You have probably seen the sales promotions for furniture and household goods that say "never pay interest" or "buy now and don't make a payment for 12 months!" For a big ticket item like a new LCD TV or a bedroom set, those offers can look pretty attractive.
FlexiGroup Limited (ASX: FXL) is the company behind those payment solutions in many of the big retailers like Harvey Norman Holdings Limited (ASX:HVN), making that a great business to be in because although there are many retailers, they usually only have one company that provides financing for purchases or rental agreements.
The company is like a toll booth keeper that clips the ticket of (and gets paid for) every customer that passes through. If the buyer wants those terms or wants to rent items, then they have to use the company's Flexirent service.
You can find the service in other retailers like Joyce Mayne, Domayne, and Apple Premium Resellers. The recent acquisition of competitor business, Rentsmart ANZ, from ThinkSmart Limited (ASX: TSM) means it can expand its footprint into stores like JB Hi-Fi Limited (ASX: JBH), Dick Smith Holdings Ltd (ASX: DSH) and Officeworks. Thinksmart sold off the Australian and New Zealand business so that it could concentrate on its UK business market.
Integrating yourself into all those retailers is a great business opportunity and one factor that should make it attractive to investors. Before the acquisition, the company's consumer and SME leases segment had an 8% reduction in cash NPAT due to a subdued retail market, but with the new store coverage, the company expects that to be mitigated through scale and wider distribution.
One segment that saw good growth in the first half of 2014 is its Certegy 'no interest ever' and lay-by products service provider, with a 23% gain in cash NPAT over the prior corresponding period. You may have seen the Certegy Ezi-Pay brand when you visit stores, so this is another example of how investors can follow the stories of companies that are in their local areas and shopping malls.
Last but not least, its Lombard Finance business that offers credit card and interest free finance has been combined with the company's recent acquisition of Once Credit, expanding and integrating the service through a roll-out of a multi-brand online cards platform in the second half of 2014.
Apart from Visa cards, Lombard also provides personal loans from $8,000 to $30,000 and add-on sales.
Foolish takeaway
What I like about this business model is that once the company establishes the working relationship with a retailer, which takes time and effort, then it is the only service provider within that store. The pervasive nature of it is similar to a credit card like Visa: it is the facilitator of business transactions and gets a fee for every one that goes through. This kind of barrier to competition can put the company in a financially healthy situation, and investors can appreciate that kind of competitive advantage.
