Secure Trust Bank Research Report

Secure Trust Bank (STB) is a specialist lender listed on the Main Market of the London Stock Exchange, with a market capitalisation of c.£152.6m at time of writing.

It currently trades on a 5-year average earnings multiple of 5.1x, and a price to tangible book multiple of 0.45x. There is also a strong case for an upward inflection that would bring these down further to 2.6x and 0.40x within the next couple of years.

Executive summary

As a bank, STB is in the business of lending and does so today through four key segments: retail finance, vehicle finance, real estate finance, and commercial finance - the first two falling under consumer finance and the latter two under business finance.

All four have seen lending growth over the the last 5 years, but faster growth from the consumer finance segments has resulted in them increasing their share of lending from 45.5% in 2019 to 51.0% in 2023. This has coincided with a strategic shift in retail finance towards interest free lending, which now makes up 86% of the segment's loan book.

The current CEO and CFO, assuming their roles in Jan 2021 and Sep 2020, respectively, have led a drive to focus the company on its core business segments, divesting a number of non-core segments in the process.

They deem the business to currently be subscale, and are aiming to grow the loan book to c.£4bn, at which level they expect to be able to generate a return on average equity of 14%-16%, a net interest margin >5.5%, and a cost income ratio of 44%-46%, while maintaining a CET 1 ratio above 12%.

Management are incentivised to achieve these targets by the end of 2026, as they form the vesting criteria for their LTIP share awards.

Based on a share price of c.£8.00 per share, and a corresponding market capitalisation of c.£152.6m, STB currently trades at a price to 5-year average earnings multiple of 5.1x, and a price to tangible book value multiple of 0.45x.

Using the mid-term targets outlined above, the forward price to earnings multiple becomes 2.6x, and the price to book value multiple 0.40x.

With a 25% payout from the company's progressive dividend policy, the dividend yield at this level of earnings would be 9.4%.

History

The company's early history is a little patchy as it spent several decades in private ownership before becoming public, but what I can say concretely is that it was incorporated in 1954 as Secure Homes Limited.

For at least some part of the subsequent 30 years it was owned by The Dow Chemical Company, before being sold in 1985 to what is known today as the Arbuthnot Banking Group.

At the time, it formed the core asset of a newly incorporated holding company called Secure Homes Trust Limited, that changed its name to Secure Trust Group PLC in 1988 when it became a public company, before changing it again in 1998 to Secure Trust Banking Group PLC, and finally Arbuthnot Banking Group in 2005 when the holding company was admitted to the Alternative Investment Market (AIM).

The "Arbuthnot" name refers to a private and merchant banking group brought into the holding company, that traces its origins back to the 1800s.

In 1994, while within the holding company, Secure Homes Limited re-registered as a public company and changed its name to Secure Trust Bank PLC. It then had its own IPO on the AIM market in 2011, with Arbuthnot Banking Group retaining a 75.5% stake. They continued to hold majority control until 2016 when they sold down their position to 18.64% as STB moved from AIM to the Main Market. Today they don't appear on the substantial shareholders list at all.

Company overview

As a bank, STB is in the business of lending and does so today through four key segments: retail finance, vehicle finance, real estate finance, and commercial finance - the first two falling under consumer finance and the latter two under business finance.

In prior years it has also had a number of other operating segments, the most recent of which were: consumer mortgages and asset finance, both divested in 2021; and debt management, divested in 2022. These divestments occurred under the tenure of the current CEO - who took over the role at the beginning of 2021 - as part of a strategy to focus the company on its core business lines and grow net lending balances.

Retail finance

STB provides retail finance through the V12 Retail Finance brand, which it acquired along with the rest of V12 Group Finance Limited (V12) in 2013. The details of the transaction are quite interesting, so I will detour briefly to discuss them.

V12 had developed a proprietary technology platform designed to be integrated into retailers' checkouts to enable them to offer point of sale loans to their customers, both online and in-store. Through these integrations, it had managed to build up a loan book worth £32.7m, but due to its lack of a banking licence had financed this almost entirely using wholesale debt - c.£7m in subordinated debt and c.£28.5m in bank loans.

