Propel Holdings Inc

TSX:PRL

Earnings Call Transcript

[Operator]

Good morning, everyone. Welcome to Propel Holdings Third Quarter 2023 Financial Results Conference Call. As a reminder, this call is being recorded on November 8, 2023. [Operator Instructions] I will now turn the call over to Devon Ghelani. Please go ahead, sir.

[Devon Ghelani, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us today. Propel's third quarter 2023 financial results were released yet after market closed. The press release, financial statements and MD&A are available on SEDAR+ as well as the company's website, propelholdings.com.

Before we begin, I would like to remind all participants that our statements and comments today may include forward-looking statements within the meaning of applicable securities laws. The risks and considerations regarding forward-looking statements can be found in our Q3 2023 MD&A and annual information form for the year ended December 31, 2022, both of which are available on SEDAR+.

Additionally, during the call, we may refer to non-IFRS measures. Participants are advised to review the section entitled Non-IFRS Financial Measures and Industry Metrics in the company's Q3 2023 MD&A for definitions of our non-IFRS measures and the reconciliation of these measures to the most comparable IFRS measure. Lastly, all the financials referenced during the call are in U.S. dollars unless otherwise noted.

I am joined on the call today by Clive Kinross, Founder and Chief Executive Officer; and Sheldon Saidakovsky, Founder and Chief Financial Officer. Clive will provide an update on our existing operations and growth initiatives, observations on the overall consumer market and will then provide an overview of our record Q3 results before Sheldon covers our financials in more detail. Before we open the call up to questions, Clive will provide an outlook for the remainder of the year and an overview of some of Propel's recent achievements.

With that, I will now pass the call over to Clive.

[Clive Kinross, executive]

Thank you, Devon, and welcome, everybody, to our Q3 2023 conference call. We are proud to deliver another quarter of record results in Q3, including record revenue, adjusted EBITDA, total originations funded, loans and advance receivables and ending combined loan and advance balances or CLAB. Similar to Q2 and in line with expectations, we and our bank partners continue to observe strong consumer demand and credit performance across our business.

We and our bank partners continue to lean into the strong demand and originated more volume to new customers, which represented 51% of total originations funded and a record level of new customer originations for the quarter. This was accomplished while continuing to manage risk and maintaining a tight underwriting posture with our bank partners.

The strong demand was driven by several factors, including the typical uptick in seasonal demand we experienced in Q3, the expansion of products and services offered through our platform, the continuing industry-wide transition from brick-and-mortar to online lending. And most notably, the continued tightening of credit throughout the credit spectrum, which has continued to push higher credit quality customers to our platform.

As recently reported by the Federal Reserve, banks in the U.S. have maintained the tightest underwriting standards on consumer loan originations since Q3 of 2020. We achieved record total originations funded for the quarter of $110 million with improved credit performance as demonstrated by the decline in our provision for loan losses and other liabilities as a percentage of revenue to 52% this quarter or 54% in Q3 2022. This performance is a testament to the strength of our core operating brands of MoneyKey and CreditFresh and our ability to continue expanding the business while delivering consistent, profitable growth.

Furthermore, the ability to achieve record level originations while maintaining strong credit performance is a direct result of our prudent management and AI-powered technology. Our technology allows us to expand access to credit for underserved consumers while also managing risk and driving profitability. With the more consumers accessing our platform than ever before, our AI is processing applications at a scale that isn't possible through traditional capabilities with up to almost 40,000 unique applications evaluated each day.

And with each application, our AI improves and is more capable to discern the creditworthiness of applicants based on the thousands of variables we can evaluate. Where an application with a traditional lender may have been rejected, our AI can provide them with an opportunity for credits. While our technology has always been a differentiator in this current economic environment, it is one of the most important assets we have and is the foundation for all future growth.

Looking at the economy. While the macroeconomic environment remains dynamic, we have not observed any deterioration in the credit performance from our and our bank partners' customers on either side of the border. The job market remains healthy with unemployment levels at near historical lows in both Canada and the U.S. While inflation remains elevated, we continue to be encouraged by the declining trend since the beginning of the year.

