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Why Collection House is investing $8.5 million in digital bank start-up Volt

The Collection House Limited (ASX: CLH) share price is flat at $1.34 today after the debt collector announced a surprise $8.5 million investment in digital start-up bank Volt in exchange for a stake of around 4.5%.

Volt is the first start-up entity to be a granted a banking license in Australian since 1981 and a potential initial public offer candidate itself one day, although first it will have to prove itself as a credible bank offering services to consumers in a competitive space.

Volt has reportedly already raised around $45 million from Tier 1 venture capital style funding, with the strict capital adequacy requirements imposed on banks (to guarantee them being able to meet liabilities) likely one of its toughest obstacles to becoming an operating success.

“This investment is part of Collection House’s ongoing digital transformation strategy, and we are delighted to be working closely with Volt Bank to deliver some real benefits to our customers,”  Collection House’s chairman Leigh Berkley commented.

Its CEO Anthony Rivas also claimed the deal would mean Collection House “can expand its collection services and analytical services divisions to offer new and innovative financial products and services to its customers”.

Mr Rivas also claimed the deal has the potential to help Collection House deliver an additional $3 million in profit in FY 2020, although no real detail was provided as to how the group anticipated making this kind of profit from the investment.

It could be via either equity appreciation or cash flow, although that would be a spectacular return on invested capital off an $8.5 million investment. And everyone will be hoping Collection House doesn’t end up collecting Volt’s bad debts.

For its part Volt claimed the deal would help the pair collaborate on new technologies in particular “the digitisation of hardship identification”.

In all honesty a debt ledger collection business and start-up bank don’t look natural bedfellows, with the success of the deal primarily looking linked to Volt’s standalone performance, even if Collection House and its ebullient CEO do have some good data analytic technologies it can share with Volt.

As such Collection House investors are likely to want more information on the rationale behind the investment prior to sending the share price higher.

Another debt collection business on the ASX for investors to watch is Credit Corp Limited (ASX: CCP), which has a more consistent track record than Collection House, but higher valuation to boot.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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