Carro eyes digibank licence as vehicle to expand into SME loans

Singapore

WITH its auto financing business already revving up profits - used car marketplace Carro is now eyeing a wholesale digital banking licence to expand the business.

The startup is already in talks with potential partners to apply for the licence, which could open the door to SME lending.

Carro's move comes amid the ebb and flow of startups' interest in the digital banking scene. Another local startup, peer-to-peer-lender Validus Capital, was reported by The Business Times this week to discussing with OCBC, Keppel Corporation, and Vertex Ventures to form a digital bank consortium. But fintech Nium (formerly Instarem), one of the first startups to raise its hand to signal interest in a digital banking licence, this week said it would no longer proceed to apply for one.

A car marketplace operator may be an unlikely digital banking aspirant at first blush. But the licence could help Carro's profitable subsidiary, Genie Financial Services, beef up its underwriting capabilities for automotive-related loans, said Carro chief executive Aaron Tan.

"A lot of times, when we finance end-car dealers, the risk is in not understanding their cash flow. But if we own a digital bank, we believe we can extract quite a bit of information from the car dealers. If they do deposits, their floor financing and hire purchases from us, we will have a very good view, internally, of whether the account conduct is fine and lower our risk of default," Mr Tan said.

On a bigger scale, a digital banking licence could also help Genie break into the broader SME lending space, Mr Tan said. He cites Silicon Valley Bank, which provides banking services to startups in the US, as a model Genie could emulate.

"A licence will allow us to do a lot more; for one, we will be able to unlock unsecured loans. Two, it legitimises our ambition to move beyond just the car vertical... The part that I'm very excited about is banking new-age businesses like startups. This is where we think the future of a company like this should lie," he added.

Fully owned by Carro, Genie provides loans and insurance services to car dealers and car buyers, along with technology platforms for dealers to manage their stock financing and loan origination. It has a headcount of just 13 and is headed by Helen Neo, a former senior executive vice-president at Maybank and head of personal financial services at HL Bank.

For the financial year ended March 2019, Genie more than tripled its net profit from the previous year to over S$3 million, on the back of over S$7 million in revenue, Ms Neo revealed. She attributes the unit's substantial margins to a sticky customer base, as well as banks' support in providing capital.

"Initially we struggled a bit, as we had to rely on VC funds (for lending). But after we were more engaged in the business, we managed to convince the banks to lend to us... Now, we've got at least two banks giving us full support. Today, our (credit) lines with the banks are more than S$80 million," she said.

The auto financier has a loan book of about S$120 million, of which about 30 per cent are revolving loans to dealers and the remainder are term loans to individual consumers. Beyond in-house financing, Genie has also referred about S$180 million of loans to banks, earning commission fees.

Genie made S$838,000 in net profit in the financial year ended March 2018, its first full year of operations. Revenue stood at S$3 million, with some S$2 million in interest income and hiring charges, and the remainder from fees and commissions.

In the same period, Carro on the whole incurred a S$2.5 million net loss and S$15.9 million in revenue, of which about S$12.7 million came from the sale of goods. It also recorded a substantial S$12.3 million "change in inventory" item on its profit & loss statement that the company declined to elaborate on.

The startup operates its used car marketplace in Singapore, Indonesia and Thailand, and recently invested US$30 million in a Malaysian peer. It faces stiff competition, with peers including Malaysia-based Carsome, ASX-listed iCarAsia and sgCarMart, owned by Singapore Press Holdings (which publishes BT).

Could a move into SME lending help Carro edge out competitors? Tan Yinglan, founding managing partner of Carro backer Insignia Ventures Partners, is optimistic.

"The company has always been doing more than just auto loans; in fact it started with working capital loans. It has over the last couple of years perfected auto valuation, and more importantly is able to raise debt to fund its asset-backed loan book. I would say that we have not seen a more profitable asset-backed book in the region," he said.

But could the unsecured lending space present greater risks to Genie, which has thus far specialised in secured loans? Mr Tan Yinglan is sanguine.

"I am sure that Genie will continue to do well and be profitable, regardless of doing secured or unsecured lending. The core of Genie's value proposition is not going to simply be about lending - but underwriting differentiated lending and savings products through big data," he added.

Besides Insignia, Carro is also backed by Softbank Ventures Asia and EDBI, the investment arm of the Singapore Economic Development Board, among other investors. It has raised some US$108 million in venture funding thus far.