1 March 2020
Emerging FinTech employing blockchain technology to deliver banking solutions.
Michael Aston, Chairman,
Nicholas Armstrong, CEO
Martin Rogers, Non-Executive Director
Peter Lloyd, Non-Executive Director
ASX Code: ID8
Current Price (29/07/19): $0.38
52-week Share Price Range: $0.36 – $0.95
Market Capitalisation: $20.7 million
Enterprise Value: $16.6 million
Shares on Issue: 54.5 million
Nicholas Armstrong, 17.2%
Regal Funds Management 11.4%
KTM Ventures Innovation Fund 11.0%
Dr Eric Knight 8.5%
Justine Roche 5.6%
Terra Capital 5.1%
Michael Gordon, 0414 501 442
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report 07/08/19||ASX ID8|
|Price $0.056||Price Target N/A|
|Analyst Recommendation N/A|
|Sector: Technology||52-Week Range: $ 0.36 - 0.95|
|Industry: Software - Application||Market Cap: $ 20.44 million|
Identitii has commercially launched its solution to the banking industry’s multi-billion dollar problem of how to manage and communicate the increasing amounts of information required to protect against fraud, money laundering and terrorist financing before a commercial transaction can be cleared and settled. Delays in settlement, because of missing information, are frequent, expensive to address and add to business debt and liquidity issues.
Identitii’s Overlay+ platform employs blockchain technology to deliver a cost-effective solution to banks, who face, and are incurring, enormous non-compliance fines, and has the potential to greatly improve the speed and efficiency of the entire purchasing and delivery value chain for businesses thereby lowering costs and improving liquidity.
Identitii’s development partner and launch client is HSBC who will be rolling the platform out through its Asian operations. A number of contracts with other banks are expected before the end of calendar 2019 with sales momentum building through 2020. As the volume of transactions processed builds over the next few years, revenue is expected to grow rapidly with a potential breakthrough into profitability during FY 2022.
Whilst additional capital will be required, with an enterprise value of around $17 million, the market seems to be heavily discounting commercialisation risk. Accordingly, we believe that there is considerable valuation upside with contract wins, and in due course transaction volumes processed, being the key valuation triggers.
- Banks can’t meet demands to “Know Your Transaction” with existing legacy systems
- Identitii is an early mover with a solution incorporating blockchain technology and tokenisation
- Opportunity to be one of the leading suppliers
- HSBC is the launch client
- Large pipeline of interest already established
- The revenue model will deliver multiple revenue streams
- Transaction volumes will be the powerful long-term value driver
- Scaling up in FY 2020 with traction building in FY 2021
- Breakthrough to profitability expected during FY 2022
- Probably need additional capital
Risks and Challenges
In addition to the usual range of economic and market risks, Identitii must also manage a wide range of execution risks and challenges associated with being an early stage business in an undeveloped market using a technology platform (blockchain) that is only emerging and yet to gain broad market acceptance. Nonetheless, we think that Identitii faces four key risks and challenges which will impact its scale-up strategies and ultimate success.
Sales cycles and scale up speed: There is no doubt banks have serious issues and challenges in meeting regulatory pressures to handle and communicate far more information with each its commercial customers transactions and there are powerful catalysts at work to drive action. However, with no established or widely accepted solution and being wary of adding to their plethora of applications, the sales process could be slower than anticipated. We expect Identitii to secure between 7 and 10 bank clients over the next two years but specific timing is uncertain.
Banks using opt-in for corporate customers: As critical mass builds, volume related transaction fees will become the primary source of Identitii’s revenue. This will ultimately reflect the level of penetration of the service into the client bank’s commercial base. There are many strategies which a bank can use to build penetration into its customer base but most will require marketing and some training. We assume that penetration will build over time but wide customer acceptance is imperative. A further risk is that banks are likely to seek to recover these transaction costs from their customers which could lead to some push-back.
Competition: Identitii is an early mover but it does face competition with at least 10 other offerings available or in development. Being a new space, the market is highly undeveloped, and a viable commercial solution is required, but no one has yet established any meaningful presence. Accordingly, business development strategies will be built around “land grabbing” and quickly building a significant client base and critical mass. More competition will most likely emerge so the challenge is to move quickly to establish a strong market presence.
Funding: In addition to a competitive value proposition, success will be a function of being able to harness the financial resources to drive the rush to scale. Identitii will probably require additional capital over the next year.