This is a problem many fintech businesses face: an inability to access retail deposits means they have to rely on wholesale funding which is considerably more expensive and makes profitable growth challenging. It is therefore a natural fit for them to merge with a licenced bank, able to raise funds from retail deposits. The alternative would be to pass the loan financing to a third-party and simply charge a fee for use of the point of sale technology platform.

In addition to £3.5m in cash consideration to the equity holders, STB agreed to repay the existing debt on completion of the deal, thus clearing the more expensive wholesale liabilities of the company. This was partly financed from the proceeds of a £20m share placing conducted in November 2012, which also highlights the benefit for V12 of merging with a listed company - access to the public equity markets.

From STB's standpoint, the company gained a point of sale technology platform, new retailer relationships, and a £32.7m loan book equating to around 50% of its existing retail finance business at the time.

The management of V12, including CEO Nick Davies, stayed on to run the business after it joined STB and have helped to grow the loan book to £1.22bn as of 31 Dec 2023. I should note that Nick Davies recently stated his intention to retire, after running V12 for more than two decades.

As I've mentioned the point of sale technology platform several times now, let's discuss it in some more detail.

From an integration perspective, V12 Finance is very similar to the other payment processors (e.g. PayPal, Stripe, etc). The customer is able to select V12 Finance as a payment option during checkout, at which point they're redirected to the V12 Finance website to complete their application.

Filling out the required fields generally only takes a few minutes and then an automated loan decision is made, taking less than 6 seconds in 90% of cases. If the application is successful, the customer is provided with a contract to sign electronically, and then the retailer is notified so they can process the order.

Once the product/service has been delivered, the funds are released to the retailer (minus a charge if the finance is interest free). V12 then charges the customer on a monthly basis until the loan has been repaid. The customer is also able manage their loan through a self-service portal where they can, amongst other things: view their outstanding loan balance; see their payment history; and send a secure message to V12 customer support.

When a customer has an account with V12 Finance, their details can be reused across all future loan applications with any supported retailer (of which there are currently 1,400 across the UK), speeding up and simplifying the application process for the customer.

The in-store process is much the same, with the customer being able to fill out the electronic application form, receive a loan decision, and sign the contract there and then.

Finance types

V12 gives retailers three types of finance to offer their customers: interest free; interest bearing; and deferred payment credit (buy-now-pay-later).

• Interest free
  • Standard terms from 3 to 60 months (interest free loans of 12 months or less are unregulated and so do not require the retailer to obtain FCA authorisation).
  • Purchase sizes between £100 and £50,000.
  • Repayments are made monthly with an optional initial deposit.
• Interest bearing
  • Standard terms from 12 to 84 months.
  • Purchase sizes between £250 and £50,000.
  • Regulated, meaning the retailer must have FCA authorisation.
  • Annual Percentage Rates (APRs) ranging from 4.9% to 19.9%.
  • Interest and principle repayments made monthly with an optional deposit.
• Deferred payment credit
  • Standard terms up to 60 months.
  • Purchase sizes between £250 and £15,000.
  • Regulated, therefore requiring the retailer to have FCA authorisation.
  • APRs starting from 9.9%.
  • First payment can be deferred for 6, 9 or 12 months.
  • Customers can repay their loan in part or in full, free of interest, during their deferred payment term, and after that point, the loan operates like a regular interest bearing loan.

Following the acquisition in 2022 of AppToPay Ltd for £1m, V12 has begun piloting a new shorter term, "Pay in 3" product with a selection of 27 retailers. As it currently stands, this requires customers to download the AppToPay app and pre-apply for a credit limit. When making a purchase of between £100 and £500 with one of the supported retailers, they will be given a code to enter into the app, at which point the purchase will be charged against their pre-agreed credit. The customer will then repay the loan in three equal monthly instalments starting 30 days from the date of purchase.

I've downloaded the app myself and found the process to be a little clunky compared to the Pay in 3 offerings of their competitors (e.g. Klarna and PayPal). First of all, you have to download the app and pre-apply for the credit before you can make a purchase. You can't fill out the application/register your details during the checkout process like you can with Klarna, PayPal or regular V12 Finance.

