Digital Payments Archives

PAX’s H1 2023 Revenue Down 15% YoY as E-payment Terminal Business Hurt by Unfavourable Macroeconomics

Revenue contribution from LACIS, EMEA and APAC regions drop YoY in H1 2023.
Revenue contribution from APAC region should improve in H2 2023 with India and SEA’s strengthening performances.
PAX expects a double-digit percentage decline in 2023 revenue.

PAX Global Technology’s H1 2023 revenue fell 14.7% YoY to $456 million, as the company’s electronic payment terminal business was constrained by slowing global economic growth and high-interest rates. Meanwhile, revenue from its payment terminal-related services segment surged 35.6% YoY during the period, mainly due to the growth in revenue generated from the Software as a Service (SaaS) solutions, maintenance, and installation services.

During PAX’s earnings call, CEO Jack Lu discussed a few key topics including the adoption of Android smart solutions, macroeconomic challenges and forward-going management strategies.

Macroeconomic Situation and Payment Trend

CEO Jack Lu: “Despite short-term macroeconomic challenges, the proliferation of electronic payments continues to be a significant and ongoing global trend. The continued advancement of payment technology, along with growing consumer appetite for convenient and secure payment options, as well as the cashless initiatives promoted by governments worldwide, have continued to open up new opportunities for PAX solutions.”

Our analyst take: “PAX’s strong portfolio across different sectors, combined with its POS terminal management platform, offers a one-stop solution for businesses. PAX is helping businesses scale their operations by providing seamless payment options. The company has strategically set up a dedicated division called Zolon to expand business Internet of Things (BIoT). PAX’s service segment revenue is expected to receive a further boost from its BIoT solutions, including SaaS (e.g. MAXSTORE) and commercial POS solutions (e.g. Elys). The enterprise IoT solution will mainly target cloud-based services for businesses to secure recurring revenues.”

Management Strategy

CEO Jack Lu: “Looking ahead, the global payment industry continues to embrace a prosperous future. PAX will continue to explore more potential business opportunities by acquiring banks, PSPs and distribution partners, offering future-oriented payment solutions for merchants and consumers across the globe.”

Our analyst take: “The payment industry has undergone fundamental changes in recent years, with a surge in the global acceptance of electronic payment options among consumers and merchants. Governments and financial institutions worldwide now place greater emphasis on their electronic payment acceptance infrastructure and are aiming to implement a more efficient and transparent financial ecosystem. The huge value and potential of the payment terminal market will be further unlocked going forward. PAX’s ongoing strategy is aligned to capture this huge market opportunity and we believe its expanding global presence and increasing investment in R&D will help it drive innovation and increase market share.”

H1 2023 Result Summary:

