John Karantzis is the CEO and Founder of a very interesting company called iSignthis.
He started the company 6 years ago as a know your customer, patented business and now it's a pretty interesting, global payments business, based on a KYC, know your customer platform.
It's based in Melbourne, but the main operations are in Cypress, and it's also listed on the Frankfurt Stock Exchange. It is effectively a European Bank, and has applied for a banking licence in Australia. It won't be a retail bank though, it's wholesale only, and that’s sort of, in a sense, a banker's bank.
The company currently has a market cap of around $300 million and it's growing very quickly indeed.
Here's John Karantzis, the CEO and Founder of iSignthis.
Well, John, iSignthis is apparently a neo bank, authorised in the European economic area as a monetary financial and payment institution. What does that mean, are you an actual bank?
What that means is we’re actually authorised to take deposits and to offer transaction banking services. We can take deposits from the general public, or for businesses that are based in the European economic area and in terms of the transaction banking services that we offer, they're predominantly to service businesses in terms of allowing them or giving them a platform from which they can accept payments, including from Visa, MasterCard, Diner's, Discover, China UnionPay, JCB being American Express, of which we are a principal member of each of those.
But is it any business, or are you an inter-bank bank, effectively?
We are a little bit of both. We are the first of what we call the wholesale of the business to business neo banks. We don't focus on acquiring retail customers like many of the other neo banks do. We focus on actually providing services to merchants and other businesses, and as such facilitating inter-bank transfers for them, inter-bank services, as well as accepting payments from consumers, into the actual business itself, so we bank with business, if you like, rather than a consumer.
Yeah, and you've applied for a banking licence in Australia, as well, right? How far along the track are you on that?
We've applied for an ADI licence, an Authorised Deposit Taking Institution Licence. Banking licence is a little bit different, we're not actually looking to lend, we're not looking to get into the mortgage market or personal loan market. We won't be offering the traditional banking business type services that you would expect from a bank.
What we are looking at, though, with APRA, we are looking to licence, hopefully within the next couple of months, and the sort of services that we'll be offering are very similar to what we are offering in the European Union, or European economic area, which is basically that business to business, card processing services, custodial services, whereby businesses have an obligation under ASIC RG212, which is when let’s say a securities brokerage firm accepts client funds from the general public, they have to place those client funds with a custodial institution, which could be ourselves and we basically safeguard those funds in accordance with ASIC regulations.
It’s more about the business to business services, than it is about traditional banking.
Yeah, look perhaps, I was thinking that the best way to explain what you do, might be for you to tell us about how and why you started the business because I think the business has evolved quite a lot. You started in 2013, as a kind of a ‘know your customer’ service provider, but I think you've evolved the business quite a lot in the five or six years since then. Tell us about the start of the business, back in 2013 and also just, as you're doing that, tell us about your own background.
Sure. My background, I'm qualified in engineering, law and business, Melbourne University. I've been in internal, online businesses or secured businesses for at least the last 25-30 years. I'm obviously a fan of the business. The business was founded off the back of, it was quite a sort of modest or problem whereby my wife was running an online store and she was experiencing a high degree of fraud. A way to actually tackle that fraud was to come up a better ‘know your customer’ process, which we actually manage to secure patents on, back in December 2013.
You dreamt up a better know your customer process, did you, and then got patents for it? Is that where the business began?
Correct, that's exactly where the business began. I'm actually also a qualified patent attorney, so I wear a number of hats and it gets quite confusing, you know, within myself, which hat I'm wearing at the time. But I've got sufficient legal and regulatory expertise, as well as engineering and patent expertise for putting something together. We basically secured patents in the field of remote identity verification, which, of course, is the basis of KYC.
And then spent the next couple of years convincing European, Australian and Asian regulators that this was in fact, the better mousetrap, in terms of KYC and that we could move away from the old process of the 100-point check, which everyone's familiar with, turn up to a bank with your passport, a utility bill or a bank statement, and show that to a bank teller. We could actually get past that and go to an online method, whereby anyone that holds a current bank account, credit card or debit card, you know, in any reasonable jurisdiction, from any reasonable bank, reputable bank, can be identified online.
Could you explain to us, can you explain to us how your idea works?
Yeah, what it does, the legal basis is quite straightforward. For KYC, you basically need to prove a person's identity and a person's address or their locale. That's the nexus of it.
Now, there's two sources that you can go to, you can either go to government or other banks, being reliable and independent sources. The idea was that if you hold a, let's use a credit card as an example. If you've got a credit card issued from a reputable bank, like any of the big four, here in Australia, if I can prove that you've got control of that account, then I can actually use the fact that you've got a credit card that has been issued under the auspices of having had KYC applied to it for you to get that and, I can actually use the data that I used as the card processing bank, to actually build a KYC file.