Secondly, the payment does not feel particularly well integrated into the checkout process. Being given a code and then having to navigate away to a separate app (which requires a multi-step login process unlike most banking apps) is very clunky, especially if you're making the purchase on your mobile. You don't then get automatically returned to the retailer's website like most people have come to intuitively expect.

While there's an argument to be made that STB may be able to leverage its existing relationships with retailers, the fact customers need to have downloaded the app and pre-applied for credit makes it quite unlikely anyone will choose AppToPay over its better-known competitors. To change this would require a substantial investment in direct to consumer marketing, which has not so far been needed with V12.

I have raised these points with management and they said they have received similar feedback from other trial users. They're currently looking at ways to make the first credit application as seamless as V12, and judging by their experience with adoption of the self-service web portal, they expect a good proportion of users to download the app without making it mandatory.

It also sounds like they plan to integrate AppToPay into V12 so users can manage longer term loan applications through the same app. This will additionally provide some immediate brand recognition, which will help with consumer marketing. Other features like a virtual card for in-store payments (rather than a pin) are also being considered, but will likely come later.

It certainly seems like management have a handle on things and have taken away some good lessons from the pilot. We'll have to see where they go from here, but there's a lot for them to go after.

The higher value products which V12 currently finances only make up around 20% of retailers' sales volumes, meaning the addition of a shorter-term BNPL product will allow the company to compete for the other 80% - an area historically served by credit cards before the introduction of interest-free alternatives.

With an existing customer base of over 840k, V12 also has a pretty good platform from which to launch a direct marketing campaign.

Retail partner selection

One of the principal strengths of V12 Finance, that gives it some defence against competitors stealing market share, is the relationships it has built with retailers. These relationships are actively initiated and maintained by a strong business-to-business sales team that selects new retail partners according to following criteria:

• Annual sales turnover of at least £1.5m.
• At least 24 months of trading history with audited accounts.
• Must be profitable.
• Sells products or services to consumers rather than other businesses.
• FCA authorisation where required.

These selection criteria encompass a wide range of retailers across many different sectors. Here are some examples:

• Furniture: Dreams, Oak furniture land, ScS, dfs, sofology.
• Sporting goods: American Golf, Ribble, Giant, Outdoor World.
• Season tickets: Arsenal, Manchester United, West Ham United.
• Jewellery: Watches of Switzerland Group (Watches of Switzerland, Mappin & Webb, Goldsmiths, Mayors), Beaverbrooks, W. Hamond.

They focus on the sectors where customers have higher credit quality, which tends to be higher value items such as furniture and jewellery. Electricals is one sector they have particularly avoided due to its association with low credit quality customers.

Customer ratings

V12 Finance has an excellent reputation with customers, demonstrated through very high ratings on independent review sites: 4.9/5.0 stars from 15,602 reviews on Trustpilot, and 4.8/5.0 stars from 4,949 reviews on feefo.

Loan book growth

STB's retail finance loan book (net of impairment provisions) has grown from £452.3m in 2017 to £1,223.2m in 2023, equating to a compound annual growth rate (CAGR) of 18.04%. New business volumes have been very similar over this period, demonstrating the relatively short duration of the loans being issued.

As can be seen from the graph above, growth was very linear from 2017 to 2019, then stumbled for a couple of years during the pandemic, before rebounding in 2022 and 2023.

Net interest income and risk adjusted income

Over the same period, net interest income grew from £41.1m to £73.1m, equating to a slightly more muted CAGR of 10.02%. This is due to decreasing margins offsetting the loan book growth.

The gap between net interest income and risk adjusted income (net interest income + net fee and commission income +/- gains/losses on modification of financial assets - net impairment charge) was significantly wider in 2017 and 2018. This can be explained by the strategic shift made in 2019 to focus on interest-free credit, growing its share of the average loan book from 62.0% in 2019 to 85.7% in 2023 (see chart below).

While interest-free credit is lower margin, the cost of risk associated with it is also generally lower. This is visible in the narrowing gap between net interest margin and risk adjusted margin (the particularly small gap in 2021 is a pandemic anomaly).

In addition, there have of course been substantial interest rate rises in 2022 and 2023, applying downward pressure on margins due to a lag in (and limit to) passing them through.

