The world of payments – the financial plumbing that enables banks, companies and individuals to send and receive money securely and efficiently – has long been a remote and unloved backwater of the financial services industry. Traditionally seen as commoditised, routine and downright unsexy, payments was where second class bankers were sent to end their careers.
But in recent years, this specialist corner of international finance has blossomed from ugly duckling to swan. Investors have realized that the humdrum activity of managing and processing payments is a cash cow that keeps on giving. HSBC, for example, reported that its Global Cash and Liquidity Management business was its number two revenue earner in 2018, after retail banking. An activity that is only noticed when something goes wrong, payments is also a very sticky product – get it right, and clients rarely move on. Commoditised it may be, but with revenues running to billions, it is no longer neglected.
But while the large global banks are able to use their scale to build a strong business and client offering for corporates and multinationals, the main consumer payments houses – Visa and Mastercard – continue to make great profits from putting merchants and buyers together and processing payments between the two. Visa’s share price has risen steadily if unspectacularly to triple in value over five years, while Mastercard has followed a similar trajectory.
But while the payments industry has been historically dominated by scale players, recent innovations have seen new entrants rise rapidly to challenge the status quo, especially in those parts of the world that the US and European giants feel less comfortable.
In Asia, Africa and MENA, access to the banking system is far lower than in Europe or North America, and therefore cheques, cards, and other traditional forms of payments are less common, leaving the field open to innovative technology to step in. PayPal, AliBaba and WeChat count their customers in the millions, boast premium valuations, and have largely left the banks behind in the provision of digital and online payments services.
In the last week, two companies in this sector have listed on the London Stock Exchange, raising over $2 billion. What makes them interesting is that both are based in the Gulf.
Network International was originally the internal payments system of Emirates Bank International (now Emirates NBD). Today it is the largest payments provider in Middle East and Africa, and in 2018, it processed approximately $40 billion in total processed volumes (TPV) for more than 65,000 merchants and processed 681 million issuer transactions on more than 13 million cards for over 220 financial institutions.
Another tech-driven payments company, Finablr, plans to raise $200 million on the London Stock Exchange in an IPO in May. Born from the foreign exchange businesses Travelex and UE Exchange, the Finablr network processed more than 150 million transactions, managing c.$115 billion in volumes for its customers in 2018. Like Network International, Finablr is based in Dubai, and its focus is firmly on the Middle East and emerging markets.
Meanwhile, on the Milan exchange, Nexi the dominant Italian payments provider raised EUR1.3 billion in an IPO – Europe’s biggest of the year so far. A general shift away from cash in favour of digital payments has fed investor demand for payments groups, making the sector a bright spot in an otherwise weak IPO market.
Network International’s investment case was popular with London investors: the share price leapt by 20% on the first day of trading, and has remained at those levels in its first week. Finablr is expected to show a similarly robust level of investor support.
The question that has yet to be asked in public is: Why did these home-grown success stories choose London over their local markets?
The answer is entirely pragmatic, yet it also offers a warning to the GCC markets. Low liquidity levels and a lack of other issuers in this sector mean that local investors may not understand these businesses, and a relatively low level of institutional participation means that GCC markets are more volatile and less liquid – and that raises risks for issuers seeking a stable stock price and measured investor returns.
For now, regional innovators and disruptors are likely to continue to follow the fintech liquidity pools to London and New York. The challenge for local regulators, exchanges and advisors is to create an environment that will reward business innovators for their achievements, and will allow investors to take part in these home-grown success stories.