A fintech boost for Africa's small medium enterprises

Deal interview: South Africa's Crossfin buys into Retail Capital.

Crossfin Technology, South Africa’s fintech holding firm, is entrenching its position in sub-Saharan Africa’s small business financing industry. The firm has invested an undisclosed amount in Retail Capital, a South African-based provider of alternative business funding to the Small and Medium Enterprises (SME) sector.

Crossfin Technology didn’t disclose its interest in Retail Capital only saying that the deal consists of a “significant minority interest.”

Retail Capital provides businesses with innovative, flexible and convenient alternatives to traditional business loans. Since its establishment in 2011, it has partnered with more than 5 000 SME’s in providing funding of more than R1.25 billion (about US$83 billion).

The company has carved out a market for itself by funding small businesses, which are perceived by traditional banks to have a higher default risk and accrue less profits than their larger counterparts.

Anton Gaylard (pictured), the chief operating officer and co-founder of Crossfin Technology, and Karl Westvig, the CEO of Retail Capital, spoke to Mergers and Acquisitions (M&A) Africa about the deal.

M&A Africa: Why is Retail Capital the right fit for Crossfin Technology?

Crossfin’s Anton Gaylard: We have been working with Retail Capital for the past four years on developing an innovative payment system. We have a great cultural fit and alignment with Retail Capital’s team. Retail Capital has been providing funding to the underserved merchant market, which has been well received by the market. We are in the process of building fintech products that we believe will grow the SME market in South Africa and the rest of the continent.

M&A Africa: Have you already identified synergy opportunities in terms of your portfolio of products that can be offered to Retail Capital’s clients?

Anton Gaylard: With our existing portfolio companies, the investment in Retail Capital creates exciting opportunities to integrate a broad suite of financial products and services to support local merchants on multiple levels. We are invested in businesses that offer gift and loyalty solutions, payment processing products, insurance and payment tech-type products that we can offer to SME’s that are funded by Retail Capital.

Retail Capital is complementary to our strategy of solving specific everyday challenges that are not adequately covered by existing products in the market. Crossfin’s portfolio of companies currently process more than $4 billion in point of sale transactions across more than 9 000 retail stores and 13 500 mPOS (mobile point-of-sale) merchants in 7 African countries. The potential to extend the reach of our products is large.

M&A Africa: Why didn’t Crossfin Technology acquire a controlling interest in Retail Capital?

Anton Gaylard: We normally do not acquire a controlling stake in companies. We prefer to partner with investee companies and their management to support their growth plans. We prefer to partner with highly skilled team instead of controlling companies.

M&A Africa: Why is Crossfin’s interest piqued by the SME sector?

Anton Gaylard: It is an underserviced market by traditional financial services institutions. It is well known that small businesses drive employment and their efforts to grow must be supported. Our larger vision is to drive financial inclusion across Africa through the electronification of the continent’s payments ecosystem. We believe that technology can be an enabler of smart financial products that can solve real problems in Africa and do it in a cheaper and innovative way.

Karl Westvig (pictured below), CEO of Retail Capital

M&A Africa: How will the investment by Crossfin Technology support Retail Capital’s growth ambitions?

Retail Capital’s Karl Westvig: The investment will help accelerate our distribution channels and reach to business owners. Crossfin’s focus on technology can help us better reach merchants with instant automated access to short-term funding through their mPOS devices. In our early partnership with Crossfin, we have seen a high take up among business owners of the funding we offer – in real time and at any time of the day.

Many small business owners using mPOS devices are new to accepting debit and credit cards. These are typically what we'd classify as informal businesses who have never had access to finance. By using their monthly transaction data, we can provide appropriate funding access to businesses with turnovers as little as R10 000 per month, driving true financial inclusion in a major part of our market that is not adequately covered by the banking sector.

M&A Africa: What are Retail Capital’s medium-to-long-term growth targets?

Karl Westvig: We expect to provide funding of R600 million to more than 6 000 SMEs in 2019 and expect a multiplier effect that will create 3 500 jobs. In the long-term, we are planning to enter the debtors finance space, helping larger businesses have access to capital and finance. We also want to grow our business beyond the SME space to finance businesses that are larger than smaller ones.