Fidel API, a start-up introducing the concept of “programmable money” to the management of card-linked loyalty programmes, revealed widening losses with its 2022 annual results.
Card-linked loyalty has been around for some years but is a notoriously difficult market in which to achieve the scale needed for profitability. Bink, a high-profile start-up which boasts both Barclays and Lloyds banks as shareholders has accumulated losses of £67m in eight years. Only London-based Reward Insight is making money. Its most recent accounts showed a profit of £2.6m on turnover of £43m.
Fidel is controlled by Subatra Dev, its founder. Most card-linked propositions are aimed at marketing directors but Fidel API is targeting developers by offering direct API access to transaction data from Visa, Mastercard and American Express.
Despite its high-profile clients, Fidel’s business performance in 2022 was modest. Turnover grew 19% to $3.59m, mainly due to “higher non-recurring platform revenues from a key customer.” Despite a push in North America, three quarters of sales are in the UK.
Operating losses widened from $11.4m to $21.8m driven by “continued investment… in people, technology and operations.” Employee expenses almost doubled to $14m with an average of 103 staff during 2022 costing $135K each.
Fidel API raised $44m in 2022 from a blue-chip investor rosta including Bain Capital and exited the year with $27m cash in the bank. Card-linking sounds wonderful on paper but, in practice, is a very tough market. The developer friendly approach is novel but management will need to work hard to deliver a return to its investors.
Last month’s poor results from Worldline and Adyen have not set a trend. Nexi’s Q3 numbers came ahead of market expectations. Management said there was no sign of the slowdown in Germany which has so rattled Worldline’s shareholders. Nexi’s stock price is recovering nicely while Worldine is still bumping along the bottom.
Adyen bounced back after its plain-speaking Dutch management presented analysts with a more realistic assessment of the company’s growth prospects and promised a slowdown in the breakneck pace of new hires. Adyen’s Q3 revenue was up 22% and with the processor now targeting 50% EBITDA margins by 2026, significant cash profits are on the horizon.
The dilemmas faced by European legacy acquirers are well described in Nightmare on Acquiring Street, a new paper from PSE Consulting. This lays out the speed at which the market is moving to “gateway acquirers” such as Stripe, Adyen and Checkout, which offer a tightly integrated bundle of services operating over a single platform.
Source: PSE Consulting
Processors operating with old technology and without modern checkout and boarding tools are struggling. Barclays and Credit Agricole are the only banks remaining in the list of top European acquirers and both now recognise the need for change. Credit Agricole has announced a JV with Worldline and Barclays is exploring options for Barclaycard which could involve a sale or joint-venture.
As well as the impact of technology trends, European acquirers also need to contend with a profound shift in channel buying behaviour by small businesses, the most profitable customer segment. A new report from Flagship Consulting demonstrates the extent of the risk.
Source: Flagship Consulting
Independent software vendors (ISVs) and other platforms are now taking between 40% and 65% of new merchants signed in the US. This trend is coming to Europe and threatens banks ability to sell direct to SMBs. ISVs are demanding increasingly high commissions from the acquirers. Bain estimates that 90% of payment revenue is at risk of changing hands.
The impact on the ISV’s themselves is less well documented but these businesses are now finding they can generate up to half their revenue from commissions on payment processing. This is incentivising bad behaviour and we’re seeing incidents of market abuse where ISVs impose penalties for merchants that use 3rd party payment products.
Shopify, the leading eCommerce retail platform, charges a 2% surcharge if merchants don’t process transactions through Shopify Payments. And Lightspeed, a restaurant POS software vendor with over 10,000 customers worldwide, insists that all new customers take its integrated payments product. Those who don’t will be hit with a 0.5% transaction surcharge.
This hasn’t gone down well in Canada where one restaurateur reported being charged $300 for using a competitor payment terminal. “It’s not illegal, but it’s unethical,” said the local business association. Lightspeed have now introduced a price pledge to match competitor pricing in any country. But it’s worrying that many ISVs are now treating their customers as hostages. This won’t end well.
Corporate activity
Advent, the US private equity giant has bought London-based MyPOS for $500m.MyPOS, which became a merchant acquirer last year, claims 170,000 mPOS merchants in 30 countries and generated €11m EBITDA in 2022 on revenues of €60m. Advent has bought MyPOS through a newly established “payment and technology platform” called Circle which will be chaired by Laurent Le Moal, ex CEO of PayU. Expect more deals to come.
Total Processing, a small but fast growing ISO based in Manchester, recruited Martin Gilbert of Revolut as a heavyweight chair just six months ago. He has wasted little time in arranging the sale of the business to Nomupay, the well-funded Dublin-HQ’d processor formed from the ashes of Wirecard. Nomupay is clearly one to watch.
Tencent, the Chinese technology platform, has paid $100m for an 8% stake in Global Blue, the market leader in Tax Free Shopping, at a valuation of $1.25bn. The Tencent relationship will cement Global Blue’s position with high-spending outbound Chinese travellers.
Silverflow, the Amsterdam based payment orchestrator has raised €15m at a valuation “significantly higher” than its previous raise in 2021. The money will be used to support the company’s expansion into Latin American and the Far East.