Background and Overview
Identitii is an emerging FinTech. The company was established in late 2014 with a concept to address a major messaging problem in the bank payments system. Between 2015 and 2017, the concept was developed with the support of global top 10 bank, HSBC. The first deployment was in 2018 and to support the commercial launch, Identitii raised $11 million in capital through an IPO in October 2018.
An efficient payments and transfer system is critical to business survival, however, it is clear that existing bank systems, many of which are decades old, are no longer able to meet the demands for information and supporting documentation that are required today to complete the settlement of a transaction.
It has been estimated that US$9 trillion is tied up on corporate balance sheets at any one time due to delays in settling commercial transfers. There is potential friction at almost every level in a transaction, especially involving the transfer of goods across borders, which cause delays. Increasingly, these fiction points involve banks as governments and regulators demand increasing amounts of information to support the transfer of funds.
In the not so distant past relatively basic information was required to facilitate clearing and settlement but even then mistakes (think misspelling or wrong account details) would cause delays involving significant costs to resolve. This problem has been heavily magnified today.
There are a number of compelling catalysts for banks to address this problem. In the post GFC world there has been a general crackdown on bank compliance resulting in huge fines for missteps. More specifically there is a global effort to fight fraudulent financial transactions and money laundering which means that banks are now required to know a great detail about both the counterparties and the nature of the transaction. Further the protocols to manage the messaging of information supporting cross border transactions have changed with all banks in the SWIFT system (over 11,000 globally) required to comply by 2025. And finally, open banking is emerging which has the potential to radically change the nature of retail and commercial banking in the future. Essentially, banking systems will be opened up to third parties through the use of APIs (Application Programming Interface) to develop new products and services. As a result, more and more demands are being placed on banks to acquire, hold and communicate information surrounding a commercial transaction.
Identitii is an early mover with a commercial solution in this emerging market. Identitii’s Overlay+ platform sits on top of existing legacy systems and uses APIs to connect and access required information. A unique (patent pending) feature of the platform is the use of tokens or encrypted keys to provide access to that information using blockchain technology.
There are at least 10 competing products and systems in development or in the market but as the market is immature penetration is very low with very few banks, at this stage, having committed to any particular route. Accordingly, there is every opportunity for Identitii to build a significant market presence and establish itself, with Overlay+, as one of the leaders.
HSBC is Identitii’s flagship client, with whom it built the bank’s Digital Accounts Receivable Tool based on Identitii’s tokenisation technology which was launched commercially in 2018. HSBC introduced the platform in India initially, and is planning to expand its presence into other key markets in Asia in the short term.
The Overlay+ platform was released by Identitii in October 2018. In a presentation in November 2018, the company indicated that it had some 40 prospects at various stages in its opportunity funnel of which several were close to closure. We expect a number of wins to be announced before the end of calendar 2019 with more to follow in 2020.
The company is directly marketing to banks but is also putting in place a partnering program to drive sales, support installation and configuration and to add additional functionality to the platform.
Identitii is employing a traditional enterprise model to generate revenue, which will include front end, fixed ongoing and volume-based fees. These fees will cover installation, configuration and training at set up, ongoing user licence and support and maintenance as well as fees based on the number of transactions handled by the platform. As scale builds and penetration amongst bank customers increases, the volume of transaction handled will be a powerful long-term value driver. It is conceivable that within 10 years the platform could be handling over 1 billion transactions annually.
Identitii’s primary market is global Tier 1 and Tier 2 banks of which there are about 800 in the Asia Pacific region alone. Each bank will typically hold multiple licences, covering geographies and business units. Accordingly, annual licence fees and support and maintenance fees could exceed US$1 million per bank with potentially considerably more being generated from transaction fees.
Business Drivers and Growth Profile
Inasmuch as Indetitii has a single launch customer, HSBC, its commercialisation pathway is evolving. Nonetheless, given the scale of the opportunity, a partnering strategy will be the centrepiece of its go to market strategy.
There are over 25,000 banks globally of which maybe 800 in the core Asia-Pacific markets are classed by Identitii as large or medium scale. These large and medium sized banks are the company’s primary targets due to the typically extensive nature of their operations which will require multiple licences and their sheer scale in terms of transaction volumes.
Identitii’s route to market will be via partnerships with banks and direct marketing to corporates, particularly in the Asia-Pacific area, and multiple sales channel partners. In addition to building sales channel partners with responsibility for sales and marketing in various geographies, partners will also be identified who can support systems integration and technology enhancement. These partnerships will be critically important in developing leads, securing deals, implementing the solution and extending product functionality.
