solution is fantastic for the ability to then send that data in real time to Banking Circle.
Tom Longhurst: [00:15:19] And I think that includes payment methods as well, right? Any non-cash payment methods we’re able to cater for and I think this again stands to this is testament to stitching together the relevant services that we provide, utilizing the data that each party holds to provide. What we see is as a super flexible, pretty, pretty automated and seamless process for the underlying merchant. And if you look at traditionally, how large would you have to be as a merchant to get these kind of services through providers? You’re probably going to have to have some weight to throw around. And I think what we’re trying to do is bring the service levels and this kind of service further down the value chain to the SME level.
Adam Sharpe: [00:15:51] The fact that they don’t have to do anything, right? It’s an integrated solution. It’s there, it’s working day in, day out. Offers are being updated day in, day out. It’s, it’s a real time service.
Tom Longhurst: [00:16:00] And if you had two separate providers that had no contact with each other, this, just being completely frank, wouldn’t be feasible.
Jakob Pethick: [00:16:05] I think when you look a little bit more broadly in the market, this sort of solution is something I really see becoming adopted in the next five years or so. See, large players like Square at the moment charging one, two or actually one and a half percent to accelerate the settlement cycle by three days for their merchants. I think longer term, it’s not quite the sort of a sustainable level of pricing, but it just shows the demand. And I really would be surprised if in five years we didn’t have a majority of the market looking at sort of plus zero settlement with some of these regular forms of payment. In summary, really the benefits that we see or kind of we’ve tried to deliver to Sidra in these two cases are really around to fast, affordable finance. So being able to buy a refrigerator, expand their premises, speed up the settlement cycle to get better working capital. And that coupled with this transparent platform that’s easy to use, brings what’s sometimes been a murky part of finance into the light. What we’ve been trying to do is bring together products that cater for a wide range of the market in a simple manner so that you don’t have to go out and look to a large number of providers. But there’s a product that actually captures a lot of the market.
Tom Longhurst: [00:17:10] And that’s part of the secret sauce in this, is that ability to pre-approve. We are taking that pain of choice and having to go and tender and try and find someone to actually accept your business and issue a loan or any other form of working capital. And we’re removing that whole process, that whole pain point.
Jakob Pethick: [00:17:26] And for the partners, we’ve already touched a little bit on upon this. But of course, it’s a lot of value to bringing your customers something that they couldn’t otherwise access. There’s a recurring revenue stream. It’s very low capex the white label solution, we can spin that up in a couple of days and to most of our partners also choose to take no balance sheet risk just given the business models. It is really a bit of a plug and play solution. Both are the ones we covered.
Tom Longhurst: [00:17:50] And I think we see a number of applications with partners, whether they be payment businesses, we’re seeing some interesting experience with banks as well. Essentially what it boils down to is if someone has access to data such as a Cardstream and owns a merchant estate, there is relevance for a working capital solution and there is an ability to partner. And what we have seen through both Cardstream directly and Cardstream’s partners is that there’s a steady stream of demand and appetite for baking in these kind of solutions into a pre-existing payment flow.
Russell Goldsmith: [00:18:20] Jakob, how quickly can a merchant go from interested to funded? And how does the collaboration between Banking Circle and Cardstream assist this?
Jakob Pethick: [00:18:28] For both solutions, merchant can typically go from interested to funded in a couple of days when we’re live with a partner. So, it’s really focused on being on demand like most modern tech solutions and giving a decision fast and funds fast. Take a step back and say, how fast can we be live with our partners? On the lending solution and the working capital solution we typically shoot for something like seven working days from a point of inquiry to being live with a white label solution. And that’s where we do most of the technology work for a partner. Some partners may want deeper integrations with our APIs, and that’s a bit dependent on the partner and could take a month and a half depending on their priorities. Then on the instant settlement solution again here APIs are ready to go, we have a team that’s ready to launch with the partner, but there’s a little bit more reconciliation work on the partner side. So, we’re probably looking at something like a month and a half or so from interested to live. But really the point is, from the merchant’s perspective, once it’s live, it’s very, very fast, a couple of days.
