PayPoint, the UK’s largest network of bill payer locations and also the country’s biggest ISO, is running hard to stand still. Despite a flurry of acquisitions, divestments and product announcements, reported revenue growth is lagging inflation in its two main divisions.
Total revenue was up 7% in the six months to October 2022 (known as H1 23) to £75.4m. PayPoint is having to share more commission with its retailer partners meaning that net revenue grew a little more slowly at 6% to £59.5m.
Costs increased 9% to £37m. Nick Wiles, CEO said “we are navigating more challenges .. due to inflation, particularly in our supplier base and the increased salary pressures experienced in recruiting and retaining talent.”
With costs growing faster than revenue, profit before tax and exceptional items was up just 2% at £22.5m.
Notwithstanding the slow rate of growth today, management is very confident about the future. PayPoint is a rare payment company that pays a dividend and this will grow 2% to £12m – 42% of the £28m free cash generated. Regular dividend hikes “reflect our long-term confidence in the business, the strength of our underlying cash flow, the mitigation plans in place for inflationary pressures and the enhanced growth prospects from the steps we have taken.”
Looking at the detailed results, PayPoint reports three segments – Shopping, which includes the ISO business, Payments and Banking, and eCommerce.
Shopping division revenue was up 3% at £30m with the increase mainly driven by higher service fees from the PayPoint One ePOS product.
Following the acquisition of Handepay for £30m in 2020, PayPoint now has over 31,000 ISO card payment sites split between three acquirers – Lloyds Cardnet, EVO Payments and Worldpay.
Three acquirers is at least one too many but management reports slow progress to a “single acquiring platform across the Group, due to our demanding requirements of acquirer capability to deliver growth.” PayPoint says it is still committed to moving to a sole acquiring partner although hasn’t specified the capability gaps that its current suppliers are failing to fill.
ISOs make money from a combination of commission payments from the acquirers and terminal rental payments from merchants. PayPoint’s ISO revenues disappointed, falling 1% to £15.9m in H1 23. Processed volume – the variable on which commission payments are based – was down 0.7% to £3.54bn. This is a very weak performance given retail price inflation of over 10%. Growth in processing from convenience stores – PayPoint’s heartland – was offset by declines from merchants in more economically sensitive sectors such as building materials.
Concerningly, there has also been a small fall of 3% in the total number of sites serviced for card payments. There is a particular problem with the Worldpay estate which shrank 15% in the last six months to 4,517 sites. FIS (Worldpay’s parent) has signed a new four-year contract with PayPoint to continue supporting its remaining merchants but has publicly stated that SMEs are no longer a corporate priority.
Despite the current difficulties, management is optimistic about the ISO business. PayPoint has hired Anna Holness as its new sales director. She has strong track record at O2 and Worldpay. Meanwhile, it is bringing best practise techniques from Handepay (which was known as a very effective new business sales and retention machine) into the wider PayPoint business.
Turning to products, there is much excitement with the new Castles Saturn Android terminal available with EVO merchant acquiring. This is offered on a one month rolling contract for merchants switching to Handepay. Next day settlement is available for £4 per month.
PayPoint is also bullish on prospects for the new SME merchant cash advance service commercialised with You Lend. This has disbursed £5.9m so far.
Elsewhere in the Shopping division, PayPoint has spotted an opportunity to provide cash over the counter at its merchant network. This meets a live public policy challenge in the UK as banks close branches and retire free-to-use ATMs. However, PayPoint’s customers don’t seem so keen. Revenue from ATMs and cashback at POS was down 4% at £4.8m despite Paypoint extending the service to an additional 4,000 locations. Total cash transactions were down 1%. Rev per transaction was down 3% to 31p.
The Payments and Banking division increased revenue 6% with strong growth in digital (as people pay gas bills in smaller, more frequent, transactions) partially offset by continued decline in cash invoice payments and top ups. The total terminal base grew 1% to 28.395 while the average weekly service fee increased 5% to £17.70. The Cash Out service (which has benefited from energy bill support payments) continues to perform strongly.
PayPoint believes there is an opportunity to use open banking to gain share in the wider bill payment market. It has invested £3m in OBConnect – an open banking API aggregator start-up. According Nick Wiles, he already has “6 clients contracted for our new Open Banking services to help deliver cost of living support payments.”
Finally, eCommerce revenues were up 43% to £3m. This small, but fast growing, division allows shoppers to pick up and return online purchases at PayPoint partner locations. It’s an especially attractive service for fashion brands. Transaction volume grew 61% to 23m but margins shrank. Revenue per transaction declined 11% to 13p although revenue per site was up 47% at £303.
PayPoint continues to add capability around its core merchant network. Shortly before the H1 results, it announced it was buying Appreciate Group – a gift and voucher provider – for £83m. Appreciate brings a “well-established technology platform,” 400,000 customers and “significant headroom to grow” in the £8bn UK market. The purchase includes well-known brands including Park and Love2shop. Appreciate will be “immediately earnings enhancing” and the main areas of growth will include extended consumer gifting network for Love2Shop to PayPoint’s ISO channel.