It’s like Standard Bank has almost outsourced SME credit book to us – Merchant Capital founder [Updated]

UPDATE (5 September 2019): For accuracy’s sake, following a call from Merchant Capital CEO and founder Dov Girnun, we have updated the headline of this article to better reflect a comment made by Girnun, when he told Ventureburn in a call “They’re (Standard Bank) almost outsourcing their small business credit to Merchant Capital”. Girnun also stressed that Standard Bank’s entire SME book has not been outsourced to Merchant Capital, and that his comments should not be interpreted literally.

Banks and fintech lenders working together. It might sound too good to be true. Usually the two are in direct competition with one another. But not for Merchant Capital‘s Dov Girnun.

His fintech startup — which he founded in 2013 (Girnun — pictured above, right was subsequently joined as a co-founder by Daniel Moritz, pictured above centre with the fintech’s chief relationship officer Ryan Cohen ) lends to small businesses and has been partnering with Standard Bank for just over a year.

“I think it’s amazing that Standard Bank were open enough to do this kind of deal,” Girnun told Ventureburn in a call last month. “They’re almost outsourcing their small business credit to Merchant Capital,” he added.

Standard Bank has almost outsourced their small business credit to Merchant Capital says founder Dov Girnun

Since June last year when Standard Bank took what Girnun referred to as “a small percentage stake” in Merchant Capital, the fintech has been able to access R200-million in deals in the last year.

Similar to RMIH’s 25% stake

Standard Bank’s stake, he revealed, is similar to that of Rand Merchant Investment Holdings (RMIH), which in 2015 acquired a 25.1% stake in the business. Neither RMI nor Merchant Capital has revealed how much was invested.

The Standard Bank deal allows the bank to refer clients to Merchant Capital’s fintech platform to access finance from the fintech’s loan book. The bank gets to retain those relationships it has with clients, while these clients utilise the fintech platform.

Girnun admits that he was surprised that the bank agreed to work with Merchant Capital — given that the two are essentially competing in the same market, for access to small business clients.

Merchant Capital initiated talks with various banks after Girnun and his team realised that the way to scale the business was to partner with larger, more established firms and their respective sales teams.

A key challenge was integrating the fintech’s proprietary software with the bank’s backend systems, something he describes as “difficult”.

The latest deal is a little different to those Merchant Capital has concluded previously. In this latest deal the parties have put milestones in place to allow the bank to grow its stake (the bank, he explained has already met its first milestone, so will be able to increase its stake).

“We didn’t want to sell them like 23% in the business and then we say ‘right guys give us your clients’ and they don’t,” explains Girnun.

What of other banks the fintech spoke to? FNB, which often lays claim to be SA’s “most innovative bank” turned the financier down. Girnun said the bank claimed that it didn’t need the fintech platform as it’s already able to service clients with its existing technology.

‘Royalty-fee payments’

So, how does it work?

Merchant Capital offers collateral-free loans to small business, allowing clients to repay loans through technology embedded in point-of-sale machines.

There are no fixed payment terms. A business owner could decide to pay off a loan in three months, or they could do it in three years — at the same cost.

To recoup loan repayments the financier uses a function on the borrower’s point-of-sale system to enables it to take a 10% cut on sales until the loan is paid back.

Further to this, Merchant Capital takes a fixed percentage of daily card payments. There are no additional monthly loan payments.

Added to this, by having access to a client’s sales, the financier is able to monitor a client’s monthly revenue and in so doing pre-empt any repayment challenges by sending out a mentor or calling up the client to assist.

‘Loans at a premium price’

Yet while Merchant Capital’s innovative finance model may have helped business owners to access finance more easily, it hasn’t come cheap.

Girnun admits his finance comes at a “premium price”, at an average of about 20% a year, meaning those that want to access an R80 000 loan, will have to pay over, R100 000 to the financier.

But while he said Merchant Capital’s finance may be priced higher than that provided by banks, it is still more affordable than that of some other unsecured lending products.

More shocking is that about 90% of those that Merchant Capital lend to should ordinarily qualify for the more affordable option of a bank loan, says Girnun, but that given the large amount of paperwork and time it takes to get a finance from a bank, about 80% opt to use the fintech’s platform to secure finance.

