Ann: Quarterly Report (Appendix 4C), page-120

Alright guys. time for good old Arigold to come in and clear the air and help out on the confusion.

So essentially splitit offers two products:

Basic Product: charges 1.5% + $1.50 per installment repayment, merchants get paid back in installments over time (essentially the sale is funded by the merchant, which does create a working capital drain. This is attractive to merchants who already ran an inhouse installment financing program becuase now it is digitally managed AND it is backed by a credit card (as opposed to taking naked credit risk). As some merchants have grown their consumer finance book, they may end up in a position where they are taking more credit risk than the are comfortable with, and splitit allows them to reduce this credit risk as they now have the authorization in the credit card. But for merchants who are working capital constrained (and in this environment!), this offering has limitations as a merchant can only sell so much stock without getting paid up front.

Funded Product: price starts from 3% + $1.50 per installment. Merchant gets the cash up front. To provide this, Splitit takes out credit facilities with Shaked (essentially a hedge fund that charges fairly high cost of funds, north of 9%) and uses these to advance payments to the merchants. Now you may look at that and see that say the incremental 1.5% higher price is well below their cost of funds and they make a loss. This is acutally not true. the pricing STARTS from 3% and this is for a 2 month installment, where the merchant is paid upfront. now an incremental 1.5% for 2 months of funding is around 9%+. If you wanted to have a 12 month installment in place, then splitit would price that at 1.5% + 9% + 1.50 per installment.

Effectively, the funded product just passes on Spltiit's Cost of Funds ("COF") to merchants.

Now where is the credit risk and who bears it?
Effectively the credit is underwriting by the credit card issuer, and split taps into this existing approved credit by putting a hold on this. In the basic product, the merchant is taking the credit risk of the credit card (e.g. not if the customer doesn't pay, but if the credit card issuer/bank defaults - which is very low risk). In the funded product, the credit facilitiy provider (Shaked in the US and Honeycomb in the UK) bears the cost of the risk, but has a level of security due to the credit card holds. Now why is the cost of funds still so high? There is operational risk here given that splitit does not have a very long track record with high volumes, and in addition, splitit is a relatively small company without a particularly strong balance sheet - so the default of splitit is a risk. If they do manage to demonstrate a track record of delivering on what they say, and grow the volumes so that it becomes meaningful to a big funder then you could see this COF come down and be more competitive.

So... if you read the announcement in January, Splitit is applying for AUSTRAC approval to offer the funded product... it will be interesting to see who they can attract as the financier behind this product here... but their volumes are still small so difficult to get the attention of someone like the banks.

So.. in terms of the value proposition? Splitit is very easy to get customers to hit checkout and splitit, since you dont need to sign up to an account, and it doesn't do a credit pull (as it banks on your credit card authorization) but it doesn't neccesarily create the same kind of ecosystem.

This is more of niche value proposition, which means its harder to scale up and sign up many small volume merchants. However, they did sign up Purple which is a pretty legit merchant... it has revenue of ~US$450m and @ 10% penetration = $45m MSV and @ a 2.5% take rate = 1.2m of run rate revenue. It needs to sign up 5-10 of these type of merchants in the next year to generate the kind of revenues that make this business interesting.

I hope that clears things up.