Novatti's share price could ride high on banking license

ASX-listed fintech Novatti could see its share price rise higher on its acquisition of a license for one of its subsidiaries to conduct banking operations in Australia.

The payments company also posted strong revenue growth in the first quarter of the new fiscal year and a reduction in its cash burn.

Novatti subsidiary grabs banking license

On 3 November, the Australian Prudential Regulation Authority (APRA) announced that it had granted International Bank of Australia (IBOA) a license to operate as a restricted authorised deposit-taking institution (RADI).

The license means that IBOA will be able to conduct business banking in Australia on a limited basis, before satisfying the full set of prudential requirements for an authorised deposit-taking institution (ADI).

Novatti holds a 91% interest in IBOA, following the finalisation of a Series A equity round which saw Novatti contribute a further $5 million out of $8 million in new funding.

APRA issued the RADI license with the expectation that IBOA will eventually advance to the acquisition of a full ADI license within a maximum timeframe of two years.

Following the announcement, Novatti’s share price surged 54% higher on the morning of 7 November after emerging from a trading halt.

Banking becomes long-term strategy

Novatti bills itself as a leading digital payments company that uses a global network covering 58 countries to process $2.3 billion in transactions annually.

Its flagship offering is the development of end-to-end payment solutions for businesses and government bodies, providing them with their own branded card campaigns that are tailored to suit their specific needs.

Peter Cook, Managing Director of Novatti, said that the fintech company now plans to expand into branchless banking as part of its long-term growth strategy.

'Being granted a restricted banking license is a very significant milestone in the delivery of Novatti's long term strategy, and is the culmination of several years of investment and development,' Cook said.

'We see banking services as significant across card issuing, merchant acquiring, billing and cross-border payments as it underpins the infrastructure and capability to Novatti's core payments business while also giving us the ability to increase margins.'

Guy Carvalho, CEO of IBOA, said that the newly licensed company would seek partnerships with fintech companies outside of traditional banking.

'A key focus for the bank will be partnering with fintechs, such as Novatti, who need an innovative and nimble banking partner,' he said.

'For a long time, we have known that traditional banks have not been able to keep up with the requirements of the disruptive business models of fintechs.'

Carvalho said IBOA would also make use of Novatti's global network to acquire clients in Australia's fast-growing migrant population.

'In addition, we see huge potential in the significantly underserved migrant sector,' he said.

'The bank will have the advantage of being able to leverage Novatti's existing payments ecosystem and global operating base to reach potential customers overseas and enable them to set-up bank accounts and transact before they even set foot in Australia.'

Sales revenue doubles in Q1FY23

The acquisition of a banking license by IOBA arrives after a strong opening quarter in the new financial year for Novatti.

Novatti posted quarterly sales revenue of $10.5 million in Q1FY23. The amount marked a 98% increase compared to the same period last year, albeit a slight decline of 4% compared to the preceding quarter that Novatti imputes to seasonal factors.

Quarterly processing revenue surged 123% year-on-year in the September quarter to almost $10 million.

The payments company has also trimmed its cash burn considerably, helping it to shift towards positive cashflow. Novatti's cash use has fallen 53% across the past two quarters, while for Q1FY23 it fell 10% compared to the prior quarter.

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