Can This Blockchain-Based Fintech Disrupt International Payments After $30M Exchange IPO?


Close up of a Bitcoin with fiat (paper0 currency in the background. Moving away from traditional technology, the ASX (Australian Stock Exchange) has indicated that it will adopt blockchain ledger, into its systems, the same technology Bitcoin uses. (Source: Getty, Royalty free).

Australian fintech company Identitii that enables the secure overlay of “transaction-level” detail on top of financial messages using a private blockchain, commenced trading on the Australian Stock Exchange (ASX) today in an initial public offering (IPO) that put a market capitalization of A$41 million (c$29.23 million) on the business.

Over the past few of years, Identitii, which was founded as a start-up in 2014, has been forging its way towards this listing on the ASX. Back in 2016 the venture won the SWIFT Innotribe Industry Challenge on Compliance, which led to a pilot with seven major banks. And, last year in October the company from “Down Under” announced the launch of its Software as a Service (SaaS) offering, which was made available on the Microsoft Azure cloud.

The latter was designed to help banks effectively address a lack of readily available payment information in certain quarters and extensively manual investigation processes that can exacerbate issues around delivering faster and more cost-effective payments, whilst ensuring extensive anti-money laundering (AML) and financial crime sanctions checks are performed.

Legacy Technology

One might ask why is this development is significant. Well, legacy technology has to date limited the amount of detail banks and corporates can share via payment networks such as SWIFT, ACH, RTGS. SWIFT, for example, imposes a limit of 300 characters on MT103 messages. MT103 is a message a SWIFT payment message type/format used for cash transfer and specifically for cross border/international wire transfer.

“The originator of a payment has had to send it off and hope it gets where it needs to go,” explained Nick Armstrong, CEO of Identitii and company co-founder. “As a result, around 8% of these messages are held up as the receiving bank does not have enough information to determine what to do with a payment when it arrives or even if they should accept the payment, because they do not have enough information about the sender.”

Banks have to manually review and clear payments, check details against sanctions lists, collect additional KYC information from customers and reconcile the transaction against invoices internally.

Clearly, this takes time to complete, and costs “on average $50 per transaction”, Armstrong pointed out. And, given that there are around 30 million messages being exchanged over the SWIFT network alone each day, this is a $120 million problem for banks. So, not an inconsiderable issue.

Identitii allows banks and corporates to securely exchange information and documents related to each transaction in real-time. It provides greater security to both sides of a transaction, makes settlement faster, reduces risks and cost associated with sharing information and simplifies compliance. It also vastly improves the customer experience banks can provide to their customers, as the payment service they provide is faster, more secure and more often settled first time. Identitii calls it “Know Your Transaction” or KYT.

The IPO

The listing, which follows a fully underwritten A$11 million raising on September 12 (2018) at A$0.75 per share, sees a total of 14,666,666 shares being issued for an undiluted market capitalization at listing of A$41 million.

Breaking down the key offer statistics, out of 39,852,133 existing shares on issue the total number of shares available under the Offer represent just over a third (36.8%) of that figure (i.e. 14,666,666). On completion of the Offer, the total number of shares on issue will be 54,518,799.

Four leading institutional fund managers were the cornerstone investors for A$9m (c.$6.42 million) of the IPO. KTM Capital and Canaccord Genuity acted as joint lead managers, with KTM Capital fully underwriting the A$11 million (c.$7.85 million) raising.

It is understood that funds raised from the IPO will go towards further “development and commercialization” of Identitii’s platform, already in use at global bank HSBC, as well as to appointing key resources in business development, marketing, account management and professional services.

In terms of bolstering management, the company has appointed two new senior management roles in order to accelerate growth and drive its “go-to-market” strategy. Clare Rhodes becomes the firm’s Chief Marketing Officer (CMO), who has spent her career helping financial services and technology companies in the U.S., UK, Asia and Australia take advantage of growth opportunities, while Mark Garvie, who has worked in Hong Kong for most of his career, as its Chief Commercial Officer (COO).

 

Problem Facing Banks

Identitii aims to solve what is described as a “multi-million-dollar” problem for banks, who combined send more than 25 million messages over existing payment networks – SWIFT included – every day. According to Armstrong “Identitii could work overlayed on top of any existing or emerging settlement technology.”

