The investment case

We've put together an investment case for small, ASX listed fintech company, Novatti. We like Novatti for four reasons:

1) The world is transitioning to digital payments, Novatti's core business
2) The company has demonstrated strong growth and financial performance
3) Strategic partnerships and aquisitions look likely to stimulate further growth
4) A major re-rating catalyst is on the horizon

We've broken out each of these reasons below in more detail along with charts and other visualisations to help build an investment case for Novatti.

Global transition to a cashless society

Novatti is a digital payments business, so lets start by taking a look at the payment landscape

Back in 2007, cash was used as the payment method for close to 70% of all transactions

By 2019 it was down to just 27%

Digital payments have become the new normal, representing upwards of 65% of all transactions in 2019

Novatti has positioned its business to benefit from this macroeconomic trend

The company generates its revenue from payment card issuing, payment processing and acceptance, international payments, technology services and subscription billing

But an economic tailwind means nothing if the business isn't performing, so lets look at Novatti's performance since listing

Strong growth and financial performance

Novatti has seen approximately 50% revenue growth year-on-year since listing

The company has grown it's revenue from $4M in FY16-17 to just under $12M last year

Novatti's core business, processing transactions, grew 60% last year

The company has seen five consecutive quarters of record processing revenue, and looks well positioned for growth post-COVID

Lets take a look at where future growth may come from

Future growth - partnerships and aquisitions

Novatti has numerous strategic partnerships which look likely to serve as growth catalysts in the near term

For example, the company's partnership with Visa culminated from a multi-year development campaign

and in September 2019, Novatti was awarded Principal Issuer Licence by Visa

The partnership enables Novatti to issue and distribute both physical and digital Visa cards, which the company now does though its subsidiary, VascoPay

Novatti has partnerships with other major companies as well, for example their recent partnership with Chinese payment giant, Alipay

In June, the Novatti announced that its cross-border payments platform, ChinaPayments, had been added to the Alipay app

Novatti launched ChinaPayments in 2018 as a first-to-market platform enabling Chinese residents to pay Australian bills online using Chinese currency

Novatti receives a fee per transaction, with eligible bills including education fees, utilities, rent, council rates and phone charges

June also saw Novatti selected by global payments company Marqeta to be their domestic partner for the launch of a new prepaid cards business in Australia

Founded in 2010, Marqeta is the world’s first open-API payments platform and is utilised by many of the world’s largest tech companies. Marqeta is a partner of Afterpay, Square, Uber, Affirm, Instacart and Doordash and has issued around 140 million payment cards globally

Novatti will earn fees from Marqeta for project implementation, ongoing compliance services and program performance based on the number of subscribers and funds loaded onto Marqeta cards

Novatti has also been growing through strategic aquisitions, for example their April aquisition of Emersion

Emersion combines diverse applications, including subscription billing, payments and provisioning, into existing business platforms

Novatti has said that they expect FY21 to be a strong year for Emersion with additional global partnerships and further plans for international expansion on the horizon

Major catalyst - Pending digital banking license

Recent annoucements from Novatti have indicated its intention to build a digital banking service

We are particular exited about this prospect. Reports have shown that 25% of banking customers have either already switched, or are seriously considering switching to a neobank

The company has submitted it's final application for a Restricted Authorised Deposit Taking Institution licence to the Australian banking regulator, and is the process of developing it's platform

Considering the valuations attributed to other listed neobanks Douugh Ltd (ASX:DOU) and Wisr Ltd (ASX:WZR) - we see this large potential upside should the license come through

According to Novatti's annoucements, the regulator paused license approvals during COVID19 and will reccomence in March 2021.

In the meantime, Novatti plans to continue to develop a strong customer and partner base ready for launch

Summary

Novatti is in an industry with a strong economic tailwind and has been growing well since listing. The company has a proven track record, with their financial reports backing up their growth. With several key partnerships recently annouced, Novatti looks likely to continue the growth into the future.

We think these facts alone create a compelling investment case, but the deal is sweetened by the potential upside associated with the companies pending banking license. If the license comes through, the company will be able to leverage the networks they have established. Should that happen, we think the market will value Novatti like other listed neobanks - which is many multiples higher than the current valuation.

We will be watching closely as Novatti moves into 2021.