ParentPay, the UK schools specialist, reported strong a strong increase in turnover in the year to November 2022 although losses widened, mainly due to higher interest payments on its £194m net debt.
The group has leveraged a niche payment business into a strong position in vertical software. Revenue doubled in 2022 to £124m reflecting a full year contribution from ESS, the leading UK supplier of school management software, but also a material improvement in messaging and payment revenues following the pandemic.
In 2021, Montague Private Equity bought ESS from Capita for an enterprise value of £400m. Montague then injected ESS into a ParentPay to create an enlarged group with complimentary payments and software products aimed at Britain’s 30,000 schools. The ESS acquisition didn’t go smoothly. The merger sparked a competition enquiry as school managers protested at a decision to force them to sign three-year software contracts. This combined with a late move to cloud delivery to spark considerable customer churn as this graph produced by Schools Week magazine shows.
ParentPay management say the situation is now under control. The competition authorities have been mollified with additional break-clauses in ESS’s new, longer contracts. And ParentPay will invest £10m into the latest cloud versions of SIMS, its core school software, which it hopes will stem churn and persuade some former customers to return.
ESS was the latest in a series of acquisitions. ParentPay Group now includes 14 companies spanning school management software, kitchen management and cashless catering, all of which generate transactions for the original ParentPay payment processing business. Although 93% of revenue is in the UK, ParentPay is keen to expand on the continent, having acquired WIS in Netherlands, and three businesses in Germany – EDV Service Schaupp (cashless catering), MensaMax and Pair Solutions (both school payment collections).
Post year end, ParentPay has bought two more small businesses – BlueRunner, cashless catering and meal management for £12m, and the assets of CEDAR, a student engagement solution for higher education for £650K. ParentPay sold nimbl, its child debit card, to Caxton for £900K.
The Group now provides services to over 30,000 schools and educational establishments serving 10m students.
In 2022, cost of sales doubled to £105m and administrative expenses rose 121% to £104m including staff costs of £42m. The Group now employed over 1,000 people including over one hundred in sales, at an average cost of £42K each, up 26% on the previous year. EBITDA before exceptionals, the company’s preferred measure of profitability, doubled to £45m.
The original ParentPay school payments business has 11,000 customers in the UK, a market share of a little under 50%, and is highly profitable. Although education is free in Britain, ParentPay collects money for extras including lunches and school trips. Revenue was up 27% to £33m and operating profit grew 13% to £7.5m at a very creditable 23% margin.
Overall, ParentPay Group reported pre-tax losses widening to £18m driven by increased amortisation of acquisition goodwill and higher costs to service the debt incurred with the ESS purchase. ESS was expensive and net debt was £194m at year end, roughly five times EBITDA. Interest expense was £17m, up from £6m in 2021. Management says that cash generation will be used to pay down the debt and, although more acquisitions are on the cards, these are likely to be less ambitions than of late.
Over $600bn has been knocked off the value of the world’s top ten merchant acquirers over the last 18 months. Adyen’s disappointing H1 results only added to the summer gloom surrounding the global payments industry.
While Adyen’s performance was objectively pretty good – revenue up 21% with EBITDA margins of 43% – analysts had been expecting faster growth and took fright at the cost of extra investment in people and product. The stock price which peaked at €2700 in 2021 collapsed from €1700 to just €700.
Adyen bulls point out that the Dutch acquirer/processor is strong in Europe where the level of payment complexity delivers consistently higher margins than the US. And its growing POS business sets it apart from online focused processors such as Stripe and Checkout.
But Adyen has suffered badly in North America where a price war is raging among large acquirers competing for business from large digital merchants. One beneficiary has been PayPal which is reported to be hoovering up volume via its Braintree brand at a margin of less than 2c per transaction.
Of course, the collapse in value isn’t restricted to merchant acquirers. Fintech is generally under the cosh. Is it an apocalypse? No, says Ben Robinson, who argues manufacturing and distribution of financial services will continue to separate, opening a significant opportunity for embedded finance sold to merchants via ISVs, some of which now generate >60% of revenue from payments.
Analysis from Sifted Research records a sharp fall in new Fintech finance rounds. Start-ups now have no choice but to prioritise conventional business metrics such a cashflow and margin. “The familiar VC growth strategy — losing money for years to acquire new customers — is not a winning pitch right now.”
Following the announcement of the $610m purchase of the less interesting parts of PayU, Arik Shtilman, Rapyd’s colourful CEO, gave a long interview with FXC revealing that the combined business will process $120bn payment volume from 250,000 clients and generate revenues of c.$1bn. This is only the start. Shtilman maintains that Rapyd will hit $2bn revenue and $400m EBITDA by 2026. We’ll be following this very closely.
dLocal, one of the small group of cross-border merchant payment specialists which competes with Rapyd, may be up for sale. Trading through a UK company listed on NASDAQ, regulated in Malta and with an HQ in Uruguay, dLocal has shrugged off a short-selling attack and a fraud probe to post annual revenues of c.$600m. Rapyd would certainly be interested. Maybe Worldpay too.
Like Don Quixote tilting at windmills, EVO is not giving up on its €1bn damages claim against Santander. It alleges the Spanish bank failed to deliver enough sales leads. The American acquirer, now owned by Global Payments, is appealing a lower court decisionin favour of Santander. Meanwhile, Universal Payments, EVO’s Spanish unit, is being merged into Commercia, Global Payments’ joint venture with La Caixa.
Despite the global dominance of Visa and Mastercard, there’s plenty of life in domestic payment schemes. In this short review, Edgard Dunn counts 90 of them, including many in Europe. Germany’s Girocard reported volumes up 15% in H1 2023 and Blik, the wildly successful Polish mobile payment standard, announced eCommerce volumes up 42%
In contrast, Carte Bancaire, the long established French domestic scheme is losing ground to the international brands. Some French banks have stopped co-branding their Visa/Mastercard cards with Carte Bancaire and the consumer preference for Apple/ GooglePay has stimulated usage of the international brands.
