Chief Financial Officer – Transaction Capital
‘At Transaction Capital we think of ourselves as an investor in and an operator of credit orientated alternative assets’
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CIARAN RYAN: This is CFO Talks and today we are joined by Sean Doherty, CFO of the JSE-listed company, Transaction Capital, this is an interesting company that generates most of its revenue from profits around the minibus taxi industry. There are about 250 000 minibus taxis in South Africa and Transaction Capital counts roughly 30 000 of them as clients, providing vehicle finance, insurance, autobody repairs and telematic systems. The telematics data can basically tell you as a taxi operator how efficiently you are running your taxis, which are the most profitable routes, when to change tyres, oil and so on. We’re going to learn a little bit more about the taxi industry in a minute but the other part of Transaction Capital’s business, and the one I find particularly interesting, is the collection of non-performing loans. Now, what’s interesting about this part of the business is the use of AI, artificial intelligence, to improve debt recovery, again, more about that in a minute. What fascinated me about this company, apart from its rather unusual business, is its tremendously strong share price over the last five years. Sean Doherty, welcome.
SEAN DOHERTY: Thank you, Ciaran.
CIARAN RYAN: Can you kick off telling us a little bit about yourself, where you studied and how you ended up at Transaction Capital?
SEAN DOHERTY: Sure, a little bit about myself, I am one-third of a very small family, a have a young son, who’s four years old, luckily, I have a very, very supportive wife. Two dogs and the only reason I mention those is their names are Islington and Angel, from my time in London, the Tube stop that I used was called Angel and I lived in an area called Islington. So we have something to remember that time.
CIARAN RYAN: What were you doing in London?
SEAN DOHERTY: At that stage I worked for JP Morgan in all divisions of credit derivatives through the financial crisis, so I was in that part of the business. Outside of work I like to run, I’ll be running in the Soweto Marathon this year, I also play a bit of tennis.
CIARAN RYAN: What about the Comrades?
SEAN DOHERTY: Yes, I have done it three times and it’s on the list for 2020, so with a bit of luck and if the training goes well. I wanted to run it this year, but I got injured two weeks before unfortunately, so we’ll try next year.
CIARAN RYAN: So Islington and Angel, carry on from there.
SEAN DOHERTY: As I say, running is something I do in my spare time, I also play a bit of tennis and because I have a four-year-old boy, any sport he becomes involved in, whether that’s soccer, rugby or a game he makes up. Studying and professional-wise I’m a charted accountant by profession, I also have a CIMA qualification, I guess that’s my foundational-type qualifications. Over and above that I did an MBA at IE Business School in Madrid and recently I have done an AMP, which is an advanced management programme at Columbia Business School. I play with little courses on Coursera or EdX, it’s always interesting to do things like digital transformation and just see what is happening in those kinds of things. So I do have a few post-grad diplomas in those sorts of things. History-wise and how I actually got to Transaction Capital, I did my articles at Deloitte, after that I worked at JP Morgan in London, it was a big learning curve through the financial crisis. I worked in, as I mentioned earlier, the credit derivatives division, so from being an obscure kind of instrument to being on the front page of the Financial Times every day was a very, very interesting lesson. Taking over Bear Stearns in a weekend was also very, very interesting, I grew up very quickly. Then I joined Standard Bank in London initially, when the corporate investment banking component of Standard Bank were looking to be a global emerging market player, the backend of the financial crisis caught Standard Bank and we had to change that strategy. That strategy, as you know now, is very much Africa focused, so moved teams, assets and people from London back to Johannesburg and in that process went through various jobs at Standard Bank. Most recently I was CFO of the investment bank, as we started to derisk the international part of our business and grow the African part of our business I took over the COO role as well, so I looked after technology, operations, components of marketing, governance, compliance and so on, and I also started to look quite a lot within the technology space at platforms, data, data science and data analytics and how that could help our business grow. Through that experience and that exposure, I started up a new venture and innovation team within investment banking. Again, looking for new ways to grow revenue and new ways to think about certain transactions, deals and so on. It was around about that time that I got approached to chat to certain people at Transaction Capital and it was a very interesting mix of founders in a business, a very entrepreneurial team, a very dynamic business, very much around finance, around technology, around data, and it just felt like a very good fit at the time. It’s obviously a lot smaller than Standard Bank but the growth trajectory is a lot different and that’s how I ended up here.
