CHEPUL Columbus Capital (ColCap) has diversified but we have stayed in the mortgage space. Many nonbanks have experienced a 10-30 per cent slowdown in origination volume, whereas we grew, year-on-year, by 7 per cent – net. Hopefully this means we have been doing things right.

Our approach has been to be very tactical while also diversifying. We are in small-ticket commercial, we do a lot in the SMSF [self-managed superannuation fund] space, nonresident, expat and Sharia. We have quite a diverse portfolio base but we have stuck to our knitting, which is mortgages. We have gone into the UK as well and are looking to expand there.

As for the competitive landscape, a lot of regulatory capital changes occurred at the start of 2023 and a number of them had a direct impact in our space. For example, the capital requirements for SMSF lending increased significantly.

I struggle to understand why, with construction finance, the regulator is putting risk weighting on an investment construction loan at about 150 per cent and at the same time government is talking about delivering more housing. It would be good if they were all talking to each other. Overall, this is an interesting area and a lot of foreign banks are going into it.

Risk weighting for residential is another interesting area. Overall, because of regulatory capital changes, banks are still pulling out of a lot of sectors – and this is where many of the nonbanks are coming in.

BOYLE It is clear to me that, really, a nonbank is a bet on change. We are going to be around so long as there is change – this is where we thrive. We can have our own views on whether we are moving into a period of more or less change, but what history has taught us is that transformation tends to become more dramatic as we go, not less.

Why is this? It is because, essentially, credit is the lifeblood of the economy. A lot of the heavy lifting will always be done by deposit takers, but we can also expect regulators will turn their minds to keeping the system safe via capital weightings and other oversights that will affect how major institutions operate.

This creates opportunity for nonbanks. In Australia, we have a good track record of growth and evolution to make sure this lifeblood of credit supply gets right to the perimeter of responsible lending, so people can benefit from it when they choose to start a business, buy a home or buy a vehicle.

Our business has continued to grow in areas beyond home lending, but we have had a pretty good year in home lending as well. There will always be a cohort of customers that is better served by nimble lending institutions, rather than by bigger institutions that serve the masses.

BOYLE Diversification is key. If we plot our course on the fundamental assumption that the world is going to change, and that at times there will be headwinds in one area and tailwinds in another, it is only logical to operate in as many markets as possible.

We took a view early – going back to choosing the name of the business, 26 years ago – that the vision was always to be a broad-based financial services business rather than offering a single product. Over the time since then, we have worked hard on fundamental skills that can apply across a broad range of asset classes or customers so we are best placed to trade through when times of change come.

STEVENS We started in New Zealand and have been operating in Australia in a meaningful way over the past four years. Having operations in two markets certainly helps.

Some people might think of New Zealand as effectively just another state of Australia, but it is different. We are coming off a fairly low base, but our book in Australia has grown to become larger than our New Zealand book in the short time we have been here. We grew the book by 28 per cent in 2022, although it is a bit slower in 2023. This is typically because customers we may have approved 12 months ago probably still have good credit but are falling short in serviceability, due to general cost of living and debt-servicing increases.

STEVENS New Zealand personal lending is worth about NZ$14 billion (US$8.6 billion). The banks provide about NZ$8 billion and the nonbanks about NZ$6 billion, so it is pretty evenly split.

One stark difference is that there is not as much support for nonbanks from the Reserve Bank of New Zealand (RBNZ), for example. During COVID-19, the Australian Office of Financial Management was able to help out, with warehouses and elsewhere, but the RBNZ is just not geared up for this. We had to manage by ourselves.

Meanwhile, the previous government changed regulations to be quite strict on consumer lending from December 2021, under the Credit Contracts and Consumer Finance Act changes. Some of this has already been pulled back because it went too far. However, there is further change on the horizon with this legislation – the new government has already flagged this – because it was onerous.

SCOTT We have had an interesting couple of years, having gone on a significant growth trajectory outside our original markets of Australia and New Zealand. We went into 14 different countries, funded by equity capital markets. At the time, the providers of this capital were seeking top-line customer growth and top-line total transaction volume growth.

Things changed dramatically through the course of calendar 2021 and 2022 as equity capital markets started demanding profitability. This had a big impact on Zip – and I have said very clearly that we will not be going back to the equity capital market.

It is really important for us to be a self-sustaining business. Hitting the milestone of group profitability, which we did this quarter, was really important. This is not to say the equity capital market would not support us – there would definitely be interest to support equity in Zip – but we really need to demonstrate sustainable, profitable growth and that we can fund this growth ourselves.

I think this really goes to the original question about the nonbank sector – that it will continue to grow, absolutely. Anywhere there are traditional businesses, traditional products and traditional models, there will be disruption and innovation. Nonbanks are specialists: when we see opportunities to disrupt traditional models we can move quickly. We can pivot our business models to respond to these opportunities as long as we have the funding to support it.