Maybe that’s why Instacart, the leading US player, is expanding deeper into the grocery value chain with technology and data products. It bought Caper, a smart cart vendor for $350m in 2021. Schmucks is the latest retailer to adopt the carts, commencing with 10-20 in each store.
Smart carts make a humane alternative to the self-checkout machines that are making people lonelier. Trader Joe’s CEO pledged never to replace employees with machines, saying “I have fun bagging groceries and working at the register. Self-checkout is work. I don’t want that.”
Turning to biometrics, it seems Amazon One, the retail giant’s new palm-payments product, is about more than shopper convenience. It’s part of a plan to own a central ID verification system that would help Amazon compete with Google and Apple. Amazon One uses generative AI. Obviously.
Payface, a Brazilian start-up, says its facial recognition payment product will be in 2,000 supermarkets by the end of 2023. The company just raised an extra $3m following a $6m funding round last year.
There’s nothing more dispiriting than a long queue of cars at a drive-through coffee shop. Starbucks is experimenting with geo-location so people can just pick up their coffee from the hatch and be on their way.
Subscription commerce
New academic research analysing card transaction data shows customer “inattention” boosts subscription revenues between 14% and 200% depending on the merchant. No wonder regulators are beginning to show an interest in helping shoppers terminate unwanted subscriptions.
Payment providers need to be alert to scammers that dupe consumers into signing up for bogus subscriptions. PayOne, Worldine’s German eCommerce payment business, has been banned from onboarding new high-risk customers. The regulator is unhappy that PayOne had been processing transactions linked to fraudulent subscriptions, phishing and fake stores.
Similarly, ING is being sued for €14m lost by investors defrauded by customers of Payvision, the PSP acquired by the Dutch bank in 2018 for €375m. The Dutch central bank has said that Payvision deliberately ignored signals about fraud from its clients. ING was obliged to close Payvision business and write off the purchase price.
And fraud is getting easier. Why build your own criminal infrastructure when you can use scam-as-a-service to create phishing or fake advertising content? The product, available via Telegram, even includes a payment gateway and price optimisation tools.
Car Commerce has long been a focus for payment innovation but has delivered little useful product to show for the effort. BMW has abandoned its second attempt to sell heated seats on subscription. Customers were angry at paying to turn on a feature in a car they’d already bought. A BMW director commented: “People feel that they paid double – which was actually not true, but perception is reality.”
Pace Drive and ryd, two German start-ups developing alternative payment apps for buying petrol seem to be struggling. Commentators point to the declining market for auto fuel and the high cost of customer acquisition. Undeterred, Henderson has introduced a Fuel Pay app targeted at independent service stations in the UK that can’t or won’t afford outdoor payment terminals.
Payment apps make more sense for supermarkets which can use them to integrate complex loyalty programs into a simple checkout experience. Rewe, the German grocer, is ditching Payback, a 3rd party loyalty programme, and launching Rewe Pay in 2024.
Two small UK acquirers made interesting announcements. Acquired.com has launched a hosted checkout including cards, alternative payments and open banking delivered through one integration with a single regulatory license. The company says this is a world first. Any readers disagree?
Ecommpay has launched US acquiring and chargeback insurance. 3DS is still optional for US merchants, resulting in chargeback rates of 4.3% for Ecommpay’s customers. Its new solution would see this fall to just 0.5% although merchants will need to pay additional transaction fees.
Digital receipts should be a standard component of any modern POS bundle. These are cheaper and better for the environment than paper. And there’s always the chance of capturing customer contact data. Verifone has partnered with Receipt Hero, with which it was already working in the Nordics.
Pi-xcels, a Singapore start-up which has invented a simple way of pushing digital receipts to shoppers’ smartphones, has raised $1.7m seed funding. Ingenico is already distributing the product and here’s a short demo that shows how it works. I’ve met the management. They’re an impressive bunch. Let me know if you’d like an introduction.
Merchant cash advance involves lending money to small businesses secured on card payment receipts. Some new vendors are making an impact. Keep an eye on PragmaGo which is working with Polksi ePłatności, Poland’s second largest acquirer. It charges 18.5% for a 12 month loan. Also Flowpay from the Czech Republic, which operates a whitelabel model with leading central European ISVs such as Shoptet and Storyous.
In the UK, YouLend, a finance house is winning a good share of partnerships at the moment, including working with Amazon.
SoftPOS
Polcard, Fiserv’s Polish unit, has equipped 4,900 DHL couriers with Polcard Go, its SoftPOS product. DHL says the main benefits are removing the need to carry a separate payment terminal to take payments from shoppers on the doorstep, no worrying about cables/chargers and the elimination of paper receipts. DHL’s comments back up a new survey from RS2, a payment software vendor with a SoftPOS solution, that “ease of use” rather than saving money is the main driver for merchants adopting the new technology.
Oona, a Finnish hardware vendor, is taking advantage of this growing interest in SoftPOS from large retailers. It has launched a range of Android self-service kiosks with can be enabled to take payments using SoftPOS applications. Here’s an example working with Viva Wallet, the Greek Fintech owned by JP Morgan.
Apple has launched SoftPOS in the Netherlands, its second European market after the UK. Adyen and SumUp are the launch partners. SumUp is charging 1.69% with no monthly fee.
In vendor news, Trustly is looking a likely winner in the forthcoming open banking shake out. It has bought SlimPay, the French account to account payment specialist for a reported €70m. SlimPay brings €5bn volume, a good subscription payment platform and a useful presence in France.
Berlin based Ivy has raised $20m at a reported $80-90m valuation only five weeks after making public its initial $8m seed round. Ivy plans to build an international network of open banking APIs. The CEO makes a bold claim: “Ivy is building for account-to-account what Visa and Mastercard have built for card.” If you’re thinking this sounds a lot like Volt, it does.
