1 March 2020
Identitii listed on the ASX in October last year after four years of development work on a technology platform that enhances a bank’s existing technology systems to allow data and documents that are critical to compliance and settlement of corporate payments to be securely exchanged across their networks. I recently spoke with CEO, Nick Armstrong, about the opportunity.
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report 20/02/19||ASX ST1|
|Price $0.058||Price Target N/A|
|Analyst Recommendation N/A|
|Sector: Technology||52-Week Range: $- 0.950|
|Industry: Software - Application||Market Cap: $30.8 million|
What do you do?
Identitii’s Overlay+ platform enables banks to seamlessly integrate existing legacy technologies, which may have been in place for up to 40 years, with new and emerging technology infrastructure. More specifically, the platform helps banks address numerous pain points in managing the huge volume of international payments that pass through their networks. Banks are looking at improvements in this area due to a number of pressures including increased scrutiny from regulators, the need to reduce financial crime and initiatives such as Open Banking, which create opportunities for non-bank challengers to take market share due to their use of new technologies.
Any payment over about $10,000 (the exact amount will vary from country to country) that crosses international borders through the banking system has to be supported with an increasing range of data and documents that speak to the origin, purpose and beneficiary of the payment. The existing system to handle this data has many gaps and the current process for gathering this data relies on emails and phone calls between the sender and the beneficiary, a process that holds the funds up from being released.
Rather than abandon existing platforms, which would be hugely expensive and subject to high execution risks, Identitii’s Overlay+ platform enables banks to easily migrate data between the systems without abandoning their existing technology and platforms. As the name of the platform suggests, it sits on top of a bank’s existing platform and creates a secure, digital network within which senders and receivers of funds can share detailed data and documents when they are needed.
What is the business case?
The international corporate banking landscape is enormous with some US$124 trillion sent by companies internationally in 2018. This is expected to grow by nearly 5% over the next 5 years. Payments can take from 30 seconds to 10 days to process and it has been estimated that about 8% of transactions require manual processing due to problems with the supporting information and documents, at considerable cost. Corporate customers are now demanding a much better experience with greater transparency and speed, as they require more visibility into cash flows for the efficient operation of their businesses. As a result, banks are facing increasing competition from new digital payments companies, using modern technologies, outside of the traditional highly regulated banking system. This is in part helped by the push for Open Banking taking place across the globe.
Further it has been estimated that some US$2 trillion is laundered through the banking system every year. Accordingly, regulators are demanding much greater control and accountability from the banks about their transactions leading to a huge increase in compliance costs and fines. This additional burden on banks means it often takes longer to process payments, at a time when customers are demanding faster remittance of funds and more visibility into when funds will be received.
Existing platforms are just not able to handle the increasing demands for information. But banks neither have the time or funds to completely overhaul their critical technology systems and are looking for faster paths through which to deliver the outcome their customer needs, bring new innovative products to market and remain competitive. This is where Identitii’s overlay approach comes in, letting the existing bank systems continue to perform their primary function, to move money, while Overlay+ adds enhanced functionality to bring the systems up to today’s digital standards.
What has been achieved?
In less than four years, Identitii has progressed from concept through pilot development and finally commercial launch in an industry notorious for its conservatism and barriers to entry. In the six months ended 31 December 2018, the company generated its maiden operating revenues heralding the commercialisation and scale up phase of the business.
Over the past four years, the company has completed the development and stabilisation of its platform and built a management team to drive the business forward. Important validation of the platform has been achieved through a development and commercial relationship with Tier 1 bank, HSBC. HSBC is one of the world’s largest banks and has extensive commercial banking operations in Asia where it has rolled out the platform having been a development partner with Identitii. HSBC’s validation provides credibility and more importantly access to other leading banks that would otherwise have taken years to establish. This relationship has subsequently led to a number of partnerships, including with London based Trace Financial, where together they have developed a way to simplify message standards migration by banks.
Trace Financial is a leading specialist in financial message transformation and has been designing, implementing and supporting mission critical solutions to the financial industry for over 30 years. This relationship provides a pathway into Trace’s large client base and is expected to become a major sales channel.
The partnership is in response to the announcement that financial systems across the world, including Australia, are either adopting or considering adoption of ISO 20022, a technology standard for electronic data interchange between financial institutions. The new standard allows more data to be shared with payment messages, but migration carries with it a risk of data loss, something the regulators won’t allow and a key opportunity for banks to use Identitii’s Overlay+ to minimise the risk.
Migration to this new standard is mandatory in some cases, including for the 11,000 banks and financial institutions worldwide who use SWIFT to process payments, and will occur between 2021 and 2026 presenting enormous time and cost challenges to the world’s banks operating under the current system.
With numerous banks worldwide migrating to the new electronic data interchange standard over the next few years, Identitii is well positioned to build a major market presence in the near to medium term. Longer term, ongoing development and enhancement of the platform will expand the range of opportunities and other products may also emerge.
As Identitii is in the early stages of commercialisation its financial structure is characterised by low revenues, operating losses and operating cash flow deficits. Whilst strong revenue growth is expected, operating losses and cash flow deficits are likely to continue for at least the next year or two until critical mass is achieved.
Revenue in the six months ended 31 December 2018 of $1.0 million was 31% higher than in the same period in the prior year. More importantly, maiden sales revenue was achieved, amounting to $336K which offset a lower R&D rebate and reduced government grants. Nonetheless, the rebate and grants contributed nearly two-thirds of total revenue. This share should decline as revenue builds. In the March 2019 quarter, cash receipts from customer contracts increased 216% over the previous quarter, pointing to a take-off in revenues, albeit from allow base.
The company will generate operating revenue from multiple sources including licence fees, with banks potentially paying for multiple licences covering diverse business units, volume base fees and maintenance and support fees. With Identitii primarily targeting Tier 1 and Tier 2 banks the fees paid by any one client bank are potentially substantial.
The company raised $11 million from its IPO in October 2018 and had cash reserves of $5.9 million as at 31 March 2019. The cash burn is about $1.5 million per quarter so the current reserves should be adequate for at least the next year.
What do I think?
The massive size of the banking industry coupled with its inherent conservatism suggest that it is ripe for disruption. Indeed, there are many FinTechs around the world emerging to challenge the incumbents. Digital banks and new payment systems are already operating and more will emerge. Whether they succeed or not is open to question, however, there is little doubt that the established banks will fight back and be pressed to innovate. As it happens, the combination of ever tighter regulatory control and major advances in technology are driving changes and opportunities are clearly available for innovative technology companies to enable and support the banks as they adapt.
Identitii is in the right place and time and having the validation and commercial support of HSBC is invaluable as it seeks to build a presence in a market where reputation is everything and large, established technology companies are advantaged. The backing of HSBC and more recently of Trace Financial will open doors for Identitii and deliver a growth pathway that would have taken years otherwise to develop.
Notwithstanding this support, and healthy cash resources, the key risks for Identitii are execution with consistent high, quality delivery of its services and the potentially long sales lead times.
Identitii confronts a very large addressable market and if it executes well and can scale up rapidly over the next two or three years, it could experience substantial valuation gains.
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