Shift4 has finally closed the $525m acquisition of Credorax Finaro. The eighteen-month delay, caused by the presence of a sanctioned Russian oligarch on the Finaro share register, has given management plenty of time to plan the integration. The combined business has scale (c.$200bn volume), international reach and the capability in eCommerce which Shift4 has been lacking.
AIB and Bank of Ireland have abandoned efforts to create a domestic money transfer app to compete with the runaway success of Revolut. The banks had spent a total of €17m on the project which was to be called Yippay (yes, really) but ran into regulatory obstacles. Nexi had been contracted to build the product.
The Irish banks may be better served joining the European Payment Initiative (EPI) which has completed its acquisitions of iDEAL and Payconiq. This gives the EPI a solid basis of technology and transaction flow on which to build a common digital wallet for all European markets.
New Shopping
We’re keeping a close eye on grocery. Shifts in supermarket payments can move the whole market. But not yet. The FT concludes that, twenty years after the debut of online groceries, shoppers still prefer buying food in real life. Despite the pandemic boost only 12% of UK groceries are bought online.
But in-store shopping is changing rapidly with the introduction of self-checkout, Smartcarts and autonomous stores.
Italy’s first autonomous store has opened in Verona. In contrast to many pilot implementations, this one is a large format Tuday supermarket. The technology, supplied by Sensei, a Portuguese start-up, can even detect variable weight items through an integration with the scales. Payments are from Nexi. Shoppers don’t need to use the app. They can pay at a standard POS if they choose.
Tesco is trialling a similar process at one UK store. Again, shoppers don’t need to use the retailer’s app. They just walk up to the checkout which will “magically present them with a list of the products they have picked up”. Shoppers can pay with a card in the normal way. The technology is from Trigo, an Israeli start-up already working with REWE, Aldi and Auchan and in which Tesco has a small stake.
A2Z, the Israeli start-up which is leading development of smart carts, announced the delivery of an initial order of 250 to Monoprix, the French supermarket. These carts contain sensors that automatically record your purchases. A2Z believes it will sell a total of 30,000 smart carts in France alone over the next three years through IR2S, its distribution partner.
There is a live debate about self-checkouts. It’s clear they can work well for small basket sizes but not for the weekly shop. Whether it’s using a handheld scanner or fixed self-checkout terminal, the process puts too much work on the shopper.
In biometric news, PayEye, a Polish start-up which allows people to pay with an iris scan has launched a new range of hardware. Called eyePOS, the terminals include a special camera but also take standard payment cards. PayEye offers them for an introductory price of €11.25 per month.
Despite overwhelming consumer demand to pay at POS by tapping their mobile phone on the terminal, there are still some circumstances when a physical card is needed. One is the M6 toll road in the English midlands. The operator has annoyed tens of thousands of motorists by removing the ability to use Apple or Google Pay. The rationale? A Government dictat that it was illegal have a mobile phone in your hand while in control of your vehicle.
After a predictable outcry, the Government has conceded an exemption for making a contactless payment and the toll road systems will be upgraded for Apple Pay.
In-car payments
The toll road problem would be avoided if all motoring-related payments – parking, charging and fuelling – were brought together in a single app accessed from the car dashboard.
Mercedes Benz has built its own payment service but Volkswagen is following a different approach of co-ordinating a set of partners. VW has launched “Pay to Fuel” for its Skoda brand working with Mastercard, Parkopedia and ryd, a German fintech that offers a pay-to-fuel app.
Meanwhile, VW has sold PaybyPhone to Fleetcor, a large US B2B payment company for $300m. PayByPhone, generates c.$40m annual revenues from its app which gives access to 4m parking spaces in 1,000 cities across Europe and North America. Payment volume was $900m in 2022, giving a very healthy take rate of 4.4%.
Fleetcor plans to expand the PayByPhone service to include EV charging and automatically buying fuel at service stations.
Product
Alcohol and cigarette vending machines are common in Germany, but age verification can be tricky. It’s good to see Girocard, the domestic debit scheme, working with Feig, a leading vending machine supplier, to restrict sales to those old enough to buy the products.
Also in Germany, Bluefin has gained Giro certification for the TECS platform it acquired earlier this year and launched a white-label POS service for ISVs. Newland is providing the Android terminals. In other hardware news, ITCARD, a Polish acquirer with 90,000 POS, has started deploying Ingenico’s Axium terminals. This is positive news for Ingenico which has been very slow to market with a workable Android product.
One reason why Stripe is so popular, despite its high prices, is that it makes life easy for its customers. For example, you can now manage Klarna disputes from within the Stripe dashboard. Previously, Stripe merchants needed to deal with Klarna customer services via email.
It’s no surprise that Stripe can get its merchants to write great testimonials. Here’s the CIO of La Redoute, the giant French catalogue retailer, explaining why he chose Stripe as its global PSP/processor. “It has been an incredible and enjoyable journey working with Stripe’s team,” he says.
Stripes’ platform strategy is sparking interesting innovation. Lopay is a UK mPOS provider built on top of Stripe’s APIs. Lopay (the clue is in the name) undercuts SumUp and iZettle by charging just 0.99% for debit/credit transactions. It says it has signed 20,000 merchants in 18 months. Lopay charges 0.8% extra for instant settlement and says this is a very popular option.