Furthermore, real wage growth for our consumers has remained positive, which is supporting their resilience. We are, however, mindful of the contrast between the economy in Canada and the U.S. U.S. GDP growth for Q3 2023 was the strongest in 2 years and was driven largely by consumer spending, which has demonstrated continued resiliency despite elevated interest rates and inflation.

In contrast, it appears that the Canadian economy is stalling and recent data from TransUnion shows that credit demand from prime and below prime consumers in Canada continues to increase, growing by 15% in Q2 2023 from Q2 2022. This is happening at a time when traditional financial institutions are tightening underwriting and competition is exiting the market.

Ultimately, this is shutting Canadian consumers out of the credit market at a time when the need for access to credit in Canada is more important than ever. In this environment, our Canadian operating brand, Fora, continues to experience strong demand and credit performance in line with expectations. We launched in Nova Scotia in early September, bringing our total presence to 7 provinces, and we finished the quarter with a loan balance of almost $10 million. We are committed to enabling access to credit for underserved Canadians when they need it most.

Regarding the Canadian federal government's announcement to reduce the maximum allowable rate of interest to a 35% APR, we are waiting for further clarity on the implementation time line and any potential exemptions and expect an update by the end of the year. The change is not expected to have any impact on our guidance. Notwithstanding the regulation, our strategy has always been to continually broaden our product offering in the U.S. and in Canada, seeking to provide loans to more consumers across the credit spectrum.

Lastly, we're excited to provide an update on our partnership with Pathward and the launch of our Lending-as-a-Service product. The rollout, which commenced at the end of June remains in line with our plan, and we completed the onboarding of the first group of Pathward customers during Q3. Furthermore, we expect additional Pathward partners and marketing channels to be onboarded by the end of the year. As stated previously, we do not expect Pathward have a material impact on our 2023 results. We're increasingly enthusiastic about the potential of our Lending-as-a-Service model and are actively exploring additional opportunities on both sides of the border.

Now onto some highlights for the quarter. Propel has once again delivered record results in Q3 2023. As compared to the same quarter last year, revenue increased by 39% to a record of $83 million, and our CLAB increased by 44% to a record of almost $300 million. This quarter, Propel also delivered net income of $6.2 million and adjusted net income of $8.5 million, which translated into a diluted EPS of $0.17 and diluted adjusted EPS of $0.23 for the quarter. In Canadian dollars, our Q3 diluted EPS is CAD 0.22, and diluted adjusted EPS is CAD 0.31 for the quarter.

All of these metrics represent significant increases from the prior year. And additionally, the year-to-date performance represents records for a 9-month period. The top line growth we experienced in Q3 2023 was driven by several factors, including, first of all, the continued origination of additional volume from new customers. Second of all, the growth of our bank programs. Third of all, the expansion of originations through growth in Canada and with new marketing partners. And fourth of all, at a macro level, strong consumer demand for credit driven in part by the tightening of credit across the financial sector, which has continued to result in a higher credit quality consumer seeking credit on our platform.

Our record performance this quarter, along with our strong profitability on both an IFRS and on an adjusted basis is a testament to our operating discipline and the scalability and operating leverage in our business model. Lastly, given our ongoing strong results and credit performance, confidence in our portfolio of growth prospects and our solid financial position, I am pleased to announce that our Board of Directors has approved an increase to our dividend from CAD 0.40 to CAD 0.42 per share on an annualized basis. This represents a 5% increase and our second dividend increase this year.

With that, I will now pass the call over to Sheldon.

[Sheldon Saidakovsky, executive]

Thank you, Clive, and good morning, everyone. We are proud to deliver another set of record quarterly results while continuing to grow the business significantly on a profitable basis. Consistent with our strategy and given the strong credit performance, resiliency of the underserved consumer and credit quality of originations, we and our bank partners continue to originate a higher proportion of new customers through both the CreditFresh and MoneyKey brands.

New customer originations for the quarter represented 51% of our total originations funded, growing from 39% in Q3 of last year and was a record level of new customer dollars funded for a quarter. The growth in new customer originations helped drive our record loan and advance receivables balance as well as our record ending CLAB to almost $300 million for the quarter. These balances were also driven by the factors that Clive outlined earlier, which include the continued expansion of our bank programs and broadening our presence across the underserved consumer market, amongst other factors.

