I’m not convinced the recent shift in market sentiment isn’t an overreaction to the government’s rhetoric around restricting surcharging. Sure, surcharging has been a significant part of Smart Pay’s value proposition, but it’s far from their only revenue stream.

It seems shortsighted to assume that a well-managed, disciplined company like Smart Pay can’t adapt its business model to shift the cost from customers to merchants. In fact, they already offer such a model.

The key questions, to my mind, are how much churn we might see from their existing Australian customer base, and how much impact the surcharging restrictions will have on future customer acquisition. As for churn, my guess is minimal. Even if merchants are required to move the surcharge above the line, it doesn’t necessarily follow that they’d go through the hassle of switching terminal providers—especially when their current system is likely integrated into their business software.

When it comes to future growth, while losing this point of difference in the Australian market might create some headwinds, it’s worth noting that not all of their customers utilize the surcharge option anyway. There’s still plenty of runway for a management team that has consistently demonstrated strong operational discipline. This company is far more than just a payment provider with a surcharging capability.

I hold IRL & Stawman, and I’m seriously considering increasing my stake. But please, have it at Stawpeople, why am I wrong?

Thing may be about to get tougher for them and Tyro.

Card payment surcharge billions under RBA microscope

The Reserve Bank may be compelled to follow the UK and Europe and ban credit and debit card payment surcharges, as the billions of dollars in fees paid by Australians each year attracts closer political scrutiny.

Labor MP Jerome Laxale, who represents the north-west Sydney electorate of Bennelong, told federal parliament this week that banks and global card networks were enjoying “kickbacks” from the “rort” of costs being pushed onto customers who paid with a card.

“Card providers, merchant and technology providers, and the banks are having a laugh here, scraping $4 billion off our bank accounts to provide an essential service that costs less to operate and maintain than its free, non-digital alternative,” he said, citing a Canstar estimate.

“I think Australians have had enough of this rort. Being charged to access your own money simply must change.”

The issue has become more acute as the cost of living increases. A customer who buys a $5 cup of coffee will be charged $5.08 if they pay with a card. Payment costs, if not passed on, are a perennial concern for small businesses, hurting margins as more transactions shift away from cash.

In response to the public unease, the RBA, which regulates payments with a mandate to keep costs as low as possible, has brought forward its review of merchant costs and surcharging. It hopes to release a consultation paper by the end of the year.

The RBA review will consider whether surcharging should be banned. Europe and the UK have already outlawed the practice, forcing small businesses to absorb the costs and potentially pass it through in general pricing.

“People don’t use cash any more, so everything is just getting surcharged. It’s prevalent in the retail industry, particularly hospitality,” RBA governor Michele Bullock told a parliamentary committee last Friday.

“We are going to be looking at the economic circumstances now, and whether surcharging is still fit for purpose as an instrument to improve efficiency in competition.”

The RBA does not collect data on how much surcharges are costing Australians, and is seeking numbers from payment providers to quantify the impost.

It estimated in 2022 that 7 per cent of all card payments involved some surcharge, but that figure would be higher today as new payment software makes it easy for merchants to surcharge automatically.

The RBA will also examine whether caps on interchange fees – charged by a merchant’s bank to the bank that provides a card to the consumer – could be reduced.

The Australian Banking Association rejected Mr Laxale’s categorisation of the fees as kickbacks, saying there were costs involved in ensuring payments were made safely and securely.

“Just because payment rails are invisible, like the 5G network and water pipes, it doesn’t mean they are free to operate,” ABA chief executive Anna Bligh said. “They have to be built, maintained and upgraded, which all requires significant investment.”

The ABA said there had been a 13 per cent drop in merchant service fees in the 2022-23 financial year, reflecting more competition in the market.

Mr Laxale will question the major bank chief executives about electronic payment costs when they appear before the House Economics Committee next week.

“I think that Australians have now begun to ask themselves; ‘why are we even being charged these fees at all?’” he said.

The issue has become more acute due to the growing popularity of “blended” payment plans offered to merchants. These charge a flat rate – about 1.2 per cent of the transaction value at major banks, and 1.6 per cent at Square – regardless of whether a customer spends with a credit card or a debit card, which costs less to process.

