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To many investors, fintech means “buy now, pay later” – but the sector is much wider than the BNPL stocks.
Here are four fintechs to watch in 2021 – one of which itself offers a BNPL twist, and an unknown minnow that could be a hedge against BNPL risks, as it positions itself to help with any debt problems that could emerge from the BNPL boom.
Market capitalisation: $1.9 billion
Three-year total return: n/a (listed August 2019 at $2.50)
Analysts’ consensus valuation: $5.18 (Thomson Reuters), $4.94 (FN Arena)
Listed in August 2019 after the issue of 84.4 million CHESS Depositary Instruments (CDIs) at $2.50 each, Irish-based FINEOS provides software to the life, accident and health (LAH) insurance industry.
FINEOS’ specialised software products help insurers to bring their operations up to speed, to accelerate their digital transformations and reduce their reliance on their own legacy systems, which are usually cumbersome, costly and more risky – given that, both for reasons of satisfying an increasingly complex regulatory environment and meeting the needs of customers for a better experience, insurers need to modernise their claims and compliance systems because of greater regulatory complexity and the demands for a better customer experience.
The FINEOS Platform is built around a complete end-to-end software-as-a-system (SaaS) core product suite that includes FINEOS AdminSuite, enabling full “quote-to-claim” administration as well as add-on products, FINEOS Engage, to support digital engagement and FINEOS Insight for analytics and reporting. In August, FINEOS acquired Limelight Health, a leading US-based provider of end-to-end quoting, rating and underwriting SaaS products that streamline the critical front-office workflows for life, accident and health insurers.
In FY20, FINEOS grew overall revenue by almost 40% on the previous year, with subscriptions revenue growth of 38%. Despite the ongoing disruptions from COVID-19, the company is optimistic for FY21, forecasting 30% growth in subscription revenues.
Of the €87.8 million in total revenues in FY20, €27 million came from recurring subscriptions, while €58.3 million was services revenue from new clients and accelerated implementation and upgrades for existing clients. The North American region represents 67% of total revenue – up from 59% in FY20 and 45% in FY19 – and FINEOS expects this to grow. In the second half of FY20, FCL won new contracts with The Prudential Insurance Company of America and the State of Massachusetts Department of Family and Medical Leave.
FINEOS is in the sweet spot of providing products that insurers need, to be competitive. It is not yet profitable at the net (bottom-line) level but analysts expect this to occur in FY22. In the meantime, the analysts that know it well are highly bullish on the stock – insurers simply have to modernise their clunky systems, and FCL has the specialised products to allow them to do that, with the simplicity of a subscription model. The company defines its total addressable market as more than US$10 billion ($13.2 billion) and it looks like it’s only just scratching the surface. As long as you can accept that this stock doesn’t conform to the typical fundamentals for which value investors look, FINEOS appears to be good buying.
Market capitalisation: $256 million
Three-year total return: n/a (listed December 2019 at $1.25)
Analysts’ consensus valuation: $1.95 (Thomson Reuters), $1.935 (FN Arena)
Digital consumer credit company and non-bank lender MoneyMe is part personal lender, part BNPL company, with a couple of twists. MoneyMe’s lending is based on its own proprietary lending platform, Horizon, which is a rules-based platform that applies risk algorithms quickly to accurately determine risk levels of individual applicants: the company says Horizon gives it a loan default rate of just 4%. 80% of applications get auto-decided.
The company’s main products are personal loans up to $50,000, and its Freestyle Virtual Mastercard, an online credit card that lives on a smartphone, and allows users to access a line of credit up to $20,000. To this it has added MoneyMe+, a BNPL tool for purchases up to $50,000, with fast online approval, flexible repayments and interest-free-period options ranging from six to 48 months; and MoneyMe Perks, where shoppers pay through Freestyle to buy items from participating retailers with credit-back offers and receive the credit back to their Freestyle account.
MoneyMe also has two specialised BNPL products in the real estate market: ListReady allows vendors to postpone up to $25,000 of property marketing costs until after settlement, with 60-day interest free terms, while RentReady gives landlords the option to cover up to $15,000 of property expenses now and pay later. RentReady funds can be used to help landlords, property managers and agents make property improvements as well as covering maintenance and general costs, marketing expenses and rent shortfall, without having to carry the upfront costs.
In FY20, Credit demand grew by 63.5%, with MoneyMe receiving more than $1.8 billion in credit requests in FY20, up from $1.1 billion in FY19. MME struck revenue of $47.7 million, up 49.5% on FY19, and 4% better than the prospectus forecast of $45.8 million. Credit/loan originations, at $178.5 million, were up 52.8% on FY19 and 6% higher than the prospectus forecast, of $168.2 million. Statutory net profit, at $1.3 million, was a four-fold increase on FY19.
