It is amazing to think that 150 years ago in 1871, Western Union debuted the first electronic fund transfer. Way before the internet, computer, and even the telephone, this first payment was done via the telegraph and proved to be immensely successful, setting off what we know today as Fintech.
Now the industry today is much more than sending payments. It’s managing funds, trading stocks, cryptocurrency, lending, payment plans, and much more, all conducted through apps on your phone or on a computer.
Square (NYSE: SQ) stepped up and helped distribute stimulus checks through its mobile wallet Cash App, PayPal (NASDAQ: PYPL) added installment plan features at checkout, and companies like Upstart Holding (NASDAQ: UPST) providing personal loans went public.
These have all been immensely helpful trends in fintech and that is why I’ve been watching the space so closely. We’ve been talking about the fintech since early 2020 here at Money Morning when we first recommend ARK Fintech Innovations ETF (NYSEArca: ARKF), a fund investing in some of the top fintech companies. An investment made at that time would be up almost 100% or triple the S&P 500 return over the same time period.
Helpful trends like these are an important demonstration of the fact that working smarter, rather than harder, is the best way to get ahead in the markets. 1,600 new millionaires are minted every day in America, and working smarter instead of harder is the best way to join them.
Now, Abe Wagner is a serial entrepreneur so successful that he makes $300k every month. And he can share with you exactly how you can work smarter instead of harder to get on the path to becoming one of those new millionaires.
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In the meantime, watching the influx of companies going public in the space, one company caught my eye as a business helping a very underserved market to buy expensive durable goods & products. The pandemic has left millions of people without work or underemployed, and while there may be enough money to pay for groceries or rent, there may not be much left over.
Affordability for the masses is a huge trend right now. Just look at The Affirm IPO, which hit the public markets at over double its initial pricing range and is now valued at over $10 billion. But today I want to talk about a much smaller company growing at an even faster pace.
Katapulting to Success
This is where Katapult, a lease to own company comes to play being brought to public markets through FinServ Acquisition Corp. (NASDAQ: FSRV).
Founded in 2012, Katapult is a lease-to-own service designed for durable goods & products (i.e., furniture, appliances, electronics). When a customer purchases an item online, they retain the rights to this item and then rent it back to the customer. The customer can decide to purchase the full ownership rights of the item at any time.
This platform was designed for individuals with less than great credit, a surprisingly large market in the United States. According to credit scoring firm FICO, 79 million Americans have a credit score of 680 or below, which is considered subprime.
Then add in another 53 million U.S. adults or another 16% of the population, who don’t have enough credit history to even get a credit score and that is half the population over 18. With Katapult, there is no credit required, application in 60 seconds, flexible and transparent payment options with no late fees, and instant approvals up to $3,500
In the words of the founder Brandon Wright from an interview in 2015, “We’re giving them a means to acquire expensive products they couldn’t otherwise afford. Refrigerators to keep food cold and beds for kids to sleep in.”
How does Katapult Make Money?
Katapult offers an innovative lease financing solution to consumers to enable essential transactions at the merchant point of sale. They are already working with 150 online merchants, but with integrations like Affirm, Magento, BigCommerce, and Shopify they have potential access to thousands of merchants.
Katapult makes money in three different ways. At checkout it costs an upfront $45 and then if customers want to buy their item outright in the first 90 days, they can do so for an additional 5% fee. If the customer goes through the full term, they will have paid twice the item’s price.
What is their differentiation and how do they win in this market?
While there are several Buy Now Pay Later (BNPL) companies out there like Affirm, AfterPay, and Klarna, their key differentiator is that they cater to the underserved, unbanked or lower credit score population, a market that has very few competitors. Since 2012 they have also created a propriety risk model, which significantly outperforms industry standards. Its model claims to get a better true positive for identifying good payers and thus can lease to more customers.
Many people need credit but don’t have access and that is what helps Katapult win the market.
What does growth look like?
Katapult is currently in a very good financial position. For the 9 months ended September 30th, 2020, total revenue grew 192% YoY to $175m, up from $60m in the prior period.
Gross margins also improved from 13% to 29% during the same time period helping gross profit to increase by 540% to $51 million.
By the end of the year, the company expects to have a $60 million cash position.
Forecasts by the company are also strong. They expect sales of $1,133m by 2023 or a CAGR of 87% over the 2019-2023 period and generate a net income of $27m in 2020 and $142 million by 2023.
While there is the risk that larger BNPL players go after the same market, Katapult has gotten themselves in a very strong market position and are already profitable.
Katapult is helping a massive, underserved addressable market and with a clear and compelling value proposition in the e-commerce ecosystem, they could continue to see elevated growth.