Growth in online retail is reshaping industries, especially fintech (financial technology). Retailers are always looking for new, secure and cost effective payment systems. Adoption of internet retail has benefited many online payment service infrastructure providers including PayPal (PYPL, Financial), Mastercard Inc. (MA, Financial) and Visa Inc. (V, Financial).
The growth story in the industry is so attractive that all star growers of the last decade are trying to get in to the payment game. Apple (AAPL, Financial) Pay, Google Wallet and Amazon (AMZN, Financial) Pay are all evidence of potential lucrative growth in the payment market.
Online payments are shifting toward more secure and hassle-free payment methods like Online Banking Electronic Payment (OBeP). GH Capital Inc. (GHHC) is exposed to the growth of the online banking electronic payment industry through its subsidiary ClickDirectPay. The company is focusing on the European payment market, which has witnessed the highest adoption of OBeP services.
Further, the company is positioned uniquely with its creative pricing structure. The growth of the OBeP industry along with merchants’ willingness to switch for costs advantage makes GH Capital a good buy candidate in the OTC space. Details follow.
Industry prospects
Source: World Payment Report, 2016
According to the global payment report, total e-commerce payment through online bank transfers including real-time transfers is set to reach $440 billion by 2020 translating to CAGR of 12% p.a. Credit cards will become less dominant going forward, according to global payment report 2016. The info graphic below depicts the increase in market share of bank transfers going forward while eWallet, credit cards and debit cards are set to lose or maintain market share.
Boston Consulting Group cites the inconvenience of remembering credentials as one of the reasons users revert to cash, cards and online banking. Further, WorldPay forecasts internet banking transactional value will reach $245 billion in 2017. All in all, the payment market is set to witness a minor shift during the next few years, and online banking transfers including OBeP will become more common.
Europe is already among the leaders in OBeP adoption with companies like Sofort GmbH and iDeal. OBeP will gain more traction going forward amid security, low chargeback risk and the fact that no one wants to sign up for multiple payment accounts. It’s convenient to use bank details to pay for purchases.
As banks are threatened by new payment systems, OBeP will keep banks in the online arena.
Given the resources at the disposal of commercial banks, they will push OBeP adoption even higher going forward. To review, online banking payment systems are set to witness growth in the coming year amid security, convenience and support from the banking system. But which payment provider has the potential to lead? The answer is in the pricing structure.
Pricing is a critical success factor
The success factor in this growing industry will be pricing. A survey by A.T. Kearney shows that cost is the deciding factor among most of the retailers choosing a payment service provider. See the chart above.
BI intelligence notes that no one company or gateway has an overwhelming share of the market, and competition among these companies remains strong. This indicates that new companies can emerge to dominate if they hold a strong competitive advantage like cost. A.T. Kearney further notes that decreasing transaction fees in many countries like France provide additional incentive to switch.
GH Capital is set to benefit from OBeP
This puts companies like ClickDirectPay in a spotlight. ClickDirectPay, a subsidiary of GH Capital, has a simple new pricing model. CDP offers every online merchant, small to large volume, 30 transactions toll free every month, independent of the processing volume. The pricing plans seem attractive. See the chart below:
Management Data and Focus Equity Estimates
Cost structure of similar providers
Stepped fixed payment structure allows merchants to budget their payment processing costs accurately. More importantly, the cost per transaction is substantially lower than counterparts, as depicted in the chart above, which will benefit GH Capital.
PayPal charges 2.9%, or $290 for transactions around $10,000. Note that PayPal, on average, charges around 30 cents per transaction. Europe's leading alternative payment method Sofort GmbH charges fees starting from 0.95% plus 0.35 euro (39 cents) per transaction.
ClickDirectPay offers a unique pricing solution if you’re a low-transaction, high-value business.
To put it in perspective, it’s worth mentioning that you will be charged nothing if the transaction volume is below 30 even if a single transaction is of high value. CDP's cost table above shows cost per transaction as low as 1.7 cents, which is materially lower as compared to cost per transaction charged by PayPal and Sofort GmbH, a direct competitor.
This indicates that ClickDirectPay and GH Capital are planning to target high-value, low-transaction volume businesses. Further, the proposition is attractive for smaller businesses that don’t have hyperscale volume; because of the cost sensitivity of smaller businesses, they are likely to opt for CDP’s stepped fixed pricing solution. According to CDP’s management:
“By accepting ClickDirectPay payments, merchants can save millions of euros month by month of payment processing costs, and it doesn’t matter if we are talking about large online retailer or airlines. We are offering every merchant 30 transactions toll free.”
Fixed pricing has the potential to change online payment services' competitive landscape in Europe.
As this is a two-sided market, fixed pricing can change the landscape of the European online payments market. Lower cost will bring more merchants on board, which in turn will lead to more customers using CDP as a payment option. The pricing on the merchant side is very important as consumers have no switching costs. CDP is set to take market share from competitors because of two key pricing decisions. First, small merchants will integrate CDP’s gateway because the company is offering fee-less low volume transaction. For large merchants, fixed fees will allow saving on large volumes, which is not possible with conventional online pricing models offered by Sofort and PayPal. The pricing strategy of CDP has the ability to change the competitive landscape of European online payment technologies.
Doesn’t competing on costs mean low margins? Yes, it does at inception. But as fixed investments are higher during the development phase of a software product, the companies in the space can benefit from strong economies once scale is achieved. This is expected to be the case for ClickDirectPay and GH Capital. Once scale is achieved, margin will go up amid scale economies.
Conclusion
ClickDirectPay has a pricing advantage and will certainly attract high-value, low-volume customers along with small and medium businesses, or SMBs. ClickDirectPay has around 350 online merchants as of now; the management is forecasting 10,000 online merchants by 2018. This seems plausible given the low cost, creative pricing solution designed to target SMBs. All in all, GH Capital is a good prospect for payment industry exposure in the OTC market. Big gains are in the cards amid explosive merchant growth going forward. Be aware – OTC markets entail high risk and limited liquidity.
Disclosure:Ă‚ We have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
