On July 8th, 2020, we learned of a story where a high net worth investor from South Africa sent $40,000,000 for an investment in an international real estate project, and saved $80,000-$100,000 on the forex transfer by using a small Fintech company based in London.

The investor had two choices: either send the money through one of Switzerland’s two largest banks, or send it using MidPoint. Midpoint got the order and made $20,000 in revenue on the transaction and likely gained a high net worth client for life.

We like to think we are well connected, but the story of the $40,000,000 was three people removed from the sender of the wire, so word is spreading about Midpoint's value. Before we get into the details of why we like this company, first view the comparison chart below of two competitors in the fintech space, as of Friday, July 10th, 2020. 

On first glance, Midpoint clearly looks undervalued. Peeling back the balance sheets and income statements more, a case can be made that Midpoint is very undervalued relative to its fintech peers.

If you are unaware, NetCents is a fintech company focused on enabling users and merchants to accept cryptocurrencies around the world while exchanging and receiving fiat money. They claim to offer lower fees than competitors doing the same. Their revenue for Q1, 2020 was $57,485, with cost of sales being ($19,751).

RevoluGroup is offering users an online payment platform for leisure and family remittance payments, using blockchain tech. Their revenue in Q1 was $349,981, but the cost of sales was (250,910).

Both seem to be pursuing a freemium service business model, where they likely will have to upsell users in the future, in order to make a profit.

Midpoint is a small fintech company, carving out a niche in the international currency transfer space, with the lowest exchange fees available for sending money between countries, of any platform we have found.

Midpoint’s user experience is simple: a client submits his/her transfer to them, and using proprietary technology, MidPoint matches the currency order within 24 hours with the best available buy/sell rate, while only charging the client 0.3% on average for the transaction. Midpoint cuts out the bid/ask spread, which for normal international wires is internally quoted within banks, often poorly priced for the clients. While Midpoint’s large international payments model may be more niche-focused, and less ‘crypto key-word’ sexy than the two stock comparisons’ business models, Midpoint’s potential growth, and path to profitability appears to be far more robust in the short to medium term. We like to invest in companies that might be undergoing inflection points towards high revenue growth. There are many micro and macro factors that suggest MidPoint’s inflection point may occur this year.

These are as follows:

• In Q1, 2020, Midpoint recorded $159,357 USD in revenue, with their cost of sales being ($28,739), its highest ever quarter since the company started in 2013.
• Midpoint appears to be on the verge of scaling. In 12 months ending Q1, it processed $103 million USD in international transfers, also its highest 12-month total.
• Midpoint achieved this scale without any client acquisition cost. Instead they used good service and word of mouth.
• Midpoint can currently service clients from 60 different countries.
• Based on their MDNA, their average transaction size is about $50,000 USD. By our calculations, the average bank transfer is $10,000 USD, and for any international payment over $2,000 USD, it makes financial sense to use Midpoint.
• Fintech companies are earning between $3-38 USD per client/year, but Midpoint made $400K revenue from a client base of approximately 3000 clients in the past 12 months. This equates to $133 revenue per client, per year for Midpoint, more than 3X the highest figure for its comparables.
• Midpoint’s average revenue per client gives it the potential to invest in various client acquisition strategies.
• CEO, David Wong (who joined the company after first becoming a client of the service, then becoming a shareholder) has plans to develop an app for both Apple and Android, which will help with their clients’ ease of use.
• Midpoint has just begun testing an Avios points system associated with their international transfers. Imagine if every time you make a wire between currencies, not only are you confident you will receive the best forex rate possible, but you also earn miles towards international flights. How many new users will that service attract?

All these stats look good for the business case, with the only stat that needs improvement being the user base growth rate. CEO David Wong’s current challenge is solving Midpoint’s client acquisition problem in an economic manner. 

Two Opportunities for Midpoint

1. Geopolitical disruptions/currency crises is one potential growth market we see for Midpoint. Imagine you were a westerner in Hong Kong recently and wanted to get your money out, or in Argentina or Brazil when your currency was collapsing and bid/ask spreads were through the roof as everyone wanted out of their home country’s currency. How valuable would Midpoint’s service be to you in that scenario? When a service is offering such obvious benefits to its clients, it is often just a matter of time until the user base grows exponentially.

2. Midpoint is testing a Virtual IBAN service, allowing 3rd party payments quickly and easily. For those unfamiliar with IBANs, think of this as a virtual account number, where transactions are deposited to the correct account with 100% accuracy quickly. Non-crypto fintech companies of the future will need this service to compete. Virtual IBANs will allow MidPoint to partner with companies that accept large volumes and sizes of international payments, to get those businesses to recommend that their clients send transfers using MidPoint to save money. Starting a new Hedge Fund? Transfer the funds with Midpoint. Private placements? Transfer the funds with Midpoint. What about international dividend payments in foreign currencies? Maybe deposit with Midpoint. There are many examples where Virtual IBANs can grow Midpoint’s business model.

Midpoint’s current scale is small for a Fintech company, but Midpoint’s revenue is already bigger than NetCents and also RevoluGroup when you factor in costs of sales. Yet both those companies trade at multiples of Midpoint’s valuation. Midpoint’s growth potential is higher than its comparables, in our opinion. Additionally, 60% of shares are held by insiders, friends and family, people with skin in the game. The stock is tightly held, which is something we look for in our investments.

Conclusion

If Amazon’s growth-first, disruptive business model has taught us one thing, it is that being invested early in these low-cost, behavioural-change businesses is the best strategy, if you want the opportunity to make life-changing returns. While crypto fintech companies are promising, evidence of their user base’s behaviour suggests that crypto is not yet disruptive today (Debatable? How many people do you know who are sending international payments with crypto?). Crypto’s inflection point could be 20 years from now. It is unknown, but low-cost solutions are needed using the current bank transfer ecosystem. Midpoint does not need a converted network effect to earn money like many other fintech firms require; instead, it is already using the largest financial network in the world - the banking system. With the fallout of Wirecard, clients and investors are looking for new, trustworthy fintech companies with disruptive models, with whom to do business. There is a yearly volume of $127 trillion in business to business (B2B) transactions, not accounting for person to person (P2P) or business to person (B2P) transactions. Banks make a killing from the portion of those payments involving currency exchange everyday. Once a new user sends a wire with Midpoint, we are confident s/he will become a loyal customer, as Midpoint saves a client approximately $1,000-$1,500 on a $50,000 USD average international transaction, by our calculations. Best case scenario, we believe that Midpoint Holdings could do for large

international money transfers, what robinhood and other discount brokers have done for stock trading, albeit on a smaller transaction scale. When costs decline and ease of use increases, transaction volumes go up.

We find ourselves asking, could Midpoint make the traditional international wire transfer model obsolete? And, if that happens, how long will it be before Midpoint Holdings’ cost arbitrage system is viewed as a threat, and MPT becomes a takeout target?

Good fortune to all subscribers,

James Harris

PS. We've made this stock buy notification free online, mostly because we think many people could save money just by using Midpoint, but future updates will likely not be posted for everyone, and may not be free in the future.