First Global Data (OTC:FGBDF) (FGD.V) recently announced a deal with LianLian Pay to launch a Social Messaging Payments and Remittance service to over 100 million users and merchant partners in China. While this may be one of the biggest deals a small cap TSX Venture company has ever signed, it has gotten lukewarm reception as the stock is about where it was before the deal was announced. Perhaps people don't understand or believe the size or depth of this deal. The company elaborated on the business model in a press release this morning, plus I had a chance to speak with CEO Andre Itwaru to get some of his thoughts on this deal. Unlike my other interviews which were conducted over the phone or in person, this was by email so the responses below are word-for-word from the CEO.
Q1: Do you have expectations of ARPU and margin per user? What is the revenue share split between FGD, LianLianPay and WeChat?
A1: Generally speaking, customers send remittances twice monthly. If FGD were to receive a combination of fees and foreign exchange in the range of $10 per transaction, with two transactions per month, the annual ARPU would work out to approximately $240.
I am not able to elaborate on the revenue share as we are under NDA with Lianlian Pay. It is safe to say that all partners will realize very good revenues on a per transaction basis.
Q2: When do you expect FGD's remittance offering to go live on WeChat? We know that it will be marketed to 100 million people. How many users do you expect to have with this deal by the end of 2017?
A2: We are working closely with Lianlian Pay on the deployment and making significant progress every day. We anticipate the service being deployed in the second quarter of this year.
As with all new services, we anticipate a ramp up of transactions over a period of time. The phase one objective set as we entered into this relationship is to penetrate 1% of the target market which are already existing Lianlian Pay customers.
Q3: How do you plan to make money off of this deal? Will the client be charged an upfront fee or is it purely a win on the currency exchange?
A3: This initiative will generate revenues in a model similar to all of our cross border payments services. The model includes both upfront fees charged to the customer on the sending side, plus foreign exchange revenues on the conversion of currency from USD to RMB.
Q4: If this business really has that good of a margin, why aren't more companies doing it? Are there any barriers to entry that will protect the business going forward?
A4: The margins for this business are very high because of the way we deliver the service. We have automated the majority of the service, and have an incredible compliance monitoring and screening capability, which again is automated.
This is a lucrative business and would be quite appealing to other organizations. We believe that the combination of First Global "assets" provides a significant barrier to entry. Assets include:
- Money Service Licensing in the USA and elsewhere which enables us to perform cross border transactions in full compliance with the law
- Our industry leading technology which performs, among other things, dynamic automated compliance monitoring and management coupled with mobile access for our customers
- Our focus on delivering innovative solutions.
- Our business philosophy and approach of partnerships
Q5: Can you explain the process of getting the remittance offering onto WeChat? Would Tencent (WeChat's developer) be a partner? Are you sharing API with them? WeChat has been trying to expand its reach outside of China. Do you expect FGD to play a role in that?
A5: This is somewhat proprietary, though I can share that we are integrating the solution with Lianlian Pay on the WeChat platform. Our engineering team is working closely with the Lianlian Pay engineering team to connect our systems together electronically.
This solution demonstrates First Global's ability to extend the reach of our partners internationally. This is a major focus for First Global.
We believe that many such large organizations will start to discover First Global and our capabilities, which should serve to increase our partnerships globally.
Q6: Is this service limited to transactions from the United States only?
A6: We are currently focused on deploying services in the USA, though anticipate expansion to other countries.
Q7: I have experience with businesses operating in China, and one of the things they usually have to do is structure their organization creatively so that earnings can be repatriated to investors outside of China. Does FGD have a plan in place for this given this new deal? You have disclosed an interest in listing in Shanghai. Could that be part of the plan, such as a spin off of FGD's Chinese operations?
A7: The beauty of this model is that revenues are generated in the USA so no need for repatriation concerns.
We are actively working on other initiatives that will be deployed domestically in China and yes, one of the considerations is the repatriation of funds. We are using a global law firm that has significant footprint in China to assist in this planning process. The Shanghai listing is something we continue to explore. Some of the key considerations include access to local capital or strategic investment, increased liquidity and global awareness of First Global.
Q8: A question that isn't related to WeChat but I have gotten a lot of questions about it. Do you have any plans to update the market on the JV with Selectcore (OTC:SLXXF) (SCG.V) any time soon?
A8: We are actively working on this initiative and do plan to update the market soon.
Q9: One final question. Based on the focus of Lianlian Pay, it appears that there is more to this story. It seems that there is an element of e-commerce given that Lianlian has a significant base of merchant partners?
A9: This is an interesting observation. We believe that this relationship is in the early stages and will begin with international person to person transactions which could realize annual ARPU numbers as discussed. The incremental opportunities revolve around consumers purchasing goods cross border, which is in essence e-commerce, and could continue to evolve to business to business transactions whereby businesses that want to purchase goods from China could do so via our service.
In essence, our business model includes diving deep into the value chain with our partners to mine incremental lucrative revenue opportunities.
Disclosure: I am/we are long FGBDF, SLXXF.
Additional disclosure: I hold positions in securities as disclosed in this article. I have not received any compensation for this article and all opinions reflected herein are my own. The information provided herein is strictly for informational purposes only and should not be construed as a recommendation to buy or sell, or as a solicitation of an offer to buy or sell any securities. There is no guarantee that any estimate, forecast or forward looking statement presented herein will materialize and actual results may vary. Investors are encouraged to do their own research and due diligence before making any investment decision with respect to any securities discussed herein, including, but not limited to, the suitability of any transaction to their risk tolerance and investment objectives.