With interest rates having stopped rising (at least for now) and interest-free credit making up more than 85% of the loan book, it's likely net interest margin will stabilise around its current 6-7% level (and potentially rise if the yield curve flattens). We should therefore start to see net interest income/risk adjusted income moving in tandem with loan book growth.

Market share and competition

While the overall Retail Finance market in the UK is pretty well the same size today as it was 5 years ago, V12 has grown its share of new business from 8.2% in 2019 to 13.5% in 2023.

Below, I'll take you through some of the competitive landscape so you can get an idea of the competitors they've taken this market share from.

Barclays Partner Finance

Barclays bank offers retail finance through the Barclays Partner Finance (BPF) brand. Its product set pretty well matches V12's, with interest free, interest bearing, and deferred payment credit all offered omni-channel at point of sale.

The sectors served also overlap with V12 as they include: electrical, home improvement, furniture, sports & leisure, and jewellery. A couple of notable retail partner examples are: Amazon, where BPF provides interest bearing credit; and the Apple Store, where BPF provides interest free credit.

At 31 Dec 2023, BPF's loan book size was £2.3bn, almost twice the size of V12's, but they have been actively pulling back from the market and decreasing partner numbers. This can be seen in the fact BPF's loan book was £2.6bn at 31 Dec 2022.

With Barclays' large retail deposit base, there's certainly no lack of funding which facilitates it taking on such large partners as Amazon and Apple - in both cases as the sole finance provider.

BPF also has a very low risk tolerance, as evidenced by the FY23 cost of risk being just 0.7% and probably as well the fact it's pulling back from market at the current time. Unfortunately however, this low tolerance of risk may have contributed to a terrible Trustpilot review score of 1.3/5.0 from 552 reviews, many due to what was perceived to be unfair credit rejection.

As STB avoids electricals - where Barclays has been most prominent - and doesn't, as yet, have sufficient scale to compete as a sole provider for the larger retailers, it is unlikely that it stands to benefit greatly from Barclays' current withdrawal from the market.

Creation Consumer Finance Limited (BNP Paribas Personal Finance)

Creation Consumer Finance Limited (Creation) is a subsidiary of French bank BNP Paribas. It again offers a very similar product set to V12, with interest free, interest bearing, and deferred payment credit offered omni-channel at point of sale.

As you'd expect with the backing of a large bank, Creation has secured a number of major retail partners, where (like BPF) it is the sole finance provider. These include: B&Q, Curry's, M&S, John Lewis, Wren Kitchens, dfs, ScS, and Dreams. In total, Creation has over 300 partners, though this also includes car dealerships for which they provide vehicle finance.

I don't have the company's 2023 figures, but at 31 Dec 2022 it had gross loans and advances of £2.14bn. While this includes vehicle finance and personal loans, I'd expect most of the total to consist of loans made through its retail finance partners. To give you some evidence to support this assumption: in 2018, when Creation initiated its partnership with Curry's, it was estimated that credit provision would total £440m in the first year. Aggregating the loan books of all the aforementioned large retailers is likely to make up the majority of the £2.14bn total.

Digging into the details a little further, 81% of loans and advances are due in more than one year, which implies they're for higher value items. The cost of risk recognised in 2022 was £69.1m, equating to 3.3% of the gross loan book at the year end; though again, this includes auto-loans which tend to be higher risk.

Net interest income for the year was £179.7m (£207.0m interest income - £27.3m interest expense), giving a net interest margin of 8.4%. Adding other income from commissions etc, and subtracting transaction and commission expense gives the operating income of £175.4m. Subtracting the cost of risk gives us the risk adjusted income of £106.3m and risk adjusted margin of 5.0%.

Operating costs amounted to £82.9m, making the cost income ratio 47.3%. We don't have an allocation of operating costs specific to STB's retail finance segment to allow for direct comparison, but Creation's cost income ratio is significantly better than the aggregate STB group, as we'll see later on.

Subtracting the operating costs and cost of risk from the operating income gives us the profit before tax of £23.4m, and after tax the net profit was £18.8m.

