Inspired by late Prof Lester, SmartFunder helps ‘missing middle’

JOHANNESBURG — BizNews doesn’t only keep its readers up-to-date with the latest happenings in the business world, but it can even inspire new entrepreneurs to kickstart their own exciting ventures. This has been the case with Henco Wiid and Francois Liebenberg who – after listening to Alec Hogg’s interview with the now late Professor Matthew Lester about the 2017 National Budget – decided to start their own business to help the so-called ‘missing middle’ with paying their family members’ school or university fees. Wiid and Liebenberg subsequently launched ‘SmartFunder‘ which now helps around 70 companies with reducing their employees’ educational expenses through an innovative form of tax relief that forms part of national legislation. Take a listen to my interview with these innovative founders to find out more. – Gareth van Zyl 

It’s a warm welcome to Henco Wiid and Francois Liebenberg who are the founders of an interesting fintech called SmartFunder. Guys, thank you so much for joining me on the podcast today.

Thanks Gareth, and thanks for the opportunity.

So, Henco you run this business called SmartFunder and its mission is to make better education a reality for all South Africans and you interestingly utilise a piece of legislation called Section 10(1)(q) to do this. Can you tell us more about how this works?

Okay, Gareth so, Section 10(1)(q) is a very interesting and a very positive piece of legislation that was introduced by government quite early in the 2000s already. It is based on an employer dependent employee value proposition whereby an employer, if they pay for an employees’ or the relatives of an employees’ school fees – they can actually restructure that to a pre-tax expense instead of the employee playing it from post-tax income. So, the act relates to any employee – if you earn R600k or less, and your employer pays for your children or relatives’ school or university fees you can actually get that as a pre-tax deduction if your employer pays it directly to the educational institution.

So, the direct impact of that is that you can potentially have lower school fees and obviously the tax benefit out of that as well, right?

Spot on. So, the objective of government here is to bring the private sector into the equation as well and see how they can actually assist what they call the ‘missing middle’ with education. So, this is a great benefit that they’ve put in place. It is, however, quite a tricky one to implement from an employer point of view just due the risk associated with it, both from an administration and a payment point of view – to do it corruption free. So, that is why in the past not many employers have actually adopted this and offered this great employee value proposition to the employees.

Matthew Lester
The late tax expert Matthew Lester.

Now Henco your idea for the business came from an interview that our publisher, Alec Hogg, did with the now erstwhile Professor Matthew Lester. Can you tell us the backstory to how SmartFunder started?

Yes, great Gareth. It is quite interesting. So, I grew up in a very small-town call Hopetown in the Northern Cape and I come from a middle-income house there. I went to study in Potch and then worked for Deloitte afterwards. Dducation has really opened massive doors for me in the last 5 or 6 years. My parents made the commitment to not send me into the world with any study debt but I had to witness first hand of all the sacrifices that they had to make to pay for my studies. The whole ‘Fees Must Fall’ campaign was very close to heart since the very beginning of it. I was always looking for ways to see how we can actually assist the education funding landscape and how can we make education more affordable, first of all, and also, more accessible.

At my time at Deloitte I met Francois, my co-founder in the business, and from the very beginning we bounced business ideas off one another and he then left. He started a different FinTech and I moved down to CT to set up a new division for Deloitte down here. The whole education thing was always in the back of my mind and given the opportunities that I got at Deloitte, my wife and I launched our first side-line business through the first season on Shark Tank SA. I really came to the conclusion that if you put your head to something, especially in SA, you can really achieve it and make a difference in whatever you want to achieve.

Then as I drove back from work one day, I listened to a podcast between Alec Hogg and the late Professor Lester, and they were discussing the 2017 Budget Speech, and Alec mentioned that he was quite disappointed that nothing was done for education in the 2017 Budget Speech. Professor Lester however, corrected him in saying that, ‘no, if your employer is willing to make an effort to pay for school fees and university fees on the employees’ behalf, they can then restructure this for anyone that earns R600k or less. So, directly addressing the problem in education where you have [inaudible 0:05:20.9] for the lower-end, but the middle income, where the majority of your taxpayers is, it doesn’t have any relief when it comes to education.

So, this obviously triggered further research and Francois and I always, (we still do), bounce business ideas around a great braai on a Friday evening and the more we unpacked this, the more we released that this can really make a massive, positive impact in SA. We can reach taxpaying employees through this. We can make education more affordable, and this is actually a great way to tie the private sector into the education funding landscape as well. So, we did our research. We got our tax opinions in place and then we set off to raise our first round of funding. We then raised a significant seed-round. We knew we had to bring tech into this business to make it scalable and to address the two pain points that exist for employers of why they are not actually implementing this.

The two pain points is the administrative burden to collect all the information, to handle the applications from employees, to verify all the information that SARS requires, which is the school or the university needs to be registered, the relative needs to be registered at the school and the distribution of funding directly from the employer to the educational institution is obviously, a big hassle if you need to bring every school on board as a vendor through procurement. So, we knew we had to solve the admin issue for companies and we needed to solve the payment issue, and then we can actually make a massive and positive impact in SA. So, we raised a significant seed-round. We built a digital FinTech platform that would handle all of this as a completely outsourced solution for employers, and then we set off in April 2018, we signed up our very first client, which was a bank, and I’m going to hand over to Francois now, to tell you a bit more about our journey since we went live with our first employer.

