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.
Investor sentiment towards the payments industry appears to be cooling despite its impressive attributes, including long-term growth, high barriers to entry, and attractive margins. Indeed the Financial Times recently asked "can payments can eat the world," ultimately concluding no, probably not. Instead, it seems more likely that software will eat payments, a topic worth revisiting in the future.
Back in the present, Stripe, the 12-year-old payments company, recently raised an additional $6.5bn at a $50bn valuation. This figure is significantly lower than recent valuations, reflecting broader worries about the technology sector. Nonetheless, Stripe deserves credit for publishing the details on its own website, and it is worth noting that the company has over 100 clients processing more than $1bn each, an impressive feat for a business that began selling two lines of code for SMEs.
With its current growth trajectory, Stripe is on track to compete with industry stalwarts such as Worldpay and JP Morgan to become the world's largest processor.
JP Morgan claims that its "cloud native microservice acquiring platform" is complete and is now concentrating on enhancing its acceptance capabilities. A good example is the acquisition of two gaming-focused payment companies: Tillia, which provides a payments platform for in-game transactions and Sightline, which processes $5bn for resort and online gaming companies.
Payment orchestration is a growing sub-segment of the payment industry with clear applications for global or complex eCommerce transaction routing. However, pricing models must evolve beyond click fees to sustain profitable growth. London-based orchestrator Apexx Global, which boasts Ryan Air as a customer, has raised $25m to enter the US market. Meanwhile, Ireland's WhenThen has been sold to French marketplace payments specialist Mangopay for an undisclosed sum.
Also in France, Synalcom, which manages over 230,000 POS terminals for 20,000 merchants, has merged with Qori, a start-up that offers pay-by-bank and crypto payments at POS via QR codes. The new business will be called Sylq. The company's president boldly asserted that Sylq will revolutionise the European payment landscape, directly challenging Adyen and Stripe.
Klarna, despite losing $100m a month, maintains that investors are willing to pay for growth. “It’s not that crazy,” says the CEO but I wonder how long his confidence will last in a credit downturn.
Blik, the astonishingly successful mobile payment standard in Poland, which accounts for 60% of online transactions, is looking to expand internationally. Romania is the first destination.
Lastly, Shift4's acquisition of Finaro is still pending. The US processor had announced its intention to pay $525m for the Israeli high-risk gateway/acquirer formerly known as Credorax, but the presence of a sanctioned Russian oligarch on Finaro's share register appears to be the cause of the delay.
From Business of Payments blog
Despite only 4% sales growth in Q4 2022, Nexi made a strategically important acquisition of Sabadell's Spanish merchant services business, adding €48bn volume from 380,000 merchants.
Saltpay continued its rapid pace of dealmaking, with 24 businesses acquired across Portugal to Turkey, resulting in an operating loss of €78m on sales of €74m in 2021.
Global Blue reported a recovery in tax-free shopping sales to just below 2019 levels in Q4 2022 and anticipates a strong 2023 due to the imminent return of Chinese travellers to Europe.
Santander unveiled its payment strategy including a target of over €300m pa EBITDA from PagoNxt and this rather excellent slide that explains everything.
Among the smaller companies, PXP Financial's 2021 results took a hard hit from Brexit and the fallout from Wirecard, causing a 39% drop in revenues and the loss of its EEA customers.
EPOS Now showed robust growth in 2021, with a 46% increase in sales to £48m, fueled by global expansion and a shift to subscriptions.
Reward Loyalty, the UK's top card-linked loyalty provider, returned to profitability in 2021, with revenue more than doubling to £43m.
Business of Payments is closely monitoring the progress of checkout-free stores, as they have the potential to shift point-of-sale transactions from the traditional checkout to customers' smartphones. This has huge implications for incumbent processors.
While Amazon has faced challenges with its "Go" stores and has closed eight locations, the technology itself is proven effective, as evidenced by BaxterStorey's recently opened "Just Walk Out" convenience store in London. In Europe, Spar opened its inaugural unattended store in Switzerland, and Rewe debuted its largest such store to date in Cologne. It looks quite cool.
Wearable technology hasn’t grown as fast as many expected. Digiseq's new deal with Curve allows any payment card to be provisioned to a Digiseq-enabled device, addressing a long-standing issue with wearable devices that require the customers to use the card credentials supplied with the device. It’s unlikely any wearable will go quite as far as a British man who kept forgetting his Tesco Clubcard and had it tattooed on his arm. While not a payment solution, it's certainly a creative way to ensure loyalty program participation.
The phones in our pockets are excellent biometric payment devices yet tests and pilots of alternative POS checkout form factors persist. Amazon is installing palm scanners at Panera locations in the US, while JP Morgan is also testing a similar solution, potentially piloting it at the Miami Grand Prix. Both initiatives attempt to bring together biometric, payment and loyalty data and are likely to spark major privacy concerns.
