The market for payment processing terminals manufacturing and payment processing has been globally duopolistic until recently. This was dominated by the two companies established in 1980’s, Verifone, based out of the US and Ingenico, based out of France. Traditionally, the industry was marked by entry barriers in the form of a high initial capital requirement, a higher research and development and innovation requirements and long gestation period required to obtain certification in a country. These entry barriers helped Ingenico and Verifone to dominate the global POS (Point Of Sales systems) market. In addition, over the period these companies built a strong collaboration with payment processing companies such as Visa and MasterCard for the development of new technologies and eliminated potential competition through the acquisition of firms developing innovative technology. Duopolistic market and increasing demand for POS on the back of strong retail industry growth has helped Ingenico and Verifone to register a healthy revenue growth at CAGR of 19.6% and 11.3%, respectively over the past three decades. Verifone and Ingenico have enjoyed good profitability for most of their tenure barring a few dipping periods as shown in the EBITDA margin graph below. Ingenico saw a fall in its EBITDA margin from 1999 to 2003 owing to its increasing production costs. From 2003, it started outsourcing its production, leading to an improvement in its margins. Verifone also saw a negative spike in its EBITDA margin in 2009 due to high impairment costs incurred in the same year.
The competition became more oligopolistic as the time required to obtain a certification got shorter (about 18 months) and new player came in the market with the use of destructive technology that was both secure and required less dependence on financial institutions. Moreover, consumers are increasingly looking for cashless payment methods for the convenience they offer. The mobile payment methods were introduced by several companies. However, the market for POS systems was at USD 36.86 billion in 2013 and is expected to grow at a CAGR of 11.6% up till 2020. (source: PRNewswire). Ingenico and Verifone may continue to witness a growth in revenue in the future, the two companies together still have 80% of the market share (source: PRNewswire), but they may also lose their market share to their competitors and therefore, lose sizable revenue.
In addition, there are other threats to the two leading companies. Televisory analysed new companies PAX Global and USA Technologies, both these firms recorded an identical CAGR of 27% in revenue in the past 5 years. The number of POS units shipped by PAX Global increased at a CAGR of 63% from 1 million units in 2012 to 4.3 million units in 2015. The company could compete in the market because it decreased the average selling price per unit by a large margin from USD 167 in 2012 to USD 85 in 2015. This resulted in a decrease in EBITDA per unit sold for PAX Global from USD 27.6 to USD 19.3 at a CAGR of minus 8.6%. The EBITDA bridge between Ingenico and PAX Global in 2015, reveal that the difference in EBITDA per unit sold was primarily on account of the price difference per unit. Ingenico did not compete on price due to its position in the market. However, the price was only a partial contributor to PAX Global’s success. The main contributor to its success was the new technology that made the payment method relatively comfortable without a major compromise on security. PAX Global introduced a new high-end multimedia payment method named ‘Multilane’, which was difficult to imitate. This was introduced in the United States, where Verifone originated and has always been a strong player. PAX Global also launched the mobile e-payment that helped it become the largest provider of mobile payments in Brazil. The revenue of PAX Global in North and South America grew at an alarming CAGR of 133% as shown in the below graph. The below table shows the increase in smartphone penetration globally in the last few years. The companies which introduced the mobile wallets also saw a good success. PayPal, which has 179 million active customer accounts in 43 countries earned a revenue of USD 9.24 billion in 2015 (source: Televisory’s Research). Customers switch to new technology if it adds comfort to their transactions and in a case of payments if it also assures them data security.
Furthermore, even after the emergence of new players in the new millennium as shown in the chart beneath, Ingenico saw its revenue grow continuously in the past 5 years. However, the growth rate was not same as earlier, Ingenico grew at a CAGR of 42% from 1995 to 2000 but at a slower rate of 18% thereafter. The revenue growth for Verifone was also not very stable. Both firms are heavily investing in new technologies at par with their competitors and started their own mobile payment solutions as a response to competition. However, the competition among mobile wallet operators is bound to be high. Verifone currently has 350 active patents and 88 pending patent applications. But, a completely new and useful technology developed by a competitor can make these patents redundant. Verifone saw unstable revenue growth despite having patents.
Investing in new technologies requires the appropriate skill set in research and development. This is scarce and the companies may compete with each other to get the best technologists. As shown in the chart beneath, both Ingenico and Verifone increased their research and development expenses. In the past 5 years, the research and development expenses for Ingenico increased by a CAGR of 15.3 % and for Verifone, this increased by a CAGR of 8%. Ingenico achieved a higher success in this period as it gained commensurate revenue for its R&D expenses as evident from the graph of R&D expenses as a percentage of revenue. Also, as shown below, the EBITDA to gross fixed assets ratio for Ingenico has been continuously increasing in the last 5-year period.
The smartphone penetration is still low in Asia-Pacific, Eastern Europe, Middle-East, Africa and South America. Ingenico and Verifone tried to increase their reach in these regions with their conventional POS systems. Another reason for the better performance of Ingenico compared to Verifone was its good performance in these regions. Ingenico has been successful in using this to its advantage in the Asia-Pacific region, which contributed to 15% of its revenue prior to 2010, this now contributes to more than 20% of its total revenue. The revenue of Ingenico from Asia-Pacific region continued to increase owing to the superior quality of its products. The EBITDA per unit sold for Ingenico increased from USD 48.4 in 2012 to USD 60.1 in 2015 as per the below graph. On the contrary, the revenue for Verifone decreased in Asia-Pacific region in 2015 in relation to its value in 2014. The reason for this decline was lower priced alternatives offered by competitors in China.
Therefore, from the above analysis, it can be concluded that both Ingenico and Verifone will have to take few risks in order to sustain their market position. Ingenico and Verifone will lose a part of their market share to their direct competitors and also to other companies offering complementary products. However, they can control the erosion of their market share and restrict it to a limit. Their ability to control the erosion of their market share depends upon their right decisions regarding investment in new technology or acquisitions to help attract new customers for use of their services.