Finally, Creation has an excellent 4.7/5.0 rating from 59,617 reviews on Trustpilot. This reputation, combined with access to pretty well unlimited cheap funding from its parent, make Creation a formidable competitor.

Novuna Consumer Finance (Mitsubishi HC Capital UK PLC)

Novuna Consumer Finance (Novuna) is owned by Mitsubishi HC Capital UK PLC. It too has a product set that closely matches V12, with interest free, interest bearing and deferred payment credit offered omni-channel at point of sale.

Novuna's retail partners generally seem to be more mid-sized, much like those of V12. In total it has partnered with over 3,000, including: AGA, OpticalExpress, carpetright, brother, Purely Diamonds, Overclockers UK, Homebase, H. Samuel, Magnet, PC Specialist, and tredz.

At 31 Mar 2023 its loan book was £3.1bn, slightly up on the prior year (£3.0bn), but new business was flat at £2.3bn. The reason for this is the company's reliance on wholesale funding, which has meant it's had to take a serious hit to margins just to maintain volumes. I would expect the impact to have worsened in FY24 as interest rates have continued to rise.

Net interest income for the year was £104.3m (£171.8m interest income - £67.5m interest expense), giving a net interest margin of 3.4%. Adding other income from commissions etc, and subtracting other cost of sales gives the operating income of £101.8m.

The cost of risk recognised in FY23 was £15.7m, equating to just 0.5% of the loan book. Subtracting this from the operating income gives us the risk adjusted income of £86.1m and risk adjusted margin of 2.8%.

Operating costs amounted to £73.5m, making the cost income ratio 72.2%. This compares very unfavourably to both STB and Creation, and really illustrates the impact of the narrowing net interest margin.

Subtracting the operating costs and cost of risk from the operating income gives us the profit before tax of £12.6m, which is down 78.5% from the £58.6m generated in FY22. After tax, the net profit came to £10.2m.

Review scores on Trustpilot are very good, with a 4.6/5.0 rating from 3,756 reviews, which stands up well against STB and Creation.

In conclusion, while Novuna has built up a large loan book and retail partner base, its competitive standing is weakened by its inability to raise funds through retail deposits. With interest rates around their current level, this is likely to restrict the company's growth and possibly result in them losing market share to competitors.

Klarna

I'm sure most people will have heard of Klarna at this point. It is the first of several companies we'll discuss that has taken a consumer-centric approach, by building an app with a marketplace of stores offering buy now pay later credit with Klarna. Once a store has been selected, users are directed to the store's website where they can shop for the product they want and complete their purchase conventionally.

As well as being a driver for retailers to add Klarna as a payment option, having such a marketplace creates an opportunity for generating advertising revenue from retailers who want their stores to have more prominent placement within the app.

Klarna is integrated into the checkout much like the other point of sale credit providers, and I will stress that downloading the app is not a prerequisite for making a credit application. You can provide all your details during the checkout process in the same way you can with V12, and the app is entirely optional for managing your loan balance afterwards. It does however have some convenient features like order tracking and returns that can make it worth installing, even if you don't intend to use the marketplace.

The main credit product Klarna offers is pay in 3 interest free credit, where a 1/3 of the cost is paid upfront, followed by two further payments at 30 day intervals. Additionally, it offers 30 days deferred payment interest free, and 6-36 months interest bearing credit.

The 30 days deferred payment product also ties into their card, which is available physically or virtually, and works much the same way as a regular credit card, with the slight difference that the user gets 30 days interest free credit from the date of each individual purchase rather than on a rolling monthly basis. The card is also accepted anywhere you can use Visa, meaning users aren't restricted to those retailers that have integrated Klarna into their checkout. It is of course just a 30 day deferred payment, making it only really suitable for smaller purchases.

The company's UK loan book (net of impairment allowance) was £863.1m at 31 Dec 2023. Given the short duration on most of the loans provided, I would expect the new business volume for the year to have been upwards of 6x this figure, which aligns roughly with the net operating income of £193.5m for the UK.

I don't have a specific figure for the credit losses attributable to loans issued in the UK, but I can tell you they were £296.2m globally, against global net operating income of £1,515.6m. This is a significant improvement on the prior year, where global credit losses and net operating income were £420.1m and £1,227.2m, respectively.