Sustainability is a hot topic. Twig Pay is a payment startup aimed at the circular economy, enabling shoppers to part-pay for purchases with pre-owned goods. It has integrations with Shopify and Salesforce.
Worldine has welcomed nine stores to its shopping mall in the Metaverse. Judging from this video, the proposition needs some work.
In the UK, Open Banking advocates were heartened by the latest statistics. According to PSE Consulting, over 70 million transactions worth £38 billion were conducted in 2022, including over £2 billion paid in tax bills. Although these figures are a mere fraction of the total payment volume, debates are ongoing about the need for either a market-driven or regulatory-driven approach to create the customer experience necessary so that Open Banking becomes ubiquitous. We should start with a middle route of industry standards, much as we see in the card world today.
Embedded payments have proven popular among Fintechs, but they critically tie the Fintech’s business model to the goodwill of their processors. Stripe's closure of Flurly, a digital goods marketplace, due to illegal transaction concerns from one of its sellers, has raised questions about the vulnerability of platforms built on Stripe. Flurly’s CEO wailed “Flurly is entirely built on top of Stripe. Their move has effectively disabled the entire platform.” Similarly, Checkout’s decision to cut its exposure to high-risk merchants forced the rather desperately named Spankpay (an adult-themed crypto payment service) to close.
Meanwhile, Checkout.com has launched a card issuing service that includes virtual and pre-pay options, aimed at merchant customers who can use their acquiring balance to fund an issuing program.
In France, Elyn has raised €2.5 million to offer delayed payments, billing shoppers after five days if they don't return their purchases. This is one of Zalando’s USPs and will likely be a popular service for shoppers although bringing significant credit risk.
Popcodes, from Calgary, claims to have reduced service calls by 50% for a large merchant acquirer. It offers two-way communication between merchant and service desk via an app on the POS terminal.
The SoftPOS ecosystem is steadily coming together but we’re still waiting for concrete figures on user adoption. Noteworthy developments include Wix, a global eCommerce platform for SMEs, offering Stripe's SoftPOS (under the WixPpay brand) to its customers, and Viva Wallet (now owned by JP Morgan) adding Klarna as a SoftPOS payment option. Transactions are completed on the shopper's device by scanning a QR code produced by the phone.
A recent Edgar Dunn report explores how SoftPOS can add value, with reducing maintenance costs for large POS estates as one of the top priorities.
One of the more interesting use cases for SoftPOS comes from Wirtualne Kasy Fiskaline, which is integrating SoftPOS with its "virtual fiscal cash register" in Poland. This is the first government-authorised software fiscal solution in Poland and eliminates the need for small businesses to purchase a fiscal printer.
It would be no surprise if the schemes were cooling on crypto. Reuters reported that Visa and Mastercard had slammed the brakes on new partnerships although Visa’s head of crypto denied it saying “This is the time to build!”
Well, he would say that, wouldn’t he. Meanwhile, the schemes continue to launch ill-advised collaborations such as Mastercard’s endorsement of the new Bybit Card which converts crypto to sterling or dollars at point of sale. But there’s growing consensus among regulators that crypto tokens are not money or investment securities. They are casino chips and should be regulated as gambling not finance..
Public policy moves slowly. Central banks are finally beginning to define what they mean by central bank digital currencies (CBDCs) just as the public loses interest. The FT has a good comment piece on why the Bank of England’s plans for Britcoin wil probably fail. The privacy implications are just too great.
In other news
Dotykacka, a Czech ISV, offers IC++ pricing and has helpfully published scheme fees. You don’t often see these written in an intelligible format. It’s 0.8c + 1bp for Visa debit.
Israeli PSP, Rapyd, got into hot water after booking an Avicii lookalike for its office party.
Two heavyweight research reports to read next time you’re on a plane. Arkwright Research released a detailed look at the merchant acquiring market (pdf) showing that the ten largest acquirers process more than the next 140. And Worldpay published its Global Payments Report which highlights the rapid growth of BNPL around the globe.
The UK regulator has woken up. The Financial Conduct Authority (FCA) wrote to 291 payment companieswith concerns about safeguarding customers’ money, inadequate reconciliation process, lack of liquidity risk management and failure to put in place adequate money laundering systems. The next scandal is just around the corner.
Finally, not everyone in Germany is convinced about cashfree payments. The ironic comment translates as “it’s not because of tax evasion and money laundering, it’s philanthropy and mercy causing this restaurant to refuse card payments.”
Get in touch
You’ll catch me next at MPE in Berlin this week speaking on embedded finance, ISVs and the opportunities for merchant acquirers. If you’re at the conference, come and say hello. Otherwise, get in touch if you’d like to share views on the payment business.