PAX reported gross profit margin of 44% in H1 2023, up 400 bps YoY, driven by lower costs stemming from a weaker yuan and a change in its geographical sales mix. PAX’s SaaS ecosystem rose 84% YoY in H1 2023 and contributed positively to the company’s overall revenue growth. The company had more than 10 million connected terminals being managed on its MAXSTORE platform during the period.
In H1 2023, PAX registered a decline in revenue from the Latin America and Commonwealth of Independent States (LACIS), Europe, Middle East and Africa (EMEA) and Asia-Pacific (APAC) Only the United States and Canada (USCA) region saw a record-breaking growth of 20% YoY during the period.
The LACIS region posted an 18% YoY decline in H1 2023 revenue to reach $175 million, constrained by the conservative business sentiment in Brazil stemming from challenging economic
The EMEA region recorded $148 million in revenue, down 19% YoY in H1 2023, mostly due to economic uncertainties, especially in Europe and the Gulf Cooperation Council (GCC), resulting in a temporary slowdown in market demand. However, PAX is confident that its strong brand recognition and products, as well as a reputable network of channel partners, will continue to positively influence growth in the region.
The APAC region saw a 24% YoY decline in revenue to $57 million, hurt by the longer-than-expected sales cycle in India, which offset the growth of other markets in the region. However, going forward, several APAC countries are expected to contribute increased sales revenues as PAX’s brand recognition improves and new products hit the market.
During H1 2023, PAX secured a steady increase in shipment volumes from the SEA region as countries like Indonesia and Singapore ramped up the adoption of PAX Android smart products as they move to modernize their electronic payment systems. Riding on this wave, along with India’s strengthening contribution, the APAC region should perform well in H2 2023.
The USCA region registered a record-breaking growth of 20% YoY in H1 2023 with $76 million in revenue, mostly driven by increasing market demand for diverse payment options and value-added services. PAX Smart Android solutions have maintained strong sales momentum and positive market reception of the newly launched Elys Solution.
In July 2023, PAX was elected to the Board of Advisors of the PCI Security Standards Council (PCI SSC), making it the first and only Chinese company to join the board – this proves how good its products are. PAX should leverage the PCI SSC news to keep gaining market share in the US and Europe.
PAX’s expertise in Android SmartPOS technology has enabled it to lead the Android SmartPOS solutions space. However, it faces strong competition in other use cases and form factors from international players like Ingenico and Verifone and homegrown Chinese players like Newland, Tianyu and Castles.
With an unwavering dedication to the payment terminal sector for the past two decades, PAX has built extensive expertise, capital prowess and a diversified global footprint supported by a strong portfolio across different sectors catering to different needs of merchants and businesses. This has helped PAX become risk resilient and adaptable to volatile environments.
PAX has a bleak outlook for 2023, given the macroeconomic obstacles, decelerating global economic growth, and elevated interest rates. The company has anticipated a double-digit percentage decrease in revenue for the year. Similarly, competitors like Newland, Tianyu and Castles are also grappling with these macroeconomic challenges for their payment terminal businesses.

Related Reports:

PAX Revenues Cross $1 Billion in 2022; SmartPOS Adoption Supports Growth

The growth was primarily driven by the strong performance of Android-based payment terminals.
PAX’s expertise in Android SmartPOS technology and its MAXSTORE platform offers a centralized and seamless way for merchants to navigate an increasingly complex business.
PAX is expected to maintain its leading position in Android SmartPOS payment solutions.

PAX Global Technology, one of the world’s leading providers of electronic payment terminal solutions and related services, posted strong revenue of $1,003 million in 2022, showing great resilience in a period of economic challenges such as interest rate hikes and higher inflation. The growth was primarily driven by the strong performance of Android-based payment terminals. Fintech is playing a central role in the advancement of digital and cashless economies by providing greater efficiency, convenience and accessibility to consumers. However, PAX’s software-as-a-service (SaaS) solutions such as the MAXSTORE platform are enabling payment service providers (PSPs) and acquiring bank (financial institution that processes credit or debit card transactions on a merchant’s behalf) to combine core payment services with financial and non-financial applications in a much more flexible and cost-effective way.

Merchants can operate digitally and process orders more efficiently with the use of Android SmartPOS terminals. These terminals also provide valuable insights into consumer behavior, enable the development of automated marketing campaigns, and help to manage inventory more effectively, among other benefits. PAX’s expertise in Android SmartPOS technology and its MAXSTORE platform offers a centralized and seamless way for merchants to navigate an increasingly complex business. The MAXSTORE platform had well over 8 million managed devices by the end of 2022.

Key regional developments

Europe, Middle East and Africa (EMEA)

EMEA region clocked $319 million in revenue in 2022, an increase of 5% compared to 2021.
The growth was primarily driven by the large-scale adoption of Android SmartPOS devices across EMEA, primarily in Europe and the Middle East.
PAX’s partnerships with leading acquiring banks, PSPs and independent sales organisations (ISOs), and tailored solutions for the European market drive its growth across the region. The UK, Italy and Germany have increasingly become important growth drivers for PAX. Significant gains were made in France, Greece, Scandinavia, Balkans, Poland, Spain and Turkey.
Saudi Arabia’s ‘Vision 2030’ program for economic reform and the Saudi Arabian Monetary Authority’s (SAMA’s) openness to innovative technology finance across the Gulf Cooperation Council (GCC) and North Africa continues to accelerate the upgrade of legacy point-of-sale (POS), driving a big growth for PAX Android SmartPOS devices.

