The COVID-19 pandemic has forced many investors to reposition their portfolio, based on how different sectors have been impacted by the crisis.

In that context, fintech is uniquely positioned as an industry that was already causing disruption to the financial services sector — one of Australia’s biggest industries.

So in light of such a big external catalyst, Stockhead caught up with a number of companies in the space to get an idea of how their strategy has changed over recent weeks.

To kick things off, we got the investor view from SeedSpace — the local fintech venture fund that launched last year with a focus on the Asia-Pacific market. And speaking with Stockhead, a partner at the fund highlighted the changes taking place in how capital is allocated.

“A catalyst like this has created material valuation changes for large successful companies globally. So you need to understand the significance of those impacts, and the flow-through effect onto smaller caps with a higher beta,” they said.

“Then when you step out further into small early stage unlisted companies, it’s clear that risk appetite in this environment is going to be severely restricted.

“We’ll be open to new opportunities, so in a sense it’s business as usual. But there’s a higher bar for prospective companies to get funding from us.”

In this environment, key metrics such as “well-mapped runways for capital management” take precedence, while SeedSpace is more alert to red flags such as high executive remuneration, and “unrealistic growth curves that haven’t made any adjustments for this pending three to six months of business uncertainty”.

 

Pivoting towards demand

Among the companies we spoke to, a key theme that emerged is that fintech services are tied to the broader trend of COVID-19 winners and losers, where increased demand for some clients is offsetting tougher conditions for the hardest hit sectors.

For Peter Cook, CEO at ASX-listed payments company Novatti (ASX:NOV), social distancing rules have given rise to a boost in card services, while activity softens for clients facing supply chain holdups.

“In terms of business growth, we’ve had lots of enquiry and demand in the area for the issuance of physical card programs,” Cook told Stockhead. In that sense, he said Novatti’s move to become a licensed Visa issuer last year had paid off in the current environment.

Cook also cited the recent acquisition of software company Emersion. “They’ve maintained growth during COVID-19 because they do automation of business processes, and most of their clients are mission critical in telecoms and IT services,” he said.

“So the thematic of remote working cashless payments and digital transformation are all working in our favour.” However, the “logistics supply chain has been hit. Our business lines held up in March but we can see in the remittance and payment area, activity has slowed a bit.”

It’s been a similar story for Cenario, an unlisted tech platform that uses AI to help business clients manage cashflows and budget forecasting.

Since the pandemic escalated, CEO Vaibhav Namburi told Stockhead the company had simplified its on-boarding process to deal with a flood of small-to-medium enterprise (SME) customers, while also pivoting towards software-as-a-service (SaaS) and ecommerce platforms.

“We’ve expanded our product to accommodate those sectors, because a surprising impact from COVID-19 is that they’ve been scrambling to maintain new customers that they’ve attracted, while a lot of small businesses are sort of struggling to stay afloat,” he said.

Nambur said that since launching the Cenario Saas service at the end of March, the company had already integrated hundreds of clients onto its platform.

“We’ve adapted, because we know 2020 is going to create a mass uptick on ecommerce. SaaS platforms will benefit because you’ll have more people at home trying different products out.

“So you’ve got to be flexible — we saw that just sticking with SME clients facing supply chain shocks might now be the safest option, because in six months time some of those business might be struggling.”

 

Capital markets still open

Despite the unprecedented challenges facing the global economy, capital markets haven’t dried up completely.

One notable raise in the fintech space this week was from Airwallex — the payments platform that last year reached tech unicorn status with an implied valuation of more than $1bn.

Despite the effect of COVID-19, the fintech completed a Series D fundraising round at US$160m ($250m) — its largest raise to date. Stockhead took the opportunity to catch up with co-founder and vice president Lucy Liu, who also highlighted the divergent nature of client outlooks.

“I think with everyone at home, we’ve seen clients become more adaptive to the digital world. It’s forced businesses to really fast-forward their digital strategy,” Liu said.

“For clients in areas such as gaming, digital services and online education, there’s been a lot of quite significant growth over the past two or three months.

“We conducted some year-on-year analysis to compare those results with Q1 2019. It showed the same clients are transacting a lot more in the digital space, but for example if they’re in travel it’s almost completely stopped.”

 

‘Accelerant for change’

Elsewhere in the space, the rapid impact of COVID-19 has provided an opportunity to further establish new product lines, or try and capitalise on fintech trends that were already underway before the crisis.

And for Max Bluvland, CEO of listed SaaS platform AppsVillage (ASX:APV), that means working to build the company’s advantage in the market for small-business lending.

“We’ve pivoted to focus more on the lending side of the business as a way to help clients, because the current market conditions are taking their toll. Particularly for SMEs where cashflow can be the difference between survival and bankruptcy,” he said.

Rather than shut up shop, AppsVillage has increased its product line to include fast-approval loans up to $10,000 with a 24-hour turnaround — a move Bluvland hopes will leave it well positioned in the medium term.

“We’ve seen a pickup in both applications paying customers for our lending services. What we’re aiming to do is establish ourselves as an essential service for SMEs, and hopefully those tailwinds can extend well beyond the crisis.”

Data security platform Identitii (ASX:ID8) is also focused on finding a “silver lining” in the chaos, as it works with major banking clients on the rollout of its Overlay+ compliance solution.

Citing Westpac’s $1bn provision in connection with ongoing AUSTRAC proceedings, CEO John Rayment told Stockhead that while the demand for improved transparency was increasing, the decision making process might change.

“For the kind of solution we’re providing, typically a bank would take an internal ‘build vs buy’ decision, and that can be a long merry-go-round,” Rayment said.

However, one trend COVID-19 may lay waste too is longer lead times on projects, as companies across the board are forced to reallocate and prioritise resources.

“The pressure from regulators and consumers to see more information with financial transactions — that’s not going anywhere,” Rayment said.

“So the net effect is they have to find smarter and more cost effective solutions to these problems, and I think that’s the silver lining for Identitii and the space more broadly.”

And for both listed and early-stage fintechs, the SeedSpace representative we spoke to said the COVID-19 crisis was acting as an “accelerant to change that was already well underway”.

“Remote workplace tech and the impact of digital financial services is clearly coming to the foreground. And enabling customers to have efficient access and transparency in their operations is what’s really important,” the representative said.

Over the past year, SeedSpace has made seven portfolio investments in its ESVCLP structure, with stakes in companies operating across payments, superannuation, document management platforms and neobanks. The fund has also participated in follow-on rounds for four of those businesses.

So despite the impact of coronavirus, the fund expects to stay busy as it scans the local market for the next fintech success story.

“We review a lot of deals and that provides us with some really good reference information, and a good viewpoint to assessing trends and also valuation differentials,” the SeedSpace partner said.

“That continues regardless of the circumstances, because it’s important to be right at the coalface of what’s emerging.

“That’s in terms of both the way markets are changing, and the way customers are responding to change. And all of that is borne out in the way these businesses are evolving.”

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