Klarna launched Klarna Kosma in 2022 which brought the BNPL giant’s internal scale to the provision of open banking API aggregation in competition with Token, True Layer and others. Klarna announced it was axing the Kosma brand before clarifying that it wasn’t. Klarna says that banking API aggregation sales to 3rd parties have tripled in the past year but disclosed no numbers.
Cash
India has hit its goals for 80% financial inclusion in just six years by investing in digital infrastructure according to a new OECD report. The study also praises PIX, the very popular Brazilian mobile payment scheme (see graph below). Both countries see moving everyday commerce from cash to digital payments as key to combatting financial exclusion.
In contrast, campaigners in developed economies focus on retaining access to cash, even at the expense of higher charges for small businesses and shoppers. Many US cities are passing laws obliging businesses to accept cash. Los Angeles could be the latest. Trends include “reverse ATMs” which turn cash into pre-pay plastic, often associated with high user charges, or for merchants to direct customers to withdraw cash from a captive ATM in store. These often charge upwards of 3.5% commission, as Dave Birch found out in New York..
GB News, a right-leaning TV station, organised a petition signed by 300K people demanding retention of cash in the UK. In response, the British Government has pledged that banks will be obliged to ensure customers can find a free ATM within three miles of where they live.
Central Bank Digital Currencies (CBDC) might seem attractive as a means of keeping both sides of the argument happy. It’s cash. But it’s also digital. What’s not to like? Digital dollars or euros would leap from your wallet to the merchant’s wallet without touching the banking system. The Bank of England has launched a consultation on the digital pound which outlines this very unexciting use case. I’ll stick with my debit card, thanks.
Crypto corner
Checkout.com has stopped providing card processing services to Binance, the world’s largest crypto exchange citing concerns over Binance’s anti-money laundering, sanctions and compliance controls. From a peak of $2bn in 2021, monthly volumes processed by Checkout for Binance had declined to “just” $300-$400m. Reports suggest Binance insisted on disabling 3DS resulting in “a European organized crime syndicate [taking] full advantage.”
Customers flocked to Binance in 2021 to take part in the NFT bubble. People lost their heads exchanging dollars for ethereum so they could “buy” jpgs such as the Bored Apes, These were auctioned by Sotheby’s at an average price of $241,000 each. The monkey-themed NFTs are now worth rather less. Disappointed punters are suing the auction house claiming it had “given an air of legitimacy… to generate investors’ interest and hype around the Bored Ape brand.“
Remarkably, there is still some investor interest in crypto payments. CityPay, from Georgia, has just raised €2m for its crypto/fiat gateway.
I know I’m a sceptic but if crypto is ever to become a mass-market payment instrument, the industry needs to address the user experience. Last month, one Bitcoin user accidentally paid $500,000 in fees to make a single transaction. Complexity seems a feature not a bug.
Stablecoins, sometimes referred to as “backed” crypto are certainly less risky. Indeed, some believe PayPal’s digital dollars (backed 1:1 with US Treasuries) are safer than the real thing. Getting acquirers involved seems sensible too. Visa is piloting USDC stablecoin settlement with Worldpay and Nuvei.
NCR, the retail tech and ATM vendor, is splitting in two. The retail business will be called NCR Voyix. The “x” represents “the actionable insights delivered to customers and the visual manifestation of the company’s ability to ‘link’ the digital and physical worlds”. That’s a big ask for just one letter. The ATM business is to be renamed NCR Atleos, a portmanteau of At (automated teller) and eos (the Greed goddess of the dawn).
Belgium’s economy minister has proposed to reduce debit interchange below the 0.2% ceiling imposed by the EU’s MIF regulations. The local banking association is not happy.
Ken Serdons, Mollie’s COO, gives an interview. The Dutch company’s success as “the most loved payment provider” in Europe is all about the onboarding, he says. Meanwhile. Mollie, which lost €120m last year, is making its first layoffs. Adrian Mol, CEO, said “we hired too many people in a short time and went too far. The company is no longer efficient.”
Swish, a P2P payment app, is used by 92% of Swedes. Here’s a good piece explaining why it has grown so quickly. Although market research showed people would pay for the service, there was a massive backlash against user charges when it launched. The product is now free.
Wirecard latest. Here’s a full round up from the FT of court proceedings in Germany and Singapore. According to the paper, no witness has yet presented hard evidence that Markus Braun, CEO, was aware of the fraud. Equally, there seems no hard evidence that he took the allegations seriously when brought to his attention.
And finally
“When I want a Whopper, I want it now.” It’s 1993 and Burger King starts accepting credit cards.
Where to find me?
I’ll be at Open Banking Expo in London on 18-19 October and at MPE 2024 in Berlin on 12-14 March. MPE has gone all pop-art this year. I don’t normally look this flourescent.
Miura Systems, a small UK based payment terminal vendor, reported good numbers for 2022 after having been badly hit by the pandemic. Turnover was up 60% to $27.4m powered by particularly strong recovery in the Far East.
Miura’ Shuttle and M10 products were ubiquitous in the early 2010s as the company was one of the first to market with mPOS devices. The strong focus on design brought by Enrique Garrido, its founder and majority shareholder, was refreshing and the company still has “beautifully simple, innovative” in its mission statement. Garrido has since stepped back from day-to-day management which is now in the hands of Executive Chair, Andrew Dark.
The company is very reliant on its customers in Asia Pacific, served from a sales office in Japan. Asia Pacific revenue was 84% to $21.9m. Growth in EMEA was more modest, up 16% at $5.1m, while sales in the Americas continued to decline to just $0.3m. Management says it now has renewed focus on EMEA and Americas with the new Miura Android SmartPOS terminal believed to be the key to success.
A second key focus is growing services revenue. Revenue from services remains small but more than doubled to $0.628m. This gives the support of recurring licence and transaction based revenue to balance the traditionally rather lumpy hardware business.
Overall, the company seems confident, stating that the new order book is strong and at its best position since 2019.