Now, the way the patent actually works, we've got two of them, one is, let’s say, you're a new securities trader, and you go to securities ABC.com and you want to open up a new account to start trading, securities, CFDs or FX or some sort of equity, you will eventually reach a paying page. You'll opt to make a payment of, let's say, $100 to securities.com. And, at that stage, we as the acquiring bank, or acquiring neo bank, will pick that up and process on behalf of the merchant, and what we'll do is we'll actually create a secret, that's transported within a message, when we process the $100.
The $100 we will actually divide into two payments to create a secret. Let's say $70 and $30, or $80 and $20, or $98 and $2. All of those combinations add up, of course, to $100. Those will appear instantly, in your transaction statement, your online transaction statement or perhaps on your mobile application. Or you could even call your bank to get access to them. If you can actually log in and access those two secrets, the 70 and the 30 or the 80 and 20, and actually tell us what they were, that tells us that you've got access to the account.
Once we know that you've got access to the accounts and control of the account, we can then take all the data that we've pulled from the issuing bank as the processing bank and start to build up a KYC profile on you.
What this product is, or what we've called it is Paydentity. Because, basically, any of the 4.9 billion people on this planet that are financially included, with a credit card, debit card or bank account, can now be identified instantly and satisfy European, Australian, US, Canadian KYC regulatory requirements, as well as the merchant actually getting paid simultaneously.
You said that you spent two years persuading the regulators in Europe and North America and here that this was kosher. Did you persuade them?
We've got a neo banking licence.
Right, so Paydentity is now accepted, is it? Is it only in Europe, or everywhere?
Paydentity is accepted, so we operate within Europe and Australia, so that's where our domain is. For a merchant that has a regulatory obligation in either, let's say, Australia or the European Union, European economic area, yes, Paydentity is acceptable. For one of their customers that is anywhere in the world, we can basically remotely identify any customer from any country anywhere in the world, providing it’s not a sort of sanctioned country, of course, and provided that they're willing to be identified.
What do you charge for it? How do you charge?
It's not so much what we charge for this, we actually charge for an ecosystem, much the same way PayPal does. So, part of the idea germinated from what PayPal started doing in 2002. I'm not sure if you’ve used PayPal before, but they actually go and put two random deposits into your account and they ask you to tell PayPal what the two random deposits are and the legal process is very much what we do as well.
PayPal, as you know, actually charge for the ecosystem, they charge a percentage of the money that is processed. We actually do something very similar. The way it works is we charge a nominal fee for the KYC, but we actually charge circa about a 150 basis points, excluding card processing fees to process the funds associated with the consumer paying the merchant. If the merchant is ready regulated, and needs to have a custodian, we then also charge fees around a 100 basis points, to act as the custodian and place funds either into the European Central Banking Network as safeguarded funds, or hopefully, very soon, once we get our APRA licence, with the Reserve Bank of Australia, at the repo window.
You've subsequently developed two other platforms, one called Probanx and another called ISXPay, which I think has, more or less, completed your business for the moment. Tell us what they are.
ISXPay is our payments platform, and that's connected to Swift, SEPA, which is the Single Euro Payments Area, think of that like an EFT type arrangement in Australia, or BECS and it's soon to be connected into the New Payments Platform here in Australia as well. It also connects us into Visa, MasterCard, Diner's, Discover, JCB, American Express, not sure if I mentioned China UnionPay, but I'll say it again, as well as some alternative payment methods.
So ISXPay is really the bridge that we use to connect the Paydentity service and Probanx, as a core banking service, which I'll explain in a minute. It's the bridge that allows our other services to communicate to other tier 1 payment channels, like one of the aforementioned. Probanx we didn't actually develop in house. Probanx, we identified a need for a core banking platform, and as you may be aware, some local neo banks have spent up to several millions or even more than $10 million, in licensing a core banking platform to satisfy APRA.
We actually bought Probanx for 300,000 Euros cash, and 100,000 Euros in shares, back in August last year, because we identified a need to have a core banking platform to satisfy not only the European Banking Authority, but also for our APRA licence going forward. Now what that acquisition has done is two things. It saved us multiple millions of dollars in trying to get a core banking platform up, licensing one from what would now be a competitor such as Temenos or SAP or Oracle. We've made a big saving there in terms of having the system.