SCOTT Higher cost of living is a rising pressure for us. With 2.3 million active customers in Australia we have a really good window into what the consumer is doing. Our customers are using our products across everything they buy including discretionary, nondiscretionary, online and in store.

Coming into 2023, we anticipated that the consumer was going to be more challenged given what we were seeing with interest rates and inflation. We took steps to tighten our credit risk criteria. We dropped our approval rates by increasing our credit cutoff and increasing our affordability levels. We have seen an uptick in risk that has worked its way through the portfolio – but we are now coming out of it. Our 1-30 day arrears are back at the lowest level since 2021.

There is certainly pressure – some consumers are definitely struggling – but our portfolio is performing well because of the actions we took at the start of 2023. In our book we see a two-speed customer, to some extent: those at the top of the credit spectrum who are shopping a lot at the moment while, at the lower end of credit, there is definitely pressure on consumers. This is reflected in a switch away from discretionary and back to nondiscretionary, and customers trading down in brands and spend.

CHEPUL We had a small uptick in hardships at the start of the year but at the moment the SPIN [S&P Global Ratings Mortgage Performance Index] is at 0.98 per cent and our arrears are at 0.28 per cent. This is on a A$14 billion (US$9.2 billion) book.

Performance has been really good – and one of the things we have benefited from is that we have a very small percentage of fixed-rate mortgages. This means we were not affected by the ‘mortgage cliff’. We are starting to see more sales in specific areas, an example being Victoria following changes in the tax regime. Certain investors are just fatigued and say they are getting out. But, ironically, we have also had a big uplift in investor originations out of the same sector.

Overall, property prices are strong, unemployment is really low and we have positive net migration. It has been a reasonably good story. Hopefully it will continue.

BOYLE It is critical. The distinction between nonbanks and banks is deposits. Without deposits, we all depend on the health of a vibrant securitisation market. It is an efficient market that responds very quickly and appropriately to prevailing conditions – and conditions change.

We put a lot of emphasis and effort into investor education and engagement, keeping ourselves informed about the state, health and evolution of securitisation markets in Australia and globally.

On this panel we have representative nonbanks that have had time in market to generate profits, see a couple of cycles and to retain those profits on balance sheet. I think this is important. Some of us were there when the financial crisis hit, and we traded through it. There is nothing like an experience like that to ensure, when we look at our businesses in calmer and better times, that we don’t forget about the things that were important when the music stopped.

In Australia, by and large the nonbank sector is a strong cohort. It is irksome that regulation can sometimes feel a little onerous, but the fundamentals are pretty good. We really can’t criticise Australian regulators for their ability to navigate the rampant changes that have that have occurred over recent years.

Our sector responds very quickly to these changes and to regulation, which has allowed space for good businesses with sound fundamental approaches and genuine customer engagement to endure.

SCOTT We have quite a big funding task coming up in the next 12 months and we are getting ahead of it with our issuance in November 2023. We have seen a real swing in the past three months with the level of reverse enquiry. It has been fantastic that we have had investors coming directly to us, wanting to engage.

I’m not seeking to disintermediate the banks or syndicates – definitely not. But we are really welcoming of investors coming directly to us because it gives us a chance to tell the story, develop a relationship and understand what the investor’s interest is. Then we can often structure something to meet their requirements.

We will do a lot more direct investor meetings and different styles of transactions, not just public securitisations, over the next 12 months. This could be variable funding notes, whole loans, securitisations or going into other markets.

SCOTT Our Australian and New Zealand businesses really operate as an ‘ANZ’ business. We have line-of-credit-style products in Australia and a pay-in-four in New Zealand, and we have a master trust structure for Australian receivables.

Interestingly, particularly over the past year, our investors have wanted to understand Zip’s corporate strategy and what is happening at the corporate level, as well as the portfolio and the master trust. They support both.

STEVENS We are funded by three of the big four banks on both sides of the Tasman Sea, in local dollars. We don’t have a master trust arrangement but the banking and capital markets environment is very supportive.

CHEPUL We had 52 meetings in three days so we had to split up to conquer. One thing I noticed is that I had underestimated how sophisticated Australia is at the consumer level. There is a lot of opportunity in the UK, because it is a very banked environment. We are talking about consolidation here, but the UK has seen a lot of consolidation – and this means there is a lot of opportunity. They are talking about ‘helocs’ [home equity line of credit loans], and I’m scratching my head thinking: that’s a pretty old product in Australia.

BOYLE We are very fortunate to operate in a sophisticated, developed, very well regulated market that was set up for success 40-something years ago with Paul Keating’s four pillars policy, and which continues to be hugely dependent on deposit-takers. This is a great thing for all our families.

Nonbanks, meanwhile, provide speed of response and a method of release in this system. By and large, the nonbanks have been the stomping ground for innovation and better customer outcomes. The work that’s done in the nonbank community is vitally important, regardless of the fact that we are relatively small in comparison with the major institutions.

STEVENS The nonbanks across Australia and New Zealand are really well supported by the big four banks; we are competing at one level but we are also customers of theirs. Mezzanine funders and the various structures they provide allow companies like ours to use less capital.