Awesome, thank you, Henco, thanks Gareth. So, just to build onto what Henco was saying. For both myself and Henco – education has always been something that we have been very passionate about and it’s very rare that you get the opportunity to fulfil a passion of yours and to make a living out of it. So, that was a great alignment of interest and the space that we were in our lives – it offered us both the opportunity to actually pursue this. Apart from actually building this FinTech, in my spare time, I lecture for the University of Oxford in their online FinTech programme, and Henco is still lecturing post-graduate students in the risk management faculty of the University of Stellenbosch. So, we are actively part of education and, as Henco mentioned, the big rationale for doing this was we saw the difference that education made for two, little plain guys like ourselves that came from humble beginnings but through education and hard work get ahead.

To expand on where Henco left off. So, our first client, which was a bank, a smaller bank, around 500 employees and the reason why we chose them is obviously, you get to go through all the red tape that a bank requires and it’s a large enough company to make for a very good use-case. That obviously comes with trial and error and as a pilot they made for a very good client of ours. But from the small beginning, we’ve expanded considerably and we have about 70-odd clients on the books, at the moments, from extremely small clients, to really large clients. We have the likes of non-listed companies, such as Dimension Data, as an example, they’ve partnered with us right from the beginning. Then bigger companies coming onboard, like Capitec, who is one of our clients, and Impala Platinum, who is a massive client of ours and really, across all the sectors. So, I suppose the value proposition, very much as Henco mentioned, was in simplifying this product so that we could package almost like a ‘bursary in a box’ so that a company could do as little as possible, effort from their side, and we take the majority of the admin on our side – in order to partner with them to make this product a possibility for their employees.

You describe yourself as a FintTech so, you’re then using technology to do that, I presume?

Spot on, absolutely correct, Gareth. What we realised very early on is that we were going to need to build a platform that is slick to use. That is beautiful and what compares to international standards and is digitally driven as far as possible. So, I think what differentiates the offering that we set in the market is that from the first moment an employee engages with the SmartFunder platform they will receive a curated invitation, which is both phone-based, via SMS or via email, which then allows them to register for the benefit. As Henco mentioned, this needs to be employer-driven so, we sit with the employer and we drive the whole application process from the employer. But then they effectively get to sign-on through the whole process, sign all of their contracts, in the digital fashion so there’s no paperwork involved in this.

Then what we’ve also done is, apart from the whole digital workflow and the process there, is that we’ve built significant capability, in terms of the payment platform that we have. So, we work with the major banks on this and one of our close Treasury partners, Investec, has given us a very good Treasury functionality in order to be able to make a couple of thousands of payments on a monthly basis in a seamless fashion. So, yes, the technology is very much secure data-driven, capturing and workflow for the employees, right through to executing multiple of thousands of payments to the various schools. Vetting and checking that the schools are qualifying and are registered with the Department of Basic of Higher Education, as Henco mentioned previously. Then, most importantly, making sure that right references were used, proof of payment goes out the employer on an aggregate level – to the schools monthly, on an aggregate level, and also the employee on an individual level.

So how do you guys make your money?

Yes, Gareth, it’s a valid concern. You have to make a living in order to run a sustainable business. So, our revenue model is very simple. We go on what we call a ‘pay-per-use’ basis. So, we have a monthly administrative fee connected to a bursary that we administer, i.e. for every bursary that we administer there’s a nominal monthly admin fee that we charge. The reason why we chose to build it that way is that it is effectively risk-free for an employer because the more people who make use of our service, the bigger the fee that we charge, and if no one cares to make use of the service. Bear in mind this is always elective. An employer will offer this. An employee has the choice to either make use of it or not.

Effectively, the risk for us is that if we don’t have a good service and no one makes of it, we don’t make any money. Then the interesting thing as well is that the employer can choose to pay for the administrative fee or as the majority employers have opt for – we can also have the employee pay for the admin fee, which means that this could be a completely budget neutral solution for the employer to rollout and the admin fee is effectively, a very small portion of the tax saving that the employee would have received. So, they would pay for our service effectively, with the tax relief that we give back to them.

Just as a last question. Obviously, you guys have got this great concept. It looks like a really solid business. What is the plan going forward now? Where do you see this going in the next 2 to 3 years, because it’s obviously still quite new as well, isn’t it?

Yes, Gareth, a very good question. So, as Francois mentioned, the way we’ve engineered the pricing and the setup of the whole business is to make it as easy as possible for both employer and employee to sign-up and also to have as little budget impact as possible. Because this is such a great initiative that National Treasury has put forward and the fact that it actually channels money directly to schools and universities, we engineered it in a way that there’s actually no reason for an employer not to give this benefit to the employees. So, the next phase for the business that we’re busy developing now is we are forming great partnerships with the schools. There are quite a few of the big school groups that have come to the party already, where given the fact that these payments will now be made directly from the employers and not from an employee any longer, schools are really struggling with massive bad debt at the moment so, this changes the credit risk profile for the schools’ counterparty significantly. So, there are great discounts coming through the system now, as well. Where if you are making use of the SmartFunder benefit that you don’t only get the tax benefit but you also get further discounts, both on your registration fees and your tuition fees as well.

Henco and Francois, it sounds like an amazing business and thanks for taking the time to tell us more about it today.

Thanks Gareth, and thanks for the opportunity and just a big thanks to Alec, and to you guys as a team as well for sparking this whole idea. It is really making a massive, positive impact in SA.

Yes, Gareth, thanks very much from our side. Your BizNews Newsletter is the first thing that is open on every single screen of all our employees’ – it’s mandated, company policy so, thanks for the good work that you guys are also doing and for this amazing series that you’re running for entrepreneurs in SA.

Great, I’m really hoping that more South Africans will read it and maybe come up with great business ideas like you guys have done – it’s very exciting stuff.