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Edited Transcript of GO.TO earnings conference call or presentation 14-Aug-19 9:00pm GMT

Q2 2019 Mogo Finance Technology Inc Earnings Call

VANCOUVER Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Mogo Finance Technology Inc earnings conference call or presentation Wednesday, August 14, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Marshall Feller

Mogo Inc. - Founder, CEO & Chairman

* Gregory Dean Feller

Mogo Inc. - President, CFO & Director

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Conference Call Participants

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* Bradley Allen Berning

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Douglas Taylor

Canaccord Genuity Corp., Research Division - Director

* Nikolaus Priebe

BMO Capital Markets Equity Research - Analyst

* Scott Christian Buck

B. Riley FBR, Inc., Research Division - Research Analyst

* Suthan Sukumar

Eight Capital, Research Division - Principal

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Presentation

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Operator [1]

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Good afternoon. My name is Leone, and I'll be your conference operator today. At this time, I would like to welcome everyone to Mogo's Second Quarter 2019 Earnings Conference Call.

Please note that today's call contains forward-looking statements. Statements that are based on current assumptions and subject to risks and uncertainties that could cause actual results to differ materially from those projected. The company undertakes no obligation to update these statements except as required by law. Information about these risks and uncertainties is included in Mogo's press release for Q2 as well as in its filings with regulators in Canada and the United States.

Also, today's presentation will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliation between the 2 can be found in the company's presentation today, which is available on its website. And finally, note that all amounts discussed today are in Canadian dollars unless otherwise indicated.

I would now like to turn the call over to David Feller, Founder and CEO. Mr. Feller, you may begin your conference.

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David Marshall Feller, Mogo Inc. - Founder, CEO & Chairman [2]

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Thank you. Good afternoon, and welcome to Mogo's Second Quarter 2019 Results Conference Call. I'm joined today by Greg Feller, our President and CFO. We have prepared a presentation accompanying today's call, which is available on our investors site. Please note you may need to refresh your screen at the presentation as it's showing.

At Mogo, we are using technology to transform how consumers manage their financial health. We're doing this by creating a consumer first, data-driven financial health platform that is personalized and engaging. Continued strong execution against our strategic plan led to a great quarter, highlighted by core revenue growth of over 40% year-over-year and 32% year-over-year growth of members.

The industry-wide shift to digitalization is accelerating and our business momentum and ongoing investment in the areas of competitive differentiation continue to drive growth and attract members, increase engagement, member monetization and attract partners. We also continue to make great progress towards our mission of helping Canadians improve their financial health.

All our development and innovation starts with a simple question, what is the problem we are trying to solve? It's that the majority of Canadians are struggling to achieve their financial goals, with financial stress continuing to rank as the top form of stress across all demographics. Almost 10 million of us carry credit card debt, and 45% are worried they won't have enough money for retirement.

So many of us are struggling financially, and this is primarily driven by the solutions we've been relying on from our banks, so while the banks make record profits and are financially very healthy, the majority of its customers are not.

The advancement of technology and data science has transformed nearly every industry and it's happening with financial services: Cloud computing, mobile, AI are all coming together to create a transformational change. The banking experience features a selection of individual products, offered through one organization, but not typically through one app or account. And the products aren't always best-in-class, such as saving rates from the big banks that are less than half of the best rates in the market are. 79% of consumers consider the banking relationship transactional.

Conversely, FinTechs are delivering innovative products with best-in-class mobile first experience. We're also seeing the rise of so-called FinTech super apps, like Ant Financial in China, bringing many of these innovative products into one app. We believe Mogo is pioneering a new category in financial services called financial health, where the goal is not just offer multiple products, but design a holistic solution that shows consumers what they need to do to be financially healthy and achieve their financial goals.

Our mission is clear. Make it simple and engaging for consumers to get financially fit. The flywheel of customer success is what drives growth. The more we improve the experience, eliminate friction and add features and products to make it easier for our members to improve their financial health, the more we grow our business. Our strategy is to deliver the best experience with the best products that result in the best value proposition for consumers.

We think this quote from Clayton Christensen sums up the power of the strategy, "Creating the right experiences and then integrating around them to solve a job is critical for competitive advantage. That's because while competitors may attempt to copy products, it's difficult for them to copy experiences that are well integrated into your company's processes."

So although having great products are important, increasingly it's how you bring them together into an experience that gets your customers meaningful results. This is also what creates a big competitive moat that's very hard to replicate. One of the key ways we evaluate our performance is the strength of our member base, member engagement and our monetization of the ecosystem. As we have discussed in the past, we have an efficient member acquisition strategy. Our total member growth was up more than 35% (sic) [32%] to 865,000 members in Q2, and we're still signing up over 20,000 new members a month. We believe there's still lots of room for growth in these numbers, and expect that new products, like our Cashback card, will help accelerate this. Although we have material scale in terms of members, we believe we're still tapping into only a small fraction of the total addressable market.

In terms of member engagement, we are making great progress with monthly engagements up 60% year-over-year. New products and features help drive this engagement, such as our Bitcoin account and mobile app. As an example, members with our app are 3x more engaged than those without. Engagement is then what leads to monetization. As the more engaged our users are, the more likely they are to attach to other revenue-driving products. In terms of monetization, we've gone from just one product a few years ago to now 6 different ways to monetize. Loans provide the highest revenue currently, and as we will discuss, through partner lending, we'll begin to drive subscription and services revenue. We also have MogoProtect, our premium account, Bitcoin, our new MogoCard and our mortgage offering. Although we're continuing to increase the number of revenue-driving members, we're still early days here and there's lots of room for improvement.