Latin America and Commonwealth of Independent States (LACIS)

LACIS region posted $385 million in revenue, a decline of 8% YoY. PAX experienced strong growth in this region in 2021, a major reason for the dip in 2022. However, PAX has a diversified product portfolio and a well-established channel partner network which can help increase its footprint in the region.
Brazil, Chile and Argentina are the major contributors to the growth in the region with increasing demand for Android SmartPOS solutions in sectors like multilane, hospitality and parking.

Asia Pacific (APAC)

APAC region recorded steady growth of 5% YoY with $172 million in revenue. PAX has expanded its footprint to more Asian countries.
India and Japan continued to show positive demand for Android-based smart payment terminals, which is expected to propel further growth.
Indonesia, Singapore and Thailand were the major contributors with double-digit revenue growth compared to the previous year. In Indonesia, sales were driven by the government’s ‘Payment System Blueprint 2025’ initiative, which is helping improve the nation’s core payment infrastructure.
PAX Technology, established as a Singapore subsidiary in 2021, focuses on local merchants and financial institutions. Singapore government’s ‘Retail Industry Transformation Map 2025’ is encouraging retailers to adopt innovative business models, which is expected to drive the demand for smart payment terminals.

United States and Canada (USCA)

USCA region posted a robust revenue of $127 million, up 35% YoY driven by PAX’s partnerships with PSPs and ISOs, and its expertise in Android SmartPOS solutions.
PAX Android smart payment terminals offer seamless integration and diversified payment methods such as mobile wallets, online ordering, curbside pickup and self-service ordering and checkout, which adds convenience for businesses operating in the retail, supermarket, hospitality and unattended segments.

Key takeaways

PAX is expected to experience greater adoption in the future, thanks to its ongoing investment in the research and development (R&D) of Android payment terminal technology. PAX spent $72 million on R&D in 2022, which was nearly 7% of its total revenue. Its terminals are user-friendly and offer a range of payment options, which makes them attractive to merchants.
However, POS vendors are now focusing on cloud-based software solutions to earn recurring revenue, increase profitability and offer better solutions to customers.
Along with strong payment solutions, partnerships play a crucial role in the fintech industry. PAX is also determined to strengthen its international sales network and customer relationships across geographies.
Due to ongoing economic challenges like interest rate hikes and high inflation, and geopolitical tensions, PAX is expecting flattish or lower-single-digit revenue growth in 2023.
With its strong portfolio across different sectors catering to different needs of merchants and businesses in different regions, PAX is expected to maintain its leading position in Android SmartPOS payment solutions.

New Umbrella Entity to Refine India’s Digital Payment Ecosystem

The Reserve Bank of India’s (RBI) move to allow private players to set up, manage and operate retail payment systems [officially described as a New Umbrella Entity (NUE)] can be described as a significant step in the evolution of the country’s digital payment ecosystem. Currently, all digital transactions in India are processed by the National Payments Corporation of India (NPCI), a non-profit umbrella body backed by a group of over 50 banks.

The introduction of private players will quicken the scalability of India’s digital payment network and the growth of the base technology. Among the many advancements, the NUE will make intra-wallet transactions possible. Also, unlike NPCI, the NUE licence allows the players to earn profit.

Why NUE?

In India, over the last decade and especially after the demonetization of 2016, innovations in payment modes have picked up the pace, from the online payment mode to Unified Payments Interface (UPI) apps. NPCI’s RuPay cards now allow offline transactions in areas with low internet connectivity. The lockdowns and social distancing triggered by the COVID-19 pandemic have accelerated the shift to digital methods. With the MSMEs (micro, small and medium enterprises) and mom-and-pop stores also joining the digital retail payment mainstream, there has been a big jump in such transactions.

Against this backdrop of rising volumes and to protect the country’s only digital retail payment system from monopolies and other threats, NPCI introduced a set of guidelines this year under which third-party app providers “are required to ensure that the total volume of transactions initiated through their respective UPI applications does not exceed 30% of the total volume of transactions in the country during the preceding three months.”

