Business of Payments
How Paytech makes money
Having spent the last ten years working for two of Europe’s leading merchant acquirers, I’ve set up this newsletter and the associated blog to provide the sort of information I would have found useful in my old jobs. Get in touch, let me know what you think and feel free to suggest new topics to cover.
Business of Payments
Multiple challenges face the payment industry as the economy slows and shareholders demand higher returns on their capital. Nowhere is this more evident than at FIS where new management, under pressure from activist investors, is under pressure to deliver value quickly.
One proposal under consideration is to unwind the merger between FIS and Worldpay which created the company in 2019. In the short-term, job cuts seem inevitable. As one unkind analyst put it FIS is “where good technology goes to die.. They buy it and then that technology dies a slow death.”
It is not only legacy players who are making job cuts and reducing valuations. Despite a significant contract extension with Amazon, Stripe has lowered its internal valuation for the third time in half a year. It was Stripe's dependability, not its track record for innovation, that influenced Amazon's decision. Max Mardon, VP of Payments at Amazon stated,
“In particular, we value Stripe’s reliability. Even during peak days like Prime Day, Black Friday, and Cyber Monday, Stripe delivers industry-leading uptime."
JP Morgan has shrugged off slowdown fears with 14% growth in payment volume in 2022 and a partnership with Byte Dance, the proprietors of Tik Tok, demonstrating the relevance of JP Morgan's brand to the booming businesses of tomorrow. However, social media was more interested in the bank’s allegations of fraud against the founder of a New York fintech.
After a prolonged legal battle, EVO (a former employer of mine) ultimately lost its $1 billion lawsuit against Santander. The dispute arose after EVO acquired Popular Payments, the merchant services division of Banco Popular, in 2013. Following the acquisition, Santander acquired Banco Popular and began redirecting sales leads to its in-house merchant acquiring division, rather than EVO. The judge ruled in Santander's favour and EVO has yet to announce if it will appeal the decision.
Better news for EVO came from Poland where eService, its joint venture with PKO Bank Polski, reported robust results in 2022. The company now serves 570,000 point-of-sale terminals and 25,000 online stores. A significant achievement for eService was a new partnership with Dotykacka, the premier Czech electronic point-of-sale software provider for small businesses.
In Spain, PSPs are slowly eroding the dominance of Redsys. Sipay, one of the larger challengers, has extended its capabilities by acquiring Woonivers, a Spanish start-up specializing in Tax Free Shopping. PaynoPain, a smaller rival to Sipay, reported a 30% increase in volume for 2022. The company's management highlighted "Buy Now, Pay Later," Bizum, and softpos as the key trends for the upcoming year.
Elavon Europe experienced a 25% growth in payment volume in 2021, as the travel and tourism industry recovered but has yet to regain its 2019 levels of revenue or profit.
Union Pay International, with its cardholders largely confined to their home country due to travel restrictions, saw revenues decline 14% in 2021 to $177m. The Chinese card network continues to invest in expanding acceptance and claims to have 80% coverage in Europe. Despite having 200 million cards issued outside China, it has so far only found European issuing partners in Serbia, one of the few Western countries still friendly with Beijing. .
From the blog
In the UK, Dojo, with its branded PAX A920 saw tremendous growth in 2021 leading its parent company, Paymentsense to report a 89% increase in payment volume. However, this success has come at a cost, as the company also reported significant losses. In contrast, Paypoint, the operator of the largest network of bill payment locations in the UK, reported lacklustre performance in its merchant services division, which includes Handepay.
The proposed NASDAQ listing of Rezolve, a new business venture from Dan Wagner, via a reverse SPAC takeover has been delayed. This development comes as no surprise to those who have closely followed Wagner's career.
Finally, I’ve listed SaltPay’s 19 European payment acquisitions and investments so that you don’t have to. SaltPay’s remarkable empire has been built with over $700m of VC cash and now spans the entire value chain from acquiring to small business software. Integrating this set of disparate companies and management teams will be quite a challenge.
New shopping
Amazon has extended its "Buy with Prime" feature to all participating US merchants, enabling Prime members to shop using their stored credentials and enjoy benefits such as free delivery. Amazon promises a 25% increase in sales but the service does not come cheap; merchants will pay $13 for a $60 order. If taken up widely, the extension of “Buy with Prime” will be more good news for Stripe.
Amazon has closed its first UK “just walk out” store which prompted many commentators to again question the business model. Aldi have tried the same format in a new store in Utrecht. Its app doesn’t accept Apple Pay or iDeal and half of Dutch people don’t have credit cards so….
The shift towards direct-to-consumer sales poses a significant challenge to established merchant-processor relationships, as it bypasses traditional retailers such as large grocery stores. For instance, Nestle aims to generate 25% of its sales directly from consumers by 2025. Manufacturers often prefer to develop their own eCommerce platforms on top of their ERP systems, rather than utilizing established B2C ISVs. Payment processors need to keep a close watch on this changing landscape to make sure they have the appropriate distribution partners.
