SMALL CAP IDEA: Cornerstone FS carves forex niche through serving the underserved

For a company operating in the cutting-edge, ever-evolving and intensely competitive world of financial technology, Cornerstone FS uses a pretty archaic piece of communication equipment to complete most transactions: the telephone.

Okay, it may not be as old-fashioned as the telegram or the shipping lanes that used to be the conduit for foreign transactions, but in a world of instant communications and high-speed fiber optic internet, why on earth is Cornerstone putting itself at such a disadvantage?

The simple answer is, it doesn’t really.

On the face of it, Cornerstone does what thousands of others have done in the past: it moves clients’ money from one country to another.

Banks have been doing this for centuries. Wise has been doing it since the early 2010s.

Yet the AIM-listed Cornerstone is a different beast than its many competitors in the world of foreign exchange.

You have to if you want any chance of thriving in such a highly competitive environment.

Cornerstone offers its customers what CEO James Hickman calls a “quasi-bank account,” or a multi-currency IBAN that allows customers, both individuals and businesses, to send and receive in multiple currencies.

This is something your typical bank doesn’t offer, as anyone working in cross-border business will attest.

This puts Cornerstone closer to competition with newer fintech startups like Revolut or the aforementioned Wise.

But even in this area, Hickman insists that Cornerstone is different.

“Our core customer base is a mix of businesses and consumers or individuals,” says Hickman.

“For individuals, it’s usually transfers with a higher transaction value, and they’re usually buying real estate, making investments, things like that,” he continued.

“So this is not a remittance company, this is very much a much higher transaction value company, with companies.”

Given Cornerstone’s pricier customer base, it needs to offer more than just a mobile app to process payments, as some of its better-known competitors do.

That is why the group sees that most payments are processed via the simple telephone.

“Clients want to know that they’re getting the best exchange rate possible, of course, and it’s a good time to do it for them.

‘But also that they know that the money will reach the other end of the line quickly and on time.

“Maybe maybe, from a legal point of view, they have to complete at a certain time, it will arrive safely,” Hickman explained.

‘Our customers want to actively talk to us verbally. And that’s where we see our distinctiveness… 70 percent of our transactions actually take place over the phone.’

It is this tailored knowledge of the currency markets that touts Cornerstone above its competitors.

Cornerstone also has an in-house developed platform optimized for one-off or infrequent but large international payments.

That’s all well and good, but where is the value proposition for the potential Cornerstone investor?

Not unlike other payment companies around the world, Cornerstone makes its living from the buy-sell spread of currency transactions it processes.

But as a relatively small fish in the FX pond (its market cap is currently just £6m at 10.5p) Cornerstone suffers from a number of drawbacks.

The group must offer more attractive spreads than the major banks in order to attract and retain customers.

Cornerstone admits it’s hard to stay competitive in the ‘vanilla’ world of converting pounds to euros and sending them to Euroland.

‘That’s not our kind of bread and butter at all. We’ve spent a lot of time and effort over the past six to eight months improving and expanding our counterparty relationships,” said Hickman.

“If you had probably asked me a year, a year and a half ago, we’d say we’re very sterling-focused, very dependent on the strength of sterling.

“That being said, we’ve put in tremendous effort to diversify our revenue streams around the world in terms of currency pairs.”

Through this diversification, Cornerstone looks for less liquid markets that can offer better spreads and ultimately stronger income streams.

Under the group’s ‘innovation through partnerships’ strategy, Cornerstone has established a foothold in Asia and the United Arab Emirates, with further expansion in the pipeline.

Operating in “the more esoteric currency pairs,” as Hickman described it, provides higher margin than, say, the intensely competitive major markets, while also helping Cornerstone hedge its own risk against the cyclical nature of foreign exchange.

Meanwhile, the shift from a while-label business model, which the group has historically favored, to a direct-to-client model has significantly boosted margins (no less than a double-digit year-over-year improvement over the past fiscal year).

It seems to have paid off. In Cornerstone’s July 11 trading update, the group said it expects an initial positive adjusted EBITDA result for the first half of the fiscal year, with total revenues of around £3.6m, up 89 per cent year-on-year.

On the back of these strong numbers, Cornerstone’s shares ripped higher and are now up more than 70 percent year-to-date.

The question is, can Cornerstone capture more of an advantage?

Given the many trillions of dollars passing through the FX markets every day, there is certainly more opportunity for the group as long as it keeps its phone bills down.

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