The first financial habit we believe is simply to monitor your credit score and protect yourself from identity fraud. Two related products that are not only a key part of financial health, but ones where we're making it easy for members to check the box. We offer free credit score monitoring with the best user experience and no advertising. This is our #1 product in terms of active members and it continues to drive member growth, engagement and serves as a strong lead funnel for monetization with MogoProtect. MogoProtect is currently our #3 product in terms of active customers and in terms of revenue. The opportunity here is big given the increasing awareness and the need for protection against the impact of identity theft. The recent capital One breach was another great example of this where the data of 6 million Canadians were exposed, including 1 million [SIM] numbers. At $8.99, this is the lowest cost product of its kind in the market today, and we believe the best mobile app experience. This value proposition has also helped us secure a few new partnerships, which we announced in Q2 with The Brick and League. These are essentially new low-cost distribution channels for Mogo.

Given the growth opportunity of Protect, we'll continue to identify and explore ways to improve effectiveness of this solution. Controlling spending. Perhaps the most important part of financial health is controlling your spending. Overspending is perhaps the single biggest challenge facing consumers today. When you look at the stats for consumers, what they have as their top financial goal, all of them come down to controlling spending. 69% of Canadians have a specific financial goals like paying down debt, building wealth and saving for retirement, and each one of these requires more spending control. Our value proposition is, we help you lower your spending so you can achieve your financial goals faster. Our prepaid Visa card product requires you to load your own money, and studies show that you spend 20% less compared to credit card when you use your own money.

We're also offering the best-in-class Cashback. Today consumers that use their own money are using debit cards that aren't getting rewards. Our 1.5% unlimited Cashback will translate into almost $4 billion that is being left on the table by consumers who are using their debit cards. As we mentioned before, the key initiative we've been waiting for is Visa Direct, which is what will enable automated loads in real time from someone's bank account. This has also what has helped companies like Venmo and Square, Cash App in the U.S. grow into the top finance apps, i.e. giving consumers the ability for real-time transfers, so there is very little friction for someone to move their money from their bank account to their MogoCard and vice versa. We will be one of the first companies in Canada leveraging this new real-time payment capability. We're now ready for launch of Visa Direct and expect to be making this available to our beta users beginning next week so a big milestone.

We are also designing this in ways it can used for other products, such as funding loans instantly, taking loan payments with real-time payment clearing information, crypto, et cetera. With an industry-leading Cashback, this will be a growth driver of members, and given the nature of the product, which is very high engagement, we're already seeing this with our beta users. It's not unusual for some active card users to use a card almost daily. So several times the level of engagement of almost any other financial product; and it's engagement that helps drive attachment and monetization into our other products.

Save and invest. Helping our members actually build wealth by saving and investing is a huge opportunity for Mogo, and we're continuing partnership discussions with multiple partners for our wealth products. We are focused on finding the right partners for our broader wealth product opportunities, our strategies to offer a marketplace of best-in-class investment options, along with the best-in-class mobile user experience that helps our members track their performance and know how they're performing versus the benchmarks. We are still expecting to announce a partnership in this area at some point in the near future with product in the market next year. In the meantime, we are focused on leveraging our Bitcoin account, which has been a great example of the kind of partnerships we can do. This is actually our fastest growing product today, both in terms of active users and transaction volume, with volume up over 500% in Q2 from previous quarters -- sorry, from previous quarter.

Bitcoin continues to gain credibility as an asset class, and given this is something that no one has access to through their bank, it's clearly a differentiated offering and one that helps drive more engagement into our app. In fact, members with a Bitcoin account are 3x more active than members without. We believe there continues to be a significant growth opportunity for us with this product. From a revenue perspective, given the small fee we charge, we don't see this as something that will have a massive impact on revenue, but it is incremental with almost no cost given it's 100% automated. But again, most importantly, it drives engagement within and increases the chance of monetizing into other products.

Our background is in lending, and this continues to be a biggest product in terms of revenue and second in terms of attachment. The need in the market remains unchanged. Consumers borrow money all the time, but surveys show the getting out of debt is the biggest challenge, led by credit card debt. Credit cards are so convenient and designed in a way that is easy for loans to go on forever with amortizations as high as 80 years. Credit cards are the primary reason why paying down debt has been the #1 financial goal for 9 years in a row. Consumers want better options. Our goal is to have the best-in-class digital loan experience, including best-in-class rates across the spectrum. So that if our members ever need to borrow money, we are their first choice. We focus on designing the experience in a way that helps our members better manage their loans, with features that are designed to help them get out of debt faster, and thereby saving money on interest. The faster they get out of the debt, the faster they get back to saving and investing. Through technology and increasing use of AI, we continue to improve the performance of the platform. In fact, today, almost 50% of the loans we originate are completely automated. And the conversion rate on these loans from application to funded averages over 90%, which is almost unheard of in the lending space, where conversion rates can easily be in the 25% or lower range.

Partner lending. While we have built this amazing platform, we have not been able to fully monetize it given the capital requirements to really scale the loan portfolio. During the second quarter, we put significant development resources into building out our platform to enable partner lending, which we see as one of our biggest milestones in 2019. New lending partnerships will allow us to scale the loan business without the capital constraints and without credit risk. In this new model, we are not only able to offer our partners the use of our platform and access to our members, but they can use their own credit adjudication as well as leverage ours, which has over a decade of data and over 1 million loans originated. Our goal is to help them be successful on our platform and leverage the proprietary data to help them optimize their models. Over time, our goal is to offer a curated marketplace of loans across the spectrum through multiple lending partners. We're very excited about this opportunity. Lending has always been the best products in terms of monetization, but also have the capital requirements credit risk. Partner lending now lets us leverage this product as much as we can, while also generating subscription services revenue.

Greg will walk you through some of the economics in a moment, but we are working with a few partnerships and expect to have our first partner live this year.

The new Mogo. We began work on a key new product initiative in Q2, which will be the biggest change we've ever made to our experience and plan to launch this in the beginning of Q4. This is all about making it easier than ever for our members to get in and control their finances. This new experience moves us from individual products to a holistic financial health solution. We're leveraging behavioral science, increasing engagement, attachment and effectiveness of our product and create an experience that guides our users through each step they need to take and achieve their financial goals. Whether that's paying down debt, building wealth or saving for a down payment for a home. This redesign includes a new dashboard that ties all the products together through our 4 key habits: a new money goal, which walks members through the importance of having a compelling financial goal and actually setting a specific goal and also what they need to achieve it. We also have a new feature that members can choose to turn on or off, and it's a daily notification that helps motivate and keep them on track to their financial goal. One of the big challenges people have after they set the goal is keeping it top of mind as they get back into their regular life.