As you might expect for a venture capital backed firm investing for growth, it made an operating loss after subtracting general administrative expenses - a good chunk of which will be attributable to marketing.

Up until now, most of V12's growth has been driven by B2B sales teams and it hasn't had to spend much at all on marketing. If management intends to shift towards a more consumer-centric approach, as seems to be the case with AppToGo, they'll need to factor in the marketing spend required to compete with the likes of Klarna and its deep-pocketed backers.

Something that marks Klarna out from some of the other firms in the space, is the fact it's able to raise retail deposits (outside the UK). This has allowed the company to remain competitive and continue growing its loan book as interest rates have risen.

Reviews on Trustpilot are very good with a 4.1/5.0 rating from 250,311 global reviews. Since a big part of the product is Klarna's app, I should also mention that it has a 4.9/5.0 rating from 173.7k reviews in the Apple App Store, and a 4.5/5.0 rating from 591k reviews in the Google Play Store, with more than 10m downloads.

In conclusion, I'd say that Klarna will be a formidable competitor as STB begins targeting consumers with its new product offerings rather than retailers. It has already become a well-known brand with consumers and can compete on a funding level with its retail deposit base and venture capital backing.

Clearpay (Afterpay/Block)

Clearpay has several similarities to Klarna, including an app-based marketplace replete with supported retailers, and a digital card for in-store purchases. However, the card is restricted to retailers that support Clearpay (unlike Klarna's that is accepted anywhere you can use Visa).

In terms of credit products, it has just one: interest free credit, where 25% is paid upfront, followed by 3 further payments spread equally over 6 weeks.

Reviews of Clearpay on Trustpilot are very favourable, with a 4.8/5.0 rating from 36,886 reviews. The app has a rating of 4.9/5.0 from 40.5k reviews on Google Play and more than 1m downloads, and the Apple App Store rating is 4.9/5.0 from 70.8k reviews.

Clearpay was acquired for £10m in 2018 by Australian BNPL firm Afterpay, which was then itself acquired by Block in 2022 for $13.8bn, when the global loan book totalled $1.2bn. Despite these changes of ownership, Clearpay Finance Limited still files its accounts with Companies House, giving us some insights into its financials.

(Note: I believe the year-end changed after Block acquired the company, so we have some weird comparisons between 18-month and 12-month periods.)

The company's net loan book at 31 Dec 2022 stood at £121.9m after subtracting provisions against default of £15.2m. The figure was £68.6m at 30 June 2021 (with provisions of £7.6m), so lending has grown rapidly from a low base.

Operating income for the 18 months ending 31 Dec 2022 was £95.3m, while the cost of risk was £43.9m, bringing the risk-adjusted income down to £51.5m. Operating costs amounted to £56.3m, resulting in a cost income ratio of 59.1%.

Subtracting the operating costs from the risk-adjusted income gives us an operating loss of £4.9m. After applying an income tax credit, the net loss comes to £2.3m.

As of 31 Dec 2022, Clearpay was reliant on wholesale funding to finance its lending, with an interest rate of SONIA + 3.95%. Given that SONIA is currently around 5.19%, this implies a cost of c.9.14%, which I would expect to have severely limited its growth since then (assuming Block hasn't provided some alternative financing).

The level of threat to STB really depends on how much Block is willing (and able) to support Clearpay with funding. Given the fact its product set has not expanded since the acquisition, the answer could be "not much".

Zilch

Zilch is pretty well a copy and paste Clearpay: it offers the same pay over 6 weeks product (though with the added twist that it provides cash-back to customers if they pay immediately); and it has an app-based marketplace, along with a digital card for in-store purchases.

The company has stated its intention to add a slightly longer pay in 3 product that would differentiate it from Clearpay and bring it more in line with Klarna, but there isn't a published timeline for it yet.

Trustpilot reviews for Zilch are very favourable, with a 4.6/5.0 rating from 55,713 reviews. The app has a 4.2/5.0 rating from 8.97k reviews on Google Play and over 1m downloads, and a 4.2/5.0 rating from 2.8k reviews on the Apple App Store.

