It’s been a volatile few weeks on the market where we now look...

It’s been a volatile few weeks on the market where we now look tohave come to the end of EOFY selling season. For the tech sector, it wasparticularly savage but digital payments company Novatti Group (ASX: NOV) hasemerged from it fundamentally sound compared to some of their peers, with an $8million cash injection around the corner.

As you may recall, Novatti acquired a 19.9% strategic stake inReckon (ASX: RKN) which initially leveraged their 114,000 customers that arenow offered Novatti payments services. Since then, the two have put a profit-shareagreement in place while Reckon’s$100m asset sale is expected to deliver Novatti an $8 million special dividend, expected to be declared shortly after settlement of the sale on 2 August 2022.

We believe that its cash injection will alleviate the cum-raiseconcerns around Novatti which has a clear path to cash flow positivity as apayments company generating more than $40 million in annualised revenue. Thisis primarily from taking a 'clip' of their total transaction value and SaaSrevenue from their payments tech.

Since Emerald Financial first started covering Novatti, a bankinglicence application has played a role in their investment proposition. Whilethey could not do anything about COVID delaying their application beingreviewed by APRA, the licence is still pending and opens up a major market forborderless banking to Novatti through its extensive payments infrastructure.Last week the fintech community was rattled by the collapse of neobank Voltwhich is in the process of returning all customer deposits, selling itsmortgage book and ceasing their operations. Unlike Novatti, Volt started fromscratch and ran a very cash-burn heavy operating model with minimal revenue.

Novatti’s intended bank however, will be leveraging their existingdigital payments network which already operates around the world, and generatesmore than $40 million in annualised revenue. That number may increase furtherwhen Novatti reports their June quarter activities at the end of the month butwe’d be surprised if it is lower than the $10.4m they reported in the Marchquarter.

If managed correctly with a sustainable revenue model, neobankscan service markets that traditional banks simply cannot due to their highoverhead expenses. Neobanks on the other hand, with their digital-focused, areproving popular to younger and more tech-savvy customers.

It’s just one reason NAB acquired neobank 86 400 for $220 millionlast year.

Neolender Judo Bank also happens to have a $1.3 billion valuationissuing small business loans through their digital-only process that canapprove applications in a fraction of the time as traditional lenders.

While Novatti is still awaiting their licence from the regulator,they differ from Volt and Xinja in that they have already built most of thetech that will be utilised by the bank, because it’s already used by Novatti’sexisting revenue-generating businesses. That alone is a big cost saving tolaunch the bank when the licence is approved. Yes, we agree it is frustratingthat Novatti is still yet to have their licence application approved but we arepleased to see that while it has been pending - they have significantlyexpanded their digital payments network with partners and licences whichvalidate their regulatory compliance protocols.

Because of their global reach with offices around the world,Novatti tends to report their quarterly revenue towards the end of the monthbut we anticipate it being another record based on their form and increasingsales from their merchant services division.

Between the new products being launched, excellent record withfinancial service compliance and established revenue-generating paymentstechnology, Novatti has a much stronger business case than startup neobanks.

You may also be interestedto see that, as of 2 May 2022, MST Access has updated theirvaluation of NOV to $1.05 per share.