Five years after it backed the International Bank of Australia (IBOA) in its banking licence application, digital payments company Novatti Group (ASX: NOV) has pulled the pin on the venture by selling its majority stake for $2.87 million.
The decision to exit the venture comes amid a major restructure at Novatti in 2023 which saw the Melbourne-based fintech focus on its core payments business, facilitating businesses to pay and be paid quickly.
Access to banking services for Novatti customers through IBOA appeared to offer potential for businesses seeking alternative banking solutions to the Big Four. IBOA, however, encountered a range of operational challenges over the past five years that stalled the vision, ultimately prompting Novatti to pull the pin.
Having entered into a binding agreement to sell their stake to Eurus Capital for $2.87 million in an all-cash deal, Novatti will receive funds on settlement which is expected on 30 July 2024. The alternative for Novatti would be to wait till the November 2024 deadline for IBOA to obtain its full banking licence, and if unsuccessful, the return of capital would have been uncertain.
Upon the appointment of CEO Mark Healy in June 2023, one key change to drive Novatti towards positive cashflow was streamlining the many fragmented businesses into 4 divisions, which included the Investments division where IBOA sat and was under review. Consequently, Novatti advised IBOA it would not be participating in any future capital raises and that it would need to be self-funded if the venture was to continue.
This led IBOA to raise $1.15m in a Series A round to assist with working capital but ultimately prompted Novatti to sell its share when it looked unlikely IBOA would be able to raise the required amount needed to obtain a full banking licence.
“The barriers to entry for new banks in Australia are very high. IBOA has faced many challenges and adverse and unexpected circumstances outside of its control,” said Healy.
“In particular, the pause in issuing new banking licences announced in March 2020 substantially delayed IBOA’s development of its business, adversely impacted its go-to-market strategy, and increased its funding requirements.”
IBOA applied for its banking licence in 2019 when the regulatory landscape looked vastly different, notably – digital banks were thriving. But upon the collapse of Xinja and APRA pausing the issuing of new licences during the pandemic, tighter regulation was introduced upon the resumption of licence issuing in 2022. These new regulatory requirements around both restricted and full banking licences meant IBOA’s revenue model would be delayed, prompting a need for more capital than originally planned.
“As the majority shareholder, after reviewing alternative options to maximise the economic return from Novatti’s interest in IBOA, the Novatti board was not prepared to provide the additional capital required to underwrite IBOA’s financial independence and enable it to obtain a full ADI licence,” added Healy.
Exiting its investment in IBOA will likely be a welcome sight for Novatti shareholders. While IBOA’s vision was originally well received and a natural fit for Novatti, ongoing delays a lack of any banking products or account openings within 2 years of its licence being granted meant patience grew thin.
Without the uncertainty of IBOA sitting in its portfolio, Novatti can now concentrate on its core payment processing business which has been streamlined by removing $4 million in annualised costs from the business, while delivering new commercial wins under a refreshed market-led strategy.
The streamlining has seen Novatti executing on its commitment to positive cash flow with Half Year revenue of $21.4 million up 12.1% on the previous half and expenses of $15.2 million down 11% over the same period.
The commercial strategy to transition towards a market led, customer focused sales model has also started delivering early wins with Novatti reporting new and extended contracts from a major BNPL player and one of Australia’s largest food delivery platforms expected to increase annual revenue by $1.5m.
These wins were followed last month with a business update that included more wins that will see Novatti onboard more than 500 new merchants from the hospitality, education and fitness industries within the next 6 months.
Mitch Korver is a Business Writer focused on high-growth companies listed on the ASX in the small and medium cap space.
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