The net loan book as at 31 Mar 2023 was £30.8m, after subtracting a credit loss allowance of £6.4m. This is down significantly from the prior year, where the net loan book was £38.7m after subtracting a credit loss allowance of £13.8m, implying a significant tightening of lending criteria.

Operating income for the year ended 31 Mar 2023 was £13.5m, while the cost of risk was £13.7m, resulting in risk-adjusted income of negative £0.2m. Operating costs for the year were £72.3m, resulting in a cost income ratio of 536%.

Generally scale brings down the cost income ratio, but as Zilch isn't currently profitable on a risk-adjusted basis, there are obviously some serious improvements to lending quality required before scale will improve things.

Subtracting the operating costs and adding £0.4m in other income gives the loss before tax of £72.1m. Adding a tax credit brings the net loss to £71.8m.

Zilch's management also gives some colour on the gross merchandise value (new business) for FY23: in the year, the company achieved a GMV of £767m, of which 82% were credit transactions (i.e. the customer didn't opt for immediate payment). This really illustrates the short duration of the loans, and also the seasonal variation in lending volumes, since the GMV is more than 20x the size of the loan book at the year end.

The company is currently funded largely by equity totalling £64.7m, but intends to fund its loan book growth with a combined £125m lending facility provided by Goldman Sachs Asset Management (which is also a shareholder), carrying a floating rate of interest. As at 31 Mar 2023, Zilch had drawn down £27.9m on the facility.

As with the other companies mentioned, a reliance on wholesale funding is going to make profitable growth challenging.

Laybuy

Laybuy is a New Zealand based company that has recently begun expanding into the UK. It again has a very similar model to Zilch and Clearpay: offering interest free credit over 6 weeks; an app-based marketplace; and a virtual card for in-store purchases.

It seems to be struggling to deliver however, as evidenced by its 2.5/5.0 rating from 9,971 reviews on Trustpilot, and 2.1/5.0 rating from 10.6k reviews on Google Play (with over 1m downloads) - though slightly redeemed by a 4.7/5.0 rating from 6.8k reviews on the Apple App Store.

At 31 Mar 2022, the company had a global net loan book of NZD33.3m after subtracting impairment provisions of NZD7.9m. While there isn't an explicit segmental breakdown, we do know that NZD20.2m was held in GBP, implying it was attributable to the UK business. This also aligns with the fact 61.1% of the company's income came from the UK (before costs).

I don't think it's necessary to dig too much further into the Laybuy's financials, other than to present you the following quote from the independent audit report:

"We draw attention to Note 3.d in the consolidated financial statements, which indicates that the Group incurred a loss after tax of $51,583,000 and a net cash outflow from operating activities of $51,967,000 during the year ended 31 March 2022 and, as of that date, the Group’s net assets were $26,033,000. As stated in Note 3.d, these events or conditions, along with other matters set forth in Note 3.d, indicate that a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern."

At the time of filing the FY22 annual report, the company was looking to raise new capital, and in the time since it has delisted from the ASX - 2 years after its IPO. I therefore wouldn't consider Laybuy to be a concern for STB at present.

PayPal

UK consumer credit makes up a very small part of the overall PayPal business, and so we can't get much info from its group financials. What I can say though, is that the company off-loaded most of its European loan book (around $44bn) to KKR in 2023, giving you some idea of its scale.

The products offered in the UK are predominantly interest free credit variants: pay in 3 for lower value purchases; and longer terms (comparable to V12) for higher value purchases.

Trustpilot reviews for the company aren't good, with the UK website having a 1.3/5.0 rating from 5,371 reviews and the US website also having a 1.3/5.0 rating from 29,298 reviews. However, reviews for the PayPal app are much better, with a 4.4/5.0 rating from 3.2m reviews (and 100m+ downloads) on Google Play, and a 4.8/5.0 rating from 1.1m reviews on the Apple App Store.

PayPal is definitely a serious competitor for STB, with both brand recognition and significant financial clout. Though it's not clear how profitable such lending is for the company in the current high interest rate environment. I don't believe it has a UK banking licence, and will therefore be reliant on wholesale funding, with the KKR deal perhaps suggesting it was getting prohibitively expensive to service.