DeluPay is targeting a similar market in France with a solution based on QR codes linked to open banking transfers. 1,000 merchants have signed up to benefit from transactions free under €2 and 0.5% thereafter. If you understand French, watch the CEO get quite a grilling on this early morning business TV show. The presenters struggle with the consumer proposition and keep asking why they wouldn’t keep using Apple Pay or Paypal.
The Polish Post Office is looking to capitalise on the 10m users of its mobile app by adding InPost Pay as a checkout button for local web shops. Customers can then pay within the app using Blick, cards or cash on delivery.
Finally, take a look at Shop.app. This is a very impressive AI powered search engine that allows you to construct a basket across over 1m Shopify merchants. Payment through Shopify Payments of course.
SoftPOS
SoftPOS is a downloadable payment application that allows any Android device equipped with an NFC chip to take money on cards. This represents a clear threat to the terminal manufacturers who, together, ship over 100m units each year. Sunmi is the first to respond. It’s latest Android hardware range includes a low-cost terminal designed for SoftPOS and shipped without a PCI certificate.
I think SoftPOS will make a quicker impact in the enterprise market than for micro-merchants. For example, Alaska Airlines is working with Stripe to allow 7,000 crew members to accept contactless payments for food and drink using their airline issued iPhones. This should speed up in-flight service.
Dotykacka, the Czech retail and restaurant software provider with over 20,000 merchants, has launched SoftPOS in the Czech Republic and Slovakia. The solution is from Softpos.io, a Danish start-up with Nexi providing the processing.
MyPOS has launched SoftPOS in the UK with merchants paying 1.6% + 7p per transaction and no monthly fee. I think it’s a mistake for vendors to forgo a standing charge as there’s a high risk of attracting large numbers of merchants that never make any transactions.
The steady rollout of Apple’s Tap to Pay as an alternative to Android has reached France. Group BPCE, Adyen, myPOS, Revolut, SumUp, Viva Wallet and Wordline are offering the product at launch.
Open banking
The latest Open Banking Impact Report shows UK open banking payments doubled compared to 2022 and now running at £4.5bn a month, still small modest compared to c.£65bn on cards and c.£110bn on direct debits.
There are now 45 open banking payment providers in the UK. This is probably rather more than the market needs and many vendors must be wondering they can stay in business long enough to reach break-even.
Who is going to consolidate the overcrowded open banking market? The CEO of Go Cardless, a very well-funded UK direct debit specialist, said it would likely be making acquisitions. Go Cardless already bought Noridgen, a Latvian open banking provider earlier this year.
If open banking payments are going to become mass market, vendors need to provide a superior customer experience to cards. One good example is William Hill, provider of online gambling and sports betting, which will be offering open banking for both pay-ins and pay-outs. This is a sector where bank transfers offer clear advantages over cards, notably the ability to pay winnings instantly. Truelayer is providing the technology.
If the industry doesn’t move quickly, the tech giants will drive the market forward.
Apple has started using open banking to offer iPhone users the chance to view their bank balance and transaction history before confirming an Apple Pay transaction. Although it would be a small additional step for Apple to start directing Apple Pay transactions over open banking rails, it may be reluctant to lose the 0.15% commission it charges card issuers today.
Cash
We’ve covered the rip-off fees from many ATMs in tourist locations before. Honest Guide (1.3m subscribers) explains the scandal better than we can. Euronet doesn’t come out well.
With the debate raging about whether merchants should be obliged to accept cash, it’s good to see merchants playing an active role for or against. This sign was spotted by Chris Higham in Newcastle.
And which button would you press in this Las Vegas taxi? Photo from Booshan Rengachari.
CAB Payments has been one of the least successful IPO’s of 2023 with shares down 80%. The FT explains why.
French authorities have levied €414m fines on four Meal Voucher providers for anti-competitive practices in this €6bn market. This is very profitable business – the providers charge 2.5% to the employers and 2-5% for the restaurants.
Cellpoint Digital, which claims to have invented payment orchestration, reported widening losses in 2022 as the London HQ’d business stepped up investment in sales and product development.
Originally founded in Copenhagen in 2007 by Kristian Gjerding, who is still the CEO, Cellpoint’s first customer was Danish Railways and the business still specialises in the global travel sector. Unsurprisingly, turnover was badly hit by Covid but people are flying again and activity is recovering. According to documents posted at UK Companies House, sales grew 14% in 2022 to $2.63m on the back of a 48% increase in the number of transactions processed. There has been a particularly marked rebound in the Americas which now accounts for two thirds of sales.
Cellpoint boasts a blue-chip, customer list including airlines such as Southwest, Emirates, Virgin Atlantic and Iceland Air but also Radisson Hotels and Specsavers, the opticians. The common thread is the need for merchants to deploy a single, global payment acceptance and routing platform which gives them access to local card processors and alternative payments. The prize is lower acceptance costs, higher conversion rates and reduced fraud.
Continuing the positive 2022, management reports that 2023 has started well. New client wins include two airlines – GOL and Beond – as well as Akwaaba, an online grocery retailer. Sensibly for a small business which needs global reach, Cellpoint is turning its attention to partnerships as a route to market. New relationships include Mikroe, a mass transit ticketing vendor, BillingPlatform, Kount, Sabre and Riskified.
