Pivoting to the blockchain

Peter Cook is the CEO of a small company called Novatti, they’ve actually been around for quite a long time, 25 years or so, and Peter started it in the early 90s but it’s a quite different company now to what it was then and he’ll take us through the business, but the reason we’re talking to them is because they are applying for a banking licence. They are becoming a payments business – fintech – they’re on the blockchain and they have setup a system to enable Chinese people in Australia to pay their bills on BPAY using their Alibaba account or Alipay account back in China, which I think is very interesting because that’s an issue for Chinese people in Australia, of which there are quite a few, of course. 

They don’t have Visa or Mastercard, they have Alipay and Novatti has made it possible for them to pay their bills here.

Here's Peter Cook, founder and CEO of Novatti. 

Peter, the key reason for talking to you is because you’ve done a couple of things recently, in particular have done a deal with Alipay to allow Chinese people to use your system to pay bills in Australia.  But also, you’ve put the business onto the blockchain in some way.  I want to talk to you about both those things but perhaps we could start by getting into the history because Novatti’s been around a while, 25 years or so and the thing on the website about you says that you were a co-founder.  Is that right, were you a co-founder of the business back in 1994?

Yes.  We’ve gone through a few iterations but actually, back in 1994-1995 we formed a business that was then called Total Tel.  We sold overseas primarily technologies for doing pre-paid billing of telephony.  In fact, in June of 1997 we launched the first pre-paid mobile in Australia as essentially a joint venture, you could call it, with Vodafone Australia.  The original and first pre-paid mobile in Australia was called Fast Phone by Total Tel on Network Vodafone.  Then about five or six months later, Telstra and Optus both launched pre-paid mobile. 

Vodafone actually bought that business from Total Tel and we then actually continued to sell that technology overseas and there were a number of spin-offs from the business.  We sold parts of the business to a then listed company called Procom.  Another part of the business some years later went to a company called Bill Express.  There was a trade sale of another part of the business and eventually in January 2016 we listed both the technology and service parts of the business that remained, so it’s a long story…

It is a long story, but during the 90s and early 2000s, the first kind of 15 years of the business, was it profitable?  Did those businesses work?

In general, yes.  Maybe, let’s look at it at the output.  One output is a business in Canada called Payment Source Canada that we founded.  Another business that got sold to Bill Express was profitable when sold to Bill Express and then eventually when Bill Express came apart, that became part of another business and it still exists today.  The technology part of the business has probably over the years been net-net breakeven and I guess the real money is in the services that have flowed from us leveraging our technologies. 

Perhaps one way to look at the more recent history of the business, the last couple of years, I was comparing last year’s March quarterly with this year’s March quarterly.  It’s quite interesting because last year you were negative $1.5 million cash for the quarter, this year it’s $2.5 million, so a bit more but sort of the same kind of magnitude.  Particularly, year to date was for the nine months around about the same amount of cash being burnt.  But the numbers are completely different.  The receipts from customers in this latest quarter was $12 million and you’re spending a lot more. 

Whereas, in last year’s quarter it was like a tenth of that number.  I’m just wondering, tell us about the change that’s occurred just in the past 12 months that’s led to that occurring?

Alan, Novatti is using that very trendy word called ‘pivot’, but we’re very strongly pivoting from being, let’s call it a largely technology business to very much a financial services business.  If you look at that great word called fintech, some people see it as tech but we’re sort of going from fintech-tech to fintech-financial services.  Within the financial services revenue streams, we are growing them quite rapidly and I think at the moment probably 40-50% quarter on quarter would be the growth in the component of our business that is financial transactions driven or financial services. 

Within the quarterly revenues that you mentioned, we have one product which is growing very, very strongly, where in a P&L sense, we only truly measure the margin of the product which is between 1-2%, but in a cash flow reporting sense for the quarterly, we have to take the top line transaction value which is let’s say $100, so we’re taking the $100 in but in the P&L sense it might only be $2 but it shows up at $100. 

Describe the product, what is it?

The product is called a voucher and it acts like a one-time pre-paid gift card.  Our biggest market actually right now is in Canada, but we’re strongly growing in a number of countries in Europe and now parts of Africa.  We also sell the product in Australia, it’s called Flexepin, but on a daily basis in Canada as an example we’re selling between $60-200,000 dollars a day of this product. 

What does it pre-pay?  Is it mobile phones still, as in the past, or is it something else?