Openbanking
The British competition authorities have declared “mission accomplished” now that the large banks have delivered the required APIs. The number of open banking payments continues to increase, with 240,000 recorded in November 2022, but a multitude of challenges stand in the way of mass adoption of this technology.
A strong industry group is now necessary to take the role of API custodian, pick up the pace and implement a set of "scheme rules" guaranteeing consumer protection. In the meantime, the nascent UK open banking payment industry is pinning its hopes on Variable Recurring Payments, which is being touted as a modern alternative to direct debits.
There are several open banking vendors with large capital investments that will need to demonstrate a return in 2023 or risk layoffs similar to those seen at Truelayer. You can judge the scale of the fixed costs required to run an open banking aggregator by looking at the enormous list of APIs maintained by Token. Without significant transaction volume, it’s hard to see a path to profitability.
Longer term, Dave Birch writes that open banking should be at the heart of any European alternative to Visa and Mastercard although it’s clear that adoption will vary according to each market’s norms. It was interesting to see Allegro, Poland’s eBay, reportedly A/B testing the removal of cards at checkout, presumably to see whether customers will use cheaper bank transfers instead.
Product
I’ve long been sceptical of biometric POS innovation. Since we’ve all got face or fingerprint ID technology in our pocket, there’s simply no need to embed these smarts into merchant devices. But the industry is not giving up. Two recent examples are Toshiba and PopID demonstrating biometric enabled ePOS and self—checkout at the NRF exhibition and Ingenico/Fujitsu showcasing palm identification on its new Android terminals.
OTI, Elzab, and Polskie ePłatności have successfully solved the issue of integrated payments at automated car washes. This is surely a noteworthy achievement in the field of payments technology.
It’s good to see acquirers demonstrating commitment to the circular economy. Getnet now expects to deliver 150,000 recycled payment terminals in 2023.
Shopify's new "composable stack" for enterprise retail poses a significant threat to traditional enterprise software vendors such as SAP and Oracle. The flexibility of the platform will appeal to e-commerce teams. Shopify Payments will inevitably pick up a chunk of transaction volume and this is more good news for Stripe, which processes for Shopify.
Crypto corner
Despite signs of a New Year dead cat bounce in cryptocurrency prices, the bad news keeps on coming. Wyre, a crypto platform which confidently valued itself at $1.5bn shut down with a valuation of, well, zero.
If you cashed out before the bubble burst, you’ll be interested in Cryptiony, a Polish start-up which calculates your crypto tax bill. Respect to the founders, they raised €500K to extend their service to the UK.
Although many have criticised regulators for not bringing crypto within the normal parameters of consumer protection, there’s a strong argument that they did the world a favour by refusing to legitimise this murky world. This point is argued well by David Dayen in an article for American Prospect.
If crypto isn’t a payment instrument or store of value, what exactly is it? David Gerard analyses the phenomenon in its historical context and concludes that “we have two possibilities:
Crypto was a stupider bubble than any previous bubble
Crypto was a smarter Ponzi than any previous Ponzi”
Cash not dead yet
Forecasting the pace at which cash is replaced by electronic forms of payment is essential for any payment strategist. The ECB’s latest study shows the cash share of POS transactions has fallen to 42% in 2022 from 47% in 2019, with a corresponding incerase in cards and mobile wallets. At this rate, cash will be dead in a decade.
Yet access to cash is vital for many in society, particularly the most vulnerable, and politicians have begun to take notice of this issue. But under pressure from the EU, the new right-wing Italian government has backtracked on its announced plans to repeal legislation obliging merchants to accept electronic payments. Instead, it’s looking to broker a deal in which payment providers agree to reduce fees on transactions under €30 for businesses turning over less than €400,000 per annum. This would be bad news for Nexi which generates over half its sales in Italy.
In other news
Strawhacker reports final numbers for US merchant acquiring in 2021. Adyen, Toast and Shift4 were the stars – growing at four times the rate seen by the established players.
Every PSP produces a country by country-by-country guide to global payments. If you read only one, I’d recommend JP Morgan.
For when your boss demands predictions for 2023, here’s a helpful collection of 95 decks from the professional prognosticators compiled by Dan Barker. As Groucho Marx said, “If you don’t like my forecasts, I have others.”
And finally
Mondex was a smartcard trialled in Australia in 1996 but never rolled out. Yet the brand is still printed on receipts 27 years later. Is this the world’s longest running POS payment source code?
Get in touch
I’m available for short-term advisory work and speaking engagements. You’ll catch me next at MPE in Berlin at the end of March.
Geoffrey Barraclough
geoff@barracloughandco.com