Last week saw WorldPay publish its first annual results as a public company. As WorldPay is the only public “standalone” acquirer/processor in the UK market, these results offer a great insight into what is happening in the UK market, particularly in pricing.
WorldPay UK is an established, stable, almost boring business……or is it? A closer look reveals where its revenue growth is coming from and how much of it is from price increases for small merchants. We also got our first glimpse of timing for completion of WorldPay UK’s long running platform upgrade.
Is WorldPay UK Losing Market Share ?
Yes. Whilst the value of all UK card transactions rose by 8.3% to £622 billion in 2015, the value of transactions processed by WorldPay only rose by 3.2% to £203 billion, a growth rate of less than half the market rate.
Transaction value is a key statistic because the value of card transactions is the main driver of WorldPay’s revenue now that both credit cards and debit card fees are largely based on a percentage of transaction value following Visa’s March 2015 interchange changes.
As you can see, the erosion of transaction value market share has been occurring since 2012, and appears to have accelerated in 2015. Even transaction volume growth (8%) has lagged market growth (11.4%) in 2015. So whilst historically WorldPay has been losing share with higher value transactions/larger merchants and keeping pace with lower value transactions/smaller merchants, in 2015 WorldPay UK seems to be losing share all round.
Why is this? WorldPay has been at the forefront of extending card acceptance to micro-payments/micro-merchants through initiatives like contactless and Zinc so this helps explain the downward trend in WorldPay’s Average Transaction Value (“ATV”). In 2015 WorldPay UK’s ATV stood at £37.56 v’s the market at £46.36. Market ATV is eroding at 2%-3% per year whilst WorldPay UK’s annual ATV erosion is markedly higher at 4%-5%.
We are seeing some growth in new entrants in the UK market, both overseas acquirers (Borgen, EVO Payments, Valitor, etc) and ISO’s but these wouldn’t account for a material value of card transactions. Other factors which could be more significant :
- WorldPay UK’s decision to abandon its ISO channel in 2014. WorldPay UK’s ISO’s were previously offering pricing which was materially cheaper than WorldPay’s own pricing which presented difficulties for WorldPay UK when increasing its fees. These ISO’s havn’t disappeared though – they now process via other acquirers.
- Price increases – WorldPay are at pains to stress that customer retention has been good, but theres no question that WorldPay customers have seen significant fee increases in 2015 which has to have led to increased churn.
- Loss of large merchants ?
Large Price Increases for Merchants
In 2015, WorldPay UK grew its net revenue (revenue after interchange and scheme costs) by £39 million (10.7%) to £405 million. A good yet unremarkable statistic until you break the growth down :
What jumps out is the eye-watering 19% growth in Net Acquiring Income (up £36m to £238m) – these are the per transaction fees that merchants pay on each debit and credit card. Other revenue is all else – MMSC, terminals, FOREX, authorisation, gateway feess. Other revenue grew at a measly 1.7% in 2015
|Net Acquiring Revenue (£m)||180||198||202||238|
|Other Revenue (£m)||125||141||164||167|
|Total Net Revenue (£m)||305||339||366||405|
If we break the £36.3 million growth in Net Acquiring Revenue down further, we can see that WorldPay UK’s 3.2% growth in transaction value translates to only £5.7m (16%) of the Net Acquiring Income growth.
The remaining £30.6m (84%) is from price increases and not passing through the EU interchange reductions.
But who is bearing the rates increases and losing out on the EU interchange reductions ? WorldPay don’t give segmental breakdown of their customer base other than in their October 2015 IPO prospectus (below).
|Merchant Fee Rates||18.6||51|
|Net Acquiring Income||36.3||100|
What this shows is that whilst a small number of large corporate customers (750) process over 85% of WorldPay UK’s transactions, WorldPay UK makes little revenue from them (24% of Net Revenue). It is the smaller customers who only process 14.5% of transactions from which WorldPay makes 76% of its Net Revenue. And its these small customers who will have suffered the vast majority of the rates increases and not received the full benefit of the EU interchange reductions. The larger corporates are on “interchange plus” pricing and get the EU reductions immediately. They are also on term contracts of 1 – 3 years at fixed margin so would not be subject to re-pricing other than on contract renewal (pricing tends to go down, not up on renewal!).