Money Class. We also have a new in-app experience called Money Class, which is where we have specialized content that is designed to help our members master their finances and the individual habits. These are detailed classes that are engaging and really simplify what they need to know to really master their finances. Each product will have its own money class, and easily accessible right in the product dashboards.

In addition to the immediate benefits to our members, this positions us also for future premium versions. Similar to what we're seeing with some weight loss apps, like Noom and Weight Watchers, there is a big opportunity to launch a premium version that includes personalized coaching and a daily experience designed to increase the success rate of our members.

We are a technology company at core, and we've created a purpose-built platform for financial services. Our vision is to become the #1 consumer finance app in Canada, and this is driven by our investment in R&D. Our new partner lending opportunity is yet another example of this. With over $200 million invested to date, we believe we are continuing to build out our moat and competitive advantage.

Our investment in R&D is what builds a great product, and it's our investment in sales and marketing that helps position and establish our brand, drive new member growth and help with engagement. In Q2, our marketing also helped drive an approximate 20% increase in loan demand over the same period last year and 16.5% increase from the previous quarter. We have built a platform that generates lots of demand, and partner lending will help us take full advantage of this.

We also recently announced 2 new partner -- marketing partnerships, both directly related to our MogoProtect product. One with The Brick, a leading furniture retailer; and one with League, a leading digital benefits platform. Both of these partnerships came about based on these companies seeing the increased importance of helping their customers with the risk of identity theft and fraud and the value proposition we offer. We believe we have many more partnership opportunities like this and expect they'll continue to be a key part of our marketing strategy. Leveraging influencers on social media is also another growing channel for us as it also gives them a chance to experience it themselves and share their recommendations with their followers.

I will now turn the call over to Greg to review the financial results. Greg?

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [3]

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Thanks, Dave, and good afternoon. Our strong second quarter results reflect the continued execution of our strategy, strong underlying economics of our products and the significant growth opportunities in front of us. Core revenue increased 41% in the second quarter to $16.4 million; our high margin subscription services revenue continued to be a key driver, increasing 42% in the quarter. Since our IPO just over 4 years ago, we have completely transformed the revenue makeup of the company to a much greater portion of capital-light recurring revenue streams. We also continue to see strong growth of our member base, which increased over 865,000 at quarter end.

Despite the strong revenue growth and significant investments we were making in technology and development, we continue to generate meaningful adjusted EBITDA, which was up 116% from Q2 2018 to $1.6 million in the quarter. Lastly, we ended the period in a strong financial position with $42 million of cash and investments. You'll recall that we exited the short-term lending business in the third quarter of 2018, so core revenue is really the metric to focus on for year-over-year comparison as it excludes fees from the legacy short-term lending business in the prior year period. Core revenue reached $16.4 million in the quarter, reflecting strong growth in Subscription & Services as well as increased demand from our MogoMoney product with interest revenue up 40% in Q2.

Within Subscription & Services revenue, MogoProtect and our premium account products were the largest contributors to our growth. Our high attachment rate of these products to our loan customers give us confidence that as we ramp up partnerships -- partnership lending, which doesn't have the natural constraints of scaling that on balance sheet lending does, we will have more ways to drive growth in these high-margin fee-based products. As we expand our range of products and continue to enhance our engagement and monetization, we expect this portion of our revenue to show continued strong growth. In the near term, as we highlight in our MD&A, our growth rate will be impacted by our decision to exit our small-scale Bitcoin mining agreement in the quarter. This represented about 5% of the total revenue and $0 of contribution to adjusted EBITDA in Q2, compared with about 4.5% of revenue and roughly 30% of EBITDA in last year's quarter. This was not a strategic growth driver for the company, and given the current economics of the business, we decided to make the decision to completely exit the business in the quarter. The exit will not result in any charges as we've already fully depreciated the assets related to the business. We will continue to have exposure to Bitcoin through our Bitcoin trading account, which we believe is one of the simplest and cheapest ways for Canadians to get exposure to this emerging digital asset class.

Excluding mining revenue, core revenue was $15.6 million, up 43% year-over-year. Central to our economic model is the underlying contribution dollars, as this is an indicator of the core profitability of our products. This quarter, we generated contribution of $5.4 million, which represented 33% of revenue. Core profitability helps us to continue to invest in technology and development at scale relative to the majority of FinTechs in Canada and helps drive long-term revenue growth as well as ensure we have a best-in-class user experience.

Technology and development spend increased 10% over last to $4.4 million in the quarter. The strong contribution, along with managing costs and marketing and G&A, resulted in quarterly adjusted EBITDA of $1.6 million or 10% of revenue, up more than 100% from the same period last year. The other important metric we focus on is the operating cash flow of the business before investment and loan receivable. This quarter, we generated $1.4 million of positive operating cash flow from operations before investment and receivable, compared to $2.2 million cash flow in the same period last year.

We have multiple dials we can use to manage our cash use, in particular the amount of growth we want to achieve in our balance sheet loan book. With the emphasis on our partner lending platform this quarter, we plan to reduce over time our capital investments in our on-balance sheet loan book. In terms of credit performance, our loan book continues to perform well and consistent with our target range with net charge-offs of 16.8% in the quarter. This compares to 15% in last year's second quarter. As our loan book investment amount stabilizes, we will see variability in the near term of this metric. However, over the long term, we expect our charge-off rate to trend down.