Managing credit risk in a very niche sector
CIARAN RYAN: So you came from CFO at Standard Bank and COO at Standard Bank to CFO at Transaction Capital, which is a substantially smaller business, but as you say, the growth trajectory is what excited you. Can you tell us a bit then about the Transaction Capital business and whether my introduction was basically correct, you are in the taxi business and you’re in debt recovery?
SEAN DOHERTY: I think the introduction was correct, I’d like to take a little bit of a step back and talk about Transaction Capital itself and then we can delve into each of those in more detail, if you want to. But effectively at Transaction Capital we think of ourselves as an investor in and an operator of credit orientated alternative assets of which, as you mentioned, recoveries and taxis are two businesses in that space. I think Transaction Capital Risk Services is a little bit more than just the recoveries piece, so the debt collection business, it’s a little bit more than just that, there are other components, which I will touch on. But from a Transaction Capital perspective we do obviously like credit alternative assets, we have very, very strong skills in that space, credit skills in terms of how we assess, how we price, how we manage credit risk in a very, very niche sector. We have very strong technology skills, which I mentioned a little bit earlier, and very, very strong analytical skills and an analytical philosophy throughout the group. The founder and our CEO have been with the businesses for 25 years, with that they have got an incredible network around the world and because of that, opportunities come past them all the time. So it’s a very, very entrepreneurial environment because of opportunities that they are seeing and they are bringing to people. The business has a history of finding very strong management teams, being able to support those management teams and being able to supplement them when necessary, which is interesting in an owner-managed type culture and quite different to a big corporate. Capital allocation, capital management and the mix between how you do that with debt and equity is also very, very strong and a very foundational skill in the business. Lastly, everybody these days talks about things like data and they talk about platforms, but Transaction Capital have actually built two incredible platforms, which are absolutely scalable and if we talk about Transaction Capital Risk Services a bit later, I’ll talk about how that has been scaled into Australia and how we’re thinking about scaling that into Europe. But those are core skillsets and we think core differentiators for us as a business and then, as you rightly say, we have two operating units, one being SA Taxi and the other one being Transaction Capital Risk Services or TCRS. SA Taxi is very, very unique, a lot has been written about it and a lot has been spoken about it, so I assume people know about the business.
CIARAN RYAN: Let’s not assume that, tell us a little bit more about it.
SEAN DOHERTY: The taxi industry has about 250 000 taxis in the country, approximately 70% of households use taxis either to get to a place of work or education, so it is the dominant form of transport in the country. SA Taxi finances about 30 000 of those 250 000. So it started off as a finance business and then over time it grew into other businesses. So another business that grew out of the need to mitigate risk in the finance book was an insurance business, that has grown past the taxis that we finance to include taxis that other people finance. In order to insure and finance taxis you need parts and you need an ability to repair taxis. So we have I think the biggest repair facility in Africa, if I am not mistaken, which does that. We have a business that can cut taxis up and salvage them and then bring those parts back to market in a very good condition and also have an ability to import parts so that people can fix those taxis. So in every step of the value chain SA Taxi have integrated bit by bit. At the moment we are moving into a rewards programme, so we have certain fuel providers that have signed up, certain tyre providers that have signed up and, again, a rewards programme will allow tax operators and drivers to earn money back but also to earn points when they spend money on things like tyres and fuel. Then over time we do see that ecosystem growing, maybe there’s a transactional capability for owners or operators, and there are 15 million commuter trips a day, so at some stage how do you touch those end consumers, almost our client’s client.
CIARAN RYAN: I think that’s something that people should understand about the taxi industry, 15 million commutes a day versus about two million that go by train or bus. So it is absolutely the dominant form of transport for South Africa and without the taxi industry this country would grind to a halt. Just give us an idea of the breakdown in terms of revenue and profit, how much do you earn from the taxi industry, how much do you earn from the debt recovery business?
SEAN DOHERTY: Just before I give you that, the debt recovery business is a component of Transaction Capital Risk Services, it is a dominant component, so 80% plus of our revenue comes from there. They do have other businesses, one of them, as an example, is a lending business to SMEs and we have a book there of about R600 million. They also have payment solutions, which facilitate payments on behalf of clients, as well as certain value-added services. But you are right, the predominant business there is debt collections. At the moment taxi is probably one and a half times the size of Transaction Capital Risk Services and we’ll probably see that going forward in a similar kind of ratio.
CIARAN RYAN: So about 60% of your business is taxi and the balance is debt recovery?
SEAN DOHERTY: Yes, correct.
Is there a future the SA taxi industry?
