Hank Uberoi, Goldman Sachs’ former technology chief, says Earthport is “probably the single largest investment opportunity I’ve seen in my lifetime, and I’ve been investing for 28 years.”
As Earthport’s boss, Uberoi is obviously biased. But he seriously believes the company can revolutionise the way international business payments are made.
“If you think about manufacturing, go back 30, 40 years, if you wanted to buy materials in one country, manufacture in a second country, then sell in a third country, you really had to be very large,” Uberoi tells Business Insider.
“You needed your own ships, your own aircrafts. Fast forward to today and with FedEx and UPS, nobody would dream of moving that stuff around themselves. These guys are deep experts in a highly complex and highly regulated field. They will always be better at this than any company, no matter how large.”
‘Try calling Citibank saying can you send this message to India’
A similar transition hasn’t yet happened in the world of finance. Banks still try and do it all when it comes to moving money around the world.
When they can’t, they partner with companies or banks that can. But these partners take a cut and communication can be an issue, meaning the process is expensive and convoluted.
“You’ve got this hodgepodge of banks around the world and they have got relationships with each other,” Uberoi says. “I’m a bank in the UK, I’ve got a relationship with a bank in Malaysia, I send instructions to them. 30 years ago when there were 7 countries that mattered and there were a few thousand companies and a few million payments a year, that worked fine.”
But in a world of globalised trade, that model is out of date, Uberoi says. “Cross border payments are expensive, they’re error prone, the money you send is not what arrives, and that’s creating a real issue.”
Cross boarder payments are expensive, they’re error prone, the money you send is not what arrives
He should know — he spent 15 years at Goldman Sachs, rising to head the bank’s technology division, before moving to hedge fund giant Citadel.
Uberoi has his own horror story of moving money: “I do a lot of business in India. I gave the Reserve Bank of India a code they asked for but they said ‘No, it’s got to come from the bank you sent the payment with via Swift [a messaging system used by banks] in this particular format’.
“Try calling somebody in Citibank saying can you send this message to India. It literally took me 2 and a half months. If you don’t resolve it they will blacklist your account. It’s a convoluted, anarchic infrastructure, and that’s just one country.”
‘We go into banks and we know more than they do’
For banks, international payments are just one of a number of things they do and fixing inefficiencies in the system is not high on their agendas.
Earthport is about “being very deep and very narrow in a very complex, highly regulated market,” says Uberoi. “We are essentially creating the FedEx, UPS, and DHL of payments.”
Rather than simply trust partners to get on with it, Earthport sends payments to its own hubs within each country who make sure payments are properly formatted, reducing the chance of error. It then uses the local payment networks — the “rails” — within each country to process the payments.
Uberoi explains: “We move money around in bulk and then we create files that are pre-validated and pre-formatted for the local clearing and we deliver to our partner banks in the local country, with the view that they shouldn’t touch it. The whole idea is to eliminate any chance of errors creeping into the system from manual processes.”
Earthport’s strength lies in blending a smart technology platform with human expertise of local payment infrastructures.
Uberoi says: “Because we do one thing and one thing only, we’ve got people talking to 64 countries everyday. Whenever anything changes we know instantly. This is not a static database, it’s changing every hour.”
“We can go into any one of the banks and pretty quickly it becomes clear that we know more about payments than they do. Not because they’re not smart, but because that function is fragmented across so many different countries and departments that there’s no one person who actually sees it end to end.”
‘My goal was to do this for 6 months on a part-time basis’
Uberoi ended up running Earthport almost by accident. He invested in the company, which is listed in London, back in 2009. But in 2010 he ended up playing a part in ousting the then CEO over troubles with the companies finances.
“I put some money in and my goal was to do this for 6 months on a part-time basis and then grow it from there,” Uberoi recalls.
“About 3 years ago it became obvious that this is probably the single largest investment opportunity I’ve seen in my lifetime, and I’ve been investing for 28 years. That’s why I’m doing this full time — I don’t get paid for this.”
The market for cross border business-to-business payments globally is $US28 trillion (£18.4 trillion) a year, compared to $US685 billion (£451 billion) a year for the remittance market, where individuals send money across borders.
And while the market for international payments for consumers is hugely crowded — TransferWise, Azimo, WorldRemit, and Western Union to name just a few — almost no one is trying to tackle business to business payments.
“The size of the opportunity is such that if we got 5% of the market, we’d be the largest payment company in the world,” Uberoi says.
‘If we were private we would be raising at a very different valuation’
Because the opportunity for growth is so big, Earthport is investing aggressively in growth. Part of that involves pricing its services competitively.
Uberoi says: “Our solution is faster, cheaper, more efficient, and we could have said it’s a so much better solution we’ll charge you $US50 (£33) more than you’re paying now. Instead we’ve said, it costs you $US100 (£66) a payment? We’ll charge you low single digit dollars. We basically decided we’re not in this for the short run.”
The knock-on effect of this, though, is profit and revenues are not as big as investors would like. Earthport’s full-year results on Tuesday showed a 78% rise in revenue to £19.27 million ($US29.2 million) but losses widened from £6.33 million to £8.71 million ($US9.6 million). Shares fell by more than 1.5% on the day.
“There’s very much a timetable for profit,” Uberoi says. “We had predicted that we would break even on a six-month run rate basis in the last half, which we did. But at that point we realised that the opportunity has become so large that it would be silly to think about breakeven rather than invest in growing.”
Earthport is listed on AIM, the stock market for growing companies in London, and has a market value of just £192 million ($US291 million) — trifling compared to the huge private financial technology companies currently springing up.
It’s a point not lost on Uberoi: “We’re listed for historical reasons, if we were private today, if you look at what’s happening in the private equity world, we would be raising money at a very different valuation. It would be measured not on where we are today, not on our revenue growth or how we’re doing now, it would be based on the size of the market opportunity, what are the barriers to entry.
“Take a company like Uber, they don’t make money, they’re not going to make money for 10 years. But look at the size of the market.”
Uberoi isn’t planning to take the business private though.
He says: “A couple of years ago [going private] crossed our minds, because the market really didn’t understand. They still don’t really understand but what happened is we realised our clients really like the fact that we’re listed.
“What we’re doing is a mission critical function. If they’re going to move it to us, they need to be really confident that we’ll do it well, that we’ll be around, and that a competitor is not going to buy us. The fact that we’re public means everything is disclosed.”
Huge banks like HSBC, Standard Chartered, Santander, and Bank of America now trust Earthport to move money around the world for them, as well as organisations like the United Nations and even Western Union. The company is on track to process $US10 billion (£6.4 billion) worth of transactions by the end of the year.
‘We’ll solve the problem in the way that works’
Uberoi’s focus now is on expanding the business. Earthport is in talks to enter Nigeria among other countries and it is also adding to its product offering.
The company recently signed a deal to offer payments through Ripple, the Silicon Valley payment system developed using the blockchain, the software that underpins bitcoin.
“We started seeing people are interested in new technologies — bitcoin, blockchain, distributed ledger technology,” Uberoi says. “We said, we don’t know if this is the right way for moving money around but banks are interested in exploring it, so we’ll explore it.”
As a hub, Earthport on-boards its clients only once before letting them use any of the payment methods they want. It also meets anti-money laundering requirements, meaning banks can use the efficiency of Ripple’s distributed ledger technology with minimal hassle.
“We’re going to become the utility and hub for the industry that finds the fastest and most efficient way of doing something at any point in time. We don’t play favourites, we’ll solve the problem in the way that works for our clients.”