The fintech space can be a confusing one.
On one side of the equation you have the Royal Bank of Canada posting the biggest profit in Canadian history. On the other, you have every shoestring fintech upstart comprised of two programmers and a dream boasting that the chartered banks are terrified of their unique brand of disruption.
What to make of all this?
For starters, almost no one -including the banks themselves- thinks they will not be changed by a wave of technology that will ultimately offer better outcomes for one group of people above all else: customers. There will round after round of rollups in the space. Banks will acquire some. Some will wither and die. Some will flourish. But how identify the latter?
Vancouver-based Mogo (TSX:MOGO) went public in June of 2015, raising some eyebrows with a $50-million financing. Less than two years later, the company has a revenue run-rate of about $50-million, just reported its first EBITDA positive quarter, and has hit hitting the 350,000 member mark. By any metric, the company is clearly an emerging leader in Canada’s fintech space, which happens to lead the world.
Cantech Letter sat down with co-founder and CEO David Feller to talk about Mogo’s journey and what’s next.
David, for those people who are new to Mogo, can you give us a brief overview of your history?
After starting and running several other businesses, I founded Mogo in 2003 and later was joined by my brother Greg, a 16-year Wall Street veteran. We were one of the pioneers in online lending not just in Canada but globally and recently we’ve expanded into a broader suite of innovative digital banking products as we look to build a next-generation digital financial services company. After a series of private financings (totaling over $80-million) we went public in June 2015 on the TSX, raising an additional $50 million.
You recently announced that Mogo had hit the 350,000-member mark. Do you think you are separating yourself from the emerging fintech pack?
We were early entrants to this market and there’s no question we have an advantage in multiple areas. In terms of fintechs that are directly challenging the banks with products and services, my guess is the next closest new fintech startup in Canada has well under 100,000 members. We also have over 10 years of operating experience, have invested more than $150-million building out the platform which now includes four products, have 275 team members focused exclusively on building out the best digital banking experience in Canada, and have a $50-million revenue run rate, all of which clearly separates us from any of the new start-ups as well as creates significant barriers to entry.
The Big Five banks made $35-billion in net profit in 2015 –that’s net profit, not revenue. This is a massive industry, with massive margin and there’s a big opportunity to create billion-dollar businesses in this sector in Canada…
What is your view on the fintech landscape in Canada? There seem to be so many emerging companies. Why do you think that is?
The Big Five banks made $35-billion in net profit in 2015 –that’s net profit, not revenue. This is a massive industry, with massive margin and there’s a big opportunity to create billion-dollar businesses in this sector in Canada and most importantly deliver a better experience and better solutions that help consumers manage their financial health. Ernst & Young’s 2016 Consumer Banking Survey recently reported that 40 per cent of Canadians have used a non-bank service provider in the last 12 months. Just like other industries that have faced disruption, it’s the fintech players that are leading the innovation and challenging banks with better experiences, lower fees, and most importantly products that make it easier for consumers to manage their financial health.
One view of fintech is that the chartered banks will simply acquire those with the best technology? Do you think that is a realistic outcome?
No question that banks and others that want to get into this space will either have to build their own platforms from scratch or acquire existing ones. We have already seen players like www.simple.com in the U.S. be acquired, but not by domestic banks but a foreign player. So the potential universe of players is very large. Paypal also continues to acquire platforms, even though they are one of the fintech disruptors in the payments space, they also realize that you can’t just build everything – it’s complicated and takes time and money, which is why they acquired Venmo, Braintree, Xoom, etc. Given the significant capital we have invested and the lead we believe we have on others, we definitely think this makes us a valuable platform in Canada.
Entering Canada’s $1.4 trillion housing loan market represents a huge business opportunity and is a natural progression for us as we continue to deliver innovative financial products and an improved customer experience…
You recently entered the mortgage market – talk to us about that opportunity and how your product is different.