Cellpoint claims its customers can choose from a very impressive 221 acquirer and PSP connections globally. Of course, maintaining and growing this network of connections and partners does not come cheap. Administrative expenses rose 29% to $22m. Higher spend was driven primarily by a threefold increase in employee costs to $12.9m as Cellpoint grew headcount in sales and product development. Staff numbers stood at 168 at year end at an average cost of $77K.
Cellpoint also stepped up spend on R&D, which rose from $2.8m to $8.9m as management implemented “a comprehensive overhaul of existing technologies in order to pave the way for new, ore cutting-edge and performant capabilities.”
Operating losses widened to $19.4m and the business was also hit by a $3.69 negative currency translation leading to a total net loss of $22m. Accumulated losses now stand at $69.9m.
Despite receiving $18.6m net new investment during 2022 from Toscafund., Cellpoint closed 2022 with just $1.8m cash in the bank. Fortunately, existing shareholders contributed a further £10.2m after year end and management has “received written assurances of continued financial support.”
Cellpoint has one of the most robust and battle-hardened orchestration propositions in the market. But overheads are considerable, and management will need to work hard to generate transaction volumes sufficient to deliver cash profits. Continued strong shareholder support will be essential for it to continue as an independent business. If not, the core technology and customer relationships could be a prized asset for an ambitious global processor.
Discover’s Q3 results showed a sharp slowdown in volume processed by its 25 network partners. These are third party schemes, such as SIBS and RuPay, whose cards run over Discover rails when used outside their home country.
Network partner volume was down 17% in Q3 to $9.8bn. Management said that Ariba Pay, a longstanding Discover partner which helps businesses settle invoices, was the main contributor to the poor performance. Partner volume has not increased since the end of the pandemic. This trend is particularly surprising in the light of reports from Visa and Mastercard of continued c.20% growth in cross-border commerce, and will be giving Jason Hanson, Discover’s new payment supremo, cause for concern.
In contrast, Diners which is still largely a series of national franchises, continues its positive trend. Boosted by the upturn in global travel and tourism, Diners volume grew 11% to $9.7bn.
Visa and Mastercard’s Q3 financial results are well covered elsewhere. At Business of Payments, we’re more interested in what the investor updates tell us about trends in the European market and the success (or otherwise) of new products.
Mastercard continues to outperform Visa in Europe although its pace of growth has moderated. The two schemes are now almost neck and neck. Mastercard’s merchant payment volume grew 26% in Q3 to $602m while Visa’s was up 20% to $637m. Total scheme volume was up 23% in dollar terms although this falls to 14% when calculated in euros. Overall ATV was steady at $36.24.
European politicians and regulators have long been worried about an over-reliance on US payment networks. The European Payments Initiative and the Digital Euro are two of the latest responses. Asked about the threat of protectionism, MichaelMiebach, Mastercard’s CEO was adamant that his business would always have a role in any payment ecosystem saying. “We’re seen as a technology company, a global technology company, not necessarily as a US payment brand.” That’s a bold statement and one which does not align with current sentiment at the European Central Bank and elsewhere. Dependence on foreign owned payment systems is a risk for any jurisdiction.
Last week, Worldline’s profits warning highlighted weakening European payment volumes, especially in Germany but Miebach said he saw no slowdown. “Consumer spending remains pretty steady in Germany and generally in Europe…. So Europe’s been a bright star, continues to be for us. So we don’t quite relate to what others are reporting.”
Portfolio wins
The deceleration in Mastercard’s European volume growth is primarily due to the removal of the NatWest portfolio win (16m cards) from the annual comparisons. But Mastercard has continued to win new card portfolios including 10m Deutsche Bank cards and 20m from UniCredit. Miebach said the Deutsch Bank conversion “has already started. It’s a combination of debit and credit. It will happen over an extended period of time. It’s not a flip-the-switch kind of scenario.”
Mastercard is also working with issuers to migrate more than 100m Maestro cards (mainly in Germany and the Netherlands) to its own-brand debit product. This is good news for consumers as their cards will now work online. It’s less good news for merchants who will be faced with higher transaction charges.
Visa is also positive about Europe, remarking that it has opened seven new locations over the last five years and more than doubled its workforce. Visa claims more than 100 relationships with European fintechs and even bought two of them – Tink (open banking) and CurrencyCloud (cross-border money transfers).
Excluding Maestro, the total number of Mastercards in Europe rose 13% increase to 796m. Visa did not publish numbers for card this quarter but reported that, excluding the UK, the number of active Visa cards in Europe is up 50% since 2019. Including the UK, where it has lost one third of the debit market to Mastercard, the figures would not seem so pretty. However, Visa’s management says it expects to migrate 40m cards from 40 issuing clients in Europe over next few years. The company says that these incomings portfolios are skewed to high margin cross-border transactions.
