Barclays Africa takes innovative leap buying 49% of loans disruptor Rainfin

I’m quite close to the Rainfin story. In mid-2012, while still running Moneyweb, I met with Sean Emery and his partners to consider investing in his innovative peer-to-peer lending operation, the first of its kind in SA. As often happens with such ideas, the perceived risk was a little above the tolerance of our directorate. So Sean and his team went looking for a different partner. And 18 months later their persistence paid off handsomely with the announcement that Barclays Africa has acquired 49% of Rainfin The deal says a lot about both businesses – Rainfin in its ability to satisfy Regulators; and Barclays Africa in having the courage to go where no other bankers in the world have ventured. The lending market disruptor has a big brother. Let the games begin.  – AH    

Sean Emery RainFin ALEC HOGG:  Barclay’s Africa has acquired a 49 percent stake in RainFin.  That gives peer-to-peer lending a huge boost into mainstream of the financial services here in South Africa.  Sean Emery, the Chief Executive of RainFin is with us in the studio.  Sean, we were talking in 2012.

SEAN EMERY:  I know – June 2012.

ALEC HOGG:  I was actually going through my emails before we got here. I loved what you were doing.  Unfortunately, my board of directors at the time thought the risk was too high.  Well, you’ve shown them something, haven’t you?

SEAN EMERY:  Well, I think that’s the cases we see: whenever you change the industry or you try to change something, you’re always going to get people that are concerned with what you’re trying to do.  Managing risk is a big part of what we have to do.  I think over the last two years as well…we learned a lot.  We also went through many people coming at us, challenging us, the regulators, and the institutions and it was difficult to prove to many people that we were doing was actually for the benefit of the individual people: the borrowers and the lenders.  It might not be to the benefit of all the institutions, which is maybe why we got so much flak, but it definitely is for the benefit of all the people out there.

ALEC HOGG:  We’ll talk about your business in a moment, and also the deal you’ve done, which catapults you into a different league.  What kept you going through all these difficulties?

SEAN EMERY:  Well, I suppose tenacity…we had to believe in what we were trying to do.  At the end of the day…for the last ten years, I’ve been involved in these disruptive technology businesses.  Some of them take longer to take off than others and ones – when you take on a whole industry – tend to take a bit longer because you get some push back.  It’s much easier in the U.S. or in markets where there are a many people who are early adopters and first adopters.  South Africa doesn’t have that, and you therefore really have to have a lot of belief in yourself and believe in the team members around you.  What was really great was that although we did knock on a number of doors – which you said previously – everyone we spoke to was quite encouraged about the business we were trying to do, so that encouragement –you feed off that – and of course, your family helps you a lot and in the end, you have to power through.

GUGULETHU MFUPHI:  This deal with Barclay’s Africa: walk us through it.  How big is it and what does it mean for your company?

SEAN EMERY:  Well, for our company, it really is that.  It pushes us into the mainstream.  A lot of the resistance we were getting with peer-to-peer lending was that people asked us these questions.  They’d say ‘if I invest in your platform, is my money safe?  How do I know that you know how to do credit scoring?  How do I know that your organisation is meeting all the regulations, and that you’re not going to be closed down – I’m going to lose all my money if you guys disappear off into the moonlight’ etcetera’.  Clearly, when we go into this technical, financial, and legal due diligence that an organisation like Barclay’s put us through, it should really calm the fears of people to utilise our service.  It also exposed us a lot to some of the financial institutions who give us the funding to keep us going, which is obviously very important and also, they themselves can help us.  When we look at our credit scores: they have deep history of credit scoring in South Africa, and they were able to give us a lot of support in how we construct our credit scoring.  Hopefully, we can therefore give great returns to our investors.

ALEC HOGG:  Real basic stuff, peer-to-peer lending: explain it.

SEAN EMERY:  In its simplest form, we take people who have money and we give it to people who need money.  These are borrowers and lenders and we’re trying to connect them in the middle.

ALEC HOGG:  Through the Internet.

SEAN EMERY:  Through the Internet.  Banks have been doing this in the past.  Clearly, they’ve been taking money from people who want to lend it.  However, they’ve been taking it, repackaging it for themselves, lending it on, and obviously making a big margin.  Our business is not about the margin.  We give the margin to those two people – the lenders and the borrowers – through the platform, so we drive out much of the costs; we drive out a lot of the leverage in the model and therefore, the returns that actually go back to the borrower and lender are much greater than through traditional banking.

ALEC HOGG:  It’s interesting.  I was going through the details of the Standard Bank results yesterday, and their interest margin is the highest it has ever been – their nett interest margin – so there couldn’t have been a better time for you to come into this market.

