Point-of-sale lender Financeit started off in 2011 servicing a market (small and mid-size business owners) that the big banks wouldn’t touch in the wake of the financial crisis. Now Financeit has closed its first acquisition — from one of those very same banks. The company formed a lending partnership with Concentra in April 2016, and announced its $339-million acquisition of TD Bank Group’s indirect home improvement financing assets a scant six months later. That deal included purchasing 800 merchant-dealer agreements — including retailers like Home Hardware. Once the dust settles on the transition, which involved staged closings and migrating data from two distinct IT systems, Financeit will service around 45,000 existing TD consumer loans.
In an environment where agile fintechs are increasingly partnering up with existing financial institutions, collaboration was key. Peter Epp of Financeit, Jason Magid of Concentra and Gus Karantzoulis, a BLG partner with extensive experience in lending, give us a look at how it all went down.
LEXPERT: We hear a lot about big banks acquiring assets from fintechs but not the other way around. How did this transaction come about?
Peter Epp (Executive VP and GC, Financeit): We had been seeking a significant opportunity to advance our goal of becoming the #1 home improvement financing provider in Canada and this acquisition presented an important stepping stone that helped us move into the fast lane. I need to give credit to our CEO Michael Garrity for, of course, together with Concentra, identifying — and driving us to complete! — this really synergistic solution.
Jason Magid (VP, Legal Counsel, Concentra Bank): Concentra and Financeit had already established a strategic partnership, which facilitated Financeit’s national growth strategy and our objective of expanding the wholesale financing solutions and investments it provides credit unions. So when the opportunity to acquire TD’s portfolio presented itself — as TD wanted to focus on core strengths and streamline efficiencies — it was a natural extension of the pre-existing relationship between the parties. We also viewed this as an opportunity to accelerate business strategy to seek growth within the consumer financing market and diversify.
LEXPERT: Why was it important for Financeit to have a partner like Concentra?
Epp: As this was a pioneering transaction, it was important for us to strategically collaborate with an established player like Concentra. We saw the potential to introduce the benefits of the Financeit solution to credit unions and caisses populaires across Canada, in turn enabling our merchant partners nationwide to take advantage of our cloud-based platform for secure, point-of-sale lending to consumers from any web-enabled device, including instant online credit decisions as well as paperless in-field loan origination through to end-of-loan lifecycle servicing.
Magid: Both parties bring complementary strengths to their collaboration. Financeit provides Concentra with access to a superior point-of-sale financing platform and immediate access to an asset class where, historically, the credit union sector has been under-represented. With Concentra’s lending capital, Financeit significantly increases its origination capacity and access to the credit union system.
LEXPERT: Fintechs have generally benefited from a lower level of regulation than banks, right?
Gus Karantzoulis (Borden Ladner Gervais LLP, for Concentra Bank): Yes, that’s right. However, these types of strategic partnerships force fintechs to meet the higher regulatory standards of the lenders backing them. This transaction was no different.
Epp: TD and Concentra are subject to the myriad regulations that govern OSFI-regulated financial institutions, many of which, as a loan originator and servicing agent of Concentra and other banks, we also need to observe. In our own right, Financeit is also subject to, and we needed to ensure compliance with, among other things, consumer protection legislation right across the country and privacy and anti-spam regulations.
LEXPERT: How would you characterize the negotiations? The transition?
Epp: We certainly had some interesting and challenging issues — both commercial and legal — to tackle. From the, at times, vigorous tripartite purchase negotiation, to sourcing funding and completing an equity raise with important new investors, to employee integration, to merchant and borrower retention and communication, to managing the various product integrations, to successfully importing onto our platform more than 40,000 loans with a current balance of over $300 million, with more still to come, from two IT systems at TD, including scaling our system and a new build-out of all the servicing features, the deal was certainly a challenge, but at the same time was conducted with good humour by all. While the commercial negotiations on a number of the aspects continued for some time in parallel with the legals — in the end we got there.
Karantzoulis: While the acquisition of the consumer loans by Concentra and the assignment of the merchant dealer network to Financeit did not present unique legal issues, the asset velocity — that is, the changing nature of the loan portfolio — created challenges requiring staged closings. This, along with various technical challenges with data migration, contributed to a longer than expected negotiation and transition period.
LEXPERT: Equity-raising for this deal included existing shareholders such as Goldman Sachs, and new investors such as The Pritzker Organization. Why do you think Canadian fintech is attracting so much capital right now?
Magid: Fintechs are nimble and can adapt quickly to a rapidly changing consumer environment. Combine this with an online marketing platform that can reach a much broader and diverse customer base, fintechs become very attractive to banks and other financial institutions in search of new ways to diversify their financing and investment solutions and needs.
Epp: I think this shows the strong confidence the investment community has in the innovative solutions Canadian fintech companies are bringing to the market.
LEXPERT: In the debate between whether fintech is “disruptive” or “enabling” to the traditional banking system, where do you think this deal falls on the spectrum?
Magid: I think it is fair to say it is both. It is enabling for consumers, and it is also disruptive as traditional financial institutions work to come to terms with the new technology platforms.
Epp: While we’ve seen fintechs portrayed as disruptors shaking-up the Canadian banking industry or as targets for acquisition, this acquisition from TD represented a role reversal and a shift in expectations. Now that we’ve laid the groundwork and demonstrated that fintechs can make major acquisitions from “Big Banks” it’s possible others may follow suit.
LEXPERT: What would you say was the most memorable or unusual aspect of this deal? What will you take away with you?
Karantzoulis: Acquiring, migrating and transitioning over 50,000 consumer loans is an amazing accomplishment. However, Concentra’s negotiation team would not give any resistance should Concentra decide to reduce its ambitions on any future portfolio acquisition — perhaps targeting a more modest 35,000 loans!
Epp: For me, it was that the deal represented a major milestone for Financeit. We are now a larger company, a more important player in our space and with more opportunities ahead of us. While there were, of course, the usual challenges and hiccups during the deal, all parties acted collaboratively and the outcome was structured and executed more smoothly than might have been expected for a company taking its first crack at acquiring a business — especially a deal with this many moving parts.