CIARAN RYAN: Let’s just talk about the taxi business quickly, the government has never been particularly kind to the taxi industry in South Africa. In fact, there’s always been this kind of move, you get this idea that the government doesn’t like it and they want to get rid of it. Just down the road here you’ve got Louis Botha Avenue where they are trying to put in this rapid bus transit system, what is the reason for that and is there a future for the tax industry in South Africa?
SEAN DOHERTY: There are historic reasons, if I look all the way back to pre-1987, minibus taxis were illegal, so I guess it started there. If you look at ten or 15 years ago, there seems to be a move in the country to “take out” the taxis and replace that with things like buses and trains. We think where that comes from is you almost have this philosophy difference between public and private. The government have invested a lot of money and obviously have thought long and hard as to why they would invest that money in things like trains, buses and, as you mentioned, some of the infrastructure that’s gone along with that. On the flip side, the taxis have always been run by entrepreneurs. So you have a typical situation of there was a customer need and these entrepreneurs have seen that need and they have fulfilled the need. Off the back of that they’ve been able to make money, as they’ve made money and they have grown so the disparity between public versus private has become more and more transparent and I think at the heart of it has been a philosophy difference. I think that’s changed dramatically over the last little while but there was definitely an assumption that these big public transport infrastructure projects would take out taxis but that’s hasn’t proved to be the case. So if we look at some of the stats, since 2013 taxi usage is up by 25%, from 2003 to now you’ve seen households move from 59% to 69% taxi usage, this is driven off the back of population growth, one, but also of increased urbanisation and I guess government has not been able to roll out infrastructure quickly enough to deal with that and the taxi industry has filled that gap.
CIARAN RYAN: But if you look at what’s happening in Africa, Dar es Salaam, Nairobi, all of these countries and big cities in Africa are looking at bus rapid transit systems. They seem to be modelling it, to some extent, on what’s been happening in Brazil. In other words, across the continent there seems to be a pushback against the minibus taxi. Do you think that’s the case and do you think they will succeed?
SEAN DOHERTY: I can’t comment on what they’re doing in Africa, my lived experience in those Sub-Saharan African countries as part of Standard Bank was that taxis or forms of taxis are absolutely the dominant mode of transport, whether it’s a scooter in places like Uganda or whether it’s similar minibus taxis in places like Kenya, that’s absolutely the way people transport themselves. I think we have different issues in South Africa, I think we have a government that is struggling to balance a fiscus and even if they have an intention of rolling out these big capital projects, I don’t actually know where the money would come from. So I think they have made peace with an integrated transport plan and that’s what’s been communicated recently. I think there is thinking that the flexibility and the reliability and the affordability of taxis is important to the working population and over time potentially that would move commuters to these big routes, where potentially a bus or a train would take them. But I do see government thinking about this in a more integrated way, as opposed to one or the other, I don’t think it’s as easy to be that binary.
Four out of ten South Africans are in financial distress
CIARAN RYAN: I want to talk to you about the CFO position but before we do that let’s just understand a little bit about the debt recovery part of your business and explain how you use AI to improve recoveries.
SEAN DOHERTY: Our debt recovery business, just to put a little bit of context around it, it’s split or diversified in a number of ways, so we have an agency business which collects on behalf of credit lenders and those credit lenders could be multiple kinds of people, they obviously could be public or private sector types, they are banks, telcos, utilities and they are retailers. So we do that on an agency basis and we obviously earn a fee for every rand we recover on behalf of them. The other side of our business is principal, where we actually buy a book of debt from one of those clients and then we run that off our balance sheet for ourselves. So effectively we “cleanse” our clients’ balance sheets as we rehabilitate the end consumer. So it’s important to note that we have that flexibility in our business model. What we do see – before I go into the AI component – we do see in tougher times, such as now, our principal business grows faster than our agency business. So those credit lenders or those credit providers are more willing to get that debt off their books, so that they can do what they do best, which is sell to the end consumer, as opposed to collect on it.
CIARAN RYAN: Are they effectively securitising debt?
