IPO Watch: Credit Clear off to a flyer

For this week's IPO Watch we're speaking with Gerd Schenkel who is the Chairman of Credit Clear, which hit the ASX boards on October 27. Credit Clear is an Australian fintech which facilitates debt payments through its online platform, allowing organisations to manage communications and payment arrangements with their customers. It's another IPO that has really benefited from COVID giving the rising number of debt ledgers. As Gerd tells me, Credit Clear are poised to capitalise on the growing number of debt repayments to be made as the economy recovers from COVID.

The stock has been off to an absolute flyer so far and as of Monday afternoon, when we're recording this interview, its share price is up 145 per cent from its 35 cents offer price to 86 cents. Gerd has been in the digital payments industry for a while, having been the founder of UBank for NAB, Telstra Digital and the former CEO of Tyro Payments, so he’s always interesting to listen to on these topics.

Here's Gerd Schenkel, the Chairman of Credit Clear.

Table of contents
Customers
Benefits of using Credit Clear
Impact of COVID on debt collection
IPO timing
Use of IPO capital
Competition
Credit Solutions acquisition 
Gerd's experience & views
Share price performance

Thanks for joining us Gerd. I thought it might be best to start by explaining what Credit Clear does. As I understand it, your platform facilitates debt payments and the communication process involved with that. Would that be correct?

Yeah, we're a technology company focused on the collection of monies due. Currently, we're focused on past due money, so that's receivables management, and debt collection but it's effectively about collecting money that is due.

You have over 250,000 active customer accounts across a pretty wide range of industries. Could you explain which industries and organisations are the main focus?

We published a number of customers in the prospectus, I'd refer you to that. I don't want to say the wrong names because obviously their privacy is quite important. In terms of industries, it's the ones you would expect. We have private and government clients. In the private space, you'd have finance companies, but also utilities, telephone and water and electricity utilities. Then in the government space, we have clients at all levels, local, state and federal agencies. That covers a really broad range and shows how universally applicable the platform really is, which is nice for us to know.

What are the benefits your platform provides to these customers? I assume cost is a big one.

If you look at traditionally how debt collection was done, it starts with the mindset that we think is a little outdated. That mindset often is, those consumers are trying to avoid paying their bills, which in most cases is not true, in most cases it's far more benign. Consumers might have forgotten or a direct debit might have bounced. In some cases, they want to, but simply don't have the amount of money ready to pay. Some bills are quarterly bills and imagine during the pandemic people spent more time at home. Your quarterly electricity bill and gas bill is probably a lot higher than what you're used to. Those people don't have the amount of money ready in one go, so then they can't pay even though they want to, but it's not that they can't even afford it. They just can't afford to pay in one go.

Our mindset starts with a different mindset altogether, and then the method of contacting people flows from there. We don't use any high-pressure methods. Calling people and talking them into a payment plan they don't really have any ability to keep up with or anything like that. We send electronic messages in the first instance, and people can then respond and take action at a time it suits them. You can imagine someone on the way home from work gets one of our messages. It's all white labelled so it comes out in the name of the biller or the provider, so we're not a scary third party. They then say, hey, I better talk to my wife or husband or flatmate about this when I get home. It might be several hours later. Then they might say, "Hey, we’ll enter into a payment plan."

They can do that on their phone at home when they are ready, which then means two things. One is the cost is a lot lower because sending a message is obviously cheaper than calling people. Also, the effectiveness tends to be higher for the reasons I mentioned, but also the time and the channel we use to send a message is quite smart. We're learning from past experiences with a particular bill type or a particular consumer, when they're most likely to respond we're further investing in that smarts. That then means that the effectiveness of contacting people tends to be higher. That's quite important because under the regulation, you can only contact people a limited number of times, this is to protect consumers from undue pressure. When you send a message is quite important in this business. It's a big difference in cost really, and experience in the broader sense, and they're linked together obviously.

Then in terms of your revenue, you will take a cut of every message that you send to your client's customer?

There are different methods of how we charge. Traditionally, we do performance-based charging. That would be a percentage of what's collected, and that is just so we're aligned with our billers who pay us for it. There's other methods as well, there's fixed price arrangements and so on. It really depends on the particular circumstance. It also changes over time. As clients become more familiar with what we do, we might get a bigger portion of their collections’ activity. Many clients use several providers and they sort of test, someone else versus us, and then as they see that we're effective, more effective, we'll get a bigger share, which then also means be more flexible on the charging arrangements. Generally, it's a success-based arrangement.

