MODE Global PLC (LSE:MODE)

UK listed Fintech play creating a next generation app and digital wallet for personal finance, that connects consumers to merchants , Bitcoin and pretty much anything money.

22 March 2021

Market Cap: £47M / 50p 

Current Share Price

Key Highlights

• Disruptive FinTech Investment Opportunity
• Rapidly becoming the first choice for buying Bitcoin in the UK with market leading fees
• Bitcoin Jar paying 5% APY Variable interest – earn money on your Bitcoin
• Alipay and WeChat Pay Merchant acquirer in the UK
• Mode for Business and ‘Super App’ set to disrupt on-line and in-store payments
• Exciting growth potential creating a single app eco-system
• Near term share price catalysts

Fintech to Re-shape Banking & Personal Finance

If you were to chat to me a a year or so ago about Bitcoin and other crypto currencies I would have probably lost interest quickly and dismissed it as something I would never invest in. Largely because it was one of the biggest spikes we had seen and because it wasn’t regulated. There is no fundamental backing it – except that appears to be changing somewhat!

The clear step-change has been Tesla revealing that they have purchased $1.5bn worth of Bitcoin and that they will allow customers to buy a Tesla with Bitcoin. Not just that but that they will hold Bitcoin as an asset on the balance sheet and not necessarily convert Bitcoin paid into Fiat!

Couple this with PayPal being another backing the digital currency and planning to allow payments via their system with Bitcoin we can see the landscape is changing, rather dramatically!

So we have what appears to be growing demand, what about supply? – well that is limited and finite so it stands to reason that the eventual price of Bitcoin could be extraordinarily higher than it is today.

So that’s why I am more comfortable with the Bitcoin story now and am investing a modest percentage of the portfolio in it (via Mode directly and in-directly as a shareholder). As with any asset class though there are still risks and with no real regulation it’s higher than other asset classes. Given Bitcoins recent move I’d use a scale in approach for exposure.

But back to the subject, how will Fintech and the likes of Mode re-shape banking and finance?

We will discuss that a bit more in a minute when we talk about what Mode are doing but essentially the banking system has been ‘opened up’ along with the evolution of smart devices, enhanced security, improving connectivity (Broadband, 5G) and the general desire for simplicity !

Many apps are emerging such as challenger banks that are providing all sorts of options in the palm of your hand whether that be investing, making contactless payments, sending money to your family or buying an hours worth of car insurance.

Basically the technology, and open connectivity is there now for new players like Mode to bring any of the above to a consumer in one app in the palm of their hand. There is and will be competition so getting it right and being a first mover could be key !

So lets talk more about Mode then…

Mode, It’s not just about Bitcoin!

As the title says, Mode isn’t just about Bitcoin, it’s a Fintech company looking to develop a financial eco-system that brings consumers and merchants closer together whilst providing users with a simple flexible digital wallet that can store, transfer, buy Bitcoin alongside managing Fiat currency balances – all easily funded from a traditional bank account in a few clicks.

The scope however goes much deeper as we will discuss. Whilst Mode sits in a comparable space to Challenger Banks it’s not aiming to be a bank but rather a facilitator given there are higher margin opportunities to be had in other areas.

Background

Mode was founded by Chairman Jonathan Rowland in 2017 and listed on the main list in 2020. As I try and do with most of the companies I significantly invest in and spend time researching I like to chat to someone at the top and was pleased when Jonathan took time out on a Sunday Morning to give me a bit more colour on Mode and his background.

Jonathan has a wealth of experience in the financial sector with a passion for technology and more recently an interest in Bitcoin. Jonathan has had some impressive achievements including re-structuring a European bank close to collapse and being the originator of the terms ‘good’ and ‘bad’ bank. I know those terms only too well as worked for a UK bank in Investment Banking Technology myself for a number of years and was there through the same type of restructuring.

Mode was born out of Jonathans interest in finance combined with Bitcoin and the desire to capitalise on the way data can be used more intelligently to develop a next generation financial eco-system that gives users everything they need in the palm of their hand.

To achieve that however you need a solid team with experience across fintech, financial services and technology and it certainly seems that Mode have one with a combined experience of over 200 years, including Ex Alipay CEO Rita Liu.

Today we see the Mode App which realises the first part of the companies vision and it’s a solid achievement. So lets talk a bit more about the offering and future potential.

Core Offering

The core offering today can be split into three services/product areas. I’m not going to do an in depth review of the app as that’s not what this note is for, it’s to highlight the investment case so I’ll just briefly mention them:

• Digital Wallet / Bitcoin Trading & Investing
• Alipay, WeChat Pay UK Merchant Acquirer
• Mode For Business / Mode Super App

Digital Wallet / Bitcoin Trading & Investing

As with many of the features of the Mode App the Digital Wallet is made as simple as possible. One lesson I learnt from working in software development was don’t make it as funky as possible, make it as simple as possible!

