The story of Ibancar.
When you lend someone money, it is you who is worried about getting paid back. How do you reverse the psychology and make borrower worry about repaying on time? There is a simple solution – take as collateral something that borrower loves or needs. Our new loan originator Ibancar operates in Spain and their clients are middle-class professional families. This group of people doesn’t own any art or expensive jewelry to pledge however all of them own a car! Ibancar saw a niche in the market and decided to lend money only against these cars. This strategy proved successful as over almost five years of lending there have been zero credit losses. Let’s learn the story about how they managed to get there.
How it all began
Ibancar is not only a consumer credit FinTech company – it has a bigger mission: “to challenge the traditional financial system without relying on the traditional financial system”, says its founder and CEO Alexander Melis. Funnily enough, he comes from the traditional financial system and had a successful career in London. He was a Managing Director in Investment Banking in renowned European banks Credit Suisse and BNP Paribas. Some bankers changed their attitude towards the traditional financial system when they were hit hard during the financial crisis of 2008. Alexander, however, left on a sabbatical just before the crisis in 2007 to think about his future goals and how he could build a financial business with social impact. He was frustrated with the service retail banks provided and saw that as a result of the crisis banks pulled back and abandoned large numbers of clients barring them from traditional loans. So, he moved to Spain, closer to sunshine, found like-minded business partners and started a company to lend to the people whom the banks had abandoned.
Banks always work on formulas and ratios and don’t really look into people’s situation. So Ibancar decided to launch a product that would serve people who didn’t meet the banks’ technical criteria but really did have the capacity to pay back borrowed money.
It was an idea that came out of a brainstorming session with the team in early 2014. Ibancar had to work out a complicated legal framework to allow borrowing against cars and considers this a key part of their intellectual property. Their competitors usually work in a different way – clients sell their car and lease it back and then have to buy it back in the future. This leads to problems and a high chance of losing the car as the monthly payments are just to rent the car and are not amortizations. In this situation, clients have to save the money to buy back the car. The companies that operate in this way are not in the lending business, but in the car business as they hope to profit from the car.
The hard work has paid off – Ibancar is the only real loan originator in this sector in Spain and holds a virtually risk-free loan portfolio that is almost 250% over-collateralized. Since the beginning Ibancar has issued Eur 1.6m in loans and revenue for 2019 should be in the region of Eur 500,000.
The founders started by investing their own money and the business grew organically for a few years. Later they managed to get more traditional business funding. Currently, at the operational level, the company employs 12 people and the other members of the management team are, like Alexander, very senior finance professionals who have worked at McKinsey and Goldman Sachs advising and managing investments for governments, pension funds, insurance companies, and global corporations. Together they want to challenge the industries they previously worked in and aim to facilitate the development of the alternative finance market, i.e. the new world of FinTech. This is why Ibancar believes it is crucial to develop partnerships with like-minded companies like Grupeer.
Recipe for success
The clients that Ibancar decided to lend to are working class families, who use and need their car every day and rely on it. This gives Ibancar extra security against potential capital loss as borrowers do not want to lose their car. This is a key differentiator as Ibancar has not lost money in almost 5 years of lending. Actually, if anything, non-performing loans generate a small profit, as when a car gets sold Ibancar often recovers more money than was owed. However, it is important to note that Ibancar does not engage in aggressive repossession of cars. They always try to restructure defaulted loans and agree with the client on a new repayment schedule. And it is normally not necessary to chase the car as- only 5.4% of all loans are overdue beyond 60 days and these get resolved on average in 160 days. Only 20% of non-performing loans involve the physical repossession and sale of the car.
There are other benefits of using the car as collateral: it is easy to value, easy to sell, it is monitored publicly by various government entities so it is easy to know who owns it if it has been taxed or insured. Overall it is a very transparent and liquid asset. This is very helpful, as clients apply for loans online from all over Spain and everything can be evaluated remotely and very quickly.
Ibancar lends only if they believe there are zero risks of loss. On average, they lend less than 50% of the value of the car and as responsible lenders, Ibancar ensures the installments are affordable and do not represent more than 30% of the borrower’s family income. Only 5% of all loan applications are approved, which is exceptionally low but it allows Ibancar to maintain the high quality of the loan book.
The business model
The market consists of clients who need money quickly or have been turned away by their bank or who need more money than they can get from a payday lender. Ibancar lends up to €6,000 for up 36 months. Typical clients are between 30 and 50 years old, with monthly family income between 1,500 and 3,000 euros and own a mid-range car valued between 2,500 and 10,000 euros. The service is so welcomed in Spain that the company has many returning customers, particularly due to favorable lending terms and personalized service. Despite widespread adoption of the internet in Spain, due to cultural characteristics, there is still a reticence to transact 100% online and clients welcome human-to-human interaction. At Ibancar, clients can phone and talk at any time about their financial situation. The management thinks that further automation is possible but artificial intelligence is still not at the level required so the personal touch is a necessity.
The average loan is 3,300 euros for 33 months, if documentation is correct, they can approve the application in an hour, which is the time it takes to verify the ownership, value and registration status of the car that will serve as collateral. If it takes longer it is generally because they do not immediately receive the correct documentation from the borrower. Loans can be canceled at any time, but also the amortized portion can be drawn down again at any time. This means Ibancar has long-term relationships with its clients.
Most often the loan purpose is to pay an unexpected expense – like a car or house repair or a tax bill. The interest rate is intended to place Ibancar in the middle of the market – they are more expensive than a bank loan but cheaper than a payday loan. However, the business model is built more based on service fee rather than on interest income.
Ibancar has ambitious plans for the future, however, they keep their core mission in mind at all times. They want to serve clients, who do not (or no longer) have access to conventional loans from banks and this number is growing constantly. Technologically-wise they plan to further develop smartphone chat-based access to their service (Facebook messenger and WhatsApp). Besides that, the company wants to expand the line of products they offer to include credit cards for those customers who don’t need money immediately but would like to have extra safety cushion and longer-term credit, all secured by cars. The geographical expansion is also a priority- the management sees huge potential in North America and Mexico but is also looking at European and African countries.
Despite ambitious plans, Ibancar wants to remember where they came from and their intentions from the beginning- not to behave like a bank and to have a positive social impact. Some might say that the debate can go forever, who are better- banks or alternative finance companies, but if we look at the numbers- in the past 5 years banks lost money and Ibancar didn’t. New FinTech businesses are key, to challenging the traditional financial system and we at Grupeer fully support such philosophy and invite our investors to participate and earn extra income!