We also had strong net income performance this quarter of $7.5 million net income, driven by the gain on acquisition from the Difference capital transaction. To clarify this point, the transaction was structured as a 1:1 share exchange, where Difference issued common shares in exchange for outstanding shares of Mogo finance, resulting in former shareholders of Mogo holding 80% ownership of the combined, post-transaction. Under IFRS, the transaction is considered a reverse acquisition where Mogo finance is the accounting requirer. As a result, based on the incremental share we issued and the fair value of the net assets we acquired, we recognized a gain on acquisition of $15.9 million.

Adjusted net loss was $5.2 million in the quarter, consistent with the same period last year. The key reason for our performance on this metric -- on the metric is attractive underlying economics of partner lending. Consumer lending remains one of the highest revenue margin opportunities for FinTechs globally, and it's an area where we have deep expertise and a leading digital platform. As Dave mentioned, one of the most significant milestones in the quarter was the development of our partner lending platform. From a financial perspective, what this means is that we can now begin monetizing this platform without the need to invest more risk capital, and instead monetize it through a recurring fee-based model that will accelerate our transition to a capital-light business. As we bring on new partners and begin to generate meaningful revenue, this will result in fairly significant changes to our financial model, which we have illustrated here. In addition to the new fee-based revenue streams from 2 sources, there are no capital requirements or credit risk for Mogo.

We think the comparison in Mogo's average revenue per monetized member to Square's average revenue per monetized member from their Cash App is a great way to showcase what we believe is a best-in-class monetization model in the industry. Specifically, as you can see here, we currently generate just over $700 per monetized member per year versus Square at an estimated $87. This means that Mogo is generating over 8x the dollar amount of revenue per member we monetize compared to Square. The biggest driver of this significant difference is Mogo's lending product, which Square does not have today. This is why we believe that every successful consumer FinTech out there will have to get into lending. However, this is also the most difficult new product to launch. Because not only do you need to develop a best-in-class digital lending platform, but it takes years of building up your loan database and hundreds of millions of dollars of capital to prove out the quality and performance of this platform. And this is where Mogo has a massive competitive advantage, as lending has been core to our business since we started 15 years ago with over 1 million loans originated to date.

Now as we launch Partner Lending, we will be in a position to convert this high ARPU revenue product into a purely fee-based recurring high-margin revenue stream. This, we believe, will be a game-changer.

One of the most important financial highlights of the quarter was the completion of the transaction with Difference Capital. This transaction significantly strengthened our balance sheet with the addition of net assets of $31.4 million, including a portfolio of investments valued at roughly $24 million at quarter end. In short, this transaction gives us total cash and investments at quarter end of approximately $42 million, substantially improved our financial position, providing greater resources to continue to invest in our platform of new products and grow our member base and revenue.

Looking at the investment portfolio at quarter end, you can see we had 2 tiers of investments in our portfolio with our first tier of key investments on our balance sheet at a book value of $16 million. We feel very good about the quality of these investments as they are in some of the leading technology companies in Canada, with proven revenue and scale. The remaining $6 million of this portfolio is in a diverse collection of investments, mostly technology-related companies. Consistent with our objective to actively monetize this portfolio, we completed our first monetization during the second quarter with the sale of our interest in Wekerloo Developments for a book value of $2.1 million. Our goal is to show a regular cadence to our monetization and are targeting a monetization every 6 months approximately.

We saw strong net member growth in the second quarter, specifically we added net members of 57,000 versus 52,000 additions in Q1. We ended the period with 865,000 members, up 32% over last year. Our core average revenue per member increased 6% year-on-year to $78 compared to $74 in the same period last year.

Longer term, we see significant opportunity to continue to grow our member base and continue to drive increased monetization of this member base as we continue to launch new products, improve our user experience and enhance our overall value proposition for Canadians. As Dave outlined, we see no reason that Mogo's average earnings per member cannot be significantly higher than where it is today as we provide more digital products and effectively replace this traditional bank offering. That concludes our formal remarks.

And we'll now pass it over to the operator to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Nik Priebe from BMO Capital Markets.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [2]

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I just wanted to start with a few questions. Just to get some clarity around the evolution of the credit business here, just as it starts to migrate towards being more of an origination platform. Can you just help me understand, so would it be the same types of loans that would be originated over the third parties in the sense that they would be nonprime, unsecured, consumer installment loans?

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [3]

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Yes. So Nik, it's Greg. So initially, our first partner likely is going to be related to very similar loans to what you just described, which are nonprime, unsecured consumer installment loans. Having said that, we have a very large member base, very high volume in new member sign-ups and a very broad demographic of members across the credit spectrum, which, quite frankly, we are monetizing just a small subset of. Because today, we don't have the cost capital and therefore we don't have the products to be able to service that full spectrum of loans. So our plan with this Partner Lending program or platform is to bring on multiple partners to really be able to monetize and provide solutions across the credit spectrum.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [4]

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Got it. Okay. And then would the intention be to gradually fully exit the on-balance sheet credit business and replace it with the origination platform? Or is it just going -- or are you thinking that, that portfolio might sort of be stable and any excess that you get would be directed to third-party off-take? Just looking to get some color on how the evolution of the on-balance sheet component will look.

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [5]

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Yes. We are currently thinking more of the latter, where we'd effectively target a stable, on-balance sheet loan book and continue to drive the growth through partner lending. So that's kind of what our current plan is.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [6]

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Okay. And I think you kind of sort of alluded to a timeline that would see you bring on a new partner this year, start to see a little bit of uptick in volume next year. What sort of time line before you really start to achieve sort of meaningful scale in that business? Is that kind of like a 1 to 2 years sort of timeline?