Being a non-profit organization, NPCI’s ability to improve and expand its technological base or build a more robust and dynamic digital payment network is limited. It has been five years since the development of UPI in India, but it has not seen much technological progress. Therefore, on August 18, 2020, the RBI announced a framework for authorization of a pan-India NUE for retail payment systems. Further, it invited applications for an NUE licence by February 26, 2021. However, this deadline was extended to March 31, 2021, because of the pandemic. Six consortiums of businesses have applied for the licence (see chart). However, there is no clarity yet on how many licences the RBI will allocate.

Consortiums in Race for NUE Licence

Source: Counterpoint Research

What is NUE?

The introduction of the “for-profit” NUE will open business opportunities for domestic and foreign players. Unlike before, the players will earn interest on the balance that the consumers maintain for their daily shopping. Further, the players will be allowed to charge fees for online transactions. A single domestic player will not be allowed to hold more than 40% investment in the capital of an NUE. A foreign entity can hold only 25%.

NUEs can improve the digital payment ecosystem in the following potential areas:

The shared responsibility between NPCI and NUEs will open opportunities for an improved digital payment ecosystem.
Moving towards a privately-held setup with government guidelines will promote healthy competitive efficiency.
The competitive atmosphere will also encourage research, development, and innovation. The players will work towards customer convenience and safety. The payment system will be more interactive and interoperable.
The introduction of an alternative to NPCI will dilute the latter’s monopoly characteristics and concentration of risk due to cybercrime and other threats.

Challenges

The state-owned banks are trying to double-dip into the payments space by enlisting as applicants for the NUE licence while already being NPCI stakeholders. This puts a question mark on the competitive spirit which the NUE seeks to promote.
How the RBI will tackle any conflict between NPCI and NUEs is still unclear.
The ruthless competition among multiple NUEs will eventually lead to zero-pricing scenarios. Therefore, the banking parameters need to offset the cost.
Banking entities will always dominate in these consortiums due to their payment infrastructure.

While we will have to wait for the RBI to allot the licence(s) before commenting further on the issue, one thing we are sure about is that this framework will be an international milestone for the digital payment ecosystem, defining standards for subsequent such endeavours.

Smartphones as PoS Terminals Fill Digital Gap But Face Challenges

COVID-19 has led to the speedy adoption of digital payment methods across India. However, many small merchants, local vendors and self-employed individuals find it difficult to afford a mobile PoS (point of sale). At the same time, it is important for them to have such a device to match different customer preferences for the mode of payment. A new form of PoS, called Soft PoS or Software PoS, aims to fill this gap by converting a smartphone or tablet into a terminal for digital payments. Hence, no additional hardware is needed to enable digital payments.

Source: Counterpoint Research

Smartphone/tablet as Digital payment terminal

Soft POS solutions, like All Tap by Pine Labs, transform a smartphone or tablet into a payment terminal. Here are some of their basic characteristics:

These solutions are available for free only on Google Play Store.
They are compatible with smartphones embedded with NFC (near-field communication) chips.
Smartphone as a PoS terminal provides all digital payment options in one application, including debit/credit cards (across all four networks), wallet, BQR and UPI.
Based on the occupation, a transaction limit is set for the entrepreneur.
The onboarding procedure is user-friendly, and one SIM holder can have one account.
When changing the smartphone, the user needs to go through only the authentication step of onboarding.
To abide by the Reserve Bank of India (RBI) regulations, PIN-less transactions of only up to Rs 5,000 are allowed.
The solutions are cryptographically secured.

Source: Counterpoint Research

How secure are these solutions in terms of hardware?

Handling finances via cellular devices brings the security aspect under the scanner. Both hardware and software security of cellular devices have an important role in ensuring user data security and privacy. However, in H1 2020, only 4.18% of the smartphones in India were estimated to have secure hardware. This number is expected to reach 9% by the end of 2021. Further, it may be noted that this portion is mainly composed of smartphones from the premium segment. But since these solutions are targeted at those who can’t afford a PoS machine, it is more likely that smartphones with poor hardware security will be used with them.