Channel Partners: Identitii will use channel partners to drive sales and generate leads. These partners will provide a global reach which Identitii would not otherwise be able to achieve. Further, these partners are likely to be both introducers, with Identitii ultimately responsible for completing a transaction, and value added resellers, who will manage the whole process. We expect a range of channel partners to be secured in due course including consulting firms and platform integrators.
System Integration Partners: Overlay+ is highly customisable and configurable and each bank will have its specific requirements in terms of functionality and linkages. Accordingly, integration with in place legacy systems will be critical in delivering an effective solution to its bank customers. Identitii has the capability to manage a local integration project but will almost certainly outsource this to a local specialist for clients outside of the Asia-Pacific area.
Technology Partners: Identitii has mapped out a development pathway for Overlay+ but there are considerable opportunities for other products to link in with it further enhancing its functionality. One such relationship has been established and more are expected. During the March 2019 quarter, a partnership was established with London based Trace Financial which supplies over 200 banks, globally with message transformation software.
The sales and marketing focus will be two pronged and focused on both banks and businesses. The “Bank-as-a-Partner” program will include sales enablement tools to help the banks to get businesses using ‘enhanced payments’ enabled by the Overlay+ platform. Direct businesses engagement will also be undertaken as they will be the primary beneficiaries of the value provided by Overlay+ through reduced outstanding receivables, lower capital requirements and reduced interest costs. And from Identitii’s point of view once scale builds, transaction revenues will exceed licence fees. Accordingly, it is in Identitii’s interest to ensure that penetration amongst a bank’s business customers is high.
Notwithstanding the partnering strategy, we understand that Identitii will develop and maintain its own sales opportunities directly with banks. With this in mind, the company announced in a presentation in November 2018 that it had 40 open opportunities in its sales funnel of which three were at close of formal contract negotiation and another three were in proposal development. We expect that the three most advanced will be successfully concluded before the end of calendar 2019 and that others will have made significant progress through the funnel. Moreover, we believe that the number of live opportunities has grown.
Identitii’s IPO in October 2018 was transformative with the injection of $11 million in new capital providing the financial resources to scale up the business and proceed with commercialisation of its core product, Overlay+.
The injection of capital enabled the company to build the infrastructure required to drive a scale up of the business. Staffing has increased and more resources have become available to commence commercialisation. Nonetheless, there were significant one-off costs associated with the IPO which have also absorbed some to the capital.
Sales revenue has markedly increased off a low base. Most of this increase was attributable to Professional Services with only a relatively small amount being Licence Fees. Licence fees won’t be significant until further clients are added to the roster whilst transaction fees will take time to build.
A clear picture of the company’s quarterly cash requirements has yet to emerge but the March quarter 2019 operating cash flow deficit was $1.4 million which points to a deficit of between $4 million and $5 million in FY 2020. Whilst it is expected that the company will secure additional clients over the next few months, the revenue impact in FY 2020 will be relatively modest comprising mostly Professional Fees with Licence Fees and Transaction fees to flow in FY 2021 and beyond.
Accordingly, it is likely the Identitii will raise additional capital during calendar 2020 to shore up its balance sheet and to provide the financial resources to enable it to get to a cash flow breakeven position sometime during FY 2021.
General Advice Warning
The information contained in this Report is only of a general nature and does not constitute personal financial product advice. In preparing the advice no account was taken of the objectives, financial situation or needs of any particular person. Therefore, before acting on the advice readers should consider the appropriateness of the advice with regard to their particular objectives, financial situation and needs. Readers should obtain and consider any relevant Product Disclosure Statements before making any decisions about the subject matter of this Report and should seek independent professional advice.
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Please note that Gordon Capital has been retained by Indetitii Limited to provide this report for a fixed fee. Gordon Capital does not provide specific investment recommendations and does not receive any additional benefit for the provision of this report. Gordon Capital aims to provide a balanced and objective analysis in this report. Michael Gordon, the analyst responsible for this report, does not receive any indirect benefits or assistance from Identitii. Our remuneration is not linked to the views expressed in this report. At the time of this report, the author nor any associated parties held shares in Identitii Limited. Please see our Analyst Qualifications and Financial Services Guide, available at www.gordoncapital.com.au or by calling +613 9607 1371 for further information.
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