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [7]

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So we -- our plan is to announce and start working with a partner this year. So that means not just announce, but actually start originating loans through the partner platform. Partner platform is ready to go. There's been a lot of investment. That's been the majority of our investment in time and resources over the last couple of quarters is getting that platform ready to go to bring on partners. So this is a lot more than an announcement where we still have a lot development work to do. So once we announce our first partner, we expect to start generating volume through that partner this year. And we believe that, at some point in next year, it will be meaningful volume. So this is something that we think can start generating returns for us within the next 12 months, and obviously then, there will be a transition from a lot of the on-balance sheet stuff that we've been doing to more of the partner lending. The other important point is, we really see, increasingly, and we believe a lot of FinTechs are realizing this, that lending -- not only is lending probably the highest LTV of any of the consumer products on the finance side, in fact we think a lot of the products that are out there that a lot of companies are focused on are headed towards 0 margin. And so if you're building a model based off of that, you're going to be challenged. You have to get into lending. That's where the money is. And so we believe that the other key thing is that lending is one of the stickiest products, right? So if you have a loan, including a mortgage with somebody, they become an important part of your financial wallet where you are more likely to actually take other financial products that they offer. So we see a very high attachment rate on our products with our loan product. The challenge we have today is that we are constrained with how much capital we want to put out in our loan product because it's all on balance sheet, which then reduces the ability to really grow a lot of other products that you get a high attachment rate on. So obviously, Partner Lending really allows us to -- or will allow us to start growing that without capital, and we believe it brings a whole bunch of other benefits to our other products as well.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [8]

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Got it. That's good color. Just one last one for me before I pass the line. In the quarter, you also announced a few new partnerships, just to help broaden their distribution today identity fraud, protection product. Obviously, that's one of your more successful products. Can you just give us a sense of what sort of uptake you might hope to achieve through those channels? Like, do you see those partnerships being a material development for the success of that product?

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David Marshall Feller, Mogo Inc. - Founder, CEO & Chairman [9]

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So this is Dave. I would say we kind of look at those channels as probably similar to member channels that were -- are current kind of member acquisition channels. We just see this as more people coming into the ecosystem initially probably starting with credit or we're also giving them a free Protect offer. So it's definitely more focused on Protect. I would say it's still very early days. In fact, these are really just getting started, I would say, to any sort of level, this month. But what I can say is there's definitely a big opportunity here with these types of partnerships. Also because we actually have an attractive partnership where they actually can share in the revenue as well. So these partners are actually incentivized to actually help improve the performance there. But ultimately, they actually come on to the Mogo platform. We're not enabling them to offer the solution through their own platform. For a customer to actually get this, they have to download the app, they sign up, then become a member and ultimately get exposure to the rest of our products. But in terms of initial volume right now, it's still too early to say. But we definitely think it'll just be a really good incremental channel for us to acquire those customers.

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Operator [10]

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Your next question is from Doug Taylor from Canaccord Genuity.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [11]

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I'm also going to focus on the Partner Lending platform. It's an important development in your story. Have you guys decided how you're going to be reporting the revenue associated with that? Is that going to be swept under your Subscription & Services? Is that going to be broken out separately? Have you guys given much thought to what that's going to look like? Or what we're going to be able to see to, I guess, assess how well that product rollout is going?

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [12]

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Yes. So yes, it will be initially under Subscription & Services revenue, because we really have right now 2 line items, interest revenue and Subscription & Services. At some point, if the scale merits it, we may look at breaking out. And obviously, we understand that the more data points we can highlight as to the success of that as we roll that out, the better. So we'll obviously be thinking about that as we consider disclosure around it.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [13]

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Okay. Have you provided or could you provide -- I mean, I think we understand there's an origination fee and a platform fee. But how we should think about those in percentage terms relative to $1 of loan value on the partner platform?

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [14]

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Sorry, can you repeat the question?

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [15]

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Yes. I mean, I guess, I'm asking, for $1 of partner lending, what would your cut be in terms of origination and platform fees that you're going to have recurring over time? Is that something that you're able to provide publicly or is that competitive?

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [16]

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So basically, the structure of the fee that we're looking at on this platform will be split roughly 50-50 between an origination fee and then an ongoing platform fee and that ongoing platform fee would be paid out over likely 24 months, which would be more performance based in terms of the loans that are being outstanding, et cetera. And the dollar amount there at this stage I wouldn't comment on it, but what I would say is that from a cash flow perspective, obviously, we're talking about cash flow in the quarter we originate a loan today is a negative on balance sheet, whereas here this would be immediately cash flow positive. And then from a 1-year cash flow perspective, based on an average loan size that we're looking at today, we estimate that we would be generating 3x to 4x that from a cash flow perspective in the first year. It obviously would be lower from a long-term LTV perspective, because we are obviously sharing those economics with our partner. But there's no capital requirements and there's no credit risk. And probably, just as important, there is no constraints from a scalability perspective. So from our perspective, this isn't just the case of, "Oh we would be taking loans that we would be able to generate a higher LTV if we funded them ourselves." It's actually about us being able to do a lot more loans that we're not even doing today because we really don't have the capital whether it's in the cost of capital or access to capital to scale it out to the level we'd like to.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [17]

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Yes. I get it. So you'd be charging -- the fee is designed to be like a flat rate per loan per customer, per -- or is it a percentage of the loan value?

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [18]

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Yes. It will depend. Some will be a flat rate based on an expected average amount. Others will be based on some origination amount. Obviously, they will be yield dependent as well and the size of the loan. So you can imagine on a same size of loan, a prime loan would be a lower one. But typically, a prime loan is a higher dollar amount. So that would offset part of that as well. But it will depend on the partner and the type of loan. The -- sort of the exact structure of it. But importantly here, this is not an origination or referral model, let's say, like some of the lead-gen businesses, where effectively you get the customer, you send the customer over to the lender, the lender funds it, takes it to the customer and pays you a lead-gen fee. This is very different. This is effectively our partners leveraging our platform, the loan product itself staying within the Mogo app and the Mogo account. And so the customer really use Mogo as their account because they are also managing all their other products there. And then in addition, and that's why in addition to an origination fee, we're getting an ongoing platform fee. And as I say, that platform fee is roughly equal to the origination fee, and that's really reflective, we believe, of the value of the platform that we built up. And that our partners that we're talking to see this as not only a valuable distribution channel, but also a valuable platform for them to leverage.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [19]

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Okay. Last question for me. Obviously, there was a big push in investment to get this Partner Lending platform up and running. You do have a lot of other product initiatives upcoming, and obviously, the refresh of the look and feel of the app and all that. How should we think about all of these things? And your R&D spending overall trending over the next couple of quarters or even years?

