The New Criterion: Stargroup and Change Financial

ATM operator Stargroup is hoping for a very nice withdrawal after the Big Four banks caved in on foreign ATM fees. Still on financial services, ChimpChange is no longer monkeying around in its quest to sign up US millennials

Stargroup (STL) 2.1c

The only pure-play, ASX-listed ATM operator, Stargroup sniffs an opportunity in the big banks’ decision to abolish foreign ATM fees at an estimated collective cost to their revenue of $120m a year.

At face value, this magnanimous act should be a threat to the independent operators: why would punters still fork out an average $2.40 per withdrawal on a Stargroup ATM when they can do it for nix on a Big Four ATM down the road?

Sensing danger, investors whacked Stargroup shares by 25 per cent after the Commonwealth Bank sparked the Big Four fee abolition chain reaction.

But Stargroup, the second biggest independent ATM deployer behind the global giant Cardtronics, believes the fee abolition will spur the banks to outsource their ATMs. “Stargroup has been positioning itself to be at the table to have such discussions with the majors,” Stargroup CEO Todd Zani says.

Zani reckons the CBA alone spends at least $160m a year on its ATM fleet. On Deutsche Bank’s sums, the Big Four will forego $117m a year in foreign fee revenue, ranging from $38m for the Commonwealth Bank to $22m for the National Australia Bank. “There are possibly lesser incentives for the owners of ATMs to continue to invest in and maintain their network,” Deutsche says.

Zani claims Stargroup could run the ATMs much cheaper, because most of the banks’ ATM hardware is outdated.

He says Stargroup’s fleet of 2400 ATMs (owned and operated for third parties) is similar to the ATM networks of the smaller two of the Four Pillars, the ANZ Bank and the National Australia Bank.

“So we have proven we can operate an ATM network the equivalent size of two of the four majors.”

As for Stargroup’s nasty share price tumble, Zani attributes the selling to retail investors who don’t understand Stargroup’s business model. 

In reality, he says, there’s little risk of the fee-free bank ATMs leaching business from its own machines. Stargroup ATMs are located in venues such as pubs, clubs, servos and 7-11s and pitched at convenience. Typically, a pubgoer will pay a high fee rather than trawl a hostile street late at night for a bank ATM.

In the meantime, Stargroup defies the gradual but remorseless trend away from cash.  According to the Reserve Bank of Australia, consumers withdrew $11.3bn in the month of July over 51.8m transactions.

Two years earlier, they withdrew $12.48bn across 60.5m transactions. While this downward trend has been consistent, the number of banknotes in circulation has been growing by a steady 6% a year.

Stargroup reports total owned ATMs of 509 as at June 30 2017, up 46 per cent, with average monthly per-machine transactions of 595 (up 4 per cent). 

Thanks to a $6.6m tax benefit, Stargroup reported a full year profit of $1.9m on revenue of $8.3m. Management guides to current-year earnings of $2-2.5m on revenue of $20-21m.

Despite the ATM resilience, Stargroup isn’t ignoring the day when the last crisp fiver is withdrawn from circulation. In early September the company signed a joint venture with the listed block chain company DigitalX (DCC) to provide ‘two way’ Bitcoin ATMs.

Currently there are fewer than 20 Bitcoin ATMs nationally and most of them only allow one-way purchases (adding the currency to a digital wallet, not selling it for ‘real’ money).

Bitcoin ATM conversion fees are a chunky 4-8 per cent of the transaction. At the midpoint, that’s around $300 per transaction at the current per-Bitcoin rate of around $4950.

But while pocketing $300 is more compelling than reaping $2.40 on a normal ATM transaction, few Bitcoin transactions take place. For the time being.

Change Financial (formerly ChimpChange, CCA) 66c

What’s in a corporate name – or in this case a symbol?

In the conservative financial services sector the answer is a lot and that’s why so many providers use ‘trust’ or ‘mutual’ or ‘assurance’ in their title.

But the US focused mobile banking upstart ChimpChange was never going to ‘ape’ the majors. To date, the company’s funky moniker and logo has served it well in attracting US millennials to its debit Mastercard-based transaction product.

The trouble is, the wider audience (including the investment community) are less fond of the simian shtick.

 “The name is polarising,” admits founder and managing director Ash Shilkin. “Our core active users love it, but then you have a lot of other people who hate it.”

The company’s investors recently voted overwhelmingly to change the company’s name to Change Financial. While more quotidian, the new title should help the company win broader appeal for other products such as credit cards.

Change is the only ASX-listed digital banking platform and only half a dozen pure-play mobile bankers in the US. The fragmented state-based US banking industry has been slow to adopt technology, with cheques remaining a favoured medium of exchange for wages.

Fees are sky high, with typical monthly account keeping charges of $US15-20 a month.

According to Change, 35 per cent of the country’s 92 million millennials are unbanked or under banked. The ease of internet comparisons also means more traditional bank customers are saying ‘banks for the memory’.

Change reported a net loss of $US8.76m for the 2016-17 year, on revenue of $US602, 000. But the trend is encouraging, with Change hitting 100,000 customers in the June quarter.

Broking analysts project 250,000 customers – and cash break even – by the third quarter of 2018.

Change’s customers originate mainly from social media. But there’s scope for a partnership with another institution –possibly a bank – to tap a captive audience of millions. “The banks are surprisingly interested and welcoming,’’ Shilkin says. “But everything moves so slowly in banking land.”

Change has also forged a “strategic partnership” with e-commerce site Hollar Inc, which has two million active users.

From next Monday, Change Financial will also be listed on a US platform, the OTCQX Best Market. Given acquirers in the sector aren’t monkeying around, it will be interesting to see how many bananas US investors are willing to throw at this one.

Rival operator Simple was acquired for $US117m and it has similar customer numbers to Change, which has a market capitalisation of around $50m (including $11m of cash).

Two others, Zenbanx and BankMobile were bought for $US100m and $US175m respectively.

Tim Boreham authors The New Criterion

Tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.