Therefore, despite ensuring software security, which most brands claim to, the smartphones from non-premium price bands are not exactly the right fit for these digital payment solutions.

Challenges in implementing these solutions.

Apart from the above-mentioned concerns related to hardware, there are other challenges in transforming smartphones into PoS terminals:

These solutions only work with smartphones embedded with NFC, which is still a niche market in India.
Spreading awareness about these user-friendly solutions in all parts of a vast country like India can become challenging due to inadequate infrastructure.
A major segment of the target population for these solutions is composed of those who prefer cash transactions. Bringing about a behavioural change in them is not easy.
Cash transactions are often used to avoid taxes. But these solutions record all transactions undertaken through them.

Stronger Adoption of Digital Payment Ecosystem

Digitization in the financial segment brings a competitive edge to a country’s economy by amplifying the velocity with which the movement of money takes place. It also acts as a multiplier for other industries linked to it.

In India, over the last decade and especially after demonetization, innovations in payment modes have evolved, from the online payment mode to UPI apps. The lockdowns and social distancing triggered by COVID-19 have accelerated the shift to digital modes. Also, RuPay cards of the National Payments Corporation of India now allow offline transactions in areas with low internet connectivity.

Growing preference for digital payment modes like UPI, wallets, PoS and QR codes as against cash or debit/credit card transactions has put pressure on businesses and self-employed people to have PoS devices.

Conclusion

A small business or solo entrepreneur cannot always afford a PoS terminal. Besides, some may find it difficult to operate them. It is in these cases that the above-mentioned solutions come to the rescue. They transform a smartphone into a PoS terminal that provides a simpler and familiar user interface. With almost 40% penetration in India, smartphones are the best mode to promote digital payments. Further, these payment solutions do not require any additional investment.

However, the low penetration of smartphones with secure hardware in India means that users availing of these solutions may end up exposing confidential data to attacks. Therefore, apart from having a bigger market for NFC-enabled smartphones, it becomes important for smartphone manufacturers to improve hardware security to let users benefit from these solutions.

Ant Group: Behemoth on an Ever-expanding Racecourse

Ant Group is expected to raise about $34.5 billion in a dual listing on the Hong Kong and Shanghai bourses on November 5, likely becoming the biggest IPO ever. At $320 billion, Ant Group would become one of the biggest financial services companies in the world – bigger than any bank in the world, or more than four times the size of Goldman Sachs.

(Update: On November 3, the Shanghai Stock Exchange halted Ant Group’s IPO, citing a “significant change” in the regulatory environment)

(Data source: Bloomberg, October 27, 2020)

This Ant is Big

In contrast to the lexicology of the company name, Ant Group is one of the biggest technology and financial services companies in China and the world. As of Q1 2020, the company had 1.3 billion registered users globally and served over 80 million merchants. Alipay, the third-party mobile and online payments platform owned by Ant Group, processed RMB 118 trillion ($17.6 trillion) digital payments during the 12 months ended June 30, 2020, which is roughly over 55% of online payment transactions in China. Alipay enjoys a duopoly position in China together with Tenpay, a payments service incorporated in the popular messaging app WeChat, owned by Tencent Holdings. The two services account for 94% of mobile payments in China.

Despite its size, Ant Group runs on an ever-expanding racecourse. In Q2 2020, mobile payments increased 27% YoY, accounting for 30 billion transactions, or more than half of non-cash payments in China. We expect mobile payment transaction values to continue to grow at mid-teen annual rates by 2025.

