Ahmed Fahour: The shake-up coming to buy now, pay later

In just a few short years Australia has gone from zero to more than a dozen BNPL players.

Ahmed Fahour has finally set the ball rolling on consolidation in the tech-savvy buy now, pay later sector.

After weeks of talks, Fahour’s Latitude Financial has made a $350m move on Humm’s BNPL business, delivering the strongest signal yet to the upstart sector that the era of free money is over.

In just a few short years Australia has gone from zero to more than a dozen BNPL players.

We have also exported the concept around the world, with the US and Britain now providing the biggest growth markets.

Australians have flocked to the concept of using BNPL for small purchases of up to $1000 with repayments spread across multiple instalments.

More than six million of us have a BNPL account with millennials and Gen Z’s leading the way as they turn their backs on expensive credit cards used by their parents.

At last estimates more than $10bn has been spent on purchases through BNPL.

Although this is less than 2 per cent per cent of retail purchases in total, the pace of growth has been breakneck.

With low barriers to entry and retailers loving the concept, this has spurred a rush.

After sector pioneer Afterpay’s stockmarket debut in 2016, it seemed as though a new company was being launched every few months.

There are now eight Australian-listed BNPL companies, including Afterpay, Zip, Laybuy and Sezzle.

There are another three global players, including Commonwealth Bank-backed Swedish giant Klarna and credit card major MasterCard getting in on the action.

Of the domestic players only two are profitable – Latitude and Humm. Something has got to give.

Jack Dorsey’s Square has already secured its $30bn mega-merger with Afterpay – but that was to fill a glaring gap for the US payments giant.

It was Afterpay which saw its shares surge from just $1.10 on listing to peak at more than $160, setting the high water mark.

Fahour, a career banker and former boss of Australia Post, believes the broader shake-up is for others to talk about, and for now he is focused on his own deal.

“There’s a lot of interesting smaller players, but really they’ve got to get out there and compete and it requires investment, longevity and stability,” he says.

Indeed, funding the growth of BNPL is a highly-capital intensive business.

Many players have been issuing shares, which is becoming increasingly costly as prices have been coming back to earth since October.

In reality, Latitude and Humm are a potential combination of two old-school consumer financing businesses that have rebooted in the digital payments age as BNPL.

Fahour’s Latitude was spun out of the giant GE Consumer finance arm, while Humm was until recent years known as FlexiGroup.

Both companies in a way were less tech-savvy BNPL pioneers that offered 30-month interest-free financing in-store for the likes of Harvey Norman or The Good Guys.

Humm has done a bit better in the digital reinvention, with FlexiGroup acquiring Certegy technology more than 10 years ago.

It became the engine room for its BNPL launch in 2019.

Still, Humm hasn’t been able to convince investors to reward it the way they have with other BNPL players.

While the market has come off in recent months amid expectations global interest rates will rise, Humm was just never able to ride the BNPL valuation wave like Afterpay or Zip.

This is partly because it was late to a crowded market and also because Humm at its heart is still an unglamorous, but profitable, commercial lending business.

Humm’s well regarded chief executive Rebecca James also knew she had to forge a different path in the market, and focused on transactions with bigger price tags.

Humm chief executive Rebecca James.

Where Afterpay generally played in payments below $1000, Humm targets big everyday transactions of between $1000 and $30,000.

Here it covers specialist transactions and targeted merchants ranging from dental to solar installation, car repairs, vets and high-end retail including furniture.

This saw it generate $1.03bn in BNPL transactions last year, with growth of 30 per cent on the year.

Fahour says the deal is a unique opportunity to bring together “the only two profitable players in the space”. While Humm would be absorbed by the $2.1bn Latitude, it would give a new entity a total of five million customers and over 70,000 merchants.

This, says Fahour, would “create scale, size and momentum”.

“They have things that they’re really good at, and we have things that we’re really good at. And it’s such a beautiful complementary mix, these two businesses coming together.”

He also remains convinced Latitude will gain an edge as regulators will soon catch up to BNPL and demand credit checks.

Latitude and Humm already have the systems in place to undertake credit checks before signing on a customer.

Newer BNPL players don’t operate under credit rules, which also cover areas such as responsible lending.

The industry has signed on to a voluntary code of conduct around relationships with borrowers, but Fahour believes the day is coming when regulators will bring the industry under their umbrella. And he is ready for that.

“At a minimum, they’re going to say this is credit, and you need to do a credit assessment.

“It’s no different to any other things.

“We believe that’s where it’s going to go,” he says.

Still, it’s not a done deal. Fahour has secured a non-binding heads of agreement to open the door to examine Humm’s books and table a friendly offer on the broad terms that have been flagged. Fahour doesn’t want this to drag on and hopes to have a formal deal agreed to by the end of the month.

Latitude and Humm already have the systems in place to undertake credit checks before signing on a customer.

Latitude has proposed 150 million of its shares (worth $300m, based on a pre-bid $2.00 Latitude share price) and $35m cash, which equates to $335m in total. The deal is for Humm’s consumer business only. The Humm listed structure would retain the commercial lending business, something that Fahour has little interest in.

Humm shareholders will receive the Latitude shares in proportion to their own holdings.

Latitude’s shares have come under pressure since listing in April last year, down more than 20 per cent from their headline price, but its shares got a boost on Thursday, with investors liking signs that Fahour may have a first mover advantage.

Latitude closed up 1.7 per cent Thursday to $2.00 in the face of a sharply lower broader sharemarket. Humm was up 2.2 per cent to 92c.

The biggest shareholder in Humm is Liberal Party powerbroker and FlexiGroup founder Andrew Abercrombie. He stood down as long-term chairman shortly before Christmas amid suggestions he was behind a mooted play to take Humm private. The boardroom shake-up came as Latitude was deep in talks with Humm.

Abercrombie, who remains on the board, has just over 20 per cent. John Wylie’s Tanarra Capital, which has a strong track record of agitating to unlock value in unloved companies, has just over 5.5 per cent. Wylie also sits on the board of Humm.

Earlier on Thursday, Humm’s new chairman Christine Christian said Humm’s “board and management … believe that the Latitude proposal is potentially attractive”, suggesting there was broad support inside the boardroom for the proposal.

The proposal would also see Humm’s CEO James, who has driven the transformation of FlexiGroup into Humm, move across to the bigger Latitude and report to Fahour. The commercial business would then be ripe for potential picking by a private equity or specialist business lender.

Humm tested the market for a possible sale of this business two years ago, which analysts have valued at more than $300m.

For now Britain and the US are the next battlegrounds, where the BNPL industry is still relatively tiny. However, growth across both markets is powering ahead.

Humm has launched its own UK business and is also getting a foothold in the Canadian market.

Fahour is committed to both if the deal goes ahead.