The other thing is that now that we've gone and had it third party certified to APRA’s requirements, that system is now available on the market to other aspiring entrants in the retail neo banking sector, that might be looking for a core banking platform. We've now got our technology division that can actually licence our Probanx as a core banking platform, and our services divisions, which basically operators operate our regulated services comprising Paydentity and ISXPay.
Right, but it's fair to say the whole thing is built around Paydentity. Right? I mean, the reason you've got these other things is to flesh out Paydentity.
Correct. Paydentity is really the unique proposition that we bring to market. The ability to bring the KYC process down from 28 to 30 days, being a very manual process to something that takes about 3 minutes, and increasing reach from being a very localised affair to something that we can actually reach and onboard anyone from anywhere in the world nearly instantly. It is the game changer, it's absolutely the thing that this business is built upon.
Tell us about your patents. How restrictive are they? Can anybody, can you prevent anybody from doing a global KYC standard, or is it just this type of KYC standard?
Well they'd have to infringe our particular method, which is either dividing a payment into two or more sections and then asking the cardholder or the bank account holder to tell us what those divided values are. Or the alternative payment we've got, is we can actually put some sort of equation or a puzzle into the transaction description. When you make a card payment online or you see a retailer's name and some sort of receipt number following. What we do is, we can actually put the retailer's name and put a question in there like 1-2-3-4 plus one equals, and we challenge the cardholder to tell us the answer to that puzzle.
Either one of the two methods we use, we hold patents in a number of jurisdictions; US, Europe, Australia, New Zealand, Singapore, South Africa. I think we’ve got China – we do have China actually. Hong Kong's still pending, but Korea, we’ve been awarded that. If anyone uses a method like ours in any of those jurisdictions, US, Canada, Brazil as well, then obviously we would have a right to sue for infringement.
Are you saying that your system enables, for the first time, true global banking?
It enables true global passporting. What that means is, if you're a financially included person, what I iSignthis or Paydentity is now to you, is the equivalent to having a passport, a physical passport in your pocket, and being able to move from country to country and access financial services virtually anywhere around the globe.
But would you have to have a series of bank accounts in different banks in each place would you, in order to implement that?
No, as long as you've got a bank account, credit card, or debit card issued from a reputable bank, from a non-sanctioned country, i.e. it's not a North Korean one or an Iranian one. As long as you've got an account with a reputable bank, we can leverage that to get you an account with us, or an account with another financial services provider, that’s on our network.
But you would have to actually get an account? You couldn't just use the account that you’ve got globally? Is that what you're saying? I'm just trying to get my head around how this works.
No, you could. Let’s say you've got a Bank of America account, and you want to start trading equities. You're in Australia with australiansecurities.com. Autraliansecurities.com would need to KYC you before you could actually start trading seriously on the ASX. What Paydentity allows us to do, is to use the fact that being KYC’d, in the US, I think I said Bank of America, or whoever you have an account with, Merrill Lynch. We can actually use the fact that you can commence and execute a payment from your Bank of America card, through us, as the acquiring processing bank to the merchant, and at the same time we'll apply Paydentity. The data that Paydentity produces will then go to the merchant to satisfy their KYC requirements, and they can then allow you to start trading nearly instantly.
Right. Are you saying that your patents will provide you with a monopoly on this system globally on global identity?
I think that would be a pretty broad reaching. What I'm saying is that we have patents for remote identity verification, as such there are only two companies that I know that do this that have actually got regulatory traction. PayPal is one, and their process takes about three days, and they use a dummy transaction to basically perform the function. Everyone is familiar with how PayPal does it, it's a slightly drawn out process. Their process was developed in 2002, our process developed in 2011, is a nearly instant process, but it shows remote identity verification and passport onboarding.
To my knowledge there's only two companies that operate in the space. PayPal of course is very, very retail oriented and we have very much, at the other end of the spectrum, focused on businesses that are in the anti-money laundering regulated sector and so on. We focus on the more, let's say, difficult sectors, whereby there is a high risk of money laundering, and it requires more transaction monitoring and more KYC ability to be able to do that in real time whereas PayPal focuses on the larger sector of retail, but with lower risks.
Yes, they do, so you're saying, you're a wholesale version of PayPal.
Pretty much.
Your most recent presentation, talked about $880 million worth of contracts to be processed during calendar year 2019. What does that mean?
Well, let's just firstly say that our calendar year is also our financial year, so I’ll clear that up. What that means is that when a merchant comes to us, typically they already have a transactional bank and let’s say it’s one of the big four. What we've seen as a consequence of – and I’ll just go a little bit off sync, here if that’s all right, Alan. A bit of backstory. What we’ve seen as a consequence of the Royal Commission, the big four banks, all of them no longer have an appetite for this regulated sector business. In fact, the largest of them which is the National Australia Bank went into print, we’ve got no appetite or zero appetite statement to their merchants.