So its small businesses that fuel WorldPay’s revenue growth and bear the brunt of rates increases. Many will recall their rates increases in early 2015 in relation to Visa debit cards.
|Customer Segment||Definition (Annual card turnover)||Number of merchants||Transaction Volume||Net Revenue|
Failing to pass on EU interchange reductions
WorldPay management estimate that the Net Revenue benefit they received from the EU interchange reductions in 2015 was £10m – £12m. This is the interchange reductions that are not being passed on to smaller customers on “blended pricing” which their larger counterparts on “interchange plus” pricing received immediately. WorldPay management also went on to say that the 2016 benefit would be roughly the same again.
But we think the 2016 benefit could be significantly larger. One would understand why WorldPay might want to downplay the true extent of the upside but most of the benefit falls into 2016 :
- Visa debit – interchange changed to 0.2% on 1 March 2015 so 2016 will see 2 extra months of benefit for WorldPay. Anecdotally, we saw rates increase for a significant number of small merchants by an amount in excess of interchange increases so we believe WorldPay profited from this.
- MasterCard premium credit cards – interchanged reduced by c.0.5% – 0.6% on 1 April 2015 so 2016 will see 3 extra months of benefit for WorldPay. We have seen little evidence of pass through of any of this reduction to small businesses in 2015, however more may see the benefit in 2016 as WorldPay premium consumer card rates are aligned with standard consumer credit cards, reducing the WorldPay benefit.
- Consumer credit cards – THE BIG SAVING!!! Interchange reduced by 0.5% on 9 December for all consumer credit cards (including MasterCard premium credit cards). This has yet to be passed onto small merchants and we understand it will be, to some extent, on 1 March 2016. Of those merchants who contacted us, we previously estimated WorldPay would only pass through c.1/3 of the full benefit in 2016. So 2016 will see an extra 11 months of benefit for WorldPay but a portion of this benefit will be passed onto merchants.
- Non-secure fees – incremental interchange costs on ecom and CNP were removed for consumer credit cards on 9 December. This has yet to be passed onto small merchants and little indication that it might be and that WorldPay will retain “Premiums” for these transactions.
Quantification the overall 2016 benefit is tricky without detailed disclosure and WorldPay gave no previous disclosure other than a comment to analysts re their 2015 benefit. An educated guess might be that the increases/decreases from Visa debit, MasterCard premium, Non-secure and any merchant rate renegotiations could be broadly offsetting. Leaving WorldPay with a repeat of the 2015 benefit plus the upside from consumer credit cards, which is the biggest benefit.
So whats the quantification of consumer credit cards benefit? Could be (very crudely) equal to :
Total Card Turnover (£202.8bn WorldPay UK 2015) times credit card element (29.2% UK Card Association market average) times % merchants on blended pricing (14.5% of volume by WorldPay UK 2014 SME/Small Corporate sector) times 0.5% (interchange rate reduction) times 11/12 (2015 results already contained 1 month) times 2/3 (say WorldPay pass through1/3 benefit) adjusted for the pass through delayed until 1 March.
Final answer ? We think there is £28m of additional upside in 2016 on top of the £10m-£12m announced for 2015 which isn’t being immediately passed onto small businesses. Our calculation is crude and undoubtedly innacurate. We havn’t carved out commercial cards for example and guessing the extent of renegotiations is difficult. But its an indication and we’d love to see clearer guidance from WorldPay.
The key point is that WorldPay’s gain is small business’s loss. But they can access more of these EU interchange reductions by shopping around, and many will. So this short term upside for WorldPay UK, which we believe is quite considerable, could quickly erode as merchants leave. And its a one time opportunity – WorldPay can’t bank this upside every year and without volume growth they will need to turn to more price increases to fuel future growth.
New platform build in 6th year
WorldPay UK is the former NatWest Streamline business. Streamline had a reputation for being a robust, resilient processing platform with little downtime. But it is an old, inflexible platform which lags its competitors in terms of automation and reporting enhancements that merchants now demand.
So a key plank of WorldPay UK’s strategy since 2010 has been the creation of a new processing platform. The build is now in its 6th year and to date has cost a staggering £450 million. The final part of the build is the “Clearing & Settlement” module which is currently undertaken by RBS on behalf of WorldPay. It is RBS who currently direct merchants’ settlement funds into their accounts, not WorldPay. This is a vital stage of the process – making sure merchants get their funds, accurately and on a timely basis.
WorldPay expects to begin using their own clearing & settlement engine towards the end of the summer 2016. This is likely to be trialled on new merchants first before existing merchants are migrated. With 300,000 merchants, migration will be a complex and time consuming task potentially lasting 12 months. Its not a risk free process – any delay in, or misplacement of merchant settlement funds will be reputationally damaging for WorldPay however one would expect this process to be “project managed” to the hilt.