Although sales are back at pre-pandemic levels, profitability is not. Margins have been squeezed by ongoing supply chain disruption and inflationary cost increases on components. Gross margins picked up a little to 28.4% but remain well below 2020 levels. Miura says it has increased its sale prices and believes that margins will bounce back com the medium term.
Management has controlled costs very well. Administrative expenses fell 16% in 2022, helping Miura return to the black with an operating profit of $1.35m. The operating margin of 5% is, again, well below the 10% levels recorded before the pandemic, but gives confidence for future investment.
AIB Merchant Services, the Irish joint venture between Allied Irish Banks and Fiserv (First Data) reported a strong performance in 2022 with profits up 31%.
Dublin based AIBS is Ireland’s largest domestic merchant acquirer. It serves all business types, large and small, with lead generation primarily via the bank network. The product portfolio includes Clover and the business competes with Bank of Ireland Payment Acceptance (Global Payments) and Elavon.
In the UK, AIBMS mainly supplies SMEs through ISO relationships such as Fidelity Payment, Card Saver, CardcuttersAdelante and Payment Plus. Post-Brexit, AIBMS can no longer serve its British clients from Ireland and has established a UK entity which is expected to receive its payment institution licence during 2023.
The third leg of the business is internationally focused and high-risk with domain expertise in gambling and gaming. AIBMS can pay out in 18 currencies and offers multi-functional Merchant IDs (MIDs) which greatly simplify multi-currency and multi-channel operations for complex merchants.
The company’s focus in 2022 was “managing merchant charge back risk and negative balance risk” arising from the pandemic and the economic recovery. This was successfully achieved although management report “some inflationary pressures but no slowdown in merchant sales.”
AIBMS does not report payment volume but does disclose gross fee and commission income – the total amount it billed to merchants including interchange and scheme fees. This figure grew 44% to €780m with particularly strong performance in Ireland which remains the company’s largest market. Although merchant service charges grew 41%, revenue from other fees which includes terminal rental was up just 8%.
Management points to to “economic activity returning to pre Covid-19 levels” and the continued consumer shift from cash to card. Volumes also benefited “substantially from the boarding of large corporate merchants via wholesale independent sales organisations” such as Payzone, the Irish ISO acquired by AIB and Fiserv for €100m in 2019.
Net fee and commission income – after deducting the changes passed through to the card schemes – rose rather more slowly, and was up 16% at €112m. This likely fall in take rate could be due to a growing proportion of enterprise customers in its portfolio or an unfavourable mix of transactions processed by customers on fixed price contracts. Or both.
Operating expenses rose 13% to €57m. Total staff costs were up 16% to €12m. Employee numbers grew from 108 to 135 at an average of €91K each. Credit losses grew 23% to €2.1m or 1.9% of net revenue, modest for a business with a number of high-risk clients.
Net operating income grew 31% to €62m with operating margin up 7%pts to 55%.
Unlike Cardnet, Fiserv’s JV with Lloyds Bank in the UK, AIBMS is still not paying a dividend to its parents “due to the potential for chargeback loss events arising” from the pandemic and “the uncertain economic outlook.” However, AIBMS has made a €75m loan to Fiserv at commercial rates.
Cardnet, the JV between the Lloyds Bank of the UK and First Data, grew net revenue 5% to £60m in 2022 despite a fall of 10% in total payment volume to £59bn. The business was hit by the loss of two key clients processing £10bn between them. Underlying payment volume rose 6%
Cardnet is a merchant acquiring joint venture between Lloyds Bank and First Data (Fiserv) with the bank holding 51%. Cardnet has no staff and is recharged for services provided by the parents. This means its financial accounts are not always directly comparable to more conventionally structured acquirers.
Lloyds provides sales and marketing through its business banking network. First Data is the processor and supplies card acceptance products including Clover. Cardnet also has relationships with 3rd parties including Liberis for Merchant Cash Advance and Qikserve for a mobile ordering app.
Overall debit volumes fell 18% to £44bn due to the loss of the two clients. These were financial institutions which processed £10bn annual volume between them at a very high average transaction value (ATV) of £476.. This transaction profile is typical of the sector, was most probably very low margin and would have contributed little to the bottom line.
In contrast, higher-margin credit volumes, driven by a resurgence in the travel sector, grew 24% to £15bn. Airlines, hotels and cruises contributed an incremental £2.4bn volume at an ATV of £406 and more than made up for the loss of the financial institution clients.
The more favourable credit/debit mix combined most likely with price increases, drove net fee and commission income up 5% to £60m. This is a good performance in the context of the fall in volume processed. But neither Lloyds or First Data would be happy with revenue lagging UK inflation which was almost 12% for 2022 . Net take rate ticked up 1bp to 0.1% while net income per transaction was steady at 5.3p.
Despite the growth in net fee and commission income, higher costs hit profits. The increased number of transactions drove higher service fees from First Data, Cardnet was recharged an extra £3m staff salaries by its parents and the company spent £6m on its “Strategic Investment Programme.” As a result profit before tax fell 9% to £39m. Nevertheless, management felt confident enough to resume dividends with payments to the shareholders of £53m in 2022 and a further £35m after the financial year end.
One of the key reasons for the collapse in Worldpay’s valuation is that when FIS bought the business, it was growing sales at about .9%. However, starved of funds under FIS’s ownership, Worldpay hasn’t been able to keep up with high-spending competitors such as Adyen, Stripe, Checkout and JP Morgan. The result: revenue was up just 1% in Q2, JP Morgan has overtaken Worldpay to the global number one spot and $25bn has disappeared.. More details on the Business of Payments blog.
In Europe, most attention is focused on battles for bank partnerships. In Italy, Banco BPM, advised by Bain Consulting, rejected its current partner, Nexi. Instead, in a surprise move, the Milan bank will merge its merchant services business with that of BCC Pay. The combined group, boasting 370,000 POS and €90bn volume, will claim number two spot in the Italian market and has the scale to compete with Nexi and Worldline.
