Financial technology, or fintech, is one of the most exciting growth opportunities over the next several years as the world becomes increasingly cashless and banks rely on technology to improve the efficiency and effectiveness of their business. In this Dec. 14 Fool Live video from our Industry Focus: Financials show, Fool.com contributor Matt Frankel, CFP, and host Jason Moser take a closer look at nCino (NASDAQ:NCNO). Here’s what this banking software company does, how it makes its money, and why it could still have tons of room to grow.
Jason Moser: This week, Matt, we’re going to jump into a specific company, as I mentioned in the read in there, nCino. For those of you who aren’t familiar. This is a new IPO, just came out from July of this year 2020. Still just really getting its feet underneath it. Its only reported two quarters worth of results. Very fascinating business and I think we’ll probably get everyone’s attention, Matt, when I say the term SaaS. Why don’t you go ahead and tell our listeners, what is nCino, and what does nCino do?
Matthew Frankel: Yeah, so they are a SaaS company. How many times do I get to say that on the show? Their goal is to essentially bring banks into the 21st century.
Frankel: They offer what they call their bank operating system that uses some artificial intelligence technology, which is right up Jason’s alley, in order to improve the efficiency and effectiveness of banking operations. It’s designed to be a seamless platform that accessible from anywhere there is an Internet connection, that really just improves banking. Just to run down a couple of quick statistics. It’s used by 1,100 banks so far. Even though it’s a recent IPO, it’s not a tiny company by any means.
Frankel: Some of its clients are Bank of America (NYSE:BAC), TD Bank (NYSE:TD), Regions Bank (NYSE:RF). It’s used by a lot of the big players in the industry for their technical needs. The statistics are pretty impressive. Just running through a few of the numbers. Banks who use this saw loan closing times improve by 40 percent. That’s pretty impressive. Overall, banking efficiency improve by 22 percent. In terms of growth, they saw account application completion rates, meaning that customers who start an application and finish it, improved by 127 percent, all while reducing service costs dramatically. It’s designed to not only improve the banking experience, but to make it more cost effective as well, which a lot of these brick-and-mortar banks desperately need to compete with the new wave of disruptors come into the market.
Moser: Yeah, it feels like the old guard, in regard to banks. The stereotype that we’re so familiar with it. It’s changing in a lot of ways. The financials industry, you’re seeing a lot of companies now in these fintech firms that are building themselves, not as banks, but really as a service company that partner up with banks to then be able to provide financial services and what not. I mean, with nCino, again, this isn’t a bank. This is essentially the technology, it’s the operating system that it offers, everything from customer relationship management to account openings, loan originations, deposit accounts, credit analysis. I mean, the list goes on, and it’s really impressive to see. I’m impressed to see that Bank of America is a customer as well. In regard to how they make their money, and again, it’s a young company, they’re just getting things going here. But I mean, is this primarily just a subscription business? Is there a transactional component to it?
Frankel: A little bit. They are primarily a subscription business. That’s what they’re focused on growing. Just when you look at the recent numbers. Total revenue grew by 43 percent in the last quarter. Subscription revenue is up by 56 percent, that’s an ongoing trend that we’re seeing.
Frankel: The subscription part of their business is what’s really being built out the most, and it’s what you want to see as an investor too, because that’s what’s long tail and predictable revenue, that you’re going to get quarter after quarter after quarter. It’s also worth noting that this platform is based on Salesforce‘s (NYSE:CRM) architecture.
Frankel: They use Salesforce’s CRM technology. Salesforce is a big shareholder of nCino.
Moser: That’s what I saw.
Frankel: They own about 12 percent of the company.
Moser: Yeah, I saw that and thought, of course the first thing that comes to mind, is this just Salesforce ultimately just taking this thing over, because with close to 12 percent of the shares. Listen, when I saw the description of the business, what they do, it’s operating system offers customer relationship management. For folks out there who wonder what that is, that’s CRM. That’s specifically what Salesforce does. I mean, shoot, man, that’s Salesforce’s ticker.
Frankel: Right. Salesforce is all in on nCino. They’ve been very helpful building out the platform and helping them build out the architecture. nCino is not the only company that does what it does. This partnership with Salesforce is a big differentiating factor, which is why I want to emphasize it so much. They are the most seamless integration into the banking process. On Bank of America, we’ve talked about it many times, how Bank of America is by far the most tech inclined of the big four banks. It’s not a coincidence that they are the first of the big four to really adapt nCino’s bank operating system, and why their efficiency has improved so much. We’ve talked about how their growth has been more impressive than other banks in recent quarters, because more people are opening accounts. They’re not getting frustrated with the process. It’s an impressive company, and I think that the Salesforce partnership, if you will, is a big differentiator going forward.
Moser: Yeah, I guess that was going to be the next question I ask. When you talk about this space, there is competition, this isn’t just nCino’s market. Would you consider their only real advantage that Salesforce relationship, or is it the fact that Salesforce has really helped build this company up from that architecture, so to speak, that gives it a more holistic service, a more holistic offering. What ultimately is nCino’s advantage beyond the Salesforce angle, or is there one?
Frankel: I would say that there is a big first-mover advantage going on there.
Frankel: I mentioned they have about 1,100 customers right now. To put that in perspective, there are a little over 5,000 banks in the US. That’s a pretty big market penetration so far, especially some of those big names I mentioned.
Moser: Not bad.
Frankel: I mentioned the statistics on how much they’re saving their customers, how much more efficient they’re making the loan process, for example. As more and more banks join the platform, as those statistics really get out there, you get this network effect, where other banks are seeing the value in the platform. At some point, JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC) are going to see how much more efficient Bank of America is getting [laughs] because of this, and might take a closer look at the platform. Regions’ direct competitors are going to see how much it’s helping Regions, and say, “We need that”. It’s definitely a network effect. If their software is really as good as it seems to be, then having 1,100 customers already using it is the best growth advantage you could have.
Moser: Yeah, well, I mean, anytime you can have that grassroots movement, so to speak, or just the customers that are using your service or just praising it. Then you’re seeing the results from your competitors and they are bringing those results down at the bottom line. Banks, especially these days, are trying to figure out in which way they can relate to get as much profitability in this low interest rate environment. Certainly can see the longer-term road there, the longer-term opportunity there for nCino.