SEAN EMERY:  I really think that interest market is very appealing for people who believe that they would like to enable people that need money, as well.  You have financial institutions on the outside.  You and I, individuals, and pension funds say ‘well, why can’t we have some of that margin?  Why is it only the banks that have access to that margin?’  The reality is that we can give that to them.  We can take pools of borrowers, put them all together, and we can obviously allow them to have access to this lender group.

GUGULETHU MFUPHI:  So often, we talk about entrepreneurs in South Africa and the lack of funding they receive, so I take it that this could also potentially boost that industry in South Africa.

SEAN EMERY:  Very much…  There are two contexts here.  We need to understand.  Are you talking about the fact that our platform could help new entrepreneurs to get new funding?

GUGULETHU MFUPHI:  That’s correct.

SEAN EMERY: Yes, we definitely are launching an SME service.  I definitely believe that our SME sector in South Africa is dramatically underfunded.  That’s because I believe banks have been looking at them in the wrong way.  They’ve been looking at them from a balance sheet point of view.  They haven’t really been looking at them from a cash flow point of view or from detailed analysis.  Part of the new services, which Barclay’s have given us the ability to launch, will be these SME services, where we can take different models and add them into the credit score.  For example, procurement data: procurement data, for us, is such a great indicator of a company’s success.  If someone has five outstanding invoices, they’re billing, they have recurring revenues, they have contracts, and they have managed to become suppliers in already large organisations in South Africa – that guy deserves funding.  Even though he might have a very asset-less financial statement, he still the [unclear 05:20] to support funding.  All consumer lending is done on cash flow, and not just on a payslip.  Why then, can’t we do cash blow-based lending to businesses as well?

ALEC HOGG:  Are you doing both then, consumer lending and business lending?

SEAN EMERY:  At the moment, our services just lie with lending, but yes, we have seven products, which Barclay’s has now given us the ability to launch.  They give us the funding to launch those from an operational capacity.  We are going to be able to launch ones with the SME focus.  We’ll also launch some in corporate bonds, which will be very interesting, and we’re also going to launch some fixed-assets support ones, too.

ALEC HOGG:  That’s an incredible jump for you, Sean.  How did you manage to get Barclay’s Africa?  Has any bank in the world made a stake in…?

SEAN EMERY:  No, ours is the first transaction – in the world – that a bank has done.

ALEC HOGG:  Maria must have something going for her if she’s thinking in that way.

SEAN EMERY:  What’s very interesting is inside that business – the Barclay’s business – there’s this unit, which they’ve established, which is now called the Growth Unit.  It’s headed up by a guy called Eugene Booysen and someone there called Johan Locke, who works in it.  They have a very good vision about these things.  Yes, you talk about those doors I knock on…and there are locks on individual doors.  I had a conversation with this group inside what I thought might have been a traditional or perhaps an older type of banking environment, but they got it, they saw it, and they are very supportive of it.  Since then, all the conversations with the high leadership, Steven van Collier, the conversation even with Craig Bond etcetera in the organisation: they get that this is where the market is going.  They don’t know where, and they’re allowing us to be…  They bought 49 percent.  They want us to go out on our own.  They want to support us as much as they can, but obviously, it’s a subsidiary investment.  We’re not consolidating into their business.  We’re sitting outside and we’re able to have the freedom to do what we need to do, but it’s very nice.

ALEC HOGG:  Did you talk to the other banks?

SEAN EMERY:  Yes, I talked to the other banks in a slightly more generic way than the conversations were with Barclay’s.  The other banks have slightly different views on this market.  The answer was ‘yes, we did’.

ALEC HOGG:  Well…well done to you and well done to Barclay’s Africa.  You know, it’s funny.  These are the little things that happen that you see in these big organisations, that tell you that they are transforming – they are changing – and for this type of investment to have been made in the first place by Barclay’s Africa – by a big organisation – tells you how the culture is changing there.

SEAN EMERY:  They’re taking a leap of faith, which I think is very interesting as well.  They’re also going a little bit into the unknown.  They’re trading in something, which is a little bit uneasy, but there’s so much in the pipeline there.  When we see the things they’re going to do, I’m very impressed.

ALEC HOGG:  I guess it’s an opportunity then for Gugu to go and take her family fortune and back them.  Unfortunately, you can’t buy RainFin.  That’s now part of the Barclay’s Africa Empire – or, 49 percent of it is – but you can certainly go and get the top company there, listed on the Johannesburg Stock Exchange.  That was Sean Emery, CEO of RainFin.

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