Adam Sharpe: [00:19:25] And the pre-approval is super important, and the interest is based on the interest of the pre-approval through the platform. So, they know what they’re being offered, they know what’s available to them, and then they can go straight through the application, which is all web based.
Tom Longhurst: [00:19:37] Yeah. And that’s what Cardstream are assisting with. Again, it goes back to that data, that data quality, that depth of data and that merchant estate, we’re using that to pre-approve, and that allows us to rapidly deploy capital to a business because there is no manual underwriting that then goes into, ‘oh, well, thanks for your inquiry, let me go away and see how much we can lend you’. They are entering into this knowing the amount that they can take as a loan.
Adam Sharpe: [00:20:00] And just for clarity, obviously that’s based on the data, the payment data. So that data could be card data. As you said earlier Tom, it could be alternative payment methods. It could even be stretching out to other types of bank payments. And that’s what we’re providing.
Russell Goldsmith: [00:20:11] Do you only support affordable finance? So, Tom, will only affordable finance support will be provided or is it also is there a broader finance that can be, or facilities that can be provided?
Tom Longhurst: [00:20:24] Yes. So, the facility that we’re offering here is what has formally been termed as, I suppose, a cash advance, which traditionally had a very unaffordable tag line attached to it. It was often seen as a lender of last resort. The typical factor rates were something near sort of 1.4 as an example. We’ve worked really hard to bring that down through the technology that we offer. So, we’re down towards as an average, I think 1.2 to 1.22 and as low as 1.08 on a factor rate. So, we’re talking about affordability. We see ourselves as competing with term loans now to a certain extent, and that the solution is affordable in itself. If we’re talking more broadly about the structure of the product and the lending, the critical thing here is, we have this payment data in it’s in any form it comes in. But we also have a depth of payment data to underwrite against. And then the other critical piece is that we need to be able to inject ourselves into the funds flow, either through us opening up bank accounts, which is what we do in the example for Sidra. Once they went through the onboarding journey, we open up a bank account in their name for future funds to be directed to, which is where we do the splits. Or that can be automated more where we’re working with a partner that sits on the funds flow. But critical in this is that there is data and the ability for us to inject ourselves into the funds flow. What we are not doing is things like term loans or secured lending.
Jakob Pethick: [00:21:38] And Tom just to add to that, I think we as infrastructure providers, we need to be relevant to a lot of different partners, different merchant bases. So hence risk-based pricing that covers a wide range of the market because we only really are attractive to a partner if we can be relevant to most of their merchant estate, which is why we try and target both the affordable aspect, but also some of the smaller thin file merchants on the other end who couldn’t get finance elsewhere.
Tom Longhurst: [00:22:02] And just for sort of clarity, we do loans as small as €5,000 actually can come lower now, but it’s a good lower bracket to go for. And we’ve now seen loans as large as 1.5 million.
Russell Goldsmith: [00:22:12] How do you see companies like Klarna who offer all these or at least some lending options from one single entity? How do you sort of compare with Klarna?
Tom Longhurst: [00:22:21] Yeah, so I think I think my experience of Klarna anyway has always been on the consumer side, i.e., that’s delayed payments on consumers purchasing goods. But a critical difference here is that that our lending tools are purely focused on businesses. What I would say we capture within that as businesses, sole traders. So, I’m conscious that that’s UK terminology, but that is very small businesses that don’t necessarily have a limited entity, as an example. We do cater for them, and we do lend to them. We are, however, not in the market of lending to consumers like a Klarna would.
Russell Goldsmith: [00:22:52] So can this type of finance services that you offer equally be applied to supply chain financing?