Can you explain what you've seen happened throughout this year in terms of COVID? Obviously, earlier on you would have had clients who would have stopped collecting debts, given some of the measures imposed. How have you seen that impact the business throughout this year?

Early on, as you said, quite early on, that's in March, some of our clients had a couple of reasons to stop collecting. One is, they were wondering whether it was the right thing to do by the community. That relates in particular to government agencies, but also some private ones who would have said, "Hey, this is not the right time to hassle people about their bills." Knowing that at some point we will have to collect this money, but it was just not the right time. The other one, which we saw quite a lot is, many clients maintain overseas call centres. Whether they actually initiated a collections call from there, or whether those are just call centres for inquiries, that people might call up the general number and ask about their bill or whatever. Some of those overseas jurisdictions, they literally shut down those centres overnight to keep those people safe.

Some clients were then faced with, "Hey, we have nobody to answer the phones. Let's not generate any more inquiry volumes." That means stopping activity, including collections, but also other activity. All of those kinds of clients in the meantime now have re-established abilities to answer phone calls, alternatively so domestically or otherwise. Also, they worked with us to replace phone calls with digital means. For example, hardship applications are one example. A lot of those clients said, "Look, we need to collect, but if someone is in genuine hardship, we can do things for you." We built electronic hardship applications for some of our clients, which meant they didn't have to answer the phone, but I could still receive those applications pretty quickly. That's happened really early on.

We've really moved on from there now, where some government agencies are still not collecting. They're still waiting to see what's happening with the community. I would say almost all of the private clients have started collecting, but they're still mindful of hardship and taking a differentiated approach. There's this backlog, if you will, of monies owed that will be paid, will be collected but the pace at which that happens is really up to each of the clients. Whilst we get paid a success fee, we don't have any ownership of the debt. We don't buy any debt books or debt ledgers on purpose. We never want to be in compromising positions where we put pressure on our customers' consumer clients. The pace at which they restart collecting is up to them and it's up to their business, their community and their brand. Most of them want a continuing relationship with their customers, so they tend to take a careful approach and we follow that approach.

That was my next question. I was going to ask you, whether you're anticipating a big wave of debt repayments to be made towards the back end of this year, due to that backlog. It sounds like what you're saying is it's not really up to you, it's up to your clients?

Yeah, we do expect that backlog to be addressed. It's not a cliff, it's more sort of a gentle wave, I would say, given where we are as a country. Our long-term interest is in a functioning healthy economy because that is the only way people can pay their bills. We follow at pace. We certainly wouldn't advocate any aggressive collections methods, that doesn't help anyone. It's more a gentle wave. We can't predict exactly the steepness of that wave, but we've certainly seen the beginnings of that now.

Could you give us context behind the timing of the IPO then? Was it a decision that you were always wanting to IPO around this time, and it's coincided with those issues we've just raised about the rising number of debt ledgers at the moment?

The exact timing is largely coincidental. We had begun preparing for a listing some time ago, but the exact timing then depends on your business environment. Obviously, COVID is the driving force for a lot of activities in the country. We certainly wanted to be certain that the country is at least on the up in terms of the pandemic, which we felt it was going to be, and I think that's come true. You then stay away from the Christmas period. If it wasn't going to be October, it would have had to be March next year just because of the holidays.

We felt it was the right time. We were ready, we’d done all the work. There's a lot of preparation work, as you can imagine, in terms of pass the audits and so on. We had also just completed the acquisition lastly, of Credit Solutions. We wanted that to be done as well, so we have a clean listing for our new shareholders, so it came together. Without the pandemic, we probably would've done it at roughly the same time, but had the pandemic dragged out further or had there been much more uncertainty we might've said, look, let's wait till March and give our investors the chance to sort out their own job, private lives or business environment so they can make a decision to invest in us. But we felt it was roughly the right time, which I think so far it's been proven out right.

We'll touch on the Credit Solutions acquisition in a moment. But I just wanted to discuss, you raised $15 million for the IPO, and a lot of that I think is being allocated towards investing in technology among other things. Could you elaborate a bit on what this capital is going to be used for?