I would also note that our Canadian operation, Fora, continues to gradually ramp up since the launch in November of 2022 and contributed to the company's overall Q3 revenue and loan balance growth, albeit modestly. Furthermore, the Pathward partnership, which launched in late June, contributed a nominal amount to Q3 revenue given the short duration of the program. We are confident that both Fora and the Pathward partnership will have a more meaningful impact to the company's results next year.

Ultimately, the record loan and events receivables balance and ending CLAB resulted in our record revenues of $83.2 million for Q3, representing 39% growth over Q3 2022. Furthermore, our year-to-date revenues of $220.5 million was a record for a 9-month period. The annualized revenue yield was 116% in Q3, a decline from 123% in the prior year. This change in yield is consistent with the strategy of moving up the credit spectrum to facilitate access to credit for more underserved consumers.

As previously noted, this is accomplished primarily through our variable pricing and graduation initiatives. I would, however, note that the annualized revenue yield has actually increased from 110% in Q2 and from 106% in Q1 2023, which is reflective of the higher new customer volume previously discussed. As a reminder, new customers typically start at a higher cost of credit before qualifying for reduced rates and higher loan amounts pursuant to our graduation program.

Turning to provisioning and charge-offs. The provision for loan losses and other liabilities as a percentage of revenue decreased to 52% in Q3 from 54%, reflecting the continued improvement in credit performance that began in the back half of Q2 last year. Typically, during periods of strong new customer origination growth, the business experiences higher provisioning than in periods of lower growth.

This is largely a result of, one, new and recently originated customers tending to have higher delinquency and default rates relative to existing customers in the portfolio; and two, due to IFRS accounting, which requires us to recognize significant provisions upfront on the new originations with minimal attributable revenue in the period of origination. Given this dynamic, the ability to grow total originations funded with an increased proportion of new customers, while at the same time, lowering the provision as a percentage of revenue and improving credit quality is a testament to our underwriting and application of AI capabilities.

With respect to net charge-offs consistent with the decrease in provisions, our net charge-offs as a percentage of CLAB also declined, decreasing to 12% in Q3 as compared to 14% in Q3 last year. This decrease is a result of the same factors that lowered the provision as a percentage of revenue and ultimately because of the higher credit quality portfolio composition. Note that the 12% experienced in Q3 is the same as last quarter even with the higher new customer originations and is lower than pre-pandemic levels. This reflects the continued shift in the overall portfolio towards consumers higher on the credit spectrum.

In Q3, our net income increased to $6.2 million from $4.2 million in Q3 last year, while adjusted net income increased to $8.5 million from $3.8 million last year. Our net income year-to-date grew to $19.3 million and adjusted net income increased to $25.4 million, both representing records for a 9-month period. On an earnings per share basis, our diluted EPS increased to $0.17 in Q3 from $0.12 last year, while diluted adjusted EPS more than doubled to $0.23 in Q3 from $0.11 in Q3 last year. Our diluted EPS year-to-date grew to $0.53 and diluted adjusted EPS increased to $0.69, both representing records for a 9-month period. And in Canadian dollars, our year-to-date diluted EPS is CAD 0.71 per share and adjusted diluted EPS is CAD 0.93.

Given the dynamic with IFRS accounting during periods of high growth, we make an adjustment to our net income to remove a part of the provision relating to the good standing loans that have no indication of underperformance. We believe that the adjusted net income and adjusted EPS are a truer reflection of the company's earnings performance.

The growth in our earnings is primarily a result of the overall growth of the business, lower provision for loan losses as a percentage of revenue, the inherent operating leverage in our business model and continued technology enhancements, driving increased automation and efficiency in originations and loan servicing.

To this point, our operating expenses, which exclude acquisition and data expenses, decreased to 16% of revenue for Q3 as compared to 19% in Q3 last year. This was driven by continued disciplined expense management, technological enhancements and inherent operating leverage. Acquisition and data expenses increased as a percentage of revenue this year due to the higher proportion of new customer originations and was in line with our expectations.

