Fintech Prospa puts off listing after ASIC queries SME loan terms

Small-business lender Prospa’s $146m listing has been postponed after what it says was a last-minute ASIC intervention.

Prospa founders Greg Moshal and Beau Bertoli.

Small-business lender Prospa’s $146 million ASX listing has been temporarily shelved by what it claims is a last-minute regulatory intervention, with the fintech ending up as collateral damage in the Australian Securities & Investments Commission’s push to clean up the small-business lending market.

Prospa — which is part-funded by Square Peg, the investment fund founded by former Seek boss Paul Bassat — has had to hold fire on its much-anticipated IPO until tomorrow as it seeks to clarify the questions posed by the corporate regulator on its loan terms. Its decision to postpone the listing came just 15 minutes before the stock was set to hit the market.

It is highly uncommon for a float to be shelved on the day of a listing. In a statement, Prospa said it and its bankers, Macquarie Capital and UBS, were “seeking to clarify queries raised by ASIC” in relation to Prospa’s small-business loan terms and asked for a 48-hour delay.

Prospa said the queries were “in the context of an industry wide review into financial services small business loan terms”.

The move comes after small- business lending was put under the microscope in the banking royal commission in recent weeks. At the same time, Prospa had been shaping up as a key test of investors’ appetite for the ­nation’s fledgling fintech in­dustry.

The unregulated nature of the online lending market had been a cause for concern in the lead-up to Prospa’s IPO and Neil Slonim, a lending adviser to small and mid-sized businesses and founder of TheBankDoctor, said the fintech’s much-hyped listing raised questions about the need for greater transparency.

“The issues around transparency are not new, but it’s intriguing that the day before the Prospa IPO ASIC has apparently been in touch and asked them a number of questions,” Mr Slonim said.

Prospa, along with several of its peers, has been working with the office of the Small Business Ombudsman, FinTech Australia and Mr Slonim on an industry code of conduct to create a framework that allows small-business borrowers to make an informed choice.

ASIC’s intervention has come in the wake of the latest instalment of the royal commission, which last week raised concerns about the inadequate enforcement of unfair contact terms against the big banks.

Industry sources told The Australian that last week’s rebuke had further galvanised ASIC to take firmer action in the non-bank small-business lending space, which is largely unregulated.

In November 2016, Unfair Contracts Terms law was extended to protect small businesses and, while Prospa has made a note of it in its prospectus, it has not publicly stated whether it is currently compliant with UCT law.

With 12,000 customers and a repeat business rate of 70 per cent, Prospa’s business model is predicated on the demand from those SMEs that need capital in a hurry. The fintech offers business loans of between $5000 and $250,000 with no security required to access up to $100,000 and funding available within 24 hours.

The average loan size is $26,000 and the average term is about 11 months. SMEs do not have to offer any security other than a personal guarantee.

However, the flexibility comes with caveats and Prospa lends at an average annual interest rate of about 40 per cent. While SMEs with no other options at their disposal are happy to sign up, there is still significant opacity around terms and conditions.

Disclosure practices and interest rates vary wildly across the sector and in Prospa’s case, the lender uses the so-called “factor rate” — a number that when multiplied by the face value of the loan shows the amount of money the SMEs need to pay back by the end of the term.

Prospa’s average annual percentage interest rate, a more traditional metric used in the industry, ranges between 40 per cent and 60 per cent. For example, a factor rate of 1.24 applied on a loan of $26,000 would see the borrower pay back $32,240.

Prospa maintains that the factor rate is easier to understand, but the approach has its critics who say it makes the loan look cheaper than it really is.

Meanwhile, there are also establishment and direct debit fees that sit on top of the loan repayment. Prospa also applies significant penalties if a borrower cannot make a payment on time and those looking to repay their loans early can be required to pay all the interest for the unexpired period of the loan.

The fintech also relies heavily on its army of 7000 distribution partners to drum up new business. However, it does not disclose the fees it pays to brokers and introducers to borrowers — another area of Prospa’s business that would attract ASIC’s interest, according to Mr Slonim.

FinTech Australia chairman Stuart Stoyan said that while ASIC’s timing had been unfortunate for the fintech, stringent regulatory scrutiny was not necessarily a bad thing for Prospa.

“Prospa has taken a pretty bold decision to defer rather than have to announce something after listing and, while Prospa’s IPO has been seen as a bellwether for the entire fintech sector, that shouldn’t be the case,” Mr Stoyan said. “Most fintechs operate in highly regulated spaces (consumer lending, robo-advice, payments). Prospa is different. SMB lending is unregulated and it has taken an IPO for ASIC to get its act together.”