Remarkable rise of FinTech stocks
Emerging finance-technology companies attracting interest.
Move over baby boomers and generation Xers: the millennials are now the biggest demographic and traditional consumer financiers should be on high alert.
While the millennials (aged roughly between 25 and 36) crave instant gratification, “their emphasis is on spending their own money and not getting into debt” says Afterpay executive chairman, Anthony Eisen - “the millennials have experienced the impact of the global financial crisis, they certainly will not countenance sky-high credit card interest rates”, a trend reflected in the flat to declining use of the devil’s plastic.
(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article. As emerging small-cap technology companies, fintech stocks typically have higher risk.)
Enter the ASX-listed fintechs zipMoney (ASX code: ZML) and Afterpay (AFY), which are fast gaining traction with their versions of interest-free, pay-by-instalment products.
A key tool in their competitive armoury is the use of complex machine algorithms to quickly assess a customer’s likely credit risk in a non-invasive manner.
The two point-of-sale challengers share a common charter: to simplify the approval process to the benefit of the customer, the merchant and – ultimately – their shareholders.
But their businesses differ in key ways.
The size of the prize
According to zipMoney managing director and co-founder, Larry Diamond, the Australian credit-card sector is worth $53 billion, of which 63 per cent is interest bearing with an average outstanding balance of $3000.
Diamond cites a broader $100-billion addressable market: $65 billion in retail, $15 billion in healthcare services, $15 billion in travel and $5 billion in education.
“The world of credit cards is under enormous pressure, both from the consumer side and the issuing side,” he says.
While the new players are approaching the market in different ways, their offerings are based on using complex algorithms to assess the credit worthiness of customers at the point of sale.
Tapping the millennium’s hybrid of instant gratification and thrift, the products work on an interest-free basis. The profits of both zipMoney and Afterpay are based on their fee to participating merchants.
These imposts are usually more than those charged by the bank-owned card schemes Visa and MasterCard. But the retailers evidently are convinced it is worth the extra cost in terms of increased sales and customer loyalty.
In the case of Afterpay, the products are the reverse of the old lay-by schemes, in which thrifty consumers would have to wait months to receive even humble household goods.
The purchases are separately approved at the point of sale, with the transaction based on a conventional debit card platform. “We can decide in real time, as it relates to that particular transaction,” says Afterpay’s Eisen.
As long as the items are fully paid for in a set period, typically around 60 days, no interest is paid, but the customer may be charged late fees.
Eisen does not see Afterpay as a competitor to any particular financing alternatives, whether they are the credit card schemes, Flexigroup’s Certigy product or Latitude (formerly GE Capital). “You will never see Afterpay financing TVs for four years,” he says.
In contrast, zipMoney’s products zipPay and zipMoney are digital wallets, with customer expenditure approved to up to $1000 or $30,000 respectively. “We are effectively digitising the credit card and removing interest,’’ says Diamond.
The rapid growth of zipMoney and Afterpay has not been lost on the ASX-listed consumer financier Flexigroup (FXL), which offers a number of card-based interest and no-interest consumer products.
A market leader with more than $2 billion of receivables, Flexigroup plans to launch a “low touch, consumer friendly” product called Oxipay in the December quarter.
Technology the key
Behind the push is the use of highly sophisticated data analytics to assess a customer’s credit risk, based on factors such as their buying patterns (if known) and the product and merchant in question.
Just as razor blades are among the most stolen items, some products are more prone to fraud and credit delinquencies than others. Afterpay’s magic trick is its Transaction Integrity Engine (TIE), which carries out real-time automated decisions on the potential customer. It is activated every time an end customer selects Afterpay as the payment method.
A key point is the analysis is done in real time and automatically, with no external client checking with a credit-reporting agency. Given the limited inputs, Afterpay concedes “it does involve some degree of risk of fraud or non-payment by the end customer”.
Founded in 2013 and listed in September 2015, zipMoney offers zipPay (for purchases under $1000) and zipMoney (a line of credit up to $30,000 for chunkier items such as holidays and cars).
zipPay was only launched in January. It is a “no interest ever” product targeting high turnover at low-value market segments.
In the March quarter the company claimed 193,456 customers – 62 per cent growth on the previous quarter. The group also recorded receivables of $114 million, up 31 per cent, and revenue of $4.6 million, up 18 per cent. Transaction volumes climbed 22 per cent to $61 million.
Similarly, Afterpay growing quickly. In the March quarter its customer numbers grew to 575,000 on annualised sales of $700 million, with merchant signings doubling to 3700. Not bad for a company founded a little over two years ago.
The company also reported revenue of $124 million and cash burn of $10 million, but expects to post a modest profit this financial year.
Afterpay says it accounts for 3 per cent of all online sales and 15 per cent of Australian online fashion retail transactions. Big-name clients include Myer, Officeworks, Big W, Telstra and Premier Retail.
Afterpay intends to merge with the business-to-business payments house Touchcorp (TCH), which processes all of Afterpay’s transactions. Effectively a nil-premium scrip merger, the union will create a new listed entity called the Afterpay Touch Group.
The merger is scheduled to be effective from June 28, with the new shares listing on July 10
Combined, zipMoney and Afterpay command a $600-million-plus market cap, with Touchcorp worth a further $200 million. This makes for an intriguing comparison with Flexigroup, which has a $650-million market valuation but is expected to post record earnings of more than $90 million this year.
In a recent special report on the retail newcomers, Under the Radar newsletter concluded the heady valuations of zipMoney and Afterpay factored in their “blue sky” potential, at least for the time being.
The challenge for the companies is to emerge from the capital-intensive growth stage to posting consistent earnings.
‘Ape-ing’ success abroad
Meanwhile, the locally grown fintech disruptor ChimpChange (CAA) has gone directly to the US market in its quest to revolutionise day-to-day consumer payments.
Founded by local entrepreneur Ash Shilkin in 2012 and listed in April 2015, ChimpChange has devised and launched a mobile phone-based account, based on a debit (prepaid) MasterCard.
Again, ChimpChange is tapping the bank-wary millennials, who account for one-quarter of the US population. True to this focus on the tech-savvy generation, ChimpChange acquired 56 per cent of its customers via Facebook and a further 9 per cent from Integra.
ChimpChange’s customer proposition is simple enough: there are no monthly fees, as long as the account is loaded or withdrawn from at least every day.
Failing that, customers incur a $US4.95 a month inactivity fee and foreign ATM and cheque charges can apply.
ChimpChange raised $15 million on listing and recently rustled up $10 million in a placement that saw small-caps specialist Acorn Capital emerge as a 6 per cent shareholder.
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