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [20]

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So we have in our R&D spend cost related to mining flow-through there as well. So when we exit that, that's going to go away. And so actually, what you're going to see is our R&D spend on an absolute level decrease, and more in line with, say, quarterly R&D spend that we saw in 2018. And then from that base level, you will see as we grow revenue, as we grow gross profit dollars, we will continue to want to have some of those dollars be reinvested in the business and some of those dollars flow down to the bottom line and we'll make -- continue to strike that balance.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [21]

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So just to understand the additional machinations with the mining exit. You gave the number with respect to revenue being 5% of total and EBITDA. But the majority of the cost -- again, there's obviously a cost, it's roughly equal to the revenue. Is that all in R&D? Or is that broken between the COGS and the R&D? How should -- just so we can model. And as you say, we can...

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [22]

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Yes. About 90% of it is in R&D.

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Operator [23]

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Your next question is from Nikhil Thadani from Mackie Research Capital.

Your next question is from Brad Bernington (sic) [Brad Berning] from Craig-Hallum.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [24]

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Just wanted to follow up a little more on the Cashback program. You talked about, it sounded like that Visa Direct is now operational. I just wanted to confirm that, and that that's going to be part of the beta test that you said you'd be doing next week? The follow-up to that is this how long do you think you'll need to be in beta before you're ready for kind of a broader product launch? And then if you could also just kind of discuss with the Cashback, how you think about margins on that product versus using that as a product to drive interest in using the account activity in a greater frequency to drive other products. Just kind of if you could walk us through how you think that program drives the model?

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David Marshall Feller, Mogo Inc. - Founder, CEO & Chairman [25]

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Sure. So I'll start. It's Dave. So yes, we obviously, we've been working on this Visa Direct for a while. It actually was -- the issue quite frankly was more it was a brand-new platform and solution in Canada. So the partners were still trying to get set up with it. So we've literally be waiting for them to essentially be ready to go. And that most of the work that we had to do in terms of actual user experience in leveraging it has already been built.

And as I said, literally next week, it's going to go live to our beta users. So they're going to be able to experience the experience of signing up and using it and actually transferring real-time money from their bank account to the MogoCard. So yes, that is actually going to happen starting next week. Now depending on -- it's the same old story, you launch something, you test it out, you see how it's going, you iterate, et cetera. I would say at this stage, our hope is that at some point in Q4, we're at a place where we're going to start to more expand out the product offering. The other, I think, related point is it actually ties in even to Partner Lending.

If you think about our strategy with the card and generally our view on the space, if you look at, for example, down the U.S., you've got a bunch of these prepaid programs, some of them, many of them actually don't feature Cashback. And that Cashback increasingly becomes a very, obviously, a meaningful impact to the consumer. If you're spending $2,000 a month, we're talking $30 a month in Cashback, very similar to what you're seeing with the Apple Card. And so there's no question about it. The value of having that part of the customer's financial wallet given the engagement level and the importance of the day-to-day spending is huge.

Our strategy is we want to offer a very compelling value proposition to really drive both member acquisition and engagement and that, that ultimately helps to increase monetization to other products. This also aligns again with Partner Lending. We think that if you think about a product that would be most likely lead to a loan product, it's absolutely going to be the card, right, especially when you're really focusing on the majority of Canadians that know they're overspending with credit card, but they're still going to need access to credit. So we see Partner Lending being very synergistic with that, and probably a key way to essentially, I'd say, monetize those members.

So I'd let Craig kind of speak on the margin side. But I'd say, generally, the strategy is go out with an aggressive Cashback offer. This is very aggressive, but again we're not -- we're talking no annual fee, 1.5% unlimited, 3% on foreign exchange. So anybody's traveling, they're getting 3% cash back. That is absolutely meant to be a further reason to ultimately acquire customers and drive member growth, along with helping to incentivize it to become the customer's main go-to card, and then obviously increase the monetization opportunity with a loan and our other products.

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [26]

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So Brad, just to finish up the question on the margin side. Yes, I mean, I think, as Dave mentioned, where our focus is definitely is a card being a tool to drive user engagement and drive also just sort of user sign-up as well, because we're going out there with an aggressive, what we believe, is a best-in-class Cashback solution. Effectively, we are really going to be taking the economics that we get out of the card and paying it to the consumer. So this will not be a profit driver on its own.

But instead, it will be a way to, again, continue to broaden out the member base that we're monetizing and increase user adoption and user engagement. And then ultimately, the more you do that, the more opportunities you have to monetize them in other products, including lending. If you look at the kind of the slide we put in the deck on, Mogo versus Square. So today, Square basically says that they're monetizing somewhere around 35% of their member base. And we say we're monetizing today somewhere around 10% of our member base.

So obviously, a lot smaller than Square, but Square's main monetization tool effectively is their card, and we believe that the card is a big reason why they've got that broader monetization going on. So obviously, we've got much higher dollars per monetization of the customers we're monetizing, but we then also need to increase the penetration of the percent of members that we're monetizing. So we get a whole bunch of ways to ultimately drive revenue growth, increase the products, increase the percent of the members that we're monetizing, and then obviously drive overall member growth as well.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [27]

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Appreciate those insights. One follow-up is, clearly P2P money transfer is an important part of the strategy for some of the bigger FinTech platforms, U.S., globally. How do you guys think about where P2P fits into your -- with this card offering? Does it need to be part of it to make it work? Is it a product opportunity? Obviously, some of the Canadian banks haven't really participated in P2P, and I'm just kind of curious how you think about that opportunity set for you guys potentially to partner with that with here?

