Shares in Ozforex Group Ltd (ASX: OFX) tumbled around 4 per cent to $2.17 in morning trade after the international money transfer business revealed a weaker-than-expected second half to financial year 2016.

For the full year the business posted an underlying net profit of $23.9 million on net operating income of $103.9 million. The net profit was down 2% on the prior year, while the income lifted 15%.

The full year dividend was also down 5% to 6.7 cents per share, versus 7.08 cents per share in the prior corresponding period.

The group blamed the margin fall on expenses that were up a substantial 22% as it invests in new technology, staff, and product development in an attempt to deliver global growth. The company has also recently rebranded itself from OzForex to OFX, which is one reason why expenses were up in the most recent period.

Competition

Investing for growth to compete with the big banks is one thing, but the share price falls come as no surprise given active clients for the full year were up a softer-than-expected 6 per cent.

The active client growth looks a worry and suggests that competition may be catching up with OFX after years of strong growth that was characterised by a remarkable lack of competition given the market opportunity and low barriers to entry in money transfer markets.

The business also admitted it suffered from high staff turnover amongst management during the past year and has delivered a mixed performance since many insiders sold down their holdings after it hit the ASX boards back in 2013.

Real deal?

I have expressed scepticism in the past about the OFX business model, which was reinforced after the recent decision of Western Union to pull out of a takeover offer after it conducted due diligence on the business.

Anyone investing in the business should be comfortable then that they are fully across all the risks and the business model. Regulatory risks are substantial and OFX continues to operate a different business model to its larger money transfer rivals like Western Union or the banks.

As disclosed in its Financial Services Guide, OFX pays some staff “a flat commission of 3% of the Profit (excluding any fees charged) derived by us on each transaction”. In my opinion this commission structure has boosted its historical growth and its retention remains important to the business model going forward. For example if the regulatory authorities were to revist the issue of conflicted remuneration when providing general advice on FX (as was once considered under the Future of Financial Advice reforms) I expect OzForex investors would be nervous.

OFX also faces regulatory risks over issues other than provision of general advice on FX, with it also conceding that it has been forced to invest more to cover increased risk and compliance costs in the US market.

In 2015 Westpac Banking Corp (ASX: WBC) terminated its banking services provided to OFX, although OFX is very unlikely to ever be short of a banking partner, Westpac’s decision does suggest some banks are looking to divest anti-money laundering risks rather than increase them.

Outlook

The group forecast FY17 earnings before tax to be up on the prior year and given it does have some attractive qualities some may be prepared to overlook the risks and recent history to back its potential.

However, after today’s result I expect shares may come under more selling pressure in 2016.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.