SEAN DOHERTY: No, no, it’s not securitising, we just buy it off them and we would buy it off them in a cent to the rand component, so you have lent R100 to your client, they go into some kind of default, some kind of distress, your business, if you are a bank, is to lend to customers, it’s not to collect on somebody who is in distress. Our business is the opposite. So what we would do is we would buy that R100 and with them we’d price what we think a fair recovery is, so maybe that’s ten or 15 cents to the rand, and then obviously if we collect more than that we make money, if we don’t, we don’t. So there are those two components of it, further to that we are geographically diversified into Australia. In Australia we are mainly an agent-type business, but we are slowly but surely getting into the book buying business there as well. From an AI perspective, again just to take a step back to make sure that people understand what we’re talking about, you can’t do any kind of analytics without data. I know it’s a statement of the obvious but one of our competitive advantages is that we have data on the ten million-odd distressed consumers in the country, which is 40% of all credit active South Africans, so it is a big number.
CIARAN RYAN: Can I just interject there, that’s a huge number, four out of ten South Africans are in financial distress. There is something fundamentally wrong with the system if 40% of people are in that position, is that not reckless lending?
SEAN DOHERTY: I don’t know if it’s reckless lending. I think there are multiple angles to this, I do think that the big five banks, including Capitec, their credit risk practices I do think are actually sound and I don’t know if they would be lending any huge amounts into the unsecured market. I do, however, think that there are other lenders that are maybe slightly more aggressive in terms of how they lend and I do think there’s a lot of unsecure lending – not for buying assets – but for consumerism, which is always dangerous and it’s always going to get you into trouble. But I think there are a number of issues that we see and a lot of them are macro issues, and we all know what those are, but you talk about four out of ten consumers being financially distressed and I think that’s right. We have household debt-to-income ratios of just shy of 73%, which is high, especially when unemployment is around 27%. You have a government which has a debt-to-GDP ratio of 59.3%, we all know what is happening with our SEOs and the financial situation they are in. That has led us to this year a GDP growth estimated at less than 1%, which is tough, but the more shocking stat I think is that since 2013 I don’t think we’ve grown GDP at more than 2%. So this is now six or seven years into the cycle, wage growth absolutely is lower than core inflation growth, and what I mean by core inflation growth is things like transport, electricity, food, and that gets us into the situation we are in but I think that’s a country structural issue, we all know what that is, that absolutely spills into our consumers.
Using AI to improve recoveries
CIARAN RYAN: Just talk about the AI component of the business.
SEAN DOHERTY: In the AI component of the business what we do is we have data and that’s data on ten million people. That data would be from various points of views, so if Sean owes Standard Bank R100 for a credit card and I owe Absa Bank something for a house loan and another bank something for a car loan, and I haven’t paid my MTN account and so on, we can build that view of that consumer. So we don’t just have one view, we have multiple views of that. Over and above that we have ID numbers, telephone numbers, addresses and so on. So it’s a very, very rich database.
CIARAN RYAN: I believe you’ve also got AI there that can somehow interpret the emotional response of the person on the phone that you’re trying to recover money from, is that correct?
SEAN DOHERTY: We’re experimenting with that. The analytics and the AI that we do on that database would be things like we have algorithms that look at somebody’s propensity to pay, we have algorithms that tell us what the right time is to call a person, is it at work, before work or after work. We have a way to prioritise who to call and when to call, we have algorithms that look within that at how you run certain campaigns with certain people in certain books. Clearly, what you mentioned, is what we call the voracity of promise to pay, and we are experimenting with voice inflection and voice tone to see what does that look like in terms of yes, I promise to pay but do I actually give you a debit order at the end of the month. So we’re playing with all of those sorts of things. We also have, over and above that, something called omnichannel, which is probably more effective in a place like Australia but that means that we can contact you via various mechanisms. So in South Africa people do like to be called but in Australia they might prefer a WhatsApp or they might prefer to be contacted through Facebook, so we can do those kinds of things as well.
CIARAN RYAN: So you can hound them no matter what their preferred social media platform is?
SEAN DOHERTY: Absolutely but hound is a tough word, there is regulation around how many times you can contact people and clearly you have to do that.
CIARAN RYAN: Can you use WhatsApp as part of your debt recovery? I guess there’s nothing to stop you doing that.
SEAN DOHERTY: No, there’s not but SMS would probably be a better mechanism in South Africa, but voice call is definitely the way. From an AI perspective and a machine learning perspective, you have all this very, very rich data, you have the analytics and the algorithms I have just spoken about and that feeds back into the data to enrich it more and so it becomes stronger and stronger.
CIARAN RYAN: As the CFO of Transaction Capital, just walk us through a typical day, where do you spend most of your time? Is it on compliance, is it keeping up to date on books or is it on people issues?