Two other large European banks are in the process of finding partners for their merchant services arms. In France, Credit Agricole has now signed the agreement with Worldline to start a new JV. The revenue should start to flow in 2025. Again, there was less positive news for Nexi. The closure date for its acquisition of a majority stake in Sabadell’s merchant acquiring business (the second largest in Spain) has been put back six months to the first half of 2024.
Both Worldine and Nexi’s merchant services businesses themselves, seem in good underlying health. Reporting H1 results, Worldine revenue was up 13%. Management said it was still interested in acquiring merchant portfolios from banks. Nexi grew revenue 10% in H1 and is proving adept at realising synergies from the recent mergers with SIA, Nets and Concardis. It has decommissioned five of 25 processing platforms, says it’s on track to close another five in H2 and, longer term, to reduce the number to just four.
PagoNxt, Santander’s payment business, is also doing well. Volume was up 22% in Q2with increases recorded in all major markets in Europe and Latin America.
We’ve reported previously on the challenging market conditions for pure-play eCommerce gateways. It’s no surprise that privately owned Computop, which claims 30% of the German eCommerce market, has sold a 30% stake to Nexi. There is strategic logic for Nexi which already owns Concardis, Germany’s largest acquirer. Computop’s volume processed fell from €34bn in 2021 to €30bn in 2022. The decline is partly due the company’s decision to exit the gambling/adult sectors but also indicates competitive pressure from Adyen, Checkout and Stripe.
The decline in value of German payment assets was underlined by KKR’s decision to hand Unzer (formally HeidelPay) to its creditors, writing off most of its $668m investment. KKR acquired a majority stake in Heidelpay, a PSP with about 17% of the German eCommerce market, in 2019. Unzer was recently in trouble with BAFIN, the German financial regulator, due to “serious defects” in its risk processes.
US based Shift4 still hasn’t concluded its acquisition of Credorax Finaro, a European processor. First announced in March 2022, the deal hit regulatory obstacles linked to a sanctioned Russian oligarch on the Finaro share register. Management says it is confident of closing the deal in Q4.
Ryan Reynolds is a much better proposition as shareholder. After taking an undisclosed stake in Nuvei, a Canadian processor with global ambitions, the actor is fronting a witty and self-deprecating brand advertising campaign. Reynolds’ investment is already under water. Nuvei’s stock fell 39% after disappointing Q2 results.
Rapyd, the London based global “fintech as a service” provider, has paid $610m for the slowest growing and least profitable parts of the sprawling PayU empire. The purchase price will be financed by a fresh capital injection into Rapyd in what the company claims could be the largest Fintech fundraise of 2023. Arik Shtilman, CEO, took to LinkedIn to explain the rationale. “If you don’t aim for a big outcome, you won’t get an outsized return,” he says. More details on the Business of Payments blog.
We reported last month that Toast, a leading US restaurant software vendor with integral payment processing, had shocked its merchants by adding a $0.99c service charge to each bill. The fee would have been paid by diners and provide Toast with free money at 100% gross margin. The company has now back tracked with its CEO recognising “we made the wrong decision.”
Shift4, with time on its hands waiting for the Finaro deal to close, responded with a clever “Don’t get Toasted” campaign.
Synch Payments, an attempt by a consortium of Irish banks to produce a domestic mobile money transfer app to rival Revolut, has been delayed once more. Again, it’s Nexi supplying the technology.
While autonomous stores are gaining traction across Europe, Amazon, which invented the technology, is struggling. According to the RTHI blog, Amazon’s stores are in the wrong place, have the wrong products, cost too much to build and are confusing for customers. For example, you can now checkout by tapping your physical payment card but not with Apple/Google Pay. Or with Amex. The stores don’t even accept Amazon gift cards.
Customer satisfaction with traditional self-checkouts is falling. Shoppers resent the ongoing reduction in staffed checkout. With autonomous stores so expensive, smart carts may provide a cheaper and more flexible compromise. Here’s a good round up from Forbes on the state of play. Kroger, the US grocer, says smart cart shoppers spend less time in store but spend more money. Everyone’s a winner.
Shoppers are returning to local stores. As expected, once confronted with the true economic cost of rapid grocery deliveries, people are willing to walk to the shops just like it’s 2019. The last mile delivery specialists are disappearing one by one. Getir is the latest to urgently need more cash to keep trading. Maybe robot deliveries are the answer.
Fans of biometric payments will be delighted that Amazon is rolling out Amazon One, its palm payment product, to 500 US Wholefood stores by the end of this year. Amazon says the technology has been used 1m times to date with zero false positives and is ideal for high volume locations such as stadiums. Shoppers first need to visit an Amazon One location where they can scan their palm and link it with their Amazon account.
Palm payments are no more convenient for shoppers than Apple/Google Pay. But there is clear benefit to Amazon of capturing extra customer data and/or being able to steer transactions to lower cost payment methods.
While Amazon can probably be trusted to keep your data safe, other vendors may not be so reliable. For example Worldcoin, a San Francisco-based start-up, is creating a global identity database founded on iris scanning and secured $115m funding in May this year. Its focus has been mainly on developing countries such as Kenya, in which Worldcoin has been asking people to agree to having their eyeballs scanned in return for $50 in tokens on the blockchain. What could possibly go wrong? Bain Capital is one of the VCs which should know better than be mixed up in this madness.
Product
Legacy acquirer like Worldpay and Barclaycard need to make rapid product investments to keep up with the new capabilities showcased by Adyen, Checkout and Stripe.
Optimised checkout is a great example. This uses AI to configure checkout pages with the best selection of payment brands, ensures that transactions contain the correct data and optimises routing to maximise acceptance or minimise cost. Stripe claims merchants moving to its optimised checkout grew sales revenue 10.5% more than a control group which stayed on the old product. Checkout says its Intelligent Acceptance product increased acceptance rates by up to 9.5ppts. Early customers include Klarna.