Tom Longhurst: [00:22:59] Yeah. Interesting. It’s a market that we’re incredibly interested in. And the reasons are that there are a number of similarities in the way that we actually offer this solution. And I’d almost see it as an analog for non-disclosed invoice discounting and I’ll try and solutionise on the spot. But this is how we see the evolution in this space is that there are increasingly providers out there that are offering e-invoicing. So fixed format invoices. And if we look at Italy as an example, that’s actually a jurisdiction where it is now compulsory, compulsory for invoices to be electronic. So, there is even at a government level, a push towards that. Now, what does that mean for us? It actually means that instead of us having to try and read invoices that have been scribbled on the back of a ‘fag’ packet, we can actually key into these providers that sit on this invoice data. We can tune our algorithms to essentially read that like we would payment data, i.e., we can look at who’s typically good for paying on time on their invoices. We can underwrite a particular business to see how often their invoices are paid, the volumes, etc. And then the added advantage we have is that we’re able to spin up bank accounts in the hundreds of thousands, millions that can be issued out either on a per business or per invoice level to inject ourselves into the funds flow, i.e. when that invoice is repaid, it will be paid to an account that we or our partner controls, and we can just use the same technology we have today to split out the repayments and push back through our payment channels any residuals to the underlying business.
Jakob Pethick: [00:24:28] I really think that this sort of supply chain finance piece is the next evolution of this sort of like payment data or data heavy form of extending credit. I really see that the solutions we covered now are really relevant for businesses that go B2C and have a large number of small repayments regularly. And I think the solution that you’re kind of alluding to in the supply chain finance space is taking the same sorts of principles around flexible white label solutions and bringing it to businesses that have maybe a slightly more lumpy cash flow, but still predictable when you look at the payment data. And I think that’s really the B2B play that we’re now exploring with a couple of very large invoicing platforms.
Russell Goldsmith: [00:25:04] Talking about the merchants that we discussed earlier, how is this solution delivered? The partners need to invest in technology. How much time does it cost to bring it to market?
Tom Longhurst: [00:25:15] Yes. So, when we’re pitching, seven days, you know, we weren’t, I don’t think we were really getting ahead of ourselves. We actually had the partner in question that Cardstream delivered to us that are the payment partner for Sidra. I think from initial engagement to payment of first commission check was four and a half weeks, something along those lines. And what we see across our partners is that at very least in the lowest touch iteration of our product, i.e., where the partner presents us with data, we pre-approve the loans, they market them and then they go into a white label environment, and we control the rest of the activity. We see that as between a quarter, a quarter or half of a full-time employee that’s their time.
Jakob Pethick: [00:25:53] So some of the organizations we partner with have very limited technology and kind of other resources to invest in delivering things that don’t seem to be core. And it’s been very important for us to design solutions that can work out of the box, but which also have depth and legs to run on if the partner wants to do further integration. So, we typically see kind of a partnership growing really well over 12 or 18 months as you sort of show success in the first few light touch integrations and then you go deeper. So this API is available at the end of this if a partner wants to reproduce the whole experience in their own way, and that’s an out-of-the-box solution that we deliver on our rails.
Adam Sharpe: [00:26:28] And obviously the collaboration is there. So, any one of the Cardstream partners are able to go live very, very quickly because the data flow is already there. It’s an opt in, an agreement with Banking Circle. That delivery is almost on demand.
Tom Longhurst: [00:26:40] And what we’ve actually seen with partners that work with Cardstream, because Cardstream have a portal that is presented to the merchant in a white label environment, is that we’ve actually seen that the offers that we are presenting to the merchants have actually penetrated better. So, across the three channels where we see direct mail, where we see email, we penetrate well and typically about 5% per year of a given merchant portfolio. We’ve actually seen where it’s been presented in an online environment with a payment partner. We’ve actually seen that tick up slightly. So, we trend towards 6 or 7% on the penetration.
Russell Goldsmith: [00:27:12] So how about the support provided for other types of products like letter of credits, discounting guarantees. Does this platform only support term loans or for companies that are looking for short term lending?
Tom Longhurst: [00:27:25] A couple of things there. The loans and advances we offer are anything up to 18 months. So, there’s a reasonable duration. Speaking openly, I think the average we see is eight months that people look for a loan for. We’re not in the business today of offering things like letters of credit, etc. We are currently focused on this as a mechanism that may happen as the bank license evolves. But what we want to do is work with sort of structurally significant players in various geographies and different sort of partner sets in the payment space to deliver really automated solutions. And again, we don’t see yet a way to really easily automate things like letters of credit, and that’s critical for us. One of the big metrics that we actually use internally, Jakob, is the full-term employee per loan as a ratio and we’re always actively trying to reduce that. So, automation is key for us.
