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HomeOPINIONThe secret vulnerability of low-cost Eftpos and how it affects retailers

The secret vulnerability of low-cost Eftpos and how it affects retailers

As speculation mounts over the big four Australian banks’ alleged plan to sell Paymark, the questions become, who should buy it, and why? This is significant because the future of Eftpos, the hallmark payment system behind Paymark that New Zealander retailers and consumers adopted with alacrity when it was first introduced, may be at stake. ANZ, BNZ, Westpac and ASB have a serious decision to make.

Eftpos’ special function is its provision of cashless, swift and low-cost transactions, but depending on which entity acquires Paymark, these simple transactions may become no more than fond memories.

According to 2013 data, the New Zealand payments market is worth an estimated NZ$63 billion, and is growing at 2.8 percent CAGR (compound annual growth rate), with debit cards accounting for a full two thirds (66.5 percent) of all transactions. The market keeps growing, and the number of Eftpos terminals in New Zealand is expected to increase by at least 3 percent over the next few years.

This market is a potentially lucrative one for credit card transaction processing and the growing contactless Paywave/Paypass market. These attract high merchant fees, which are increasingly being passed onto the consumer as transaction surcharges, whereas Eftpos transactions are free. Of course, money talks, and banks have begun to shift away from Eftpos cards to more lucrative credit and contactless transaction processing. So as Paymark is a domestic Eftpos switch, competition from Visa and Mastercard signals a potentially significant loss to consumers.

The prospect of Paymark going on the selling block makes maintaining stability in the payments market essential. This end would be achieved if Paymark were acquired by a party, or parties, capable of and committed to keeping the Eftpos system intact. If Paymark falls into the ‘wrong’ hands, from this standpoint, it risks being cannibalised by the credit card companies and the big banks in favour of more expensive transaction fees for New Zealand consumers. 

A contributing factor is Eftpos’ failure to keep pace with technology, which means it has fallen behind in its consumer usability in the growing online transaction market. Without additional tech investment, the Eftpos system will become more transactionally incapable and less competitive with credit cards. On the bright side, Apple Pay and Samsung Pay, two of the newest payment systems in the world, could have entered this market with their own proprietary payment systems. Instead, both determined that the existing Eftpos infrastructure is so sophisticated that they didn’t need to introduce their own systems but could piggyback on what is already here. A degree of investment is all that’s needed to maintain this status in the Eftpos space in New Zealand.

So who could buy Paymark, and what would it mean? Paymark competitor Verifone, a US-based firm, entered this market via its acquisition of Eftpos New Zealand and now controls roughly 35 percent of the market share in terminals. Through its end-to-end terminal and switching capability Verifone is able to aggregate the transactions in front of Paymark, which allows Verifone to retain a significant share of the network access fees.

Other potential suitors are the two global credit card providers Visa and Mastercard. An acquisition by one of them could cement the demise of Eftpos as we know it. Private equity could certainly have an interest in a business with a local presence and steady cashflows, but is not likely to be in it as a long-term play, and could be expected to turn Paymark in three to five years in order to maximize profits. In the interim, a private equity owner would focus on reducing cost and increasing revenues, which in turn might be achieved by promotion of Visa and Mastercard ahead of Eftpos. The end result of either of these two options could be much the same.

A third candidate is Smartpay, a local terminal deployer that previously swallowed up its competitor Viaduct. Smartpay is a merchant-facing business, while Paymark is one step removed from originating the transaction flow. Therefore Paymark is heavily dependent on third parties such as Smartpay to access the network of merchants, and would be at a serious disadvantage if it attempted to build the terminal component of the value chain. But there are things Paymark does that Smartpay can’t, at least not in its current model, so the best, most synergistic proposition (that preserves Eftpos in its current form) may be a merger of some kind.

What would the Commerce Commission have to say about such an arrangement? Its 2014 Consumer Issues report expressed concern about a transaction fee structure monopoly, which would be a valid worry should Verifone emerge as a potential acquirer of Paymark. On the other hand, with Smartpay and Paymark each having one half of the value chain in payments, a combination of the two would stabilise the payments market and protect Eftpos as we know it. It would also bring critical renewed investment in technology to compete in the ecommerce transactions market. Most importantly, this scenario is the most likely to protect the consumer surplus currently enjoyed by both merchants and consumers.

 Donald Blair is the managing partner of Paradigm Strategy Partners, a New Zealand-based corporate advisory firm. An American-born economist, he has over 28 years of experience in global markets across the public sector and in a diverse portfolio of private sector firms.

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