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David Marshall Feller, Mogo Inc. - Founder, CEO & Chairman [28]

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Yes. So definitely. I mean, the precursor to P2P is actually Visa Direct, right? So again, Square would not be Square without Visa Direct, without these real time payment rails that haven't made it to Canada yet. So that really was the precursor. And so as I said, my guess is we're going to be, if not the first, among the very first in Canada that actually is using this is to do real time transfer from a bank account to the card as a way to actually load it, take that friction out. And no question about it, P2P will continue to be an important component.

Obviously, our strategy on the card is a little different than, say, what Square is today. They're not really trying to, at least today, say, "Hey, that's going to be your go-to card." People are using it P2P, they have a balance in there and they're starting to use it for some spending, they're obviously leveraging the cash boost, which is a version of Cashback, if you will. But as far as we're concerned, especially in the market, we've got things like the Apple Card, et cetera, they're going -- to be competitive and to get that spending, they're going to have to offer a Cashback, a stronger Cashback across the board.

The only way you can do that is really if you have these other ways to monetize. But ultimately, as that becomes your main spending card, P2P especially when you talk about splitting the bill, paying someone back, I'm out there, I'm using the card, I'm paying for dinner, I'm going to pay for dinner for everybody because I'm also getting the highest Cashback, I'm going to split the bill, that's essentially P2P right there. Obviously, that also helps to drive a network effect. So just from a marketing customer acquisition, that P2P is definitely something we are looking at and will consider. Right now, we just want to get the experience right in terms of this card, loading it, using it, and really making it that card that somebody increasingly wants to make as their essentially go-to spending card.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [29]

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If I could just ask one technical last quick follow-up question, and I'll get in the queue. So daily or monthly on the rewards program, how -- obviously, if there's Apple's pushing daily, which is unique just like yours, is that how you guys are thinking about that?

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David Marshall Feller, Mogo Inc. - Founder, CEO & Chairman [30]

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Yes. So what we do is, ours is essentially daily in that you get real-time -- every time you use it, you get a real-time notice of what Cashback you actually earned from every transaction. And that shows up in real-time in your app. Then at the end of the month, it automatically gets credited back to your account, right? So it's not real-time as in you can't tap into that money before the end of the month, but it is real-time as you are seeing it, you're experiencing it and you get your real-time credit. And at the end of the month, it's automatically credited back in your account.

Now that is completely different than almost all of the Cashback cards in Canada. A lot of them now are going to an annual Cashback. So most of the big banks, they essentially, at the end of the year, you get access to that Cashback on a credit on a statement, which typically also involves your annual fee. So we definitely -- we agree with Apple in terms of that model. Ours is also different in that we don't put it on some sort of a card that you can use, it goes straight back to your spending account, right, which obviously, if your goal is to help somebody control their spending, if you're spending $2,000, that's $30 to $50 a month depending on the foreign exchange, you can either use that to help lower the amount of money you need on the card for your spending or you can also, we're going to also offer you the ability as it when you tie it into save and invest.

You want to take that Cashback and add it towards your kind of saving and investing goal, which obviously becomes a challenge as well, right? And then you start adding in the things like the round up. So obviously, your Cashback might get you $30, your goal is try to get to $50 a month, you added it in the round up and maybe you're somehow getting to that $50 range and then use that the $50 towards your saving and investing goal.

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Operator [31]

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Your next question is from Suthan Sukumar from Eight Capital.

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Suthan Sukumar, Eight Capital, Research Division - Principal [32]

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First question for me is on -- is on the rebounded marketing spend this quarter. Has your new campaign been fully rolled out now? And if so, what type of early results are you guys seeing? And what type of early feedback are you guys seeing from that?

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David Marshall Feller, Mogo Inc. - Founder, CEO & Chairman [33]

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So it's Dave. In terms of when you campaign, what specific campaign? Are you talking about the campaign -- the money app campaign?

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Suthan Sukumar, Eight Capital, Research Division - Principal [34]

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Yes.

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David Marshall Feller, Mogo Inc. - Founder, CEO & Chairman [35]

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Yes. No, we actually have not rolled that campaign out yet. That actually is going to be coming out alongside this new redesign that we talked about. It really aligns to that. So we decided to kind of hold off on that, the launch of that campaign and align it to the launch of this new redesign, which really kind of ties nicely into that. But in the meantime, we have obviously increased spend and looking to test a bunch of channels, different channels and different strategies, also some branding type strategies. And that also is partly what also help lead to kind of record loan demand. We had a loan application volume go up 20% year-over-year, 16.5% from the previous quarter. And our member acquisition continues to be around that all-in just over $20. So we think that's pretty cost-effective as well. Craig, I don't know if you have any other comments to that?

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [36]

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Yes, Suthan. So a couple of things. First of all, the marketing spend, effectively went back to the level we were at for a quarterly level we were at for most of 2018. So I would say it has sort of went back to, let's call it a more normalized level on an absolute basis, which as a percent basis, is actually a little bit lower as a percent of revenue. As Dave mentioned though, we did see a big increase in effectively loan application demand. But we actually had one of our lowest increases in investment in loan books this quarter, which is really a function of us trying to limit the amount of loan capital that we put out there.

So what it's really doing is setting us up for getting partner lending going because we believe we've got a lot of leads that we can monetize with Partner Lending, but quite frankly, we just don't have the capital to monetize those all on balance sheet. And as you get into -- as you move into that and you want to be able to ramp that up, you've got to get that marketing going ahead of the time. So this, I would say, is getting our marketing back to a more normalized level. And then as Partner Lending gets going and ramps up, we'll then adjust marketing based on where we see the economics in terms of the ability to get an ROI on that marketing spend through more partners.

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Suthan Sukumar, Eight Capital, Research Division - Principal [37]

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My next question is on the high interest savings products. Not sure if I missed any commentary in the opening remarks, but can you guys provide an update on the partner discussion that are ongoing for the high interest savings product? And if this product is still slated for launch later this year?