It’s for prepayment of financial services or products that you’d buy on line.  The basic use case is that you can go into a retail outlet and that could be a small mum and pop shop or it could be Canada Post.  You hand over $200 of cash or buy a credit card or something, you buy a voucher, then go online and you can purchase goods and services with that voucher.  The point about that voucher is it’s not repudiable.  Unlike a credit card where there could be a charge back, this method allows someone to commit to a purchase online without giving up their credit card details and from the merchant’s point of view there’s not a charge back for the service.  It gives security to both the consumer and the merchant.

So it’s all about security?  That’s the reason that people would use it and do use it?

Yes, it’s about security and also in some cases if people don’t have a credit card that they want to use online or the merchant may not want to accept – the merchant fails them for a credit card then this way they can purchase online.  You might be selling a service where you’ve had a lot of bad debt from credit cards, but you’ll allow Flexepin as a payment method because you know you’re going to get paid for your money as the merchant.  From the consumer’s point of view, they’re not risking their details online.

The accounting rules are making your accounts look a bit meaningless then because you’re having to have the whole amount that’s on your card as revenue, where in fact you’re getting a clip.

We’re deep-diving here, but the 4C we have to show cash movement but normal accounting rules you are only showing what we declare as revenue and we declare the margin as revenue.

Okay, righto, so what is the margin?

It’s just a function of the 4C.

Okay.  What is the margin?

It depends on the country and the exact use and that particular product would range in margin from 0.5% to 3% and averagely between 1.5% and 2% in our major markets. 

Just take us through how that’s growing again.  I mean, it’s doing well in Canada, where are you seeing the most growth?

We’re seeing very strong growth in Canada.  We’re starting to see strong growth in a number of European markets.  The product either under our brand or as a white label, which is a variation on us enabling someone to use the service is, it’s been distributed in parts of Scandinavia, in a couple of Southern European countries, in the UK now, and we’re starting to bring on a couple of African countries, as I said.  We’re getting growth in multiple markets.  

What about Australia?

Australia, the product is issued here at about 6-7,000 outlets.  We have relatively slower growth in Australia and it’s actually a lower margin product in Australia.  Our focus is actually on a number of overseas markets.  It’s also important for us in the long term with that brand, Flexepin that we get it in more and more markets because some of the bigger global merchants will then have more appetite to use it as a payment method.  Rather than as an example, focusing on Australia, we’re better off focusing on getting additional markets, then it becomes more attractive to some of the big merchants as I said.

Is this the product that you put on the blockchain?

No, Alan.  The way we see the blockchain is that it is one of the great advancements in technology.  We see the blockchain as technology that can give us immutable ledger transactions and so we are putting blockchain into some of our existing technologies to, I guess, enhance the technology.  But the general way that we’re interacting with blockchain at the moment is that we have a partnership agreement with a major US company called Stellar and Stellar is essentially a new international remittance network and we at the moment will be their major initial partner in Australia. 

We see that in this case we can – and we’ve done a lot of R&D for this – we will interact with the Stellar network and that will allow us to send cheaper and faster transactions globally.  Both are for what you’d call normal cash remittances and in the longer term for actually any type of asset transfer.  It could be helping in the trading of a commodity or something else that goes across border.  The Stellar network allows compliance and the holding of value and I guess the control of the transfer of value for any type of asset.  That’s more how we’re interacting with blockchain at the moment.

Tell us how this is going to benefit your business?

Within Novatti we’re building up a number of financial transaction revenue streams that are very focused on bringing us to a situation where we can launch a very specialist banking service in Australia.  In the case of remittances, we have a remittance business now and Novatti does that because we have an Australian financial services licence for non-cash payments.  We also have remittance network provider status with AUSTRAC and we have remittance banking facilities.  We’re providing remittance services both under our own brand and also for wholesale customers by interacting with the Stellar blockchain and quite possibly or probably, Ripple in the future. 

We can reduce the cost and improve the speed of those international payment transactions.  But more importantly or equally importantly, by building that remittance customer base, we’re building future customers for the bank licence that we hopefully will attain over the next 18 months or two years.

Have you applied or you are applying for a banking licence?

We are in the early steps of applying for a banking licence.  APRA announced, or actually the legislation came through in early May for what’s called restricted ADIs, which is essentially an innovation way for new banks to essentially test their procedures and be licensed.  Novatti has announced to the market and been in discussion with APRA about bidding for a bank licence.  We’ve got on quite a sizeable team at the moment and are funding that.  Our aspirations are to use some of our own technology for the kernel of the core banking system to insource other technologies to give it a full banking layer for customers and to bring to market a new essentially digital bank or neo-bank that some people term them as and so that’s essentially the major strategy of the company. 