Notwithstanding this increase, our cost per funded origination of $0.096 this quarter remains below those levels experienced prior 2021 when we and our bank partners were originating a similar proportion of new customer volumes relative to total originations filed. Furthermore, the cost to originate new customer loans has decreased since prior to early 2022, reflecting the continued optimization of our acquisition and underwriting models.

Overall, our net income margin increased to 7.4% in Q3 from 7% in Q3 last year, and the adjusted net income margin increased to 10.2% in Q3 from 6.4% in Q3 of last year. On a year-to-date basis, our net income margin increased to 8.8% for 2023 from 6.1% in 2022, and the adjusted net income margin increased to 11.5% for 2023 from 8.3% 2022.

In addition to the higher acquisition and data costs, which led to record new customer originations, our margins were further impacted by the higher interest costs on our credit facilities due to the increasing interest rates relative to last year. The higher interest rates increased our overall cost of debt, which includes interest and other credit facility associated fees to 13.7% in Q3 from 10.5% in the prior year. We believe we are at or near the peak of interest rates and given the floating nature of our credit facilities, this could provide a tailwind to our profitability when interest rates apply.

Lastly, I'll provide an overview of Propel's financial position. At the end of Q3, we remain well-capitalized with a strong liquidity position to continue executing on our growth plan. As of September 30, we had approximately $116 million of undrawn capacity under our various credit facilities. As a reminder, each of our credit facilities are supported by a syndicate of lenders, ensuring that we have redundancy across our funding partners.

Our debt-to-equity ratio of approximately 1.8x is the same as the end of 2022, despite the significant growth in originations year-to-date. This comes as a result of strong earnings and operating cash flow generated over the year, offsetting the increase in debt utilization. Given the structuring of our credit facilities, which provides us the capacity for 4x leverage, we continue to have ample debt capacity and liquidity to execute on our strategy.

Lastly, we recently implemented an NCIB program in mid-September and have not used it as of yet. We are confident that our strong financial position and significant cash flow generating capability will be able to support the continued expansion of our existing programs, growth initiatives, any purchase of shares pursuant to our NCIB, and to support our increased dividend.

I will now pass the call back over to Clive.

[Clive Kinross, executive]

Thank you, Sheldon. For just under 2 months before the end of the year, we are observing incredibly strong consumer demand. Q4 is historically our strongest quarter with consumer demand and originations the highest during the holiday season. We expect to end 2023 in an incredibly strong position, all while maintaining prudent underwriting with our bank partners. The fourth quarter also marks the 1-year anniversary of launching Fora.

As a proudly Canadian fintech headquartered in Toronto, it has been exciting for us to watch the growth of Fora across the country, covering 7 provinces within a year. While Fora currently represents a small percentage of the overall company, Canada represents a significant growth opportunity for Propel, and we are determined to grow into an industry leader in Canada.

In the U.S., we and our bank partners are continuing to respond to the strong demand and will do so on a prudent basis. We and our bank partners are also evaluating the possibility of expanding into additional states and additional marketing partners through our existing MoneyKey and CreditFresh brands. With respect to Pathward, as mentioned previously, we expect to onboard additional partners and channels by the end of the year. This has been an incredible year for Propel, and our efforts have not gone unnoticed.

Just last month, we were included in the Globe and Mail's ranking of top growing companies in Canada by achieving a 3-year revenue growth of 234%. We were in the top 10 for those companies with revenue above CAD 250 million. And I would like to point out that all of our revenue growth was organic. This is on the back of winning one of the best places to work from HRD Canada earlier this year.

And just announced this morning, we are also honored to be included in Deloitte's Technology Fast 500, a list of the fastest-growing tech companies in North America for the first year. These external awards are exciting for our team because they are a recognition of our hard work and focus.

Looking back 2 years ago when we went public, we set out an ambitious growth agenda, and we have delivered on it. At the time, our revenue was $88 million for the 9 months ended September 30, 2021. Over the past 2 years, we have grown our revenue organically, all organically by almost 150% to USD 220 million while expanding profitability for the most recent 9-month period with our strongest quarter of the year yet to come. Looking ahead, our business development pipeline remains the most active it's been, and we look forward to being able to announce some of these initiatives to the market in the coming months.

