Mark Forsyth

Mortgage and financial services distribution company Firstfolio is one of the fastest-growing players in the Australian mortgage market. The back-end service provider has grown its managed mortgages from $1 billion to more about $20 million in the last three years through a series of acquisitions and developed a strong distribution network. It also owns leading online mortgage aggregator eChoice.

The rapid growth has led to an impressive financial turnaround too. Revenue in the first half of 2009-10 was up 32% to $28 million and the company is forecasting earnings of $10-11 million for the full year, compared with $5.4 million last year.

Today chief executive Mark Forsyth talks about building a distribution network, boosting web traffic by bringing dormant URLs to life and the trade off between short-term profit and long-term growth.

I understand this company is centred around a distribution network, but can you talk a little bit about how the various parts fit into that?

Well, the first starting point is distribution business, why I say that and I don’t mention the word mortgage in there is that I wanted to create a distribution business in financial services. It just so happened that I started with a vehicle that had mortgages in it. But I could have started with credit cards, debit cards or something else.

But we’ve started with mortgages which is a good place to start because it’s people’s biggest asset and liability and we know the most about them by having their mortgage. Unfortunately, it’s the one that takes the longest time to transact so in terms of the transaction, selling a TV and taking Harvey Norman credit is the quickest thing. Selling a mortgage takes anywhere to six months depending on the person’s transaction and whether they’ve got a property. So one of the things that we had when we started the business was we had $1 billion mortgages but they were wholesale and with a wholesale business you don’t have any direct relationship with the consumer.

So from the business that I wanted to create, well I said that’s a problem because I don’t know the customers, I don’t know where they are, I have no influence over what they buy or sell. I couldn’t get that through the wholesale channel, so I said I’ve got to build a distribution platform. So then I bought a business called Lawfund, which was national and in the aggregation space. So immediately I diverged because I had wholesale and then I had aggregation. Aggregation for people that don’t know would be Mortgage Choice – an intermediary between the banks and the brokers or franchise holders, or somebody that’s talking to the customer.

A wholesale lender on this side can be very profitable but you tend to have a much narrow focus, you deal with much bigger intermediaries who would maybe do $10 million to $20 million each, where an individual broker would only do $500,000 to $2 million each. The benefit of the latter is that you have a national footprint, lots of foot soldiers, lots more contact and lots more geographic spread, which is what I wanted. But you still have a very tenuous and not necessarily direct conversation with the customer, so somewhere in our evolution we got to the point in 2008 where we decided, we’d like to have a B2C relationship. But the problem with B2C is that it’s relatively expensive to get to C, especially in our space where we’re competing with Aussie John, the sheep from RAMS and they’re chucking whatever, $10 million, $15 million, $20 million at advertising so the cost of acquisition and the share of voice is very difficult.

So we very early on in that thought process discussion decided we’re going to go web. Now, not a lot of people had gone web in financial services, a few people had tried web, thought about web. ANZ had ANZ One I think it was, CBA had a web strategy and then started to pull out of it.

So we were lucky, or by design, by the fact that we’d done acquisition, we were known for doing creative deals and at that time Allen & Buckeridge, a venture capital firm came to us and said ‘look we’ve got this business called eChoice, we invested in it about nine years ago, we’ve got a 10 year fund, the fund’s going to close out. To close out we need to close out our investment and get a return on it. We’re looking to sell. And of course they wanted a price, which was much larger than what we were willing to pay, and we had a price that was much smaller than they wanted us to pay.

So a long story short, we have B2B wholesale, B2B broker, B2C web. The margin differential is of course B2B broker is our lowest margin because we’re just in the intermediary between the banks and the consumer and there are lots of mouths to feed along the way. B2B wholesale where we’re manufacturing our own product from ING, Adelaide Bank and ANZ and marking up and packaging it and charging fees and selling it through a broker channel wholesale business and then B2C where we’ve got our internet channel. Now where we sell internet intermediary for banks, we still make five times the margin of the broker. Where we intermediary our own product, we can make up to 20 to 30 times.

Now the debate would be well how many people actually want to transact on the web? And Australia alone is one of the highest adopters of technology in the OECD. It’s been one of the lowest adopters in the OECD of actual transactional based use of the web. So our online purchases have been actually quite low. So for example, you take Harvey Norman online, when you go and look at Harvey Norman well it isn’t online, it’s actually just a brochure that you flip through.

Indeed, we’ve had many discussions with Gerry about the importance of online retailing and he differs from our point of view, but I think he’s got some franchisee issues there he might just need to consider.

But you know there has been a very slow build and the internet is like that, the curve is not linear. It tends to be a curve and a rapid ascending curve when technology uptake occurs. Australians are relatively conservative but once they adopt something, they adopt wholeheartedly and I think the compounding effect of buying tickets online, booking hotels online, booking cinema online, buying a car online has all added to acceptance of technology and I think we bought eChoice at the right time.

So where do you think we are in terms of that curve or buying mortgages online, are we at the bottom of the U?

I think we’ve actually gone past the bend in the U and I think we’re on the upward curve. It’s just a debate as to how steep the curve is.