Digital banking is gaining traction throughout the world, and especially in emerging Asia. Across the globe, it's estimated to be an $8 trillion market that will grow 6% a year for the foreseeable future, according to research firm Global Market Insights. This evolution in banking is one reason smart investors are watching the relatively new (and relatively unknown) Chinese company OneConnect Financial Technology (OCFT +0.00%).
A huge growth market ...
OneConnect is a fintech that provides technology-as-a-service platforms for financial institutions, primarily in China. Its solutions help customers in areas like revenue generation, risk management, and sales productivity. The company also provides solutions that help improve efficiency, reduce costs, and improve service. The overall idea is that OneConnect becomes a one-stop shop for financial institutions, and it refers to this as a "bank in a box."
Digital banking-in-a-box is a growth market in Southeast Asia, especially in Singapore, Malaysia, and the Philippines. OneConnect's offerings in this space involve mobile banking apps, customer analytics and targeted marketing, business origination services, and salesforce management modules. These offerings generally attack the revenue side of the equation, but OneConnect's other offerings can help on the cost side as well.
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OneConnect typically starts customers with lower-cost products to introduce them to its business and then seeks to cross-sell further enhancements and solutions. OneConnect provides both technology applications and business services with a transaction-based revenue model. The company pretty much runs the gamut of lifecycle phases: product development, sales and marketing, risk management, operations and infrastructure. The Chinese government is also encouraging financial services companies to invest in IT infrastructure in order to improve service, which will provide a tailwind.
... but customer concentration is a risk
OneConnect has two major customers. One is Chinese insurer Ping An, OneConnect's former parent company and still a large minority shareholder; it accounted for over 50% of OneConnect's revenue last year. The other major customer is Lufax, a Chinese personal financial services platform that accounted for about 10% of OneConnect's revenue. Outsize customer concentration is never a great thing, so investors are keen to see if the company can increase its business to third-party customers.
Last year, sales to third-party customers increased 20%, while sales to Ping An rose 74% and sales to Lufax rose 15%. Overall revenue rose 42%. Operations support services -- which improve efficiency, aid in risk management, and improve the customer experience -- rose 82% and accounted for almost a third of the company's revenue. The business origination segment declined 21%, and it was this which drove slower growth in third-party customers. Cloud services, a new segment, contributed about 10% of revenues.
OneConnect has yet to turn a profit
Like many early stage companies, OneConnect is not turning a profit. The gross margin is strong (and increasing) at 37.5%, but the company is investing heavily in research and development, so its overall profit margin is -43%. Still, this is quite the improvement from 2019, when the loss was -75%.
Digital banking is clearly growing, and OneConnect is front and center with this development. With deep penetration in the Chinese banking market, the company is poised to expand its reach into other Southeast Asian countries. While OneConnect's losses and overreliance on one big customer may be too much for some investors, the company bears watching.