Lastly, you may have noticed that we have a new look. A few weeks ago, we launched a renewed brand that better defines what value we create for consumers, partners and shareholders. We set out to build a different way of facilitating access to credits for underserved consumers, and we've done that, but there is much more to do. We are just getting started.

That concludes our prepared remarks. Operator, you may now open the line for questions.

[Operator]

[Operator Instructions] And your first question will be from Matthew Lee at Canaccord.

[Matthew Lee, analyst]

I just wanted to ask a little bit more about the sequential improvement in yield you're seeing. Can you just maybe break that down a bit more, especially given the fact that you're moving up the credit ladder? I mean, is that just kind of the reflection of the demand in consumers or something else? So then are you setting that to persist as you originate new loans in Q4?

[Sheldon Saidakovsky, executive]

Yes. Matt, thanks a lot. So I think overall, the yield has -- the revenue yield has been dropping as we've said, as a result of us kind of moving upstream from a credit perspective into better and better quality consumers, primarily through our variable pricing and graduation. And that was really expedited over last year, particularly when we started kind of tightening underwriting, if you recall, starting in Q2 of last year and then we sequentially tightened underwriting quarter-over-quarter.

So we really tightened up on new customers. And so because of that, new customers start at higher APRs before they get graduated over time and mature through the portfolio. So that decrease in yield was kind of expedited over the back part of 2022. And now that we're leaning into more new customer demand, and we've had record new customer originations this quarter and last quarter, so that has started to push the yield back up.

I think that now we're going to have very strong originations in Q4, as you could see, obviously, through the forecast and your projected numbers. It's conceivable the yield may tick up a little bit more in Q4 until we sort of keep it relatively flat over probably the first half of next year, and then it will probably start taking down a little bit as well. But I think all things considered, we should be kind of hovering in the -- probably in the $100 million to $110 million range over the course of next year once we start taking [indiscernible].

[Matthew Lee, analyst]

Okay. That's really helpful. And then maybe just talk about Pathward. I know it's really early innings, but any key learnings yet, anything going faster or slower than expected?

[Clive Kinross, executive]

Yes. As you say, Matt -- first of all, as you say, we're still in our early days over there. We've got 3 months of operating history behind us over here. As you know, the dynamics of those programs as we work with the Pathward partners, on the one hand and on the other hand, once the loans are originated, they get sold to different institutions in the form of forward flow arrangements.

So from our perspective, besides managing the entire Lending-as-a-Service aspects of the program, we're also working with Pathward to onboard program to onboard partners on the one hand and financial institutions on the other. And that's a balancing act more so at these early phases as we try and meticulously manage the demand and supply aspects of that. Once the program starts to get to a stage of more scale and more growth, those 2 aspects will be easier to manage in stair step with one another.

With that said, we're pleased with what we have in terms of demand for these loans. We have the right level of financial institutions lined up given the growth that we're expecting for -- certainly for the short and maybe even the medium term in terms of onboarding new partners. We're making excellent progress with a few Pathward key partners and expect to onboard a couple more certainly between now -- I was going to say between now and the end of the year, and I think that that's accurate, but certainly between now and the end of Q1.

Operationally, the program couldn't be going any better. We're very pleased with all of the KPIs. And I would say, 3 months into the program, more or less, it's achieving all of our desired early term results.

[Operator]

Next question will be from Adhir Kadve at Eight Capital.

[Adhir Kadve, analyst]

Congrats on the performance this quarter. My question will be on the credit performance. Obviously, strong here. You're increasing the amount of loans you're making. So the performance is really good to see. Can you give us a sense of what you're doing differently from a Propel standpoint versus prior years? I fully appreciate that the quality of borrowers is coming -- that's coming to the platform is good. But on a Propel-specific level, what are you doing differently this year as opposed to last year or years prior?

[Clive Kinross, executive]

Yes. Adhir, and as you say, there's certainly external variables, which were having a positive impact on our business, specifically the tightening of credit across the supply chain both in Canada and the U.S., as I mentioned earlier. The Federal Reserve came out and said in the U.S., more applications for consumer loans than they've been since Q3 of 2020.