“But they’re saying they’d be happy to pay a premium to get finance, because of the simplicity and the ease and the speed that they can get finance” he says.

Another reason, he reckons business owners favour Merchant Capital is that after borrower has repaid 70% of their loan, they automatically qualify for access to a second one.

He points out that the large number of returning borrowers and the low default rate (at between two and three percent of the book) is testament that the product isn’t too expensive that it either kills a client’s business or drives them away.

Private equity background

Before he founded Merchant Capital in 2013, Girnun had a number of ventures while at high school and when he attended Wits University.

He then went on to complete a finance and economic honours at Wits University in Johannesburg before he moved to the UK to work for a hedge fund there.

Following this he worked in private equity company Tau Capital for over seven years specialising in mining exploration projects in Africa and Latin America. The pay was good, but Girnun always had an itch to be the one calling the shots.

‘Amicable split from US partners’

When Girnun decided to start a financing business, he opted to spend six weeks on the East coast of the US, where he teamed up with New York based Merchant Cash and Capital to develop a financing product.

“This gave Merchant Capital credibility from an investment point-of-view. A lot of school fees were paid,” he says.

The US company agreed to work with Girnun as the company initially wanted to determine whether they could export their product to other markets.

While he says Merchant Cash and Capital never took equity in the business, Merchant Capital had to pay royalty fees to the US company.

While he says he had many discussions with senior guys in the US, after six to eight months the two parties came to realise that because of the different banking laws in each country and the time zone difference, it didn’t make sense to continue the relationship.

He stresses that he still talks with the company’s current CEO, and that the split was done “amicably”.

As seed capital in 2013, Girnun secured a R3-million investment from his former employer and CEO of Jel Capital. He and Moritz also put in some of their own money.

Later in the same year, the Capricorn Capital Group, which is associated with the broader Yellowwoods Group, made an undisclosed investment in Merchant Capital. Neither party revealed how much was invested in the startup.

This investment was followed in 2015 by RMIH taking a 25% cut in the business.

R1bn to 5000 small business

Merchant Capital has a small team — just 35 employees man the operations, countrywide. Girnun says the advent of technology has enabled the company to keep the team small.

About 10 or 15 years ago one would have needed 10 or 15 staff just to make a decision on who to lend to, he says. Now one person can do the work of these 10 or 15 people, without even having to jump into their car to visit the client.

But this doesn’t mean that people have become redundant in the business.

“It’s still a people’s business. We take a genuine interest in anyone we fund. It’s not like a bot talks to you when you log in,” he says.

Merchant Capital claims it has provided R1-billion in funding to small businesses in South Africa up to 2018 and has funded 5000 small businesses.

The financier is now looking to expand its offerings, and together with Hollard Insurance, is currently piloting a new insurance product for business owners.

By the Merchant Capital’s own estimates, provided in an email to Ventureburn, the financier has helped sustain an estimated 100 000 jobs, or 20 jobs per business funded.

Reflecting on these numbers Girnun says he wants to do something to help solve unemployment in South Africa.

Yet while the banks may be working with his fintech, ironically in doing so business owners are having to pay more to access the finance they need to grow their business and hire more people.

The question is, is this the kind of cost that entrepreneurs will have to bear if South Africa is to create more jobs?

*Correction (26 September 2019): We incorrectly stated that Merchant Capital co-founder Dov Girnun attended the University of Cape Town, when he attended Wits University. In addition, we had it that he worked for Jel Capital. It was in fact Tau Capital. We also had it that the financier offers trade finance, when it simply offers straight loans.

Furthermore, Merchant Capital clarified that it does not install any software onto a borrower’s point-of-sale (PoS) system. Rather, the ability to collect payments is already installed on the PoS. Further, Merchant Capital take a fixed percentage of daily card payments and there are no additional monthly loan payments.

In addition, Merchant Capital stressed that its finance has “sustained”, rather than “created” 100 000 jobs since its inception.

Featured image (from left to right): Merchant Capital chief relationship officer Ryan Cohen, co-founder Daniel Moritz and founder and CEO Dov Girnun (Supplied)