Blended fee plans are also circumventing a policy known as “least cost routing”, which is supposed to allow merchants to choose the lowest-cost payment network.

The RBA was originally planning on consulting on surcharging as part of a broader review of retail payments regulation, after new laws providing it greater powers over platforms were passed. But that legislation has been delayed given it was stapled to a politically contentious bill on superannuation tax concessions.

Businesses are prohibited from applying a surcharge if they don’t accept cash. They also aren’t allowed to add a surcharge that is more than what it costs them to process the payment. The Australian Competition and Consumer Commission has powers to investigate if businesses break these rules.

The Independent Payments Forum, which is representing the Council of Small Business Organisations Australia, along with service stations, restaurants and cafes, backs the RBA review.

The forum’s co-ordinator, Warwick Ponder, said it would provide an opportunity to “highlight the massive cost-of-living implications caused by the disparity between the fees charged to small businesses and their customers for everyday card payments, compared to big retailers”.

Sub holder reducing their holdings

If I'm not mistaken, Anacacia looks like a private equity firm - https://www.anacacia.com.au/

Have sold a while back after going through the last update.Given growth has flattened and sellers still active, maybe revisit at $1.20 or when the macro becomes clearer

Some selling by Wilsons asset management which is unusual given the recent solid results

I admit I came into Smartpay (around 95c) early this year with a bit of apprehension as I'm more mining/biotech but was attracted by the financial metrics, product scaling, customer satisfaction and also see it being used in a few places.

One broker on Capital IQ (I believe it is Bell potter) also forecasts EPS of 0.03 for FY24 which implies a PE of around 56 at current price. Overvalued but looks like you are paying for quality.

So the selling could explain the weakness today (14 July). Maybe Wilsons is selling some to chase other opportunities or they see the Bell potter report as well.

[held]

It's difficult to say anything bad about the results. Smartpay is on a big purple patch at the moment.

Free cashflow lags some of the other numbers, because the growth requires upfront capex in payment terminals. The company increased the Australian fleet terminal by +62% this financial year. Australia is now 81% of the group's revenue having been 40% only 3 years ago.

Coming out of March 2023, the revenue run rate is already +17% on that of FY23, due to the extra terminals deployed during the year.

There is also a potential kicker on whether SMP can transition its New Zealand business (19% of group revenues, but 2x the number of terminals vs Australia) from a terminal rental to payments acquiring business and become vastly more profitable. Something to watch out for.

Roughly 4.5x revenue, 50% gross margin, 33.6x EBIT and FCF positive despite the capex required to fund the company's impressive growth rate.

Not sure what others make of this tweet. I know TLX put out only revenue numbers in the JP Morgan conference before the formal business update came through.

Also a bit unusual for me being a holder of Smartpay given they operate in a highly competitive industry. But do like the fact there are lots of positive testimonials about their service and they seem to be growing.

Given the macro picture is against retail at the moment, I didn't think Smartpay share price would hold up this well.

[held]

Surprised that there’s not a lot of chatter on this name, given the share price is hitting into all time high territory.

1H FY23 results (30 Aug half end) was out on Monday and the company has continued its path of revenue growth, profitability and positive free cashflow.

Group revenue grew half-on-half by 23% (68% vs pcp), with EBIT and FCF still both positive at $3.8m and $3.0m respectively (not too dissimilar to the last half).

While increased advertising spend was largely foreshadowed, it was a significant jump in salaries that muted profit margins in the half. The CEO clarified this during this morning’s Coffee Microcaps interview - it was due to the hiring of a Business Development manager and Outbound Sales manager in late Q4 and the building out of the teams underneath which spiked the costs. Salary expenses will return to the previous run rate in 2H FY23.

In my previous post, I wrote about Smartpay’s “marketing innovation”, and still think this is an area that is being dismissed by some. There’s a value proposition difference between a “completely free payment terminal” and “here’s a bunch of fees to use our terminal, but you can recoup it by configuring a surcharge”. The end result might be the same, but the cognitive and initial financial load on a small business owner is tangibly lower.