SEAN DOHERTY: I’ve been at Transaction Capital for three months, so it’s difficult to give you a typical day, so I’ll give you a cycle. Within each quarter we definitely have strategic themes that we try to follow, some of those are for quarterly reporting or board cycles, some of them are absolutely strategically and change orientated and on a day-to-day basis you will drive those. I’ve mentioned the entrepreneurial nature of the business, there’s lots of stuff that comes past my desk because of that, thinking of various opportunities, thinking of various risk management strategies around those opportunities, it is a very dynamic environment like that. To your point about processes, people, books, numbers are always going to be important. One of the things we are trying to change is as opposed to having accounting events, a month end, a quarter year end, a half-year end, a budget, we would like to have more of a process, there’s no reason in this day and age where you shouldn’t be able to see operational numbers and levers every day, which we do have, and you should understand how those translate into numbers. So that is how we are approaching the financial aspects of it. You mentioned people, absolutely, everything we do is through teams and we execute through people, so that’s where I spend most of my time, whether it’s learning from them, working with them or guiding them, it’s with people always.
CIARAN RYAN: You also performed the same role at Standard Bank investment arm, has the role of the CFO changed in the last decade, give us your sense of that and how has it changed?
SEAN DOHERTY: It’s an interesting question, I would say yes and no, I think that the expectations of the CFO have changed. I think if you looked at a good CFO ten years ago, and I have been lucky enough to work for some of them, I think they were doing what is expected of a CFO today. But I think your traditional financial director, accountant, recordkeeper or governance-type CFO I think that is very much yesterday’s role. That stuff is really important, it’s foundational but I do think that the expectations are much bigger. There is an expectation to help the business look forward, there is an expectation to guide the business through good and bad times. There’s an expectation to drive change, there’s an expectation to partner the CEO, there’s an expectation to be able to tell a story around your business, around the numbers, which is honest. Ironically, I think given corporate South Africa at the moment, there is a big, big role to be the voice of the shareholders and the voice of the stakeholders in your boardroom and in your executive team.
I think that a CFO now is a critical component of strategy’
CIARAN RYAN: Would you say CFOs are more involved in strategic issues today than was the case in the past and why is that happening?
SEAN DOHERTY: As a generalisation yes, I think the good CFOs of the past would have been involved as well. I think there are a few reasons, one is that businesses are more complex, I don’t think they are run by one or two people anymore, I do think that they are run by teams of people and the CFO is a component of that. I think everybody in an executive team or on a board should have a point of view about the business and about aspects of the business, I think a CFO needs to bring that to the fore and I do think that post financial crisis where CFOs did have to step up and people started to realise how important the numbers are, and not just the numbers as they stand today but how those can affect what you do going forward and the financial decisions those drive. I think that a CFO now is a critical component of strategy, I don’t know how you would plan without the financial component of that.
CIARAN RYAN: Absolutely, final question, any good books that you’ve been reading or that you’d recommend?
SEAN DOHERTY: I do have a few, given I have a four-year-old, anything Dr Seuss is always quite interesting. But more seriously, I have just finished again, after reading it for the second time, 1984 by George Orwell, it’s very interesting, given what we are going through now. A book I have just got and I’m looking forward to reading it is a book by Rita McGrath called Seeing Around Corners: How to Spot Inflection Points in Business Before They Happen. She’s got a previous book called The End of Competitive Advantage, which is actually very, very interesting. Then one of my favourites is Great By Choice by James Collins.
CIARAN RYAN: Is Rita McGrath’s book a business book?
SEAN DOHERTY: It’s a business strategy book, she’s a professor at Columbia Business School.
CIARAN RYAN: Okay, any takeaways from that?
SEAN DOHERTY: The big thing is the processes that you need to be doing and you need to be thinking about so that you don’t get caught off guard. Some of the examples she uses is things like Nokia, General Electric and how they were very, very relevant and thought that they were maybe too relevant, and maybe lost sight of what was outside and about to hit them.
CIARAN RYAN: There’s a book that I recently reviewed called Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy by George Gilder, which looked at the companies that were top of the pile ten years ago, they are no longer to be seen. It was Walmart and China Bank. Now it’s Google, Facebook, Apple and Amazon. The question that he poses there is are these companies going to be around ten years from now. Historical evidence will tell you that no they won’t, there will be something else that will come in and displace them. That, of course, keeps you guessing, will it be something in the blockchain space. But, Sean, we are going to leave it there for the moment, thank you very much for coming into the studio and talking to us. That was Sean Doherty, chief financial officer at Transaction Capital.