THE RISE OF THE CASHLESS ECONOMY - DIGITAL PAYMENTS, NEOBANKS, AND CASH ALTERNATIVES - Emerald Financial
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THE RISE OF THE CASHLESS ECONOMY
DIGITAL PAYMENTS, NEOBANKS, AND CASH ALTERNATIVES
Alfred Chan | Emerald Financial Group | admin@emeraldfinancial.com.au | (03) 8080 5777
Digital Business Thriving Through COVID-19
Amidst the coronavirus pandemic of 2020, major shifts in business Date: 29 May 2020
practices, human interaction and economic priorities have been catalysed Stocks Covered:
by social isolation. It’s forced individuals to connect digitally like never
before, and technology has been the key driver, perhaps saving millions of
lives by allowing populations to continue to work in isolation
World Health Organisation directives and Government protocols have
been the key drivers to multinational corporations and small businesses
advancing their methods so that employees can work from home.
Customers can still be serviced and products can still be bought and sold.
But all of this is happening in a more digitised manner than ever before.
This has had significant ramifications on ideologic concepts of ‘cash’ and
its value in the globalised world, even once the pandemic subsides.
Visa Inc (NYSE: V) remains one of the industry leaders in this space
and has been gradually making a big push into the digital wallets space.
Visa (and its competitors) continue to see consistent growth in its online
transactions over a sustained period. During 2Q20, Visa signed a 5-year
partnership with Tencent (the parent of WeChat, a highly popular platform
with more than 1 billion monthly active users) in China and announced
a strategic partnership with Safaricom (the largest telecom in Kenya).
Through sustained corporate activity, Visa now has relationships with wallet
providers that gives it the potential to embed Visa credentials in 2 billion
wallets as the global cashless economy looms large. This was confirmed
by 5% YoY growth in Visa’s payments volumes.
Online Purchases
Throughout COVID-19, there has been a notable rise in online transactions with social isolation creating a greater
reliance on goods to be delivered via postal networks and services to be delivered digitally wherever possible.
Beyond Visa’s 5% increase in payments volumes, ASX darling Afterpay Touch (ASX: APT) has reported major
adoption in the United States, with 1 million new customers reported during the first 10 weeks of the coronavirus
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pandemic. Adoption of Afterpay’s buy-now-pay-later (BNPL) service continues to attract interest both from
consumers and at a corporate level, the latter highlighted by a significant investment from Tencent Holdings in
May 2020. Between the two events, Afterpay’s share price quickly reached all-time highs to recover from the
market’s wider coronavirus-induced downturn.
The Afterpay rebound has been further attributed to the significant upswing in online sales reported by retailers
through COVID-19. Where brick-and-mortar retailers have had to close stores for biosecurity, the transition to
online sales has been a profitable one for those who were able to transition quickly
Glancing at the ASX-listed retailers, Mosaic Brands (ASX: MOZ) has reported 80% growth in online sales
through COVID-19, Michael Hill (ASX: MHJ) has reported more online sales than seen throughout Christmas
2019. It also led Woolworths (ASX: WOW) and Coles (ASX: COL) to suspend their online platforms temporarily
due to unprecedented demand.
Core to these online retailer platforms is the ability to purchase using cash alternatives. These include the likes of
Afterpay, Alipay, Visa, Mastercard, Paypal and others.
In doing so, payment service providers are facilitating the shift away from cash purchases, of which many retailers
do not factor into the cost of goods sold. This is where larger transaction volumes do not necessarily reflect linear
profitability for retailers, and it is instead the facilitating intermediary that cannibalises margins.
It’s how BNPL businesses like Afterpay are able to offer interest-free loans on purchases. Reaching a new all-time
high despite the coronavirus pandemic slowing economic growth, the higher entry price for exposure to a shifting
cashless economy may prompt investors to seek more emerging listed companies within the sector.
Within the small cap fintechs, Novatti Group (ASX: NOV) has been rapidly growing in the payments space as a
partner of Visa, Alipay and WeChat Pay, two of China’s biggest online payment platforms.
This has seen Novatti continue
to grow its payments business,
which saw a 67% rise in payments
business revenue through Q3 FY20,
right at the height of the pandemic.
In turn, and much like fellow fintech
Afterpay, they have quickly returned
to their pre-virus share price levels,
ahead of the wider market.
