Fundamental Monday: Cross Border Payment Technology - a Growth Opportunity

Includes: EBAY, PLPM, WBA, WMT
by: Finance Banter

The world continues to rapidly evolve into a big, seamless marketplace driven by inter-connectivity and globalization of commerce. Changing consumer behavior, proliferation of devices including smart phones, and investments in enabling infrastructure globally are ensuring that the secular trend of global e-commerce growth continues to accelerate. In this race it is the cross-border component of e-commerce that is growing almost twice as fast as the overall trend.

Brick and mortar retailers are waking up to this new reality and have made aggressive "brick and click" forays. Walmart (NYSE:WMT) is exploring synergies with their physical stores and acquisition of by Walgreens (WAG) suggest the e-commerce push is real but there is an underlying strategic dilemma faced by established incumbents. Technology companies specializing in bringing this expertise to "brick and click" models are commanding premium as seen by the recent acquisition of GSI Commerce by EBay (NASDAQ:EBAY).

Enabling commerce for global audience is truly complex involving processing payments in multi-currencies, creation of customized infrastructure at point of sale, and also addressing local regulatory issues. This expertise is unique and has traditionally been dominated by small private companies in Europe, particularly Ireland. These nimble operators work alongside larger processors and payment companies in retrofitting innovative multi-currency solution across markets and channels (e-commerce, point of sale, ATMs) as retailers seek to connect to the global audience. These companies provide back-end integration worldwide to accept, process and reconcile payments, offering a wide array of currencies, without the complication and expense of establishing legal presence in multiple countries. They also offer dynamic currency conversion, allowing international cardholders to see the final transaction amount in their home currency.

The business model is driven directly by multicurrency transaction growth and a share of fees paid by merchants. It is truly scalable across countries and clients, particularly with the leading payment brands removing restrictions relating to implementing this program globally. The lucrative revenue trajectory is fairly predictable and driven by long term client contracts and merchant volume based revenue share. In addition, earning fixed implementation fees has pushed some of these companies at the threshold of a competitive advantage period.

The technology companies operating in this domain are largely privately owned, some with significant venture capital interest. Amongst others, Planet Payment (NASDAQ:PLPM), a leading international payment and data processor listed on OTC markets in U.S. and U.K., has been growing steadily to gain leadership in this niche business. Fintrax Group, an Ireland based private company offering these services since 1986, initially started as an airport tax refunds processor. Confirming its fast growth path, in 2010 PLPM recorded 27% increase in total revenue to $ 64.7 million and 80% increase in multicurrency revenue.

As the wider payment ecosystem pushes forward further into global commerce initiatives, there is a strong possibility for increased valuations for these "under-appreciated" niche technology companies focused on enabling cross-border payments and currency conversion. The possibility exists for current private investors to exit via IPO route or sell-off to an established global payment processor looking to integrate these value-add offerings for its clients.

We have witnessed other similar developments relating to niche plays becoming strategically important to mainstream business. Over the last two years, as demand for new storage architecture designed for cloud service delivery increased big technology companies showed insatiable appetite chasing data storage targets and driving up valuations. The industry had discovered the synergy and opportunity to play in lucrative segment.

While in the long run this high growth rate will moderate for firms in the industry, currently this niche business is primed to reward its investors. Stay tuned …

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.