And similarly, TransUnion came out with a stat in Canada, saying that near prime and subprime demand for consumer loans increased by 15% in Q2. So you're seeing -- you are seeing strong demand for consumer loans at a macro level, and those lenders ahead of us like mainstream banks and credit unions have tightened up considerably, which means that the volume of consumers coming to us as well as book quality has never been better.

So I want to speak about that at a macro level and really are factors outside of our control. In terms of factors inside of our control that are also having a positive impact. Look, our underlining is just getting better and better. As we accumulate more and more data, the machine learns, the underwriting gets better. If you were to look at our originations, even though we've been in business for 12 years now over the course of this year, really since our inception we'll be doing, give or take, 30% of our total originations in 1 year being this year.

So the growth of data, the amount of data that we're getting and the refinement of the machine is just getting better and better as we go along. And as a result of that, we believe that our performance is best in class for our industry, not only from a credit performance standpoint, but also from a growth standpoint. Then ultimately, that's a testament to the unique things that we're doing as a business. This is on top of a platform that's mature, having been in business for in excess of 12 years now, and our AI infrastructure having been in place for in excess of 6 years now.

[Adhir Kadve, analyst]

Okay. Excellent. And then just maybe on Canada, good to see the growth in that market, but I fully appreciate that you're going to be a little bit more measured in your approach heading into next year. But has your thinking on the market changed at all? And just maybe just talk about the opportunity in Canada a little bit more.

[Clive Kinross, executive]

Our feeling on the market, to the extent that it's changed, it's become even more positive and maybe I'll temper there some of the positive aspects that we're seeing and temper them against what right now is a regulatory environment that's a little bit challenging with the proposed lowering of the rate cap bill.

Certainly, the demand that we're seeing in Canada has exceeded our expectations. I've said that for a couple of quarters now, we're in 7 provinces. So we're rolling out right across the country. But we're operating with one foot on the accelerator and one foot on the brake. And that's not a function, that's not because of being prudent in the -- with the macroeconomic backdrop, we're prudent irrespective.

But it's really because we're operating at a level where we're trying to get a sufficient volume of loans through the system to make sure we understand the unit economics and all of the KPIs that drive the business on the one hand, and the other hand, not being too aggressive given some of the regulatory changes that could be coming.

I would say to you that in a normalized environment where we didn't have regulatory concerns, our volumes in Canada would be materially higher than what we're seeing at the moment just because the demand is that strong and our KPI performance, particularly on our CPAs, our second highest cost as well as credit performance have been really, really strong, in fact, in both of those 2 metrics. Our KPIs have been getting better and better, notwithstanding some of what you pick up in the media every day.

I will say that we're still awaiting, as I mentioned in my comments, still awaiting the final regulatory bill, which we expect to be -- to come out before the end of the year. The 2 key items that we'll be looking for over there are the timing of the new rate cap bill, when it will be implemented in other words, as well as any exemptions, if any, to the extent that the exemptions are favorable from our perspective and favorable for the roughly 8.5 million underserved consumers in Canada.

For sure, we will get materially more aggressive than we have been, and we'll be doing it also in a backdrop where there's less and less competition. I'll also mention, Adhir, that to the extent that the rate cap bill is lowered, we're committed to continuing to build a best-in-class business in Canada.

We're in discussions with our Lending-as-a-Service model in Canada, not that distinct to what we've done with Pathward in the U.S. and believe that we will create an industry leader in Canada at the 35% and below market, which again represents a much smaller opportunity than if the rates were to stay at 47%. And if they were to stay at 47%, we'd continue to build an even larger franchise, but in both scenarios, the growth prospects in Canada are significant.

[Operator]

Next question will be from Stephen Boland at Raymond James.

[Stephen Boland, analyst]

Maybe just to Sheldon, the first is cost per funded on your originations pretty flat quarter-over-quarter. It's certainly up from last year on a quarterly basis on a year-to-date basis. Can you just -- is this number expected to stay around these levels? Maybe just a quick reminder why there is that increase on the cost per funded loan.