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David Marshall Feller, Mogo Inc. - Founder, CEO & Chairman [38]

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Yes. So it's Dave. I think the update is we have had and continue to have multiple partnership conversations on the wealth side, and kind of put the interest rate savings account in there as well. I would say we -- so one is we actually haven't made a firm decision on which of those products we actually believe is the right product to begin with. It could be high interest savings, it could be a different investment product. So we're still kind of looking at that and analyzing that.

I would also say this Partner Lending and focus on Partner Lending and the resources we put on that, that, to a certain degree, was earlier not a -- was not as an expected -- as big of an initiative and the timing. So just an example in terms of looking at what we're doing and continuing to look at our strategy and plan and making adjustments, while we're continuing down on the partnership side. So at this stage, I would expect that we most likely and have a partnership in the wealth space announced before the end of this year. But at this stage, given our current focus, including the card and this new money app and our development road map, I would doubt that we're going to launch one of those products this year. I would expect that one of those products is going to be launched -- or the products would be launched next year instead.

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Suthan Sukumar, Eight Capital, Research Division - Principal [39]

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Okay. Thanks for the color. I got just one quick last one for me on the MogoCrypto side. Just really, over the recent rally, has that served as a new member acquisition channel? And further to that, what types of cross-sell or attach rates to other products have you been seeing with these MogoCrypto first members?

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [40]

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Yes. So I would say last quarter, we're definitely focused on kind of marketing the Bitcoin account given obviously the activity with Bitcoin. And what we're seeing there is definitely an increase in both member acquisition in terms of customers coming -- member signing up because of our crypto offering. But at the same time, also members and existing members that didn't necessarily come for it, then activating and attaching it, and we're seeing that engagement level. As I said, a member with a Bitcoin account, forget about whether or not they're actually actively investing on a regular basis, those customers are even more active.

But the average member on average is 3x more engaged than somebody without the crypto, just because of the nature of the product. And there's no doubt about it, with -- the math is very clear. The more engagement we have in the app, the higher the monetization. So when you take a look at our members and you take a look at the monetization opportunity, and that's why we kind of really tried to spell that out in today's presentation, it'll just show that what we look at here is just like credit score, credit score obviously doesn't drive revenue, but it absolutely drives engagement. Square Cash App same thing, P2P doesn't drive revenue, but ultimately drives activity and engagement. Bitcoin actually does drive some revenue, but it also drives engagement, and I would say, the kind of the attachment rate to the other products is in line with the engagement level.

The other thing I will say is, and this speaks to the Partner Lending, is we also noticed it's a much higher credit score customer on the Bitcoin side. So this also speaks to the Partner Lending opportunity. So those are customers that we're currently not trying to monetize on the loan side in terms of the rates that they would qualify for. And that also ties into the importance of the Partner Lending and finding those kind of best-in-class on the prime side as well. And that's part of the reason for doing this. Increasingly we have this increasing engagement and member base of actual customers that we really aren't looking to monetize into our current loan product, which is absolutely even in this partner lending model by far the highest revenue and profitability per product. Several times than any other products we have.

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Operator [41]

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Your next question is from Scott Buck from FBR Riley Capital Markets.

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Scott Christian Buck, B. Riley FBR, Inc., Research Division - Research Analyst [42]

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I'm curious how you envision the implementation of the third-party lending. I mean, how quickly can go from announcing the partnership to all 865,000 members having access?

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David Marshall Feller, Mogo Inc. - Founder, CEO & Chairman [43]

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Greg, do you want to talk about that? Or do you want me?

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Gregory Dean Feller, Mogo Inc. - President, CFO & Director [44]

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Well, so I guess, Scott, to be clear, once we launch it, we'll be able to go to all of our members and, obviously, new members that are signing on. And where appropriate, offer them a loan product. So depending on the initial partner that we launch with, which our initial plan is to launch with another subprime lender, then obviously we're not going to have an offering for any of our prime members that we're going to go to. But obviously, there will be a cadence to this rollout.

So we'll obviously, start -- we're initially going to really sort of start with new members and new members that are signing up. And then make sure everything's working smoothly and the experience is working the way we want it to. And then obviously, look at broadening it out. But there is no natural restriction that we have other than our making sure we've got the right products for the member and being in a position where we want to start rolling it out more broadly. And it's all resources and focus.

There's a whole bunch of opportunities that we have to do more nurturing to our existing members, to drive more monetization and more cross-selling. We know there's a lot of low-hanging fruit there, and it's about having the right resources on it. And we're balancing all of those opportunities with new product launches and new things like Partner Lending and that. And so that's something we kind of continue to do on a regular basis. But that's kind of how we're looking at the rollout for now.

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David Marshall Feller, Mogo Inc. - Founder, CEO & Chairman [45]

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But just as an additional point there. This isn't like we're launching with a partner and then they're trying to figure out, okay, how are these loans performing. This is also just, again, what we bring to the table as we already have a lot of history in loans, including obviously, a certain segment even in the prime space, not that we're trying to grow that portfolio, but we have definitely been gathering data, et cetera. So what this does is part of this kind of Partner Lending model is we essentially give those partners access to our data so they can actually see the performance of those loans within segments everything else. And that obviously gets them to a comfort level a lot quicker because we've got all this history, et cetera. They are not going into this thing blind, right?

So that's also part of why this platform is, obviously, has value to them. There's a lot more there than just giving them access to our members and putting the information in an app. It's all of the data behind. And by the way, for some of these partners who we're talking to that actually have really not ever done any of these loans, one of their challenge of doing these digital loans is they just don't have the data, right? So if you don't have the data to do this, it is very difficult, it takes a long time, et cetera. So there's no question that, obviously, it's going to accelerate the scalability of this channel.

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Operator [46]

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There are no further questions at this time. Dave, please proceed with closing remarks.

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David Marshall Feller, Mogo Inc. - Founder, CEO & Chairman [47]

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Okay. Thank you. Appreciate everybody's time today, and we look forward to updating you after Q3. Thanks again.

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Operator [48]

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Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.