What that does is sort of drives the merchant to come looking for obviously a processing acquiring bank and actually contract with someone to allow them to process credit cards for consumers. As part of the process we obviously have to perform due diligence on the merchants. We look at the merchant’s historic financials. We look at how much they’ve processed over the last one, two or three years and we form a view on what we call Gross Processing Turnover Volume is, the GPTV. As a new bank, we assume that if a customer is bringing us a $100 million of GPTV or potential turnover volume per annum, as a new institution, we assume that we’ll catch 25% of that.
What that $880 million actually is, is our budget of what we expect to capture of the merchants that have contracted with us, GPTV. In effect, the merchants that we have already been contracted, have a combined GPTV upwards of about $3.2 billion. We are assuming that we’re going to process 25% of that this year.
You also expect that to recur annually, right? It just keeps going?
Correct, and grow, and so on, as we bring on more merchants and the benefit of Paydentity allowing our merchants to have global reach as opposed to localised reach. Bear in mind also that one of the biggest issues that regulated sector merchants face, is that most of them have about a 20% conversion rate on KYC when they’re dealing with international customers. If you're an international customer, looking to trade in securities, let's say you’re in Singapore, and you're faced with download a form, take it to a notary or lawyer, get your document certified, post it to the firm in Australia. The firm in Australia some time in the next 28 to 40 days is eventually processes your application and someone from sales eventually calls you back. It's a bit of a killer, the mood is gone in terms of you wanting to trade a particular stock or an index on that date.
If using Paydentity if you can actually convert that customer from that 40-day process to a 20-minute process, then your chances of success obviously go up much higher. What we’ve seen with our merchants to date is that where they had a 20% conversion rate, it is now upwards of 90%. We expect their overall revenues to increase as their reach and conversion also increases.
But who are the merchants? Are they all securities traders, foreign exchange traders, and so on?
No. We've got some social gaming, we've got gambling, we've got a small smattering of travel services. Basically, anything that's either regulated by the Anti-Money Laundering Act, and Table 6 of the AUSTRAC regulations have about 60 sectors that are regulated by them, that’s everyone from bullion traders to securities, to banks, to crypto, and so on. Typically, the industries that we look at are securities traders, in Europe, crypto, the fiat side of it, money service businesses or any sort of business where there is a transfer of wealth that could potentially lead to a money laundering issue.
You also talked about $300 million worth of E-money accounts. What does that mean?
Well the E-money accounts is basically our terminology for deposits. So, we don't deal in cash, being a branchless bank, being a neo bank. We don't have an ability to take cash over the counter. E-money accounts is just our way of saying deposits. That's the sum that we expect to see come into our custodial accounts that we will place for the European Central Bank this coming year.
With both the E-money accounts and the card processing contracts of $880 million, you're talking about an average gross profit margin of 100 basis points. That means you're talking about you're going to capture one percent of each of those sums, is that correct?
I'd say that we've contracted significantly higher in some cases, but on average I think that's a fair assumption.
Right. Your revenue for example in card processing for 2019 is going to be $8.8 million, right? Is that what you're saying?
Plus, ancillary fees, yes.
Right. You've got other revenue streams as you say, how significant are they?
Reasonably so. I mean, we charge FX so we don't take any foreign exchange risks but we do actually support 16 currencies natively across our products. What that means is that if a merchant wants to accept US dollars, Canadian, Japanese yen, or Euros, or Pounds, we can actually accept that currency from the card holder natively, so there's no FX by the card centres and actually settles to the merchant natively as well.
Now, if the merchant doesn't want Pounds and he wants it converted to Aussie dollars, we will handle that conversion for 100 basis points for $100 to pay them out, so Bloomberg plus 100. We'll actually pay them out in Aussie dollars if they want that but they can hold a store of US dollars, or British Pounds, as they like. That's one stream.
The other stream is there’s ancillary fees associated with processing. So, for example, each transaction attracts a processing fee between 15 to 30 cents and when we're dealing with volumes of transactions obviously that adds up. The KYC process we charge a fee of around $6 per customer, to KYC the customer as well. Then we've also got what we call our payout fee. We have a licence from the major cards, Visa and MasterCard, to actually be able to pay directly to an existing Visa, MasterCard, you know, credit or debit card virtually any amount providing that we're satisfied with the KYC.
