The broader tailwinds behind ecommerce, fintech and digital payments have been well documented.

Now, investors need to assess which individual companies can stand out from the pack as these sectors undergo structural change.

For his part, professional investor Dean Fergie from Cyan Investments is adopting a cautious approach to the listed space after some strong rallies this year.

As an early investor in Afterpay (ASX:APT) back in 2016, Cyan has had a front-row seat to the growth of Australia’s buy now, pay later (BNPL) sector.

“Obviously businesses go through cycles, and the investor mindset goes through cycles too — from early scepticism, to dipping a toe in the water then jumping on the bandwagon,” Fergie told Stockhead.

“There’s no doubt these businesses have beaten expectations operationally. Plus you’ve got huge tailwinds from COVID where spending has gone online, and companies with a purely digital product have benefited.”

“But I think those structural tailwinds, combined with the fact everyone’s got on board has created a perfect storm.”

“Underlying valuations for me have gotten out of hand and investors have lost sight of what these businesses can actually earn — it’s all about blue sky.”

While noting that BNPL stocks have re-rated downwards in September, Fergie said the sector would have to grapple with increased competition over the longer term.

He’s also cautious on the cohort of ASX players bringing new tech offerings to consumer finance, ahead of what is likely to be an uneven economic recovery out of the pandemic.

So while the shift around payments and ecommerce still has plenty further to run, investors will have to make a judgment call about which business models will outlive the “investor mindset cycle” Fergie referred to.


Partnership approach

In analysing the current state of fintech disruption, Stockhead also took the opportunity to catch up with Douugh CEO Andy Taylor, as the company prepares to list on the ASX after raising $6m from investors.

Like BNPL stocks or neobanks, Taylor said the outlook for Douugh would be defined by a complex mix of new technology and regulation.

And it’s also not alone in taking a partnership approach to scale up, having partnered with the regional Choice Bank in the US — its core target market.

In that context, Taylor stresses that Douugh isn’t part of the neobank sector, where a number of entrants have run into recent headwinds caused by the capital-intensive nature of banking.

“We’ve sort of seen writing on the wall there, and I think there’s a need to move away from this whole narrative,” Taylor said.

“What we actually are is a fintech building a software platform that can be monetised through subscriptions, without all of that overhead.”

Taylor said investors approved of Douugh’s partnership strategy, where customer funds were held by the partner bank with a government guarantee.

“Right now the banking model is we partner with one bank in each country that gives us the licence to take deposits. So they’re the infrastructure on those funds but customers deal with Douugh,” he said.

“The biggest feedback we got from this raise is ‘we love the fact you’re capital-light’. So every dollar raised can go to R&D and growth, whereas every dollar a neobank raises, half of it goes in reserve capital.”

“That’s a tough model. It means you’ve more or less got to get straight into lending and there’s no innovation there.”

Taylor said the end goal for Douugh was to become a subscription-based “financial control centre” for the customer, combining transaction banking services with additional partnerships that allow for streamlined access to simple investment products such as exchange traded funds (ETFs).

He added that the US regulatory backdrop was unique because in some ways “it’s so far ahead, yet so far behind on other things”.

For example, US company Plaid has already built an interface that allows banks to share customer data (and sold to Visa for $US5.3bn). Effectively, that means the US system already operates with Open Banking laws that have only just been introduced in Australia.

“They (Plaid) basically built all the infrastructure without any regulation, and banks let them,” Taylor said.

“So they’re pretty advanced on this and have slicker technology. But at the same time, so many US customers still use cheques, so from a banking point of view they’re miles behind Australia.”


Listed space

Outside of the much-discussed BNPL sector, payments company Cirralto (ASX:CRO) is looking to build off the momentum in payments automation as more industries go digital.

“I think there’s a lot of mileage left in the digitisation of payments,” CEO Adrian Floate told Stockhead.

“Demand is shifting where people want more than just contactless (payments). They want to be in control of their own card number from a consumer or business perspective, and make complex transactions more streamlined.

“So we’re pretty excited to do it in B2C (business to consumer), but we’re much more excited in B2B (business to business) as we really focus on putting traditional EFT payments to card, and then sharing that remittance experience end-to-end.”

From the investor point of view, Cyan has a position in Quickfee (ASX:QFE), which is “kind of like BNPL for professional services”.

“They fund legal and accounting invoices, and I don’t think it’s been fully discovered yet. They’re capped at a bit over $100m, and operating in the US, so there’s potentially more growth there,” Fergie said.

“We also own quite a few shares in Raiz (ASX:RZI), the app-based funds management platform. We think that’s a good place to be and they’re seeing nice growth in user numbers.”

But Fergie is more cautious on fintech disruptors more broadly, particularly where valuations have already run hot.

“We want to get into the next business worth $100m and ride it up to $1bn, rather than a $10bn company that might go to $20bn,” he said.

“In this market I think it’s smart to be fairly well diversified across sectors and businesses that are both commercially proven and financially stable, as well as those with more of a speculative upside.”