Tokenised transactions
Increasingly, cards are tokenised which means that the fraud-prone 16 digit PAN is not included in the transaction data. Visa processed 14bn tokenised transactions worldwide in Q3, up 60% year on year. Tokens make card transactions significantly more secure, and this means that issuers are much less likely to block them. This is very good news for merchants. Ryan McInerney, Visa’s CEO, said “we’re seeing, on average, somewhere between 4% and 5% higher approval rates across our partners. And we also see it with a reduction in fraud — a 30% reduction in fraud.”
Mastercard reported “the number of tokenized transactions has more than doubled over the past two years. We just processed over three billion tokenized transactions in one month.” Management highlighted the importance of tokens in allowing Mercedes-Benz customers in Germany to “pay for fuel directly from their vehicle using only their fingerprint.”
Open banking
Although Visa was blocked from buying Plaid, an open banking leader in the US, it was able to acquire Tink, a similar business HQ’d in Sweden. Management said that Tink “continues to perform very well in Europe…and we look forward to the opportunity to bring Tink outside of Europe.”
Mastercard has acquired Token, another European open banking provider. Questioned about the commercial model for the schemes to enter open banking, Mastercard’s Miebach said “We’re putting in our open banking connection to make it clear is there a balance on the account. It’s called the payment success indicator. That is the product. And it is a per-click fee related to the API call. So that is the model.”
Contactless
Mastercard says contactless now represents 63% of face-to-face transactions globally. Miebach explained why mass transit was so important. “By converting transit to Open-Loop, we gain access to more low-ticket, high-frequency transactions, both at the station and the surrounding merchants.”
Visa reports 76% of all F2F transactions outside the US are contactless, up 5ppts. The US is growing more quickly, albeit from a lower base. Contactless share was up 13ppts to 40%. Rapid transit is driving adoption worldwide. Visa says it enabled 150 new transit systems for contactless, taking the global total to 750. Impressively, 40% of these new customers are using Cybersource, Visa’s in-house acceptance solution, as their payment gateway.
Gateways
Cybersource seems to be out-performing Mastercard Gateway Services, its direct competitor. Cybersource attracted 2,600 additional customers in 100 countries in Q3. McInerney put its success down to investments in omni-channel, tokenisation (vital for mass transit) and fraud prevention capabilities.
Both schemes have products that allow money to be sent to one of their cards. Visa reported 7.5bn Visa Direct transactions globally in Q3 up 19%. In Europe, it is supported by 1000 programmes managed by 100 Visa partners. McInerney said Visa Direct is “focused on bill payments, on earned wage access, on insurance disbursements, on P2P more broadly in new geographies around the world, both domestic and cross-border.”
Lifting the gloom a little, PagoNxt, Santander’s payment business, reported sparkling Q3 results including a maiden operating profit. This performance highlights the success of Santander’s decision to in-source and consolidate its payment activities. PagoNxt comprises all of Santander’s payment assets, including Getnet, a leading multi-national merchant acquirer, trade finance expert Ebury, Payments Hub which brings together the bank’s account to account transactions, and Superdigital, a financial marketplace for the economic inclusion of the underbanked.
Q3 merchant payment volume was up 27% to €54bn “backed by good merchant performance” in Mexico, Brazil, and Europe and share gains in all core markets. Transactions grew 26%, leaving ATV steady at €22.46.
Management gave few other updates but said that the Payments Hub is “already one of the largest processors of A2A” in Europe and is now processing transactions from Santander businesses in Spain and the UK.
Overall revenue was up 16% in Q3 to €298m but expenses fell 11% to €251m. It’s not clear what has led to the decline in operating costs but the impact on operating profits was very positive. PagoNxt reported an operating profit of €48m for the quarter at a healthy 16% operating margin, compared with a loss of €24m in 2022. It will be interesting to see whether this is a blip or the first step towards steady growth in profitability.
Barclays has updated investors on its strategic review of Barclaycard, the UK’s leading card issuer and the second largest merchant acquirer. Reuters reported in August that Barclays had hired consultants to advise “whether some of the payments businesses should be expanded or combined with other providers through a merger or joint venture.”
Confirming for the first time that a review of merchant acquiring was underway, C.S. Venkatakrishnan, Group CEO said “I think there’s a broader strategic question for us, which other banks have faced. [Payments is] a very technology-driven business. Is there a comparative advantage in developing the technology or in implementing the technology or is there a comparative advantage in helping service [merchants] as part of a larger set of banking services? That’s the question we’re looking at, and then I think the commercial arrangement will come out of the answer to that question. So, that’s the way we are thinking about that business.”
Despite its strong distribution through the bank’s network of business advisors, Barclaycard is believed to be losing market share in SME to Dojo and with larger corporates to Adyen and others. Lack of investment in new products is understood to be a the heart of the problem and could be addressed if the sales team had access to technology from a modern payment vendor.
If Barclays decides to divest its merchant acquiring business, several private equity funds, including Bain/Advent, would certainly be interested. A sale price of £2bn has been suggested based on EBITDA of £300m but management may struggle to achieve this following the sharp declines in the stock price of listed European payment businesses such as Adyen and Worldline. This might tip the balance towards incorporating Barclaycard inside a JV with a technology partner such as Fiserv, Nexi or Worldline. Two other major European banks are currently in processes to do just this – Sabadell with Nexi and Credit Agricole with Worldline.
