Why Mark Bouris’ Yellow Brick Road could be worth following: Bartholomeusz

Wizard Home Loans founder Mark Bouris has suddenly escalated the rate of activity as he attempts to create another new non-bank financial services business.

Whether he can realise his ambition of creating a new “fifth pillar in banking” or not, there is no doubt that he is trying to position his Yellow Brick Road Group (YBR) as the most visible of the non-bank challengers and a disruptive force within banking and financial services more broadly. Given his track record at Wizard, which he sold to GE Capital in 2004 for more than $500 million, his chances of transforming a relative minnow into a serious challenger shouldn’t be discounted.

Earlier this year Bouris backed YBR into the dormant ITS Capital Investments listing, with YBR shareholders emerging with 85% of the entity. As part of that deal, ITS/YBR is in the processing of raising a minimum of $6 million of new capital but has shareholder approval to raise up to $12.5 million. For a company with a market capitalisation of only about $7 million that is itself quite ambitious.

The prospects of the raising won’t be harmed by the announcement last week that Nine Entertainment had signed a heads of agreement with YBR under which it would invest $13 million in cash and kind in exchange for a 19.9% stake in the group. That would take the amount of new capital being injected into YBR to about $25 million.

The deal with the private equity-owned Nine has raised some eyebrows but is essentially a re-run of the deal Bouris struck with the Packers when they owned the network. They took up about 25% of Wizard and in exchange put the massive promotional clout of their media group behind the brand.

So, Bouris will have a tidy little lump of capital and the backing of Nine’s network and magazines. That’s hardly going to cause the majors to lose any sleep at this point but will give Bouris the funds to significantly accelerate a strategy that already has significant momentum.

YBR already has a fledgling branch network, with 59 outlets today. It is opening branches at an average rate of one a week and expects to have more than 100 by the end of the year. The goal is to rapidly build that network to about 250 branches, roughly the number Wizard had in Australia and New Zealand at its peak.

YBR, while it does use the franchise model Wizard adopted, isn’t, however, a simple recreation of Wizard. Wizard was essentially a home loan originator supported by a securitisation vehicle. YBR wants to be – and to some extent already is – something significantly more than that.

Apart from accepting deposits and making home loans YBR also provides financial advice, superannuation, accounting and tax services as well as insurance and finance broking. It wants to provide the full range of banking and wealth management and protection products and services.

The model it has developed is, however, different – and potentially it is disruptive for the other plays in the sector.

The branches are essentially just shop fronts – a pure distribution network – generating leads that are actually serviced out of head office. In the financial advice areas, for instance, Bouris has a team of salaried advisers on staff. As well as using the network to distribute his own branded financial products, YBR also acts as a broker channel for third party product.

The ambition is to add and re-badge as YBR products new and more innovative offerings, including the kind of super-charged fixed interest product – a blend of a conventional term deposit with a more active cash component – similar to that which enabled ING to catapult itself into the local deposit market offering super-competitive rates.

The problem for non-banks post-crisis has been funding. Bouris has very creatively found a way around that, with an alliance with the Gateway credit union in NSW. The deposit-rich credit union provides Bouris with funds and he then markets and distributes them.

It is a funding structure that could be broadened and deepened through similar alliances with other credit unions. With the exception of a couple of the big consolidators, most credit unions are region or occupation based. YBR offers an opportunity to both deploy their deposits (credit unions are generally entirely deposit-funded) and increase them by using its retail network to effectively expand their reach.

So, Bouris has solved the funding issue and has a structure and strategy that will enable him to rapidly roll-out a national and quite extensive retail branch network, promoted by Nine and within a financial structure that is capital-light and not subject to the capital and liquidity requirements – or level of regulation – of an authorised deposit-taking institution.

The fact that YBR isn’t a bank or an ADI probably provides YBR a significant competitive advantage over more intensely regulated financial institutions, an advantage that will increase as the weight of the looming new regulation regime fully descends on the banks.

Bouris has the opportunity to under-cut the banks on price, but that by itself isn’t a particularly disruptive model. It would be simple discounting, albeit using a lower-cost model.

The more interesting element of the strategy is the potential to sell third party-manufactured product – either under their own brands or preferably as re-badged YBR product – through his branches, leveraging the volumes and the value of his distribution network. His advisers and his loan broking business can sell – and generate income from – third party products.

There are plenty of foreign banks, investment banks and non-banks without extensive retail networks that would do revenue-sharing deals with YBR to get broader distribution. That offers the prospect of not just replicating existing bank and wealth management products and services at a lower cost but offering more innovative and differentiating products as well.

The YBR model would have relatively low fixed costs and, because of its use of franchises, its funding alliance and its use of third party product manufacturing, a high proportion of variable costs that it could dial up or down depending on conditions and demand.

At some point, if circumstances permitted and as his strategy evolves, he could create his own product manufacturing capabilities and add an element of securitisation to YBR’s funding sources as that market steadily normalises.

YBR might at this point be tiny in the context of the financial services sector, but Bouris’ track record both as a builder of financial services businesses and as an outstanding marketer, his backers, the YBR model itself and the way it could leverage third party contributions and, most importantly in the current environment, the fact that it isn’t a bank suggests there is some potential, at least, for it to become far more significant – and quite disruptive.

This article first appeared on Business Spectator.