prelado: B2C platform with synergies, scope to expand
In May 2017 UMT announced a cash and shares acquisition of a 51% stake in PEACHES Mobile GmbH, the owner of prelado, a leading German online vendor of digital pre-paid mobile top-up cards/transactions.
Prelado derives 85-90% of its revenues from mobile phone top-up cards for more than 50 German mobile operators, and the bulk of the remainder from payment services. Payment services on offer include Sofortuberweisung (a leading EU payment brand), Giropay, MasterCard, Visa, American Express and PayPal. Prelado’s website has attracted a Trustpilot rating of 9.6, which we believe supports the potential of UMT to successfully add new mPay services based on customer trust.
Prelado sources mobile phone top-up cards direct from Germany’s mobile operators, including Aldi and Lidl, as well as from card resellers. It is able to retail the cards for an average 5% mark-up as well as benefiting from a tendency of many customers to not use the last 10-20% of credit on cards purchased, which can be retained by the card seller after two years. The company has 203,000 customers in Germany with marketing largely via search engine optimisation. prelado also has advanced plans to launch sales of e-gift cards with retailers including Zalando, Amazon, Saturn, Media Markt, OBI, Douglas, Starbucks and Thalia.
Exhibit 1: prelado screenshots – mobile balance and gift-top up functions
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Exhibit 2: prelado screenshots – T-Mobile phone top up and payment choices
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Exhibit 1: prelado screenshots – mobile balance and gift-top up functions
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Exhibit 2: prelado screenshots – T-Mobile phone top up and payment choices
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Mobile phone top-ups: A key part of the alternative payments ecosystem
According to Accenture Consulting (2017), more than a third of the world’s adult population make little or no use of formal financial services. The majority of these people are found in low and middle-income emerging markets but also according to Accenture even in high-income countries large numbers of people do not use banks to help meet their daily financial needs.
In this vacuum, given that the vast majority of the world’s population have mobile phones, mobile phone top-ups have become a key payment method in many populations. Accenture estimates that the banking sector loses $380bn per annum from not serving these populations and businesses, while communications firm IPsmarx estimates that 75% of mobile money transactions are made using airtime remittances, with global remittances totalling $414bn.
According to a GSMA Intelligence report of October 2016, the average cost of sending $200 using mobile money is 2.7% across 45 surveyed corridors, compared with 6.0% using global money transfer operators, giving rise to a strong incentive to use mobile phone top-up transfer as a money transfer tool.
The opportunity for mPay specialists such as UMT is to plug into this market and convert users to different mPay options, offering flexibility, etc, in return for taking more of the margin on transactions.
UMT made the purchase of PEACHES after the latter fell into insolvency in early 2016. We understand that this did not have a material impact on the business, which was supported financially by a major shareholder, which still has a 49% stake in PEACHES. The acquisition was undertaken by a merger with a UMT subsidiary, which was backdated to 15 September, enabling the consolidation of PEACHES from that date, including the consolidation of €780k in revenues. UMT has announced that it intends to increase its stake in PEACHES over the next 12 months and that it is looking to extend the group’s IP, licences and patents but as this does not appear to have been finalised we have not included such a stake increase in our financial forecasts.
The group also guided for revenues from Peaches in 2017 of €3.2-3.5m. UMT sees significant potential to boost earnings by the adoption of a strategy with the following planks:
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Geographical expansion: Initial relatively low-cost expansion into the fellow German-speaking Austrian and Swiss markets, followed by launches in larger market such as France and the UK.
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Expand product range to coupons and e-discount vouchers: Here the group will utilise existing retail contacts with loyalty program providers and is looking to sell gift cards (typically with discounts) for companies such as Zalando, Amazon, Saturn, Media Markt, OBI, Douglas, Starbucks and Thalia. It is also looking to innovate with targeted voucher offers for retailers with focused promotions (eg, on slow-moving stock lines). This sort of promotion should enable the group to increase revenue generation from its price-sensitive customer base.
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Reduce costs by integrating the platform into UMT’s Payment and Loyalty platform: With a high proportion of customers using PayPal to pay for their purchases, UMT is also looking at the potential to cross-sell payment services.
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Introduce new commission charges: UMT is looking at the potential to introduce a small commission charge on sales of pre-paid mobile top-up cards, to bring prelado’s operation into line with a number of other competitors who charge customer fees of 2-5%. We would expect this to boost margins, although at the risk of the gain being lost in lower revenue market share.
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Increase disintermediation, with increased direct to business card creations using online vouchers to reduce purchases from card resellers: This disintermediation has the potential to increase the gross margin by approximately 2-3 percentage points based on current reseller margins. It should be noted that prelado already deals direct with a number of retailers, including Aldi whose mobile phone service is responsible for approximately half of pre-paid mobile voucher sales.
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Apply prelado’s credit assessment software to group payment services: Prelado’s high-quality credit and risk management software was a key point of attraction of UMT for the acquisition. The software includes an analytics-based credit assessment engine, which UMT intends to incorporate into its own payment platform, adding to the group’s earnings potential.
UMT also envisions prelado applying for membership of the Payback loyalty scheme at some point in the future. This would enable Payback members to use their Payback points to buy prelado products, adding to its market reach. This strategy comes with Payback membership costs, so this is not likely to take place until the business has expanded its product range to the point where the benefits justify the additional cost.
Recent research from Allied Market Research projects that the global pre-paid card market will grow at a CAGR of 23% between 2016 and 2022. One potential headwind for the market is expected changes in money laundering legislation, specifically the EU Directives PSD2 and the fifth money laundering directive, but also under discussion in other jurisdictions. These are expected to enforce transparency on payments via the internet, and to crack down on the issue of anonymous gift cards, which in turn is expected to choke off demand for use in money laundering as well as black-market payments.
Other risk factors for B2C sites are low barriers to entry, and the potential for tech giants or retail to try to push into the space with higher marketing budgets or customer tie-ins.