Are SmartPay & Tyro Private Equity Targets?

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What are the impacts of potential reforms to the payments system in Australia and what about merchant acquirers?

-Regulatory concerns weigh on Tyro Payments and SmartPay
-Potential reforms by the Reserve Bank and Federal government
-Wilsons expects an overall neutral impact for both companies
-Shares prices are weak; opportunity for private equity?

By Mark Woodruff

Investors last week were reminded of the increasing risk from regulation being faced by ASX-listed merchant acquirers such as SmartPay ((SMP)) and Tyro Payments ((TYR)) following the release of an RBA consultation paper as part of an ongoing review into card payment costs.

This consultation builds on the Albanese government’s announcement last October flagging a prospective ban on debit card surcharging (set to take effect from January 1, 2026), part of a broader set of reforms aimed at improving consumer protections and addressing rising costs for consumers.

The government considers cash or cash accessed by a debit card should be treated equally, a point of logic which is hard to counter.

The government announced last week $2.1m of new funding for the Australian Competition and Consumer Commission (ACCC) to help combat retailers from passing on fees to customers for debit card payments in the form of a surcharge.

Card payments and surcharging are linked, noted the RBA, “since merchants would be less likely to surcharge consumers if card payment costs were lower”.

Even though merchant acquirers play a crucial role in enabling businesses to accept card payments by ensuring transactions are processed securely and efficiently, the RBA is focused on ensuring merchants are not being overcharged for accepting credit and debit card payments and is taking steps to promote transparency and competition in the payments system.

At present, the focus is on payment surcharging and seeking feedback from stakeholders on how to address increasing public concern.

As part of the industry-wide consultation process, the central bank last week stated it is considering restricting fees that payments providers such as banks receive for processing debit card transactions, warning the cost on businesses may be too high.

This course of action would be a potential threat to bundled suppliers of payments and point of sale (POS) systems, suggests Wilsons.

Just days before the RBA paper, Canaccord Genuity initiated research coverage on both SmartPay and Tyro Payments with Buy ratings. The analysts felt a prior share de-rating for both companies was largely complete given prices were trading near 12-month lows.

Unfortunately, on the day of the consultation paper release, shares of SmartPay and Tyro Payments fell by -14% and -10%, respectively.

The immediate market fear, explains Canaccord, is based around merchant acquirers having to potentially absorb a large proportion of the margin impact of lower payment costs.

Some market commentators suggest SmartPay in particular could be forced to rejig its economic model which currently involves surcharging the customers of merchants directly.

Also, any outright (or partial) surcharge ban reduces the competitive differentiation of challenger payment companies like SmartPay and Tyro Payments relative to major incumbents, explains Wilsons, and could slow net merchant additions going forward.

Up until now, Canaccord points out these challenger payment companies have been taking substantial share from the major five banks who do not surcharge.

Tyro Payments and SmartPay explained 

A greater understanding of the operations of Tyro Payments and SmartPay will assist before later investigating the impact of potential new regulation.

Tyro Payments is the fifth-largest merchant acquiring bank and provides payment solutions to 71,000 merchants in Australia via more than 115,000 terminals. 

Deriving around 95% of total revenue from its Payment Services division, Tyro generates over 90% of this total from a merchant services fee and the balance from terminal rental revenue, observes Canaccord.

This merchant services fee is the primary fee a merchant acquirer charges a merchant and is calculated as a percentage of the transaction value plus a fixed amount per transaction.

Tyro utilises least-cost routing, choosing between Visa, Mastercard and EFTPOS networks, which provides natural price and margin competitiveness, explains the broker.

Fellow merchant acquirer SmartPay is a full-service EFTPOS provider in Australia offering payment terminals, software, maintenance and transactional processing products. 

Already holding a relatively mature position in the New Zealand terminal rental market with a fleet of around 35,000 terminals (generating rental revenue), Canaccord notes SmartPay expanded into the Australian processing market in partnership with Cuscal in FY21 and reports 18