The wallet currently allows you to buy/sell/transfer Bitcoin and put Bitcoin into a Bitcoin Investment Jar. which currently earns 5% APY paid weekly.

You own the Bitcoin you buy which is important and a selling point to consumers. It’s held with a custodian on your behalf. The Bitcoin can be lent out (much like a bank lends out your deposits) which in turn earns the user interest along with Mode and the custodians cut.

I’ve used the app and I can tell you that registering, completing the ID verification process which uses the latest technology and linking my bank account took just a few minutes. Within another 10 seconds or so I had bought my first Bitcoin – it really is that simple! I’ve since made additional bank transfers and Bitcoin purchases and set-up the Bitcoin Jar with not a single glitch.

Mode have had their fees off me for the Bitcoin purchases (0.99%) which I believe is market leading but certainly mounts up especially if I start speculating i.e. buying and selling regularly as the fee is per transaction! With enough usage take up this alone will be significantly cash generative in my opinion.

Curiously it seems some investors from what I have seen think the share price of the company should rise and fall in line with Bitcoin or at least that’s how the share price is behaving. This should not be the case, volatility and transaction volumes whether that is buy or sell is what hits Modes bottom line. The only material impact Bitcoin price has on Mode is related to the Bitcoin it holds in treasury which is just c.10% of the current market cap at the time of writing.

Lastly the wallet by default has a sterling and euro account where you can keep transient funds if you wish – later on with the Super App and alternative payments this will have a more important role to play but for now its a store for your surplus money.

Alipay, WeChat Pay UK Merchant Acquirer

This is somewhat a legacy part of the business but still an important part. Essentially, Mode through a previous incarnation of the business before it listed and changed name to Mode had developed partnerships with WeChat Pay and Alipay such that they are the UK Merchant acquirer. The bridge between them and UK merchants.

This encompasses on-boarding UK merchants to accept payments from Alipay and WeChat Pay as well as anything from strategy around engaging with the Chinese market/consumers to advertising and social media strategy.

The payments integration side includes settlement and facilitating payments whether that be the popular QR codes or POS payment in store.

That leads us nicely onto Mode for Business that aims to disrupt the current monopoly enjoyed by Credit Card providers and could with a first mover approach prove to be an enormous part of Mode’s future business success and of course of particular interest to Us investors!

Mode For Business / Mode Super App

In Q2 2021 Mode plan to launch their alternative payments platform, Mode for Business. Along with the platform comes the Mode ‘Super App’

The Mode Super App will be an evolution of the existing Mode App. It will have the features that allow end consumers to make alternative and frictionless payments to merchants that are signed-up. App users will simply be able to complete mobile check-outs in a couple of simple clicks or desktop based checkouts by scanning a QR code and confirming.

Now there are two things that need to happen for this to be a success.

One, users need an incentive to bother to use the Mode App and two, merchants need an incentive to bother to integrate it.

Merchants

For merchants its pretty simple, it comes down to the bottom line and customer loyalty. Card fees are currently a sizeable portion of cost to a merchant if you consider that some retailers have single digit % margins and card costs are themselves a single digit % cost.

This is because each card transaction goes through a few hops and service layers to complete a payment and everyone takes a piece of the pie. Now compare that to a single transaction fee charged by Mode where an end user’s account is debited straight away and funds reach the merchant straight away (Not 2 days for some cards) – pretty disruptive I’d say !

Another benefit though is security and fraud prevention, Mode users authenticating payments will be doing so biometrically on their phone – say good bye to credit card fraud. Of course nothing is bullet-proof but this seems like a valuable incentive to both merchant and consumer.

Now the merchant who is saving money on the transaction fees can ether bank that margin or they can choose to re-invest a little back into customer retention by rewards. This could for example be something simple as credit against future purchases or say Bitcoin rewards.

Lastly and this is powerful and why many merchants maybe falling over themselves to get on the platform, using basic data about the individual companies can target after-sales products and offers to them. Now this isn’t completely new of course web search engines and advertisers do this but if you develop an app that becomes a part of everyones daily life whether that be checking Bitcoin balances, rewards or whatever else become part of the mode eco-system – merchants can place offers and marketing in a sensitive non disruptive manner.

All in all it’s really a no brainer for merchants for the sake of a bit of checkout development which is probably just dropping some javascript on the page!

Consumers

I see this as the more difficult bit!

