Technology firm Midpoint’s (CVE:MPT) goal is to revolutionise the largest and most liquid market in the world.
Equity markets may grab most of the headlines but the real action is in the US$5,500bn or so that changes hands each day in the world’s foreign exchange (FX) markets.
The interbank market, where banks trade different currencies, is fragmented, unregulated and – here’s the thing – unnecessarily expensive.
Midpoint offers an alternative way of making currency trades and cross-border payments by operating a peer-to-peer (P2P) currency exchange that cuts out the banks’ or brokers’ fees.
If the term P2P platform is unfamiliar, think eBay, Betfair, Uber or AirBnB.
eBay matches millions of buyers and sellers of goods and yet carries no inventory. AirBnB connects those who want somewhere cheap to stay with people who have a spare room or two available, and it owns no rooms itself. You get the picture.
It is an asset-light business model that pretty much lives and dies on the efficiency, robustness and popularity of the technology platform.
Importantly, the model is scalable, so adding new users provides a disproportionate boost to profitability.
Chairman and chief executive John Booth is confident that Midpoint’s patented technology will give it the edge over its competitors, even though its three main rivals are backed by heavyweight venture capital organisations.
“We’ve spent on the tech,” Booth said.
“One of the unique selling points is the transparency. We think some of our competitors are being disingenuous when they call themselves peer-to-peer.
“We know for a fact they don’t actually have the matching engine that we do. We have this patented business method process built around multi-party and multi-currency netting, which allows us to win the race to the bottom, simply because we do not warehouse any currency,” Booth asserted.
In his view, Midpoint’s competitors are just providing an access point to FX liquidity providers; if we go back to our AirBnB analogy, these competitors are more like the sites that screen-scrape data and then simply point you to a hotel web site that is providing the best room rates.
The commitment to transparency extends beyond pricing to its corporate structure. It is the only publicly quoted firm operating in this field and because of the disclosure requirements, users can be confident “we do what it says on the tin”.
At least one of its competitors, according to Booth, has a flashy front-end that merely disguises the fact that everything is done in the back room on spreadsheets; Midpoint could not get away with that sort of subterfuge.
Simply put Midpoint’s system works as follows.
Jane has US$10,000 that she wants to convert into Canadian dollars; Joe has €15,000 that he wants to convert into US dollars; Jim has C$20,000 that he wants to convert into euros.
The Midpoint platform will effectively funnel Jane’s US$10,000 to Joe via Jim in the blink of an eye, satisfying Jane’s requirements.
Joe is still left some euros he wants to convert into US dollars, and Jim with some Canadian dollars that he wants to convert into euros, and in the absence of another customer wanting to convert US dollars into Canadian dollars being available, the system will get the currencies from an external source at no additional cost to the user – though as the user base increases, this requirement will taper off.
It is an elegant and cost-effective system.
Booth said Midpoint’s current pricing structure is not necessarily one it is going to maintain in the future. It makes money by taking a tiny percentage of the value of each transaction, but Booth foresees a time when trading volumes have risen to a level at which Midpoint can switch to a flat-rate model.
The firm’s results for the first three months of 2015 showed the platform is gaining traction, albeit from a low base.
Sales rose to C$44,783 from C$24,052 in the same quarter of 2014, while foreign exchange gains boosted revenue to C$93,878 (2014: C$53,523).
The sales figures don’t do justice to the scale of money passing through Midpoint’s system, however; Booth calculates around C$60mln has gone through the system since the company’s reboot a couple of years ago.
The company's quarterly loss narrowed to C$276,763 from C$289,850 the year before, but if you think the company is another of those tech companies where the top line is more important than the bottom line, think again.
“I’m not sure the foreign exchange space is a land grab,” Booth told Proactive Investors, though the company’s well-heeled venture capital-backed P2P competitors might be treating it as such.
“It’s just so big, and it’s so fragmented,” Booth said, in reference to the size of the foreign exchange market.
Furthermore, while the flurry of financial scandals – LIBOR et al - has heightened the need for regulation, it is unlikely to get a central regulator because countries will jealously guard control of their own currencies (and those that don’t – we’re looking at you, Greece – have lived to regret it).
What Midpoint provides, however, is the sort of transparency that politicians can endorse, at a price that company treasurers can embrace.
With the technology in place it is now largely a matter of spreading the word and building the user base.
To that end, the recent deal with accountancy software titan Xero, has introduced the company’s platform to hundreds of thousands of small and medium-sized enterprises (SMEs) – “a notoriously difficult sector to reach,” Booth observed.
Currently, Midpoint’s user base grows largely through referral but it is looking to “insert the platform into existing communities that are already established”.
Booth says the company is looking at similar deals to give a turbo-boost to Midpoint’s expansion plans.