Frodo Financial is aiming to redefine the way in which consumers use overdrafts by introducing a new type of personal credit account and so go head to head with the mainstream UK banking community.
The newly launched business is an independent and innovative financial technology company, launched by financial technology expert and CEO Kevin Lewis to provide consumers with an alternative way to borrow and pay for goods and services. Crucially, unlike the numerous new start up banks, Frodo does not seek to replace existing banking arrangements rather it seeks to complement them – a major factor given the reluctance of consumers to change their bank accounts.
While not needing to change bank accounts might appear good news to the high street banks, less welcome is the fact that Frodo is firmly positioned to compete in their prime lending market as it targets those customers who present the lowest risks. In this regard it is quite different to some of the new start up on-line loans businesses.
Frodo has three key products – two of which are aimed at the mainstream banks customers. Frodo Flexi has been designed for borrowers fed-up with the overdraft arrangements offered by their existing bank while Frodo Bond is for investors seeking income. Both products work together to provide what some have described as a ‘traditional banking service’ with money ‘in’ used only for lending ‘out’.
Except Frodo Financial is not a bank, rather its regulated under the consumer credit act to borrow and lend money. Its third core product Frodo Pay is a payment gateway set up to rival the likes of Visa, MasterCard and PayPal. FrodoPay, which is regulated by the Financial Services Authority (FSA), is the technological driver behind the new business.
Kevin Lewis set up Frodo Financial as a result of his own personal experience of attempting to arrange an overdraft with his existing bank. Lewis, an entrepreneur with a breadth of commercial awareness and business knowledge, felt that not only was the process of arranging an overdraft extremely cumbersome, but the cost of using the facility was too high. He was particularly irritated by his bank’s insistence on adding fees and charges to an already expensive headline interest rate. So he decided to do something about it by using his skills and expertise and so founded Frodo Financial.
“I’m not the only person who has been disappointed by the reaction of their bank when seeking an overdraft. Not only was the deal offered very poor but the whole process was cumbersome and difficult. Like most people I didn’t want to change my bank but felt there had to be a better way. So I started work on building Frodo and a financial regime fit for the 21st century in order to challenge ‘big banking’,” said Lewis
So how does Frodo and its products work? And why are they so revolutionary?
The Frodo Flexi account is a rolling cash-credit facility of up to £10,000.It is designed as an alternative to an overdraft but can be set up without the need to change banks – it also comes without fees and charges. The customer uses it when they need it – it does not cost the consumer anything if they do not. Interest starts accruing the day cash is borrowed and charged monthly. Once customer starts using their Flexi Account, the minimum monthly repayment is 10% of the outstanding balance up to 100%, plus an interest fee equivalent to a representative 16.9% APR variable. This is a highly competitive rate particularly for borrowings of over £1,000 and makes Frodo a powerful challenger to the high street banks’ overdraft business.
With your approved credit limit the customer can use Frodo Flexi to top up their bank accounts or make payments direct from their Frodo account. If they do so then another unique attribute of the account comes to the fore and that’s the very valuable Section 75 credit card type protection which is usually afforded only to credit card payments.
It also has the following additional benefits:
- no upfront, monthly, quarterly, annual or renewal fees;
- enables the customer to avoid the higher charges of borrowing for overdrafts with their existing bank
- Flexi account applications are on line and decisions are quick – usually within five minutes;
- Customers can use the account to top-up their bank account or make direct payments to over 2,500 online providers
- Pay a bill – all you need is the account number, sort code and reference number
- Pay directly for goods and services from our growing list of over 2500 selected online providers
Frodo is funding its lending by raising cash by issuing bonds and institutional funding. So far Lewis has issued two successful “Capital Secured Bonds” – all in advance of the FrodoFlexi accounts going live at the beginning of October 2012.
Most of the money came to Frodo from large private investors who understood the Frodo concept and were happy to back it with their own money – particularly given the headline rate of 7.5% (gross) per year. Two tranches of bonds were issued in succession – both were successful and both are now closed. Lewis believes that as Frodo becomes better know, then more main stream investors will be attracted to Frodo bonds – although he stresses he can’t guarantee the eye watering 7.5% will be on offer in future. A new bond issuance is being planned for the 12th November at a rate 7 % PA. Investors – whether individuals or companies – will still have to be UK based. The bonds are also available for SIPP pension scheme owners.
The final element of Frodo Financial is at the very heart of the business and reflects Lewis’s technical skills in financial technology. FrodoPay is a proprietary payment gateway which will rival Mastercard, Visa and PayPal. By re-engineering many of the processes involved in both overdrafts and on-line payments, Lewis has managed to cut out elements of the value chain so ensuring his processes are run at lower cost than existing providers. This re-engineering is likely to turbocharge Frodo as its scalable technology allows online retailers to accept payments by Frodo customers and also enables them to promote the Flexi account to its existing customer bases as an alternative payment process without incurring merchant fees, (which currently average around 2% of the transaction value). Frodo is also holding out the opportunity for retailers to introduce new business to this business.
Without doubt, Frodo is an innovative business. It has a technological platform which controls and integrates external web services into all parts of the customer journey and credit management without being reliant on a third party.
Lewis has developed a powerful tool in the fight with the banking competition. Unleashing such a tool on in the highly competitive world of on-line retail and credit, with big high street names vying for a competitive edge in everything from white goods to holidays, will almost certainly prove it’s making.