While the impact of fintechs across the payments market is largely exaggerated, the latest financial reports of the local arms of Stripe and Block Inc indicate that merchant acquiring and payments processing are clear exceptions.
Stripe Payments Australia Pty Ltd and Block’s Australian merchant services arm Square Au Pty Ltd each posted record growth in the 12 months to the end of December last year, without incurring fat losses along the way to improving their respective market positions.
Financial accounts lodged with ASIC in the last week show Stripe’s Australian business grew top-line revenue by A$140 million or 34 per cent to $551 million last year.
Stripe’s local arm reported a net loss of $1 million.
Square Au Pty Ltd expanded revenue even faster as it widened relationships with SMEs and micro-merchants across the country.
Square grew top-line revenue by $111 million or 62 per cent to $288 million.
It eked out a net profit of $1 million.
The spectacular growth of both companies is evidence of a process of disintermediation occurring in the merchant services market in which the stranglehold of the major banks has been loosened.
Stripe and Square are displacing the major banks in the once lucrative acquiring market where banks charge retailers service fees for processing and settling credit and debit card transactions.
The strategic vulnerability of the four major banks is evident from disclosures in the inaugural accounts of ANZ’s merchant acquiring joint venture with global payments giant, Worldline.
ANZ’s merchant services business was transferred to the joint venture at the start of April 2022 and now trades under the name of ANZ Worldline Payment Solutions.
In the nine months to the end of December, the joint venture generated revenue of $471 million and turned a bottom line loss of $51 million.
If ANZ Worldline’s nine-month sales performance is annualised, it is sitting on annual revenue of around $630 million.
While an improvement in the joint venture’s operating performance is expected in 2023 – given that one-off start-up costs are not likely to repeat – the more noteworthy observation is that ANZ’s merchant acquiring business is set to be overtaken by Stripe sometime this year.
ANZ Worldline is believed to be the third largest merchant acquirer in Australia behind CBA and Westpac.
Stripe’s business is said to be already on a par with the National Australia Bank in terms of the revenue it generates.
It’s a remarkable trend that has taken less than a decade to unfold: Stripe entered the Australian market in July 2014 while Square debuted a few years later.
“Recent entrants such as Square and Stripe have managed to peel away payments and merchant acquiring from the broader business banking relationship that the major banks once had to themselves,” said Sydney-based payments expert, Brad Kelly.
“They’ve also squeezed the big banks into the low-margin middle segment of the acquiring market.
“Square and Stripe are winning more lucrative merchant customers, particularly in the SME segment where they are able to extract large margins.”
“One of the silent winners here is CUSCAL which is settling payments on behalf of Square.”
Kelly says the new players are offering mostly traditional merchant services but with better digital technology.
“They can onboard customers more easily and that’s a key point of difference for them,” he said.
The US-based monoliners have triggered strategic rethinks about the future merchant acquiring across the banking industry, with a string of banks effectively deciding to outsource their operations as the economics have gotten harder.
ANZ last year ceded a controlling stake in its joint venture to Worldline and in August 2021 Bendigo Bank farmed out its acquiring business to Tyro Payments.
One of the big issues emerging from the market share gains made by Stripe and Square is that the pricing of their services is significantly higher than each of the major banks.
For example, CBA charges merchants a flat rate of 1.1 per cent to process and settle credit and debit transactions, while Stripe offers similar services at a rate of 1.75 per cent.
If the new entrants continue to deepen their market presence, a policy challenge likely to arise is whether the Reserve Bank’s Payments System Board would tolerate a sustained blowout in the average acceptance costs borne by Australian retailers.
For more than two decades the RBA has pursued reforms aimed at lowering merchant fees on credit and debit card transactions.
Melbourne-based payments consultant Grant Halverson says the focus of regulation will likely shift as the monoliners make further market share gains.
“The problem we have in Australia is that the new entrants are building new costs into the payments system as they increase their market share,” he said.
“The regulators have been very slow to respond, so I think there’s quite a bit to play out yet.
“The success of Square and Stripe is also encouraging others such as Zeller to enter the acquiring market.”