Meanwhile Barclaycard UK acquiring volume recovered a little in Q3 to record 9% year on year growth, having increased just 4% in the previous quarter.
Following Adyen’s catastrophic H1 results, Worldline was next to shock the financial markets. Shares in the French processing giant fell 50% as management warned of lower profits due to “economic slowdown in some of our core countries,” notably Germany. Worldline also said it would terminate some German merchants generating €130m annual revenue. This move is believed to be linked to the German gambling regulator’s decision to clamp down on EU gamers which don’t have a local licence. In more bad news Bafin, the financial regulator, has restricted new customer onboarding at Payone, Worldine’s joint venture with German savings banks, citing money laundering and fraud concerns.
In a minor consolation for Worldine shareholders, the company bought the acquiring business of Banca del Fucina for €25m. The deal adds 5,500 POS generating €500m payment volume. The Rome-based bank will sell Worldline’s products through its 36 branches.
Nexi is another processor under pressure. The Italian group’s stock price has sunk 30% since its IPO in 2019 despite reporting good progress on integrating acquisitions of Nets (Nordics) and Concardis (Germany). Private equity groups, including CVC, are rumoured to be preparing bids although the Italian government still has a veto on any sale.
The relative underperformance of payment processors reflects concerns that payment acceptance is becoming commoditised. Checkout.com disagrees. In a new report, the London based processor says acceptance is becoming more complexand that the additional complexity brings margin opportunity. Checkout highlights the rise in cross-border payments, additional friction generated by strong customer authentication (SCA) and disjointed application of network tokenisation by issuers as factors running in its favour. You can read the full report here or a good summary by Enemigo.
Bucking the trend Boku, a London-listed processor, reported revenue up 26% in H1 2023as it successfully manages the transformation from carrier billing to global APM provider. Boku has a stellar client list including Amazon and Facebook and says it is now competing successfully with Thunes, dLocal and PPRO.
In corporate news Shift4, a US processor with strong in-house vertical software products, finally got the regulatory green light to proceed with the $575m acquisition of Credorax Finaro, the Israeli HQ’d acquirer/processor. The enlarged group will have the strong capability on both sides of the Atlantic that Shift4 needs to support Starlink, its marquee customer.
Rock solid delivery is at the heart of payment processing. If you can’t guarantee this, you won’t get a hearing for those wonderful value added services the product team has invented. Square went down for over 24 hours worldwide due to a DNS issue caused by “an utter failure in system testing.” Shift4 saw a golden opportunity to poach Square customers.
Although the outage will make it harder for Square to sell to larger merchants, established enterprise acquirers can have similar issues. Worldine went down one recent Saturday, causing chaos in supermarkets across France.
BNP Paribas is launching a marketplace payments start up in H1 2024. Called Panto (oh yes it is), the new business will include acceptance, pay-outs and automated boarding and is aimed at BNP’s current customers. Panto will be built by 321founded who claim to have put together a beta version in just 6 months.
Mollie, the Dutch payment unicorn which lost €121m in 2022, has announced further staff cutbacks. Following the departure of the CEO and CFO, 10% of employees will lose their jobs. Founder, Adrian Molle, “denied that the company board lacks vision and that there is a toxic work environment.”
New shopping
We’re keeping an eye on the development of autonomous stores as a possible accelerator of the switch in payment transaction from the POS to the shopper’s phone.
AiFi is a technology vendor with 100 stores operational worldwide including 50 Zabka Nano in Poland. AiFi solutions are also powering the Konzum Smart store, the first autonomous retail outlet in Croatia.
JUXTA, a US vendor, is commercialising portable autonomous stores which can be used at sports or music events. The company sees an opportunity to place them next to EV charging stations, so motorists can shop while waiting for their batteries to charge.
Some vendors are proposing facial recognition as an alternative to cards or Apple Pay. Payface, a Brazilian start-up which recently raised $2m, expects to have 2,000 stores live with its solution by the end of this year. The company just bought SmileGo, a competitor. But even facial recognition isn’t fool proof. Underaged delivery drivers in Brazil have been registering for work using photographs of their parents.
Primer’s product strategy makes sense. Orchestrators need to move beyond simply routing transactions if they want to generate significant revenues. Gr4vy, another orchestrator, has launched “vault as a service” in which it stores customers’ card details, billing and shipping details, linked to a vaulted card token. There’s no vendor lock-in which is very welcome. Merchants can export their data and move to another supplier.
Of course, anything “as a service” is only as good as the vendor supplying the product. Where the service is regulated, risk is heightened if the supplier’s processes are not up to scratch. UK based Modulr, a payment infrastructure provider that raised £83m in 2022, has been ordered by FCA to stop onboarding new customers. This is the latest intervention by European regulators. Railsr had its e-money licence revoked by Lithuanian authorities and Bafin, the German regulator, has restricted Solarisbank and PayOne from onboarding new customers.
One reason to upgrade to an Android terminal is for digital receipts. France outlawed the automatic issuance of paper receipts in August and the Belgian region of Wallonia has also banned retailers giving paper receipts unless shoppers specifically ask for one. There are no penalties for non-compliance, but the move gives the retail trade a welcome environmental nudge.