Snapshot of Ant Group’s Size and Scale

(Source: Part of ‘application proof’ published by Ant Group to meet the requirements of the Stock Exchange of Hong Kong and the Securities and Futures Commission)

Putting User at the Center of Growth

(Source: Part of ‘application proof’ published by Ant Group to meet the requirements of the Stock Exchange of Hong Kong and the Securities and Futures Commission)

The beginning of what eventually became Ant Group was made in 2004 alongside Alibaba (both founded by Jack Ma), in the nascent days of e-commerce. Alipay was conceived as the payment gateway of Taobao, the B2C e-commerce platform of Alibaba Group. Alipay was to be the crucial cog in solving the trust issue between buyers and sellers in online transactions. As Taobao took off with Chinese consumers embracing e-commerce, backed by rapid urbanization, infrastructure improvement and widening internet adoption, Alipay also caught on the rising momentum of mobile commerce, and became the dominant payment method within Alibaba’s marketplaces and even beyond – other online and offline ecosystems and eventually physical stores.

Alipay’s strength lies with user experience, including a superior payment authorization rate, boosting convenience and reliability. The fact that all the services (more on this below) are embedded in one app means that take-up is hassle-free for even an entry-level user. Alipay charges a merchant fee of about 0.6% on transactions, which is less than the typical 1% charged by debit cards. This lowers costs for consumers and merchants alike.

Alipay as One-stop Shop for Digital Payment and Digital Finance Services

(Source: Part of ‘application proof’ published by Ant Group to meet the requirements of the Stock Exchange of Hong Kong and the Securities and Futures Commission)

(Source: National Bureau of Statistics)

As the Chinese consumer class blossomed (see chart above) and transactions picked up, Alipay’s deposit pool started accumulating cash in big amounts, sufficient enough for the company to think of a way to benefit shoppers when they were not shopping, besides enhancing user stickiness. In 2013, the company launched Yu’ebao, a money market fund that offered superior interest rates than banks. This was the first step to expand beyond just payments and into a full-fledged financial services behemoth – Ant Financial – that provides services like virtual credit card, wealth management, insurance, foreign exchange, securities trading, micro-loans, credit filing and rating, and identity verification. The company is further branching out to emerging technology in areas such as block chain, cloud computing and artificial intelligence.

Why was Ant Group capable of such extraordinary growth? The answer lies in the market realities of financial institutions over a decade ago. Back then, visiting a bank in China was hardly an enjoyable experience. It involved heaps of paperwork, long queues, and dubious stares and questioning by the staff for even the simplest tasks. To many, instantaneous access to money via Alipay and Tenpay was a far more superior experience, leading them to consider mobile money platforms, not banks, as the go-to place for financial life. As the market evolved, the duopoly consolidated market power in online payments, while simultaneously bringing competition to the wider Chinese financial industry. They have forced the mainstream state-owned financial institutions to become more like Alipay and Tenpay – platforms that are data-driven, with enormous scale built on network effect and negligible marginal cost of cross-selling, so much so that even the UIs of bank mobile apps are converging on those of mobile money providers (see below).

Convergence of Mobile Money and Bank Apps

(Left – Alipay app’s home tab; Right – Bank of China app’s ‘lifestyle’ tab)

Home Sweet Home

Over the past month, there has been a rumour that the Trump administration is seeking restrictions on Ant Group over concerns that its digital payment platforms threaten US national security. For what the allegations are worth, we do not think they will pose a material risk to Ant Group’s operations, bottom line or the IPO, simply because the company’s focus is on the domestic market and it has a limited international exposure. Ant Group recorded RMB622 billion worth of international transactions in the year ended June 30, 2020, or 0.53% of the total.

We have seen Ant Group venturing modestly abroad in recent years, mainly in the payments arena, and mainly following Alibaba’s global expansion footprint (as of today, Alibaba has a 33% stake in Ant Group). It has launched e-wallets in 10 countries (mostly in Southeast Asia and South Asia), as well as striking partnerships that allow its payments to be accepted in 56 countries.

Ant’s international strategy can be broadly summarized in three areas: consumers purchasing internationally, merchants selling internationally, and international travellers. In our view, these represent ‘bolt-on’ services for Chinese consumers/merchants conducting transactions with a foreign counterpart, rather than a substantial strategic venture abroad. Therefore, these initiatives are unlikely to contribute materially to Ant’s bottom line, especially as international commerce and travel continue to be in the doldrums due to the COVID-19 pandemic.

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Insights Tag: Digital Payments