Yeah. The technology investment is one side, the other side will be further business growth. That'll be sales and marketing, but the majority of the sum is going to be invested in technology. I mentioned earlier that the system is relatively smart. It can be a lot smarter, especially as we collect more data on how people pay their bills and what their preferences are. We can feed an ever-smarter engine. There are certain business rules and workflow rules in the system today, but the intelligence could be a lot higher. We're investing in, the term is a little bit overused, but effectively in artificial intelligence or machine learning, where the timing and the channels being used to copy and other kinds of strategies for collections will be increasingly smarter. The investment will allow us to do that.

There'll also be a category of investments that have to do with effectively usability for our customers. Those would be collections and billing departments where there'll be more self-service, richer reporting those kinds of things. We'll be guided by them, so there is a process now of customer feedback and we run a Net Promoter Score, Voice of the Customer Program, that'll help us decide what's the most useful feature for our customers. Those are a few categories where we're investing.

There's clearly this new influx of fintechs which are disrupting the traditional banks and those traditional ways of paying. What sort of competition are you seeing Credit Clear face and how are you able to differentiate yourself from them?

Look, at the minute the market is still largely traditional, so that's telephone calls and letters and so on. We can make phone calls and send letters and so on as well. Although we don't think that's the way of the future, except for the calls, the digital platform. We still see ourselves replacing old methods for some time. In terms of the technology, as long as we stay ahead of the game and our system becomes smarter quicker than any competitor would build a system like ours, we wouldn't be too worried about it. It's a big market and competition is helpful for innovation. We're quite happy with a vibrant market.

We're more worried about how quickly can we replace old methods with new methods and therefore gain share from the traditional debt collection providers. Then beyond debt collection, I said earlier, that's just one application or the first application of the technology. We see a number of additional applications that we'll explore over the next 12 to 18 months. There'll be other markets we can enter with the current core technology as well. We're not worried about running out of market or anything like that.

In the September quarter, I think it was 2.6 million digital communications since. It was more than triple the number at the same time last year. Are you able to quantify how much of that has been due to COVID and or how much of that has been growth that perhaps would have occurred regardless of the situation?

I think it's anyone's guess really. We haven't really done the analysis, but we can see from our timelines that there was this dip in the monthly numbers. As I said, when people delayed or deferred collections, and then there was a strong recovery from it, which then ended up with those quarterly numbers. We don't publish the monthly numbers because they can also be a bit misleading if you published them out of context. We haven't segregated the growth into COVID and non COVID because it's in the eye of the beholder. We'll see going forward as the economy normalises what our growth rate will be. As I said, I think it's largely in our control. If we do a good job our customers tend to give us more business and if we do a less good job, they give us less. We think it's in our control. We focus on investing the money we now have prudently and carefully and really be as customer focused as possible.

You had a $4.3 million loss in the 2020 financial year. Do you have a forecast or estimate for when you think you might turn a profit?

We have various forecasts. We don't publish them again, a lot of it depends on the recovery speed out of the pandemic of the economy. That said, it doesn't worry us at all because we're well-resourced, and we're on a steep trajectory towards that. The exact timing is secondary to us, but obviously when we publish our results, then people will see that. The top-line growth rate is probably more important to our investors right at the minute, rather than the exact breakeven time, especially now that we've raised some funds.

You touched before on that acquisition of debt recovery agency Credit Solutions late last year. Could you explain how that has since integrated into Credit Clear?

The reason we made the acquisition is effectively that our clients, especially our larger ones, they preferred to get a one-stop-shop across the different collection methods, makes their job easier. We then said, okay, we now have multiple products, if you will, or strings to the bow. We have the digital platform, which is to core and what we lead with, and then we have traditional methods. They're still very customer centric and not high pressure, but we can call customers. We can take inbound calls, we can make outbound calls, we can send letters. Then as a last resort almost, we own a legal firm, which has come with Credit Solutions they’re called Oakbridge. We can lodge court actions if need be. Our customers now enjoy the end to end bundle, and that's why we did that.

We also got, with the acquisition, a very experienced management team. We have obviously our technology team, but with Credit Solutions, we have a team that's been many decades in the industry. Very established relationships, we have a salesforce that is well known in the industry. We have a reputation via the salesforce of trust. As you can imagine, we're handling private data. We're handling transactions, we’re not handling actually the money itself, but we're handling money transactions for our clients. They're right to be conservative and so we effectively got a business here that has decades worth of trust with our clients. Our CEO Brenton Glaister came from Great Solutions, he is the founder and been in the industry for a very long time.