In the first quarter of the current financial year, MME cut its funding costs through a $167 million warehouse funding facility with Westpac – its second major warehouse – and also added $58 million worth of mezzanine funding from the Australian Office of Financial Management’s (AOFM). This funding enabled MoneyMe to lift its personal loan offer size from $20,000 to $50,000, and the Freestyle limit from $10,000 to $20,000. The company reported that, since its launch in August, MoneyMe+ was showing an average borrowing value of $3,000, reflecting its targeting of higher-value transactions compared to the smaller value transactions supported by the core BNPL market. In contrast, Afterpay’s average transaction value is $153, while Zip’s average “basket size” in Australia/New Zealand is about $180.
MoneyMe is a profitable company, with Thomson Reuters’ collation of analysts’ estimates expecting earnings per share (EPS) to jump from 0.84 cents in FY20 to 3.1 cents in FY21, and then to 6.4 cents in FY22. FN Arena’s analyst poll is slightly more bullish, looking for 3.9 cents this year and 6.5 cents in FY22. That is still a high price/earnings ratio of 23.6 times FY22 earnings, but MME looks more than capable of having the growth prospects to match it.
Market capitalisation: $1.6 billion
Three-year total return: n/a (listed December 2019 at $2.75)
Analysts’ consensus valuation: $3.97 (Thomson Reuters), $4.28 (FN Arena)
Tyro Payments provides payment terminals for businesses to accept credit, debit and EFTPOS payments from customers. It specialises in servicing merchants in the hospitality sector – when you pay for your coffee or meal at a café or restaurant, you’re probably using a payment terminal from Tyro.
Tyro is the largest provider of merchant terminals in Australia behind the four major banks and grew its “fleet” by almost 12,000 units or 22 per cent to 62,722 in the year to the end of June. The company pioneered least-cost routing (LCR) for contactless debit transactions in 2018 – beating the big four banks – a move that has helped it to attract thousands of small and medium retailers to its network.
Tyro offers CounterTop EFTPOS, which makes payment fast and straightforward, but it also allows customers to pay at the table by bringing up their bill through Tyro’s Pay@Table integrated payments functionality – customers can split bills at the table and pay whichever way they choose.
Tyro’s share price has been depressed in recent weeks – more recently, the Sydney COVID outbreak news would not be helping, as investors are clearly hoping for the full reopening of the economy, with the possibility of an early vaccine rollout being good news for the stock. It would not have helped that Tyro has been rapped over the knuckles by the Australian Communications and Media Authority (ACMA) for “spamming” customers by email and SMS messages over the last two years. But the share price weakness – TYR is down by 27% since mid-October – is a potentially great opportunity for savvy buyers to get into TYR, because the company’s operating numbers have been very sound, given the effects of the pandemic, and the first quarter of FY21 continued that trend.
Tyro has gone from processing just $6 million transactions a year when it was founded in 2003 to more than $20 billion worth in FY20. In October, it struck a deal with Bendigo and Adelaide Bank to provide merchant acquiring services to its current and referred customers, and brokers expect that deal to lift total transaction value by 20 in FY22 on its own – with the strong likelihood existing of other similar deals (brokers think Suncorp is the most obvious next one).
Balanced against this potential is the fact that TYR is not profitable, and not expected to be until FY22. But given a return to reasonable simulation of normality next year – despite the Sydney concerns right now – Tyro looks poised for further strong growth. Contactless payment got a big boost from COVID and that will only continue. This looks to be a cracking buying opportunity.
Market capitalisation: $33 million
Three-year total return: 22% a year
Analysts’ consensus valuation: n/a
Lastly, the tiny Credit Intelligence (CI1) is a very interesting speculative fintech proposition – it is an “ethical” debt collection, restructuring, lending and insolvency management services business based in Hong Kong, but which has expanded into Australia through two recent acquisitions.
In June 2020, Credit Intelligence bought Australian debt negotiation business ChapterTwo, which provides informal debt negotiation to individuals in financial hardship due to unsecured debts (credit cards, personal loans and other credit). ChapterTwo strives to offer debt solutions to individuals without impacting their credit rating – as a bankruptcy does – and focuses on debt solutions that improve the individuals overall financial position and leads them on a path to financial freedom. Credit Intelligence followed this earlier this month by buying YOZO Finance, which runs an artificial intelligence (AI)-based financial management platform that helps small businesses in their debt management, lending and payment needs.
If BNPL debt is going to be a problem in Australia – the Australian Securities and Investments Commission (ASIC) has already flagged upcoming regulation for the BNPL sector, as one in five consumers miss payments – the services of a company like Credit Intelligence are going to be needed more. Despite its tiny size, the company is actually profitable and pays a dividend – but it its barely known.