SoftPOS
Although Visa and Mastercard have pushed SoftPOS as a micro-merchant proposition to accelerate cash displacement, the business opportunity for the payment industry lies in enterprise. SoftPOS can revolutionise big company operations by bringing together multiple services on a single device and liberating staff from the till point.
Poland is fast developing into one of Europe’s leading SoftPOS markets. ING, which has 7,000 SoftPOS SME merchants has added Blik, the popular domestic mobile payment standard, as a payment option.
Polskie ePłatności, owned by Nexi and the second largest Polish acquirer, has launched PePpay a SoftPOS product in partnership with Danish start-up Softpay.io. Nexi has also announced SoftPOS in Italy to be distributed in conjunction with Banco Intesa Sanpaolo. There is no monthly fee and transactions under €10 are free of charge under the Government imposed micropayments initiative.
Elsewhere Tebi, a high profile Dutch start-up founded by Adyen alumni, is building its emerging payment business around SoftPOS. This is a fascinating move and offers the opportunity to see what happens when POS technology leaps a generation. Pricing is 5 cents per transaction + 2 cents for debit or interchange + 0.4% for credit.
Open banking
Many in the industry have been worried about the commercial viability of the emerging open banking sector. These concerns were underlined by 2022 financial results from Yapily and Truelayer, two well-funded start-ups. Truelayer, which claims market leadership in UK, Ireland, Spain and France and “significant share” in Germany and Netherlands, generated just £4m of sales in 2022. Together, Truelayer and Yapily lost £83m on combined turnover of just £7m. More details on the Business of Payments blog.
Very sensibly, Truelayer is using some of its cash for lobbying to help create a market for itself and has called on the EU to combine open banking with instant payments. This could create a domestic payment option for the EU that will “act as an alternative to the card duopoly” and create customers for open banking players.
Investors hoping for a quick turnaround in the industry’s fortunes will be heartened by Stripe’s announcement that it will be using Truelayer to offer open banking payments as an option for its merchants in 22 markets. The volume generated should be considerable, but Stripe will have driven a hard bargain and Truelayer may not see much margin.
Undeterred, Swedish open banking start-up Brite Payments has raised $60m to expand into 25 countries. Unlike many of its competitors Brite, which receives funds and settles with merchants, claims to be profitable already.
To succeed, open banking needs “scheme” rules, a well-publicised brand and an acceptance that all actors in the value chain will need paying. In the free enterprise model, where there is no profit, there will be no products.
The European Central Bank is making good progress with the Digital Euro and it’s hard to argue with the ECB’s statement that “The growing trend towards digital payments has also entailed increased European dependency on foreign service providers. A digital euro would also address risks stemming from geopolitical tensions. [COVID and Russian war] has painfully demonstrated the risks of relying exclusively on external suppliers for basic needs.”
The ECB is adamant that the digital euro is not “programmable money” and will safeguard “cash like levels of privacy”. There’s no rush. Central bankers now begin a two year “preparation phase” which involves finalising the rule book and selecting vendors for the platform and infrastructure.
Mastercard sense a business opportunity despite being one American vendors from which the ECB wants to reduce its dependence on. The network has launched its “CBDC Partner Programmefeaturing 7 vendors including Giesecke + Devrient, the German banknote printer.
In contrast, the digital dollar seems dead. It’s been killed by a combination of vested interests wanting to keep the current fabulously expensive US payment system going and conspiracy theorists convinced that digital currencies “undermine the American way of life.” Rich Turrin has a good summary of the evolving mess and Steve Forbes summarises the rather unhinged case against.
Crypto corner
We’re witnessing the prolonged death throes of the crypto bubble. Binance, the largest exchange, had its credit cards terminated by Visa and by Mastercard. Paradoxically, we’ve also learned that crypto/fiat volumes have been quite low. Visa has processed just $3bn from cards issued by 75 crypto exchanges since 2021. This makes sense: if you like crypto, why would you spend it?
Stable coins, which are pegged to traditional currencies, are said to offer the efficiency benefits of crypto but without having to worry about criminals and speculators. Yet Paypal’s stable coin dollars have not been wildly successful. Less than $10,000 daily volume is reported but it’s early days. Dave Birch says that PayPal’s stable coin might be the killer app for P2P cross-border payments. Others argue that there are now two kinds of PayPal dollars and that the stable coins, backed 1:1 by US Treasuries, are much the safer choice and will prove most popular.
The European Payment Initiative has chosen a brand. The new digital wallet facilitating account to account payment will be called “wero”, combining “we”, “euro” and “vero”. “The short and snappy sound resonates with the fast-paced nature of digital transactions,” said the CEO with a straight face. Wero will launch in Belgium, France and Germany by mid 2024 with the Netherlands next on this list.
Kristo Kaarmann, founder of Wise, discovered Singapore Airlines marking up an eDCC transaction by 5%. He wasn’t happy.
PCI-PAL, a London listed supplier of secure payment products for contact centres, won a resounding victory in its longstanding patent battle with US rival, Sycurio.
Fraudsters don’t always need crypto. Any Pilley, the colourful owner of CardSaver, a UK ISO, has been jailed for 13 years for mis-selling energy contracts to small businesses.