We've got a number of really important assets that we're now using to further our growth in industry. It's the bundle really now that we're selling. We've also got some assets, there're some platforms that came from Credit Solutions. It's effectively a form of CRM if you will, that the guys use there, and also a form of document management that Oakbridge, the legal company, uses there. It's quite a good fit, because they're already quite efficient, very customer-centric, very much based on trust. Credit Solutions, didn't buy debt ledgers either, so they're in a similar business. It's really come together quite well.

You've been in the digital payments industry for a while, Gerd, having been former CEO of Tyro Payments among other roles at NAB and Telstra. Could you give us some background about how you became involved with Credit Clear and what are your views, I guess you've brought along with you?

The most interesting perspective I bring is actually from Telstra, where my team was running digital sales and service. One of the things we did is digital bill presentment and collections. In fact, we collected around three-quarters of Telstra's consumer builds on our digital platforms. We worked very closely with the Telstra collections and finance team that was quite a sophisticated team there. They used us as a channel and as a communications method with Telstra's 10 million consumers. I know how the decisions are made, and I know how important it is to be high quality in, if there was an outage for a day or two, even that at a scale of Telstra, that makes a difference for the monthly numbers. You simply cannot have outages. You can't miss a day of collections and so on. Apart from the technology, but it's the importance of how collections and bill payments drive the economics of those companies is an important perspective.

I met some of the investors in Credit Clear, some of the earlier investors. Then I met the team and I'd known some of the team from prior lives. Really, I quite like the simplicity of the proposition and the idea. Sometimes you come across a business and you say, "Oh, this doesn't exist? I can't believe no one's done it. This should definitely exist." I like well-defined useful things and Credit Clear was one of those and it's turned out to be true, even in the two years, almost two years that I've been involved with.

We've come a very long way in terms of size growth and maturity of the business. I just saw it as something that's a no brainer, that's going to do well. It doesn't rely on crazy inventions of things that don't exist yet, so the technology risk is relatively low. We're employing technology that is in existence, hasn't really been applied in this kind of way, but is mature and available. We're not risking huge amounts of money on things that might not turn out to work in the end. So relatively low risk, huge market. I like financial services because I understand some of it. I also think we're doing a good thing for the country. There's this whole responsible lending conversation in the industry, which is very important and collections is adjacent to that. People need to pay the money they owe, but that doesn't mean everybody's a fraudster or a crook. Sometimes people need a bit of extra time.

I think the way we do it is a good way of doing it. There's no charges for consumers ever. We don't charge interest. We don't charge late fees. Our service is free for consumers in all cases. If offered, if they enter into a payment plan, they're always better off than if they hadn't done that. For those people, if they didn't have Credit Clear as a service, the alternatives might be borrowing from friends and family. That's not great. Using a credit card at a high interest rate or even go to a payday lender, and those interest rates are very, very high. I think we're doing a good thing here for essential services and I like to be associated with that personally.

And just lastly, it's been a pretty solid week or so since you listed your share price is up around 140, 150 per cent from that offer price of 35 cents. Were you expecting this demand at that offer price once you'd listed?

Oh, look, it's hard to predict. We had very good feedback in the roadshows, so we felt confident going in, but you never know. You hear a lot of stories of IPOs being pulled the day before. You really do not know. We're in it for the long run, so the first day price it's important because it feels good and you feel like the business has been endorsed and supported by shareholders. Clearly going up is better than going down, but financially or anything, it makes no difference.

We tuned all of our financials and incentive schemes for the long term. Other than the private money in terms of the earnings that our employees derive from this, they don't get any benefits from the short term, day one price that we achieve here. I think the way I personally interpret the price movement is a vote of confidence. My message to the team now is let's demonstrate that the confidence was well-placed, and deliver on that. It's certainly not mission accomplished or anything like that. It's more, okay, we got the support from our shareholders. Let's deliver on that and take a two or three year time horizon in that sense.

Thank you very much for your time, Gerd.

No worries, anytime.

That was Gerd Schenkel, the Chairman of Credit Clear.