Actually, related to that, we’re also in the process of applying for an e-money issuing licence in Europe and then actually as a later step from that to apply for a bank licence in Europe as well.  Longer term strategy is a bank licence in Australia and a bank licence in Europe.

What’s your sense of how much money you can make from that?

Starting on maybe how much it will cost, I think it would be fair to say that for a full bank licence in Australia, the tier one capital is $50 million and you can probably add another $50 million for the people and technology and the operating costs that go around it.  Plus or minus you’re going to be up at $100 million over the next couple of years by the time we get to a full licence.  Our business modelling says – and we’ve done quite a bit of business modelling on the segment of the market that we want to attack – that that will become a highly profitable business.  But there’s obviously a lot of execution that has to be done in the meantime. 

Why do you become a bank?  Essentially, the one thing it allows you to do is to take true deposits, which is hopefully the cheapest form of financing for your longer-term lending plans.  You can do many things that a bank does without being a bank.  You can lend and you can borrow yourself.  What you can’t do is take deposits and nor can you call yourself a bank. 

The other thing you’ve done recently is added Alipay to allow Chinese visitors in Australia to pay their bills.  That’s a BPAY thing isn’t it?  They can use Alipay for BPAY?

Correct.  Novatti has been quite innovative in the space of what you’d call cross-border payments from the Chinese payment methods and what you’d call the Chinese wallets, Alipay and WeChat, that have most commonly been seen in Australia, but also in Australia is China Union Pay.  The positive thing I’ll say for Australia with this is that it is allowing Chinese consumers to be able to easily pay for goods and services either online or instore with their preferred payment instrument.  Maybe if I can put it this way, I think it’s over 90% of Chinese people do not have Visa card or Mastercard, so without these other payment methods, when one of a Chinese citizen comes to Australia, if they go into a store, they may want to buy something but unless they’ve got enough cash on them, then they just don’t have Visa or Mastercard or American Express or whatever. 

Now, with Alipay, WeChat, China Union Pay, we’re seeing this explosion of stores that can accept that as a payment method and more recently some online services.  Novatti has helped a number of the distributors of Alipay and WeChat get licensed and provide service in Australia.  Then online we’ve deployed a service called Chinapayments.com and also Chinapayments.com.au, so a Chinese citizen with Alipay, and in the future China Union Pay and WeChat, can go to our website, Chinapayments.com, they can put in Origin Energy, account number ‘1234’, amount ‘$607’, and pay their bill and the funding is actually coming out of their Chinese yuan Alipay account.

Tourists obviously aren’t paying electricity and gas bills generally, it’s really all about paying in the shop, isn’t it?  That’s not what BPAY’s about.  Are you going to somehow add the ability to pay in the store sort of either through a card or something?

Essentially, two different market segments.  Instore people, yes, are buying goods and there’s an explosion of stores that are now accepting Alipay and WeChat.  You go into a store, you want to buy $20 of goods and traditionally the store would accept cash, Visa card or Mastercard, now a lot of stores are saying, ‘We’ll accept Alipay or WeChat.’  And you might see these things called QR codes which is the method that they interact with the consumer’s phone.  That would be what a tourist wants but don’t forget in Australia there is hundreds of thousands of Chinese students.  We’ve got Chinese students who are then on work experience, we’ve got recent migrants, we’ve got families of those people…

And so many of those people do have the normal utilities and bills that you and I have.  A young woman who’s say, a student at Melbourne University, she’s renting somewhere so she’s got to pay her rent, she’s got an electricity bill, she may want to pay her mobile phone bill, so she needs to interact with the Australian payment system. 

Yes, so it’s really going to some extent for the student market?

It’s the students and the recent migrants, yes.

How much do you make out of that?

There is a transaction fee at the moment, it ranges between 1.5% and 2.5%, that’s put on top of a bill that’s paid by that person.  Within that there are some, let’s call it wholesale costs and I think what’s more important at the moment is, yes, there are fees there but again, what Novatti’s trying to do is build up our future customer base for our intended bank licence.  We see this service and our remittance services, and in fact, a business that we’ve recently bought called Vasco Pay which is a prepaid card business, as all businesses that are touching overseas students and new migrants and essentially giving them payments and banking type services in Australia.  Alan, I think the main thing out of this is fees on the way through, but we’re really in the early stages of building our future banking customers. 

I see, right.  Well, that’s fascinating.  I’m going to have to leave it there but it’s been terrific talking to you, thanks Peter. 

Alan, thank you very much.

That was Peter Cook, the CEO of Novatti.