To some extent Mode have set themselves up with a good start to onboarding consumers that will use Mode to pay merchants. The introduction of the Digital Wallet and associated Bitcoin trading just as Bitcoin is in the spotlight could serve as a master stroke. The number of app users has been growing rapidly due to the Bitcoin effect. This has essentially been ‘free marketing’ for the Super App which introduces payments and rewards.

The refer a friend features etc should help grow numbers. I certainly think that earning rewards in Bitcoin or other rewards that aren’t as cumbersome as say existing card reward programmes will also attract more users.

Merchant take-up will also drive consumer numbers too as when the Mode check-out options appear on merchant sites showing potential rewards users will naturally investigate and probably download the app, especially of they see its ease of use comparably to entering and faffing around with credit cards and renewing expired cards.

The organic growth of the Mode Super App itself with new features, partnerships and products should also over time build user numbers.

If you want to see a demo of Mode for Business you can find it in the later part of this recent Mode webinar

Future Potential

So far I have only briefly touched upon the core products and services that mode offer. From an investment perspective though I am excited about the possibilities.

Future incarnations of the app could include a number of additional services that span the financial sector whether that be currency exchange, credit facilities, further crypto currencies or even additional investing options such as fixed income and equities.

Of course the captive audience if they get the combination right will also provide opportunity on the advertising side where very targeted financial products can be tailored to the consumer. The growth opportunities are endless but of course there will be competition and we must assess risk.

An Eye on Risk

The key risks I see as an investor at this stage are that we are investing in an early stage technology platform/concept that whilst looks very good with huge potential, is yet to be validated by app user numbers. That said the app is live and integrated with open banking and seemingly performing well and the user numbers reported by the company are growing at an impressive compounding rate.

There is also to a certain extent third party and credit risk to consider. Mode rely upon some third party services that directly impact upon their product offering so a bit of due diligence here is worthwhile to understand that risk.

In mitigation, the Mode team appear highly experienced to the extent that for me my concerns over the risk mentioned above are somewhat abated.

Conclusion

So before I highlight all the fluffy bits and why those invested could be sitting on significant returns we need to be aware that investing in small/micro cap companies in general carries high risk so don’t be throwing the kitchen sink in, manage your risk !

Coming from a technology background myself, I’m somewhat naturally sceptical about any new disruptive technology product. I can say though, as I have delved deeper into what Mode are doing, looking at the teams back-ground and of course assessing risks, I’m pretty excited by the investment opportunity.

Firstly, I can see the app has an appeal, especially as I myself like it. But for younger generations I can see this is how finance and banking is going to look, there simply wont be a need for a high street branch or plastic cards in a wallet!

Capture an audience and give them all their finance needs in one app is adventurous but nail it and the upside is simply huge. Having first mover advantage on the alternative payments side in the UK is a good start. Having existing merchant relationships in the UK via the Alipay and WeChat pay partnerships is also a good start.

So from the app perspective and given the company have reported a high growth in user numbers, ahead of expectation, if this translates into £’s we could see rapid growth potential especially with the Mode for Business and Super App coming on-line in Q2.

Lets not forget either that the company have placed 10% of their IPO and subsequent raised funds directly into Bitcoin held in treasury which I believe based on rough calculations at the time means they have over 100 Bitcoin valued at around £4.5m today. Thats c.3x value increase on what they paid for it!

When you weigh up the fact the company have say £4.5m in treasury and probably a decent chunk of the recent raise to hand along with what should be increasing revenues, at £47m Market Cap it looks incredibly cheap to me if you consider it’s an established business with experienced team, huge growth potential, new IP and historic investment.

In terms of near-term share price catalysts, I expect the following:

• Regular user/download statistics
• Mode for Business launch
• Merchant on-boarding (they have spoken to FTSE sized retailers!)
• New app features / products
• Full year results

The proof of the pudding will of course be in the eating and full year results will be due soon along with updates on app take up, user numbers and revenues (the company reported in Feb that month on month growth from August 2020 was a consistent 110% – prior to Android App launch too which could account for half of the crypto buying market).

I shall however not be focusing too heavy on first results as I would expect there to be a significant amount of re-investment back into the business at this stage – what I will be focusing on is user numbers, transaction volumes, revenues and the Mode for Business Merchant on-boarding as this will start to give a picture on what I’m personally expecting to be a strong growth story and perhaps even a complete disrupter that emerges as a house-hold name in the UK and subsequently across Europe and the world!

Disclaimer

Research materials prepared based upon my own analysis and research. Accuracy cannot be guaranteed and research notes should not be taken as investment advice. Please always do your own research.