[Sheldon Saidakovsky, executive]

Yes. Thanks, Steve. So we do need to break out the cost per funded loan on a new customer versus on our total originations funded, which is something that we're thinking about going forward. But overall, just let me speak about it in terms of new customer dollars funded. So in the quarter, we paid about $0.19 per new dollar funded, and that was compared to about $0.18 for 2022. In 2021, we paid about $0.23 per new dollar funded. So the reason it dipped down in 2022 a little bit is because we tightened underwriting significantly in the back half of last year. And particularly, we cut out some of the organic marketing spend that we were doing, which we brought back.

So if we are going to be funding a similar proportion, let's say, 50-50 on new customer and existing customers in the coming quarters, you should expect the cost per funded to be at around $0.09 to $0.10 in total. And in terms of the new customer funded amount, the $0.19 is a good -- really good cost per new funded dollar for the business, and that's what I would expect moving forward. But in total, I mean, obviously, the acquisition costs are going up with originations naturally and the balances.

[Clive Kinross, executive]

Yes. And Stephen, if I could also add. I think you know that the other thing that we look at in evaluating any application is the overall profitability of the loan. And there's 2 key drivers to profitability in terms of the financial metrics. The one is default performance. The other as you've identified is cost per acquisition, which, as I mentioned, has gone up a little bit. But by the same time, credit quality has gone down.

And obviously, we could triangulate around those 2 variables at any point in time in getting to that overall profitability. The profitability per loan on a seasonally adjusted basis is absolutely stellar. And I say that in a market where our new customer originations could be materially higher than they are.

The reason that they're not is because of our prudent underwriting stance, we've built in a big margin of safety from a profitability standpoint. And if anything, I think we're going to look back over this period and say probably between us and our bank partners, probably could have been a little bit more aggressive. But I'll say that in a backdrop where we're one of the fastest-growing fintechs in North America and doing it while expanding our profitability at an even faster rate.

[Stephen Boland, analyst]

Okay. That's good. And maybe my second question, Clive, just on the regulatory front. I guess we're hearing too that it should be implemented basically by the end of the year, but the actual -- I guess the actual rate may not actually be implemented until mid next year, like in 2024, so it won't be Jan 1. I'm wondering if you're hearing the same thing. Can you also mention or also talk about the exemptions? If you can remind me exactly what, again, the exemptions that you're trying to get the government to implement.

[Clive Kinross, executive]

Yes. So certainly, from a timing standpoint, we're hearing that something that we'll be able to see the timing and the exemptions before the end of the year. From a timing standpoint, Stephen, I would expect that, that will give -- I would expect that they'll probably give 3 or 4 quarters at a minimum before it gets implemented. So I think you mentioned around the midpoint of the year. We were hearing the fastest that could get done is probably Q4 of next year, likely into 2025, and that would still be fairly rapid.

The other thing from an exemption standpoint, as you know, the user rate cap in Canada currently is 47% today. And there's a carve-out for payday loans. And a payday loan is defined as unsecured $1,500 or less. And to the extent that the loan has those characteristics, it gets pushed on to the provinces who regulate it separately, and the effect of APRs on that product come out to 400% to 800%.

In the absence of our products, that's what consumers will be pushed to. There is an acknowledgment, if you think about that payday loan exemption, that loans that are unsecured and smaller dollar in nature, need to have higher APRs for those products to be profitable. So from our perspective, we've certainly been working with the regulators and educating them the economics of the smaller dollar loans in the hopes that there will be an exemption for the loans that are smaller dollar in nature and also unsecured.

And the unsecured aspect is obviously important as well, just insofar as when our customers are risky to begin with, default on their loans, what happens is there's a very nominal amount that we're able to collect and consequently, you need the higher APRs in order for us to be profitable.

So we've spent a good amount of time with the government and government officials explaining this to them, explaining how -- if this goes how it's -- if this regulation goes in without the exemptions in excess of 4 million Canadians who currently have access to the lower cost of credit will be pushed to payday loans and illegal lenders.