The big 4 banks (76% share of the merchant terminal market, excluding Square - according to Tyro) will have difficulties responding.

1. The merchant terminal business is trivial compared to everything else a bank does. It’s really just an add-on to help support the business banking proposition.
2. Banks have much bigger and much more profitable credit card divisions. The employees working in credit cards have had many years of education from their scheme partners (Visa, Mastercard, Amex) that credit card surcharges are bad because they suppress spending. Suppressing spending is bad, because the bank makes money from transactions (interchange) and larger outstanding balances. Who’s going to be ballsy enough to introduce a SmartCharge feature at a bank to make next to no money at any risk (perceived or otherwise) of endangering the top-line of a much larger and more profitable line of business?

Jack Mallers has just announced a partnership with NCR, one of the largest POS providers to integrate lightning payments.

This eliminates merchant fees, potentially rendering Smartpay's business obsolete. I don't know when this innovation will be open up to Australia, but shareholders need to keep a close watch on this development.

Smartpay released a trading update yesterday, which showed their continued strong growth trend. The quarterly group revenue of $13.2m was up 43% YoY and 32% QoQ and was wholly due to the Australian business, although the mature NZ business held steady.

The general sense from the release was the easy gains from rollout of previously sold but unutilised terminals may have a little way to play out but is probably closer to the end than the beginning. However, the sale and rollout of new units reverting to a 'normal' run rate just means they go from hyper growth to merely mega growth.

What is really pleasing is ARPU on an annualised basis exceeded over NZ$4k for the first time and I think this still has someway to play out over the next 12 months as current COVID fears subside. Further COVID-variant risks continue but when you consider this business - that you might think was most at risk to a pandemic lockdown scenario - is at or very near financial sustainability and has built that in the midst of a pandemic, it makes you wonder what they can do in a more normalised environment.

[Held here and IRL]

Smartpay is likely to benefit from the re-opening of retail in Australia, and should have strong results for Q2 2022. The same thing occurred overseas, with peers Square Inc and Lightspeed reporting strong GPV growth in the June quarter of 2021 as their economies re-opened. However, both companies have hit headwinds in the September quarter, as GPV growth normalises, and headwinds begin to return, noting the following challenges the industry faces:

• Withdrawal of fiscal stimulus from governments, creating a drag on the economic recovery.
• Inflation in commoditises, such a oil, reduces discretionary spending.
• Boomer generation retirement generating a headwind as boomers spending reduces.
• Emergence of DeFi, although not material presently, will disrupt this sector, as it presently is doing to remittances.

Smartpay may return to pre-pandemic growth rates, but I think that is the most optimistic outcome one should be modelling.

@jwrostangno27

Sorry if I didn't phrase it correctly.  Smartpay is supporting Alipay and WeChat pay as part of its mobile payment options on its platform.   It's not competing.  It's 'joining forces' with some of the biggest mobile payment operators in the world.   It is only going to be a good thing for Smartpay

https://www.smartpay.com.au/eftpos-features/alipay-wechat-mobile-payments/

I have not heard anyone mention Alipay and WeChat pay as a point of difference.

To me, these are epayment giants just dipping their toes in the Aust environ.  The fact the Smartpay have already integrated gives me confidence that they are in the know.

Pre-COVID, Alipay and WeChat pay was beginning to gain traction.  Take a walk around Chinatown and every second retailer had a terminal on their counter.  Granted, COVID has sent a fair few Chinese students back home so there might not be as many users at present, but when the borders reopen, who's to say they won't return, with their families in tow?

WeChat pay in particular do a lot of viral marketing on their platform creating their own markets and sales funnels.  Social media + payments all-in-one.

08-May-2020:  CCZ Equities Research: Smartpay (SMP): A Smart Buy, Deal or No Deal

See also:  01-May-2020:  Update On Proposed Sale of NZ Business and Assets

CCZ has a "Buy" call on SMP and a TP of 56 cps (previously 62 cps).

SMP closed up +10% at 44 cps today (08-May-2020), possibly partly due to CCZ distributing their "Buy" note this morning.