The metaverse didn’t last long. Banks are retreating from this short-lived hype cyclewith one vendor commenting “the urgency of these initiatives has been superseded by more pressing requirements.”
TrueLayer, the generously funded open banking unicorn, indicated just how costly its expansion plans have been. According to documents posted at UK Companies House, Truelayer Group reported group operating losses widening to £61m in 2022 on revenues of just £4m.
Founded by Franceso Simoneschi in 2016, TrueLayer is backed by a stellar rosta of investors including Stripe, Tiger Global and Anthemis. It has received funding of $272m in total (Crunchbase) with its $130m round in 2021 valuing the business at $1bn.
The London-based fintech is investing at pace to establish a large claim in the crowded market for open banking payments. Along with its competitors – Tink, Token, Volt, Yapily etc – the company aggregates connections to thousands of banks into a single API. This allows merchants to offer consumers the option to pay from almost any bank through a single connection with TrueLayer. Clients include Cazoo, Coinbase and Revolut.
Although TrueLayer is live 21 countries, it claims market leadership in four – UK, Ireland, Spain and France – and “significant share” in Germany and Netherlands. It has an EMI license in the UK and PI licence in in Dublin.
Management highlight two major product launches.
Variable Recurring Payments (VRP) – TrueLayer was first to market in the UK with recurring payment through its single open banking API as an alternative to direct debit and card on file. Merchants benefit from faster settlement.
Identity data – Signup+ widens TrueLayer’s proposition beyond payment initiation by making bank-sourced identity data available through its API. This simplifies customer onboarding by removing the need for additional verification checks. I used it to sign-up for Plum and can report the customer experience was indeed seamless.
TrueLayer is growing – revenues were up 56% in 2022 and payment volume was 2.8x higher than the previous year – but total sales of £4.14m are modest for a business boasting “annualised total payment volume” of $35bn. As context, a specialist eCommerce merchant acquirer with similar processing volume would be making net revenue of $75m-$150m depending on its risk appetite.
This modest growth has come at considerable financial cost. Administrative expenses were up 88% to £63.4m driven by higher spend on employees – up 99% to £46.4m. Staff numbers ballooned to 434 at an average cost per staff member is £106K. Management trimmed its employee base by 10% at the end of 2022 with the CEO saying “we are now operating in a very different context and more challenging market conditions.”
TrueLayer’s operating loss rose from £31m in 2021 to £61m in 2022. Fortunately, the business is well financed and had £96m net cash at year end.
If shoppers do shift quickly from cards to open banking, the prize for API providers such as Truelayer could be significant. But the market is growing more slowly than many hoped and competition between the specialist players is reported to be ferocious. Consolidation is inevitable and likely to favour businesses, like TrueLayer, with wealthy and committed backers.
Financial results from Yapily show that the open banking market is taking off more slowly than many had hoped. Although Yapily is one of the leading API providers and reported 60% revenue growth in 2022, total sales were less than £3m, generating a modest return on the nearly $70m raised from VCs including Sapphire, Lakestar, HV and LocalGlobe.
European retail banks are obliged to offer APIs that authorised providers can use to access account information or generate account-to-account (A2A) payments. Yapily, founded in 2017 by Stefano Vaccino, a former Goldman Sachs exec, is one of a number of businesses formed to aggregate the APIs offered by thousands of individual banks into a single connection. Although this sounds like a winning proposition, competition is fierce and a number of other start-ups offer similar services. These include Truelayer, Token, Tink, Trust.ly, Nuapay, Volt and many more.
Yapily’s API connects with 2000 banks in 19 countries and, management claims, is accessed by over 3.500 software applications provided by its 500 customers. Yapily has a strong position in providing access to open banking payments for Fintechs, which often use its APIs to offer simple A2A transfers for their customers to top-up accounts. Yapily’s customer list includes Payhawk, Guavapay, Pleo and Quickbooks. The links take you to mini case studies on the Yapily website.
Turnover in 2022 was £2.78m. 80% of sales were the UK, where Yapily is based, but European revenues more than doubled to £0.48m. Management says the positive result was driven “by increased demand as the business expanded into new regions” and stepped up its sales and marketing efforts. Yapily bought a German rival, FinAPI in May 2022 for an undisclosed sum.
The modest increase in topline growth has been costly. Administrative expenses ballooned to £23.7m in 2022 from £9.5m the previous year as management spent heavily on “continued investment in product development, sales and marketing… and support functions as the company scales.” Notably, employee costs more than doubled to £14.6m. Yapily now has 158 staff, mainly in London, costing an average of £92K each.
The team has been busy. Management highlighted a growing range of products, a more extensive network of connections to banks and other financial institutions, a 70% increase in customer numbers and a 4.5 times increase in payment volume. The actual payment volume was not disclosed.
The operating loss grew to £21.5m from £8.4m the previous year, reflecting the company’s “deliberate growth strategy” aimed at “seizing substantial market opportunities” in the emerging open banking market. Accumulated losses now stand at £33m.
Yapily had £18m cash at year end after taking an additional £10m investment. JP Morgan reportedly looked at taking a stake in the business but decided against.
The open banking market is going to be big. The only question is when. And the open question for Yapily and its small army of competitors is whether they can afford to wait.