This makes us all more competitive, which is better for the consumer at the end of the day. No-one wants to go back to the days where the big-four banks dominated and could get away with whatever they wanted. The nonbanks play a critical role in achieving equilibrium.

BOYLE I think the number will grow and shrink as the economy does. We are at an interesting moment, after 13 interest rate increases over 15 months. Going back to before rate increases, there were some great, small fintech-oriented lending businesses building momentum under the proposition of better operating expense and faster technology to benefit the customer. This is an excellent strategy, but for it to be successful these lenders need liquidity – and they need it to be relatively cheap.

Of course, interest rate rises result in exactly the opposite conditions. This makes it a very hard road. This is not a critique of those businesses. They did fantastic work. They were delivering better and cheaper products for customers than would have been the case without them. But they got a little caught short by the changing environment. Will they trade through? Some will. Whether they remain independent businesses or are consolidated is the question.

There is a certain commonality around the way these businesses have been run and, for consolidation to happen, there must be motivation on price. Buyers are looking at businesses and asking: ‘what do they offer that I don’t have?’ The sellers are saying they have a valuable business that offers great consumer outcomes – but there are many of us. Conditions are ripe for consolidation and maybe we will see it.

SCOTT I think the market can definitely accommodate more nonbank organisations – and we definitely want innovation, to push the boundaries of customer experience. This is a good thing. The question is, can they cross the ‘valley of death’ and get past the point where they have scale?

It is increasingly hard for companies to do this now, not only because of the capital and funding situation but the regulatory environment. Lenders need to get to profitability really quickly, which is really difficult during the growth phase.

In our sector it is not so much consolidation but rather that we are picking up customers and merchants who are exiting other providers’ products. This is definitely an opportunity for us because we have a regulatory platform that is fit for purpose. It is a scale opportunity for us. However, we should all be aware that there are others out there trying to disrupt our businesses in just the same way. This is good for the industry.

CHEPUL I suspect cheap equity for growth is gone. We are being approached regularly by small players that are seeking either to do whole loan trades or for capital injections. It is a cycle. Some of these firms will survive – they will grow and become more resilient – but scale, efficient structures and diversified income streams are key in this market.

We also need to remember that markets evolve. Last year at the securitisation conference in Barcelona two investors said to me that Australian RMBS [residential mortgage-backed securities] are liquid, for the first time in their experience. This was amazing to hear, considering all those bear weeks that happened in 2022. We are experiencing situations where we will securitise all the way to equity. The market is willing to back good businesses all the way down the capital stack.

STEVENS There is a huge market for nonbanks, although the big-four banks still have a dominant position in Australia and New Zealand. I had a senior role at FlexiGroup in the aftermath of the financial crisis and we effectively grew the business through acquisition, because a lot of companies lost access to funding. I suspect to see some of the same in the current cycle. But if a lender has a product that is profitable, it should keep it on the playing field when others fall away.

This is the key message. In 2020, when we listed, it was all about top-line growth – to grow at any expense. But really, lenders actually should have a profitable business. This is a key focus for us. The firms that focus on this while keeping funding lines in place will be the ones that ultimately can acquire other firms.

SCOTT As a chief executive, I feel a great responsibility to make sure our business has strong foundations and is well positioned. We have had to radically simplify our business and there was absolutely a risk that many in the industry might go under because of the level of leverage and what was happening with cash burn. It was absolutely critical to the future of the business, frankly, for us to make the decisions we made – to pull out of noncore countries and products, and get the business to profitability as quickly as we could.

This is why I talk about the concept of being self-sustaining – so we can own our own future. We are now in a position where we are not at risk if there is a contagion-like effect, because we have our own funding. But I think that was a risk about 12 months ago.

STEVENS We use AI and machine learning quite heavily in our business because we are a 100 per cent direct-to-consumer model. We get almost all our business through Google and online, and we don’t have brokers. Our models are continuously learning how to find the right customers.

We started our journey about nine years ago, trying to build AI and machine learning into the credit decisioning process. This is critical to us as it provides consistency of decision-making. A lot of our approvals are automated – we don’t have credit officers involved.

Credit officers come and go, they are different personalities, they read the paper and feel positive one day and negative the next. But AI doesn’t have a pulse, in this regard. This is where I want to use it – more so than for servicing clients. It is pretty exciting.

SCOTT I agree that AI presents a huge opportunity. Our credit-decisioning engine is already driven by machine learning and AI.

I believe the genie is out of the bottle. If anyone who runs a business thinks they can stop their employees from using AI, and is trying to shut down ChatGPT, I think they are mad, from a productivity perspective. It is proliferating across our organisation in the marketing team and we are now piloting it in our engineering team.

We are looking at customer experience and partnering with some of our service providers for generative AI for scripts – just to speed up the experience of incoming calls, which tend to be more complex. For us it is absolutely a game changer, not only in the core of our business but also in how we think about operational excellence and bringing down operating costs.