This Hidden Tech Company Powers a Banking Service That You Probably Can’t Live Without

Many consumers prefer to deposit a check on their smartphone instead of visiting a bank branch or ATM in person. However, most banks lack the technological know-how to make this process work. That’s why thousands of them have partnered with Mitek Systems (NASDAQ: MITK), a leading provider of image capture and identity verification software that makes it possible for banks to offer this must-have service to their customers.

In this segment from Industry Focus: Tech, host Dylan Lewis is joined by Motley Fool contributor Brian Feroldi to discuss why Mitek Systems dominates the mobile check deposit market and why it is poised for rapid growth as it finds news uses for its technology.

A full transcript follows the video.

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This video was recorded on June 8, 2018.

Dylan Lewis: Brian, we have one more for people’s watchlists. This one is quite a bit smaller than the other ones we’ve discussed. BlackLine was a $2 billion company, GrubHub about a $10 billion company. This is about a $300 million company.

Brian Feroldi: Yeah, these guys are teeny, teeny tiny. The company we’re going to talk about is Mitek Systems, ticker MITK. Although they’re very, very small, I would wager that the majority of people that are listening to this podcast have actually benefited from Mitek’s products and they don’t even know it.

Mitek is a leading provider of mobile image capture and identity verification software. Their bread and butter is, they partner with more than 6,000 financial institutions — companies like PayPal, Morgan Stanley, TD Bank — and they power their app to allow customers to make mobile check deposits right from their phone. They run the software that turns the camera and allows it to take a picture of a check and allow you to deposit it right within the app itself.

Lewis: This is a company that I’m thrilled it exists, as someone that hates going to the ATM.

Feroldi: I 100% agree with you. In fact, I was a Bank of America customer myself for many, many years, and I made the switch to an online-only bank specifically when this technology became available. The only reason I ever went to my local branch was to deposit a check. So, once I could deposit a check from my home, I basically switched to an online-only bank, and haven’t looked back.

Lewis: It seems like the strength here with this company is in working with all of these legacy banking companies. They have partnerships with PayPal, Morgan Stanley, TD. They seem like they’re pretty rooted in this industry, and that’s what gives them a lot of the stability that they have.

Feroldi: Absolutely. Their market share in mobile check cashing is estimated to be above 90%. In essence, if you use mobile check cashing, you are probably using Mitek’s software. They have 6,000 financial customers, which is just a huge number, but it’s almost a no-brainer move for banks to partner with them. The reason is, when you deposit a check via your mobile phone, it is literally ten times cheaper for a bank to process it that way than through an in-person transaction at a branch, and it’s four times cheaper to do it through a mobile deposit than it is even through an ATM. So, Mitek’s solution is saving banks huge dollars on customer deposits.

Lewis: It’s kind of interesting to me that the banks haven’t ever decided to do this themselves, they’ve just kind of all voted that it’s easier to find a provider that does it for them?

Feroldi: I think that’s exactly the case. Banks aren’t necessarily technology experts, and you can imagine that getting the technology behind this right is absolutely critical. I think it’s just easier and cheaper for them to partner than it is to build it itself.

Lewis: Looking at the stock chart for this business, it has been up and down quite a bit over the last couple of years. It seems like there are both some really great factors pushing this business — I think their penetration rate is super low right now for mobile check cashing — but also, there are some industry tailwinds that maybe they’re not participating in. What are you seeing as strengths and weaknesses with them?

Feroldi: The strengths that I see is that, these guys are the leader, they’re the dominant player. Right now, only about 3% of checks that are processed in the U.S. are done via mobile. Given the convenience for consumers and the cost savings for banks, I can absolutely see that as a huge growth opportunity for them. And I think that these guys have been public for quite some time, but this mobile check cashing business that they’ve got into, they only really got into it in the last several years. If you look at their stock chart over the last couple of years, once they got into that, that’s when this business has really caught fire.

And the reason that I really think this business is worth checking out is, mobile check cashing is absolutely a growth industry for them, but it’s not their only business. They are currently taking their camera detection software and they’re entering the ID verification business. You can imagine that you’d use your phone or some kind of visual image to verify somebody’s ID. You could look at a passport, you could use it for a driver’s license, you could use it for an ID card. Obviously, that’s super important for banks to do, as ID verification gets more prevalent. But, there’s a number of industries that are interested in this technology. I could easily see it being used in healthcare, telecommunications, education. That’s what I think really excites me about this business, is there’s a lot of optionality to them to use their software in other applications.

Lewis: I’m glad you mentioned that. My view in looking at this company was that I was probably the least bullish on it out of the three we’re talking about today. That’s really because, I think about my own consumer behavior, and, aside from maybe cashing a check from grandma or something like that, I haven’t really used checks all that much in the last couple of years. For the most part, it has been mobile payments, using Venmo, using PayPal. That’s how money transfers happen for me. I’m sure there are a lot of consumers that are also looking at the landscape that way. That said, I’m guessing there are also a lot of legacy consumers that are using the old way of doing things, cashing checks.

Feroldi: Yeah. I don’t know about you; my parents and my grandparents still send me physical checks in the mail whenever my kids have a birthday. The day care that I used to take my children to, they only accepted actual physical checks. So, I agree with your sentiment that, long-term, the number of checks in circulation will continue to go down. However, I think there are millions of consumers out there that are happy to write checks for the rest of their lives. Since this company only has 3% market share, even if the overall pie decreases slightly over time, these guys still have an enormous runway within check cashing.

Then, when you layer in the ID verification on top of that, they’ve thrown out that they think their total addressable market there is $18 billion. This is a company that, literally last year, between the ID verification and check depositing, generated $45 million in revenue. So, there is still a tremendous room for this company to grow.

Brian Feroldi owns shares of BL and GRUB. Dylan Lewis owns shares of PYPL. The Motley Fool owns shares of and recommends PYPL. The Motley Fool has a disclosure policy.

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