Entering Canada’s $1.4 trillion housing loan market represents a huge business opportunity and is a natural progression for us as we continue to deliver innovative financial products and an improved customer experience. If you have applied for a mortgage, you understand the lack of transparency – on rates and the process – and how paper-based the entire experience remains. To make the experience of getting a mortgage transparent, less stressful, and more convenient, we have simplified the process and made it more engaging in a number of ways for consumers including an online and mobile process, from pre-approval until the mortgage is renewed or fully paid-off. It’s really about beginning to bring this legacy experience to the digital world. From a business model perspective, as a mortgage brokerage we have no capital requirements or credit risk, positioning us to drive high-margin, fee-based revenue from our mortgage offering.
It seems that some new fintech companies have a very high cost of customer acquisition. What is your cost and how do you think it will scale?
Customer acquisition cost is a major impediment to success for new entrants, and this is an input we have focused on improving. Following the launch of our digital account and free credit score, we saw a dramatic increase in our new member additions which tripled from the additions we had in Q2. Perhaps more impressive is that this was accomplished on lower absolute marketing spend during the quarter, which means that we substantially reduced our cost of member acquisition. In fact, if you take our net increase in members this quarter relative to our total marketing spend, you will see that our implied member acquisition cost has decreased from approximately $133 in Q1 of this year to under $20 in Q3. This is a great example of the power of our platform, products, and brand all working together to drive real financial benefit.
You reported 2016 third quarter results and your revenue was $12.6 million, which was a 9% increase from the third quarter of 2015. What’s your outlook on revenue growth?
As we have said to our shareholders, after growing loan originations significantly in 2015, we have purposely slowed down loan growth while we invest in the platform and new products, as we believe these will be bigger long-term drivers of shareholder value. We recently launched our mortgage experience and plan to rollout our new digital spending account later this quarter– two important fee-based products for us. We expect to see revenue building from these products as we progress through 2017. Separately, the unsecured consumer loan opportunity in Canada continues to represent a significant opportunity for Mogo, and we also expect to resume growth of this product in 2017. We believe the total market opportunity for our full spectrum unsecured loans in Canada is just over $100 billion, and with an existing loan book of approximately $71 million, this is still a big market opportunity in front of us.
Our business model has considerable operating leverage so we expect to achieve much higher levels of profitability over time as we grow and diversify our revenue base…
You achieved Adjusted EBITDA positive in Q3. When will you be profitable?
In the third quarter of 2016 we achieved quarterly positive Adjusted EBITDA for the first time since our IPO, a quarter ahead of our original Q4 target. Adjusted EBITDA was $500,000 compared to an Adjusted EBITDA loss of $500,000 in Q2 of last year. This was also a $3.7 million year-over-year improvement from the third quarter of 2015. We achieved this again in large part through the power of our platform, which fundamentally is a more efficient and effective model for delivering innovative financial products to our customers. We have not given specific guidance on achieving net income positive, but our expectation is that we will see further improvements in EBITDA in 2017. Our business model has considerable operating leverage so we expect to achieve much higher levels of profitability over time as we grow and diversify our revenue base.
While the share price performance in 2016 no doubt was disappointing, the company had a better run over the past several months. Why do you think that is?
Absolutely the share performance has been disappointing for us. Overall, we believe we are taking the right steps to drive long-term value for shareholders. We continue to make great progress enhancing our technology platform, product and brand – the three key pillars to our plan of building a next-generation digital banking experience. Ultimately we are confident this will be reflected in our stock price. We think the more recent momentum reflects the achievement of our positive Adjusted EBITDA target, acceleration of member growth and lower customer acquisition costs. Now with the launch of our new mortgage experience, which significantly expands our addressable market, along with greater awareness of our story through new research coverage we believe we are well positioned for 2017. We have a multi-billion-dollar opportunity in front of us. At a $45mm market cap we believe the share price continues to be disconnected from the fundamentals, which is why me and a lot of our senior team have been acquiring shares over the past several quarters.
Disclosure: Mogo is an annual sponsor of Cantech Letter