So, what that means is you're probably familiar with payouts from gamblers at the moment where a gambling company like Ladbrokes will actually post your prepaid card with a $2,000 limit on it and you pay out all your winnings are on that card. I consider it a pre-Internet model. What we're able to to do is actually ask you and say look, if you've got an ANZ card or a Westpac card, credit or debit card why don't we just put $50,000, $100,000, $150,000 that you've earned from your securities trading directly onto that card and you've got access to it immediately.
So, it's a game changer here in Australia. No-one in Australia actually offers this OCT, Original Credit Transfer facility and allows us to basically, with Paydentity allows us for very quick checking of the customer or onboarding of the customer and a very quick offboarding of the customer. Now, if you've had any contact with the gambling industry or with securities traders, what each of the operators in those fields will tell you is that the two most essential things for them is their speed to check in and speed to check out, because if a customer, an end user isn’t convinced that they can get on quickly and get off just as quickly then they're likely to try to find somewhere else to go.
You're saying therefore from all this revenue that you're going to make EBIT of $10.7 million. Now your December quarter just past, you burnt through $2.5 million cash. So are you saying this year, presumably that $10.7 million EBIT means you're turning around from burning cash to being cash positive. Is that correct?
Correct. What's changed from December last year is that up until December last year we were using other people's networks. Think of this like a virtual service. You remember when Virgin started selling mobile services they were actually renting the Optus network and 90% plus of the revenues were going to pay for Optus, right? We had a similar situation last year where we hadn’t yet built out our own Tier 1 facilities and we were renting other people's networks and paying most of our revenues out to basically rent those networks. What it meant though was we could actually contract customers improve our business case and get an understanding of the value of Paydentity and what revenue we could generate.
From January this year, or late January, early February this year we started onboarding merchants directly to our own Tier 1 network and of course what that means is that we retain 100% of that gross profit line. We're now subject only or our costs are only our fixed overheads and when we look at the revenue line as you correctly multiplied out, yeah the 100 basis points across the GPTV. Once we take that revenue plus the ancillary costs and minus off our $7.5 million annual costs for running the business, that gives us our EBIT number. We're pretty confident in the figures. We're confident because we're seeing the historics of our merchants through our due diligence process and providing their businesses keep tracking more or less the way they’ve been tracking over the last three years, then our business will do what we’ve stated there
Mind you, with the $300 million market cap, the market’s building in a fair bit of that already, obviously.
I’m not sure.
No I'm just saying that it's...
Well, no, the reason I'm not sure about that is if you look at the PE of PayPal. If you look at the Wirecard, if you look at Vantage and others, you'll find that their ratios are much, much higher than ours. I think we've got a long way to go once we do actually get to these numbers. Payments companies are some of the most highly priced in terms of those ratios in the world simply because they can spin off a lot of cash and some of the mega mergers going on recently, First Data, FIS, World Pay, FireServe and so on indicate how lucrative this sector really is and how well it's perceived on the London Stock Exchange and the New York Stock Exchanges. I think here in Australia because we haven't had neo banking or a payments company on the exchanges yet, the market still doesn't quite know how to treat us.
Well, but you’re on a 2019 EBIT multiple of 30 so, that's fairly…
Yep we’re half way.
Half way to what?
Half way to PayPal.
Are they on 60 x EBIT?
Yeah.
Right. Tell us a bit about, I can't keep going for too much longer, but tell us a bit about your onboarding, how you're going with it. What your month by month growth rate is and how you go about signing people up? What's involved in that?
Well, customers are finding us, but we also exhibit at trade shows such as IFX in Cyprus in May and ICE which is the gaming sort of gambling trade show in London in February. Most customers are finding us. The industries are pretty small and word of mouth of course. We've got a sales team located in Amsterdam, London, Nicosia, Sydney and Melbourne. Our sales team actively out there fielding the calls or finding new customers. Luckily for us though customers, because they're regulated, they're all listed by the regulators, so we know who's in the market and who's not and we can grade them pretty easily. In terms of the way it's going, hectic, manic, the NAB exiting this sector has created an amazing opportunity in Australia and new regulatory regimes in Europe have created just as an amazing regulatory pressure on merchants to comply and both of those two things were a lever to probably far more prospects than we ever could have anticipated. Pretty bullish and I think the numbers and certainly some of the charts and trajectories we'll start to put out over the coming months will support those statements as well.
The fish are jumping into the boat?
Mate, the fish are really jumping into the boat, yes. That's a good way to put it.
Very good. Well good on you John, thank you very much.
Thanks for your time Alan. Pleasure speaking with you.
That was John Karantzis the Founder and CEO of iSignthis.