To illustrate the extent of the issue, the SWIFT website cites the number of financial messages sent over their network each day, which is usually around 25 to 30 million. Other networks are ACH and RTGS.

And, while the precise answer to the dollar cost from all these messages flying around, McKinsey’s Global Payments Report 2017 has suggested payments will be a $2 trillion industry by 2020.

These legacy networks currently limit the amount of detail that can be shared in messages, resulting in high rates of payments being held up for manual verification and investigation.

And, while savings Identitii could potentially pass onto the banks who use their service versus the other/legacy systems in use is hard to pin down, Armstrong pointed to a SWIFT proof-of-value where Identitii demonstrated how it could save a single bank $15 million annually.

Private Blockchain

The Identitii platform is built on a private blockchain and provides a way for banks and corporates to securely overlay documents and information on financial messages moving via the existing infrastructure, using Identitii Tokens.

This additional transaction level detail – termed KYT – is touted as resulting in a higher rate of payments being settled first time, faster reconciliation, significantly decreased risk and an improved customer experience.

Their token technology uses a distributed ledger and an innovative messaging system to enable information sharing before and after financial messages have been sent. As such, tokens travel within traditional settlement messages including SWIFT, ACH and RTGS and emerging settlement technologies.

Armstrong commenting in the wake of the IPO on the ASX, which as an exchange signaled recently that it will adopt blockchain ledger into its systems (the same underlying technology that Bitcoin uses), said: “The need for enriched information to be shared between financial institutions and corporates is being driven by changing regulations and a push for faster and more transparent communication between counterparties.”

By way of background, Armstrong previously founded and run EnergyLink (formerly COzero), an energy & emissions trading company with cloud-based energy management software, and Greentricity, a renewable energy provider acquired by AGL.

An early proponent of blockchain, he added: “The opportunity to help banks and corporates achieve the visibility they need into their financial transactions is what we are solving at Identitii, and it is a solution that has been validated by both the legacy networks we enhance, and the financial institutions that use them. The funds raised today will enable us to continue to support this evolution in the markets and further commercialize the Identitii product suite.”

Among its other solutions, Identitii’s Serra is an append-only federated database management system that supports robust permissioning and an immutable, verifiable audit trail. Leveraging what is claimed to be the “best parts” of distributed ledger technology (DLT), relational and graph databases, it enables the secure and auditable exchange of information between systems, branches and institutions.

In relation to the health of fintechs and start-ups with blockchain-based systems and raising capital, Armstrong reflected generally that: “Blockchain has proven its value as a technology that can solve real transparency, auditability and compliance issues for banks and corporates. There are some real innovations coming out of the FinTech blockchain landscape and that is reflected in the strength of companies like ours delivering real benefits for their customers.”

Industry Reaction

Gary Wright, CEO and founder of City thinktank B.I.S.S. Research in London, commenting said: “This initiative is just one of many in the fintech space that is releasing DLT technology to solve real and age-old problems in the financial markets. The crazy explosion in fintech – with almost as many start-ups you can see stars in the night sky – is beginning to sort into those firms who have genuine prospects and the majority that will fail.”

Wright, a former head of European settlements at JPMorgan Flemings in The City, added: “Identitii is in the former category and their listing will consolidate their future prospects. Payments is a natural starting point for Identitii, but their transaction information platform concept has value also in securities.”

“The Private Blockchain aspect is one area that may limit the potential in the markets as open source is really what the market is looking for with fast organic growth. For this reason, I expect Identitii to face competition from legacy vendors of data and other new entrants to produce alternative and competing services. And, probably similarly constructed as Identitii.”

Furthermore, according to Wright at B.I.S.S., which provides benchmarking services to financial firms particularly in the back-office space, it is “an exciting time to see the financial markets finally tackling problems that have historically cost the client and customers and that has carried so much risk.”

Funding support was provided by the Australian Government under the Accelerating Commercialization element of the Entrepreneurs’ Program and specifically helped commercialize Identitii’s Serra platform. The program assists small and medium businesses to bring novel new products, processes and services to market and can offer up to $1 million in matched financial assistance for eligible activities.

For an overview of Identitii’s platform and private blockchain offering see this video.

 



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