Russell Goldsmith: [00:28:11] Jakob, do your partners generate revenue from the white label solution? So how is the revenue model?
Jakob Pethick: [00:28:19] So our partners always make revenue out of both solutions. They do work in terms of acquiring merchants and it typically becomes quite an attractive recurring revenue stream for our partners. Some of our ISO partners, we’ve gone to sort of about 15% of their annual net income, which is significant to add with no risk whilst you still generate growth on the core product. So, it’s typically a quite significant revenue driver for our partners, which of course helps drive the investment case to go further. Of course, our partners typically start out with another motivation as well, which is just to increase customer value and loyalty stickiness in the core product. That’s a bit harder to estimate the commercial value of, but that’s usually a very serious driver as well.
Russell Goldsmith: [00:29:01] Tom, have your lending partnerships evolved over time?
Tom Longhurst: [00:29:04] Yeah, so I think I think what we’ve seen is that it’s an iterative process. I think we were a bit more tech first when we were working with Cardstream because the nature of the relationship being a sort of white label on a white label. So, we moved more quickly to integrate on an API basis for the exchange of data for pre-approval of loans. But if we look at the traditional journey we see our partners going through, they start with a very low touch iteration, either in a pilot phase or full rollout, but that sort of low touch example is as simple as they provide us with data. We pre-approve the data, they market the loans, and the merchant goes into a white label environment where we handle the rest. What we typically see is that the next logical step is the introduction of the onboarding API, which is where a lot of our partners obviously sit on KYC data on the merchants that these loans are being marketed to. And we’re just trying to build some efficiency into that application process by taking some of the burden of work away from the merchant. That usually just improves the merchant experience and helps to a certain extent the sort of penetration rates on the number of merchants taking a loan, just improving that funnel essentially. And then post that, we have a number of other tools.
Jakob Pethick: [00:30:11] Yeah. in short, the partners we have who’ve done the deepest integrations they show offers in their native applications that are based on payment data that’s prequalified in real time. They can onboard the merchant with that merchant supplying additional data, and they’re able to show to the merchant with real time updates how the merchants are repaying their facilities, just really driving that sort of continuous engagement with the portal and driving kind of stickiness in the core.
Russell Goldsmith: [00:30:35] And your partners Tom, do they have to provide capital themselves for lending?
Tom Longhurst: [00:30:39] No, no. So, the idea here and going back to the sort of commission piece is that this completely avoids any risk for the partner. We actually provide the loans through some SPVs that sit within the platform, and they are the providers of funding. There does, however, exist the opportunity for partners and a good example would be a bank that we’re in discussions with where they can actually, they can provide funding for the loans. So, in that kind of example, we’re providing them with the platform and the technology to both offer the loans, issue the loans and reconcile split payments, etc. and they are simply being onboarded with Banking Circle to hold an account where they have a pool of capital that we draw down off of to fund the loans to their underlying merchant base. Where we see this as particularly compelling is for sort of banks that have an acquiring arm where they have a balance sheet that they probably want to lend out and they struggle to through their traditional mechanisms because again, manual underwriting, lack of risk, appetite, etc. But they also have this portfolio of businesses for whom they service in the payment space. And what we try and do is cross-pollinate those to those two areas by allowing them to deploy their balance sheet better into their own existing merchant base. So rather than those revenues escaping elsewhere and then having an unhappy merchant, we feel it’s sort of, it’s keeping everyone happy.
Russell Goldsmith: [00:30:35] Well, that’s it for this episode of the Knowledge Circle podcast. Thanks once again to our guests, Jakob Pethick, Tom Longhurst and Adam Sharpe. I hope you enjoyed the conversation and, if you did, please follow, like and share on your podcast platform of choice. Hope you can join us on the next episode. Until then, thanks for listening and goodbye.