We've cited Quebec, which is a state -- which is a province today that already has a cap of 35%, has 68 illegal lenders lending in Quebec today to consumers who otherwise can't get access to credit. I think that the government officials are aware that the unintended consequences over here are entirely predictable. And we are hopeful that the right exemption will be put in place so that consumers won't be pushed to payday loans, which will be materially more expensive with lower loan amounts than what they could otherwise get today.

The last thing I want to mention is all of that is happening in a backdrop where the Lerner Index have turned around and said, Canadian banks today are the least competitive of all the G7 countries. And our current rate cap of 47% is one of the lowest, not in the G7 countries, but one of the lowest in the entire planet. And so again, we're hopeful that the government will strive to right balance between lowering the cap and carving out the right exemptions.

[Operator]

[Operator Instructions] And your next question will be from Andrew Scutt at ROTH MKM.

[Andrew Scutt, analyst]

Congrats on the strong quarter. So first one for me. You kind of have already touched on this on a high level, but regarding the new customers, was this kind of due to maybe loosening your underwriting standards versus where you were last year, whether you're getting stronger applications or maybe improved marketing strategies? Just any further detail there would be great. And then where does that mix kind of new and existing customers' originations feel best for you guys moving forward?

[Sheldon Saidakovsky, executive]

Yes, Andrew, thanks a lot. So I guess, firstly, there's very strong demand that we're observing. And from a pure seasonal perspective, we expect higher demand kind of sequentially over the year. Q3, we have higher demand over Q2. And Q4 that we're into right now is the highest demand quarter. So just purely naturally, from a seasonal perspective, we saw an uptick in demand.

The other part is, as we've discussed before, just this dynamic in our industry where there's tightening across the credit supply chain upstream is continuing as more traditional banks and traditional credit institutions are tightening. So that's driving a better quality consumer to our platform. So we're benefiting from that as well. There's also a continued transition online. So all of these dynamics that we've spoken about before.

Now what we did last year is we tightened new customer volume as a result of just some uncertainty and an uptick in default rates. So I wouldn't say -- we could do substantially more volume today than we're actually doing, notwithstanding still the record amount of new customer originations that you've seen in Q2 and Q3, we can -- we and our bank partners can enable substantially more.

So we're continuing to maintain a very prudent approach to underwriting even in an environment where we're doing record new customer originations. So hopefully, that answers the question over there. And at the same time, expect a very -- a quite large increase in new customer originations in Q4 as well, even though we maintain a prudent underwriting position.

And sorry, you also asked about the proportion moving forward. I think I would expect it to probably be around 50-50, certainly in Q4. And as we go into Q1 of next year, typically new customer volume settles a little bit just because of seasonality. But then over the course of 2024, I would expect it to be probably close to 50-50, if not new customers dipping closer to 45% to 50%.

[Andrew Scutt, analyst]

And you kind of alluded to this in your answer and we might be a couple of weeks early here, but as we head into the holiday season, are you guys -- what's the demand you guys are seeing relative to years prior?

[Clive Kinross, executive]

Yes, we're halfway through Q4 over here. And as we mentioned in our comments, demand really picks up post-Thanksgiving. Those 5-or-so weeks of the back end of the year. But yes, we are seeing very, very strong demand and continued stellar credit performance. We're delighted by both of those 2 variables. We've maintained our exceptionally tight underwriting and really pleased with what we're seeing.

We expect growth in Q4. I've been saying this a few times over the course of the year to be our highest growth quarter of the year by quite a big margin. And right now, we don't see any reason to change our stance as far as that's concerned. Credit performance continues to be outstanding, with demand very strong even before moving into that post-Thanksgiving period.

[Operator]

Thank you. And at this time, we have no other questions registered. Please proceed.

[Clive Kinross, executive]

Yes. Thank you so much, everybody, and thanks also for the warm congratulations. We're certainly proud of what we're doing over here and not only proud of what we've kind of done this quarter, but part of what we've done since our inception and in particular, since becoming a public company. Obviously, I want to thank you all for attending the call this morning. I'd also like to thank all of our investors for your continued support and belief in Propel and our vision of building a new world of financial opportunity.

And as always, and importantly, I would like to extend a big thank you to the Propel team for pushing themselves and helping us transform in the industry. The best is yet to come, team. Have an excellent day. Operator, you may end the call.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.