Prospa should not rush to list

Online lender Prospa has avoided the ignominy of a market wipe-out by putting its listing plans on hold.

Online lender Prospa has avoided the ignominy of a market wipe-out by putting its listing plans on hold, and there’s no guarantee the fintech will test the waters any time soon.

Prospa’s heavyweight investors — Square Peg Capital, Entree Capital and AirTree Venture Capital — are still backing the business.

Entree Capital managing partner Avi Eyal, for one, is extremely confident about Prospa’s prospects.

“We have had the benefit of almost three decades of doing business in technology and finance, we’ve seen the ‘ups’ and the ‘downs’ and this is not a ‘down’,” he said in a memo sent to the Prospa team yesterday.

“We know winners when we see them and Prospa is fantastic!”

Whether the broader market and small business customers share Eyal’s conviction following the listing fiasco remains to be seen. The triple threat of the banking royal commission, the Australian Competition and Consumer Commission’s assault on ANZ, Citigroup and Deutsche Bank for cartel behaviour, and ASIC’s review of the small business lending space has added up to a perfect storm for Prospa.

Given the focus on the financial services sector, even a hint of noncompliance was enough to make all involved, especially UBS and Macquarie, nervous, and a last-minute chat with the corporate regulator was enough for Prospa to pause.

However, the vagaries of regulation should not have come as a surprise to Prospa, its bankers and its VC backers, and begs the question of whether it had any business listing in the first place.

Prospa’s business model has always had its critics. Its average annual percentage interest rate, which ranges between 40 per cent and 60 per cent, is higher than most of its peers, and the fintech has played in the risky end of the curve. Almost 40 per cent of its loan book is made up of businesses less than three years old and it’s also heavily involved in lending to the hospitality sector.

That in itself doesn’t make Prospa a bad business but it does shed some light on why it charges such high rates and has a slew of extra fees and charges.

Its reliance on brokers is another cause for long-term concern, especially as any regulatory pressure for more disclosure on what brokers are paid could hurt growth.

Top-line growth is one thing that has worked in Prospa’s favour, giving it a significant lead over its peers. But lending businesses aren’t necessarily served well by following the same trajectory as a standard software-as-a-service business.

In a sector where the regulatory framework is evolving, opaque fee structures and disclosure practices will always attract scrutiny.

Prospa may have had better luck if it had waited for the industry code of conduct governing online small business lenders to be finalised.