Beyond their role in processing
Alipay transactions, Novatti holds
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a Visa Principal Issuer Licence from Visa Inc which enables the company to issue prepaid Visa cards, further
facilitating online merchants that elect not to adopt BNPL service providers.
Through their established network of international merchants, an AFSL, and Visa Principal Issues status, Novatti
has built a significant foundation to collaborate and incubate with new fintech businesses seeking to capitalise on
this shift towards cashless solutions.
Beyond their consistent revenue growth in challenging times, Novatti has further strengthened their business with
the $2.6m acquisition of Emersion Software Solutions in April 2020, securing significant recurring SaaS revenue.
Not long after, the company announced a partnership with Decta, a leading European payments regulatory
business, to launch a new Asia-Pacific Visa issuing business.
Stocks to Watch: Afterpay Touch (ASX: APT), Novatti Group (ASX: NOV)
Neobanks, Digital Banks and Neolending
Amidst the fallout of the Royal Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry which concluded in February 2019, the model of traditional banking has been thrown into
disarray.
Archaic models around licencing and a lack of accountability opened up a slew of unethical practices which have
left major banks with a black eye. With the Royal Commision shedding light on many of these practices, we are
witnessing a shift in the power balance of financial products where consumers are afforded greater transparency,
leading to the establishment of traditional banking alternatives.
Whilst BNPL apps are just one financial service to offer an alternative to high-interest credit cards, many of those
apps have spending limits and Terms and Conditions FlexiGroup’s Simplified Brands
to prevent the products from being classified as credit
loans, which fall under more stringent legislation
Instead, if consumers wish to make larger purchases
without paying cash upfront, traditional means meant
purchasing bank-issued credit cards or drawing down a
personal loan from a bank or credit union.
Well before the rise of BNPL apps, FlexiGroup (ASX:
FXL) have been facilitating these credit alternatives,
somewhat in the shadows, and have recently emerged
with a renewed business model to actually classify
themselves as BNPL providers - something they’ve in
truth always been but never marketed themselves as.
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The company did this under the guise of store-based credit cards from major retailers and various B2B brands,
but have since consolidated everything into three categories - BNPL, Cards and SME Lending.
In their H1 FY20 results which detailed the consolidation, Flexigroup also reported a 12% increase in merchant
partners to 71,000, an 11% increase in customers to 1.89 million. Of most interest, the company saw an 18%
increase in transaction volumes, highlighting the sharp rise in neo lending solutions.
On the smaller side of town, fintech neolender Wisr (ASX: WZR) has seen a surge in applications for their credit
products where the Australian company can offer debt consolidation and personal loans at significantly lower
interest rates than the Big Four banks.
Key to Wisr is their digital business model which does not require any brick-and-mortar stores and operates
entirely online. Incorporating digital KYC and regtech into their credit application process, customers are able
to secure loans around the 8.7% p.a. interest rate range, with the major banks offering closer to 13% on similar
products.
Despite the company’s minimal
marketing, there has been rapid
growth in their financial products
where customers can consolidate
high-interest products like credit cards
(many charge interest at 19% p.a.)
and personal loans at significantly
lower rates. In their commentary
following their Q3 FY20 results, the
company confirmed they have had
more than 190,000 Australians enter
their ecosystem and more than
Wisr’s loan growth since 2017
87,000 downloads of their app.
Included in their Q3 results was the milestone of reaching $202.7 million in loan originations, of which $50m was
underwritten over just the past four months - a 50% increase on Q2 FY20 and 140% increase on Q3 FY19.
The company has been quickly recognised as one on a growth trajectory, debuting in the AFR’s Fastest 100
Growing Companies at #78.
Stocks to Watch: Flexigroup (ASX: FXL), Wisr (ASX: WZR)
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Disclaimer
Alfred Chan is a Director of Principal Investor Relations (Principal) (ABN: 51 633 750 928) and an Authorised
Representative of Emerald Financial Group ABN 85 106 823 741 which holds Australian Financial
Services License number 241041.
Any advice contained in this presentation is general advice and does not consider your objectives, financial
situation or needs, and you should consider whether it’s appropriate for you. The information we are giving you
is for educational purposes only.
“Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss.
If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at
www.emeraldfinancial.com.au and the relevant Product Disclosure Statement first.
Please note past performance is not a reliable indicator of future performance.
All Figures in this report were correct as of 29th May 2020.
Directors of Emerald Financial Group hold shares in a number of the companies mentioned in this report
NOV has engaged Principal IR on retainer to assist with Investor Communications
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