Checkout.com has also launched Identity Verification which, it says, uses AI to identify individuals within 120 seconds as they video themselves holding up identity documents. Uber Eats is an early customer.
Adyen announced Data Connect for Marketing which helps merchants identify their in-store customers. Retailers used to this themselves before PCI regulations banned them from storing customers’ card details in their own systems. Impressively, Adyen is also the first Fintech to join FedNow, the new US instant interbank payment network.
Subscribed
Away from the global processors, Cashflows, a UK eCommerce acquirer, has added a range of Castles POS terminals as part of omni-channel proposition to its ISV and ISO distribution partners. This is a smart move. New UK regulation has outlawed lengthy POS terminal rental contracts but were connected to one of the 14 largest acquirers. Cashflows is not one of the 14 and so will be an attractive option for ISOs looking to continue business as usual.
Far Eastern tourists are back in Paris to shop and the top retailers know they need to offer their favourite ways to pay. Printemps, a leading department store, has integrated Alipay+ into its POS checkout flow. Alipay+ also gives access to Kakao Pay (South Korea), GCash (Philippines), Touch ‘n Go (Malaysia) and TrueMoney (Thailand).
Fuel cards are commonly issued to staff who drive company vehicles but there’s always a risk of fraud or misuse. A new idea from CarIQ uses vehicle data as a sort of biometric ID. Linked to a virtual card, the vehicle pays for its own fuel, without the driver needing to sign for the gas. CarlQ has just signed a global partnership with Visa.
Access to cash
As cash usage declines, a growing number of merchants are only accepting digital payment. This presents problems in societies where some citizens don’t have access to electronic money. But cash-free stores are also enraging many of the people already angry about vaccines, traffic restrictions, 5G masts and sundry other inevitable aspects of modern life.
If cash is to be preserved, public policy needs to address the fact that the less cash is used, the more expensive it gets. For example UK convenience stores often host ATM machines with the retailer receiving a commission of 15p per withdrawal. One store reports transactions down 70% at a “free” ATM. The result: the retailer is not making enough revenue and is switching to an ATM that charges customers a withdrawal fee. The likely outcome is that transactions will fall further.
SoftPOS has only been available on Android so news of the European launch of Apple’s “Tap to Pay” on iPhone made the headlines. Apple’s SoftPOS is based on the $100m acquisition of Montreal-based Mobeewave in 2020. Architected differently to Android SoftPOS, Apple offers an SDK to developers/PSPs allowing them to build payment acceptance capability into their own iPhone apps.
With Apple SoftPOS, there’s still a need for an acquirer (or payment facilitator) to process the transactions but no obvious role for the specialist payment app/gateway providers such as MyPinPad or Phos. Happily for the SoftPOS start-ups, the Android market is large enough to keep them all busy for some time.
In Android product news, Oona, a Finnish start-up, has some interesting enterprise SoftPOS ideas such as this kiosk, for which Rubean provided the payment application. Getnet (Santander) has launched SoftPOS in Spain although only for larger business customers. Finally, Worldine is now live with SoftPOS in Italy via its new Banco Desio partnership supported by a clever TV commercial.
Open banking
Natwest, which has modestly taken the URL www.bankofapis.com, commissioned a report to identify the key obstacles holding back the wider adoption of Open Banking. It concludes the problems lie in “lack of commercial incentives” to develop or enhance the core APIs and “lack of alignment between.. .banks.” Or as Nick Dunse, former CMO of Pay with Bolt wrote on LinkedIn, “Nobody is leading it and there’s no money in it.”
Some Fintech lobbyists are asking the regulator to lead by expanding the number of services available but Oliver Wyman, the management consultant, thinks its time for banks to introduce financial incentives for themselves by monetising the APIs. The consultants suggest that a typical bank could make $50-$75m per annum if it charged PSPs for value added services linked to the open banking APIs.
Variable recurring payments (VRP) – an open banking equivalent to direct debits – were meant kick start the sector in 2023 but have also been rather slow to take off. Here’s a good podcast from Edgar Dunn which explains how VRPs work and what the opportunities might be.
In corporate news, NuaPay, an early open banking leader may be for sale. Its parent company, Senteniel, was acquired by EML, the accident prone Australian fintech for €70m in 2021. Account to account payments are meant to be hard to spoof but Senteniel was then hit by A$8.5m merchant fraud in August 2022. Now the Irish regulator has raised anti-money laundering concerns and asset sales look likely.
Munich-based Ivyhas raised €7m for “instant bank payments your customers love.” It sits on top of Tink, TrueLayer or Token.io and looks like a very well thought-through proposition. Merchants need vendors to build compelling customer experiences on top of the raw capabilities provided by the API aggregators so this could be a winner.
Crypto corner
PayPal is hoping to legitimise crypto with its newly minted Paypal dollars but opinion is divided. Bank of America thinks PayPal is unlikely to win significant crypto market share but I suspect its analysts are missing the point. PayPal will focus on customer experience, global deployment, and ease of use in a sector notorious for operational complexity. If PayPal can’t make this work, nobody can.
Meanwhile, the regulatory clampdown on unbacked crypto is bringing results. Sex workers are complaining that crypto exchanges have been terminating their accountsciting reputational risk. One adult star left with a pile of unsaleable crypto tokens said “the whole ‘crypto is permissionless and censorship-resistant’ thing is a bunch of bullshit.”
No criminal could possibly need the new “No KYC Visa card” available to anyone with an Ethereum wallet. Jason Mikula explains that this wholly noncompliant boondoggle is most likely built on banking-as-a-service capabilities from Stripe.
Other news
Edgar Dunn writes on payment orchestration platforms (POPs). The consulting company counts 27 multi-acquirer platforms available today plus eight acquirers marketing their eCommerce gateways as orchestration platforms. The sector has attracted over $650m investment in recent years.
Poland is a fintech hotbed. There are over 80 payment businesses referenced in the 2023 Map of Polish Fintech.
If you want to become a wealthy payments sales person, here’s a handy guide from the US Electronic Transaction Association. Because independent sales agents are rewarded with small but long-lasting commission payments, the best advice is to be patient and love your customers.
The British Government has launched (yet another) Future of Payments Reviewalthough without clearly stating the problem it is trying to solve. No matter. The UK Payment Association has a handy survey for you to give your views.
The collapse of Railsr has caused havoc at Irish shopping centres, many of whom had sold open-loop gift cards issued by UAB Payrnet, a Ralisr subsidiary whose licence was revoked by the Lithuanian regulator.
Latest Wirecard news. Two ex-employees have been jailed in Singapore, the first criminal convictions anywhere in the world relating to the scandal. Meanwhile, Jan Marsalek, the fugitive COO, has claimed that Wirecard’s third party operations, whose existence or lack of existence, brought down the company, have continued to trade.
And finally
Worldline kindly invited me to join its Navigating Digital Payments podcast. If you’ve enjoyed this newsletter, give it a listen. Although I was certainly flattered to be asked to participate, my head isn’t normally this large.
Worldpay has lost its crown as the world’s number one merchant acquirer, although only by a very narrow margin. In each of the last four quarters, JP Morgan has processed a greater volume of payments.
Worldpay has been hobbled by having, in FIS, a cash-strapped parent unwilling or unable to invest. The challenges were spelled out earlier this year when FIS took an $18bn write down on its acquisition of Worldpay. We covered this in detail at the time. Now, Worldpay is to be spun-out of FIS as a joint-venture with GTCR, a Chicago private equity firm.
Meanwhile, Q2 results demonstrate the extent of Worldpay’s problems. Global payment volume grew 6% in Q2 to €591bn, once again lower than JPM which recorded an increase of 10% to $600bn. At Worldpay, another weak US performance (+4%) was offset by a healthier 11% increase in international volume but, over the last twelve months, JPM has processed $2287bn against $2266bn for Worldpay.
Underlining the reason for divesting its merchant solutions business, FIS reported Worldpay revenue rose just 1% in Q2 to $1.312bn “with similar sub-segment trends as seen in the first quarter”’ This likely means double digit growth in global eCommerce but continued revenue declines in the domestically focused US and UK businesses which are most badly in need of investment. Take rate fell 1bps to 22bps. ATV rose 2% to $46.17.
Worldpay adjusted EBITDA did rise but only by 3% to $634m. Margins expanded 120bps to 48.3% “as we grew our high-margin revenue streams across the operating segment and delivered on cost management.”
FIS management had first proposed a stock market flotation for Worldpay but now say that the partial trade sale is the best option as it can realise value faster and get a cash injection more quickly. It will sell 55% of Worldpay to GTCR, a private equity business with one successful payment investment under its belt. GTCR bought Sage Pay US in 2017 for $260m, floated it as Paya and sold it to Nuvei earlier this year for $1.3bn. Worldpay’s new valuation of $18.5bn is rather less than the $43bn FIS paid for the company in 2019. However, the price does represent 10x EBITDA, which is in excess of the 8x valuation of FIS as a whole prior to the announcement. To financial analysts, this represents value creation.
Looking ahead, management says that Worldpay “will remain an important partner and distribution channel for FIS” and that Worldpay will continue to benefit from access to FIS banking technology services and solutions. Backing from GTCR will “also ensure that Worldpay will have ample access to capital to pursue near-term inorganic growth opportunities.” Now is a good time to be shopping for payment capabilities. Valuations are lower than they have been for some time and we can expect Worldpay’s new owners to move fast to make up for its wilderness years with FIS.
Nexi, which is vying with Worldine for the title of European payment champion, posted revenue of €835m in Q2, up just 3% on an unadjusted basis. Good growth in Merchant Solutions, up 10% to €474m, and Issuing Solutions, up 7% to €270m was dragged down by declining sales in the Digital Solutions division, which has been hit by the impact of banking consolidation in Italy.
Paolo Bertoluzzo, CEO, said revenue growth would have been 8% when adjusted for currency fluctuations, acquisitions, businesses held for sale etc and “confirms solid and profitable growth in all our businesses and in the different geographic areas in which we operate, despite the ongoing uncertain macroeconomic situation.”
The merchant division interests us most at Business of Payments. Like Worldline, Nexi is becoming increasingly dependent on sales to merchants as their traditional business model of process outsourcing for banks comes under pressure. Merchant Solutions accounted for 57% of total revenue, up from 53% in the same quarter of 2022.
Bertoluzzo was pleased with the “acceleration of revenues in Merchant Services in the DACH region, and acceleration in e-commerce, broadly across geographies.” However, Bernardo Mingrone, CFO, added that merchant services growth was “a touch lighter than what we might have expected” and blamed tough comparisons from 2022. For example, the growth in high-margin foreign card transactions in Italy, Nexi’s largest market, slowed to just 6% in June as you can see below.
There was more positive news further down the P&L. Nexi is proving adept at realising synergies from the acquisitions of SIA, Nets and Concardis. It has closed five of 25 processing platforms, says it’s on track to decommission another five in H2 and, longer term, to reduce the number to just four. Similarly, it has closed 11 of 45 data centres and is on track to shut another two in H2.
Total expenses fell 3% to €399m yielding a welcome 10% increase in EBITDA to €436m.
Looking in more detail at Merchant Solutions, payment volume rose 8% to €209bn in Q2. Over half Nexi’s volume still comes from Italy but growth in its home market was just 6% compared to 11% elsewhere. The DACH region was particularly buoyant and recorded “strong double-digit” increases across the quarter.
Two thirds of Nexi’s merchant volume is from SMEs with the remainder split between eCommerce and Large/Key accounts. Highlights include:
SME – volume up 14% in H1 driven by 145K extra POS terminals and 250,000 additional customers compared with a year earlier. Management called out significant growth in Italy and Poland. The SoftPOS roll out is progressing across geographies.
eCommerce – volume up 8% in H1 and revenue up double digits as client numbers rose 10% year on year. Sales accelerated in Italy and Nordics. There was good performance from A2A (the old P24 business) in Poland. Management is pleased with progress signing new ISV partnerships. A commercial agreement with Shopware, the German eCommerce platform, is now live in Italy and DACH. Nexi says it has been selected as Shopify’s preferred partner in Poland.
Large account/key account (LAKA) – volume up 10% with most new wins in omni-channel retail, hospitality/restaurants and mobility/petrol.
Alongside the results, Nexi announced it had taken a 30% stake in Computop, the German eCommerce gateway. The purchase price was not disclosed. This partnership is highly complementary to the Concardis acquiring business and reinforces Nexi’s presence as market number two, behind Worldline/PayOne. Computop claims 30% of the German eCommerce payment market but processed volume fell 12% in 2022 to €30bn. The poor performance partially mirrors a general fall in eCommerce volumes in Germany but Computop also lost customers when it exited the adult and gambling segments. Nevertheless, Computop is also believed to be under pressure from international acquirers with integral gateways such as Adyen, Stripe and Checkout.com.
Speaking about potential future corporate activity, Bertoluzzo said that Nexi was not interested in entering the UK market where Barclays is reportedly looking a strategic options for Barclaycard. “At the moment, we are not looking at the UK, we have other priorities and that’s not necessarily a market that we consider for us attractive.”
We would expect one of these other priorities to be the merchant acquiring business of Spain’s Banco Sabadell which announced a JV with Nexi in February this year. Surprisingly, Nexi gave no update during its results announcements, but Sabadell has suggested that the deal may now not close until H1 2024, six months later than scheduled.
BancoBPM, is certainly no longer a Nexi priority. The Italian bank has chosen to ignore its long standing partnership with Nexi and opted for a joint-venture with BCC Pay, a local newcomer. Bertoluzzo said the revenue impact of losing the bank is expected to be zero this year and negligible next year. He felt that BPM customers were “used to Nexi products and propositions that are quite advanced for Italian standards, and quality of service” indicating confidence that Nexi can defend its existing customer base.
Asked whether he felt that PE firms were inflating valuations for payment companies, Bertoluzzo explained that “the multiples that we see around these days are probably far too low, given the potential value generation of the sector.” He went on “we’re not particularly worried about private equities coming in and inflating price and so on and so forth, because honestly, buying additional assets is not our priority. So we are very selective on what we’re looking at and currently, we are looking at a very, very small number of potential small opportunities, where honestly, we don’t see private equities around.”
Discussing progress divesting non-core businesses, management said that the sale of NetsDBS had been delayed by the unexpectedly early publication of EU draft directive on electronic ID wallets. However, they still hope to close the transaction “in the coming weeks.” There was less positive news about Ratepay, the German BNPL business inherited from the Concardis acquisition. Berltoluzzo said “It’s not the most ideal market to sell a consumer finance business.”
Finally, commenting on the Italy’s progress towards electronic money, Bertoluzzo said “Personally, I’ve not been using cash for the last many, many, many weeks… but as soon as you go outside the metropolitan areas, there is still a lot of cash payments around. …the overall penetration of digital payments in Italy, is probably today in the low mid 30s, which is still very much behind what you see in the rest of Europe…There is a long, long run in front of us in terms of cash to digital payment conversion. It’s happening. It’s good it’s happening, but there is a long, long way to go.”
PayU GPO is an emerging market eCommerce gateway, orchestrator and payment facilitator that operates in 30 countries. The acquisition will enhance Rapyd’s capabilities in Latin America and central Europe, notably Poland. The combined group will service over 250,000 clients globally in 41 jurisdictions with a workforce of 1,700 across 22 countries.
The sale certainly looks like an excellent deal for Prosus. It gains a welcome cash injection and will retain PayU’s largest and fastest growing markets – Turkey, and India. The GPO businesses which Rapyd is acquiring are growing slowly and are barely profitable. As a trade buyer, Rapyd should be able to find plenty of synergies. However, as PayU is itself built from numerous acquisitions, the integration and decommissioning of its multiple technical platforms may be challenging.
Rapyd, which has already raised $770m according to Crunchbase, is asking investors for a further $700m to fund the PayU GPO deal. Arek Shtilman, CEO, says this will be the largest fintech raise so far in 2023 and that he wants to take advantage of the downturn in technology finance to make more acquisitions.
The price represents 1.6x revenue or 68x underlying trading profit based on the PayU GPO FY 23 figures published with the Prosus annual results.
These showed that Pay U GPO annual payment volumes rose 13% to $39 billion. This is a modest performance for a payment business targeting digital merchants and much lower than the increases of 22% and 54% in previous years.
Revenue was up 15% at $393 million but PayU GPO posted a trading loss of $14 million including a $23 million provision “related to merchants in Brazil and in the travel industry.” Underlying trading profit was $9m.
Barclaycard, the UK’s second largest merchant acquirer, reported disappointing growth in payment volumes in Q2 2022, an increase of just 4% to £77.3bn. This is well below the consumer price inflation rate of 10% in the UK and indicates Barclays is losing market share. Customer numbers also grew 4% to 401.000.
Barclays has a strong track record at cross-selling acquiring to its UK business banking customers. However, it has found going tough recently as fintechs with newer technology – notably Adyen and Checkout – are poaching its enterprise clients. A good example is Checkout’s work with Sainsburys.
Reuters reported last month that Barclays had hired consultants to look at options for Barclaycard, its payment business which includes card issuing and acquiring. The mandate was to examine “whether some of the payments businesses should be expanded or combined with other providers through a merger or joint venture.”
With a strong position in Europe’s largest card market, Barclaycard’s merchant operations would be very attractive to outside investors. Options could include selling all or part of the business to to private equity (with Bain/Advent likely first in the queue) or creating a JV with one of the global acquirers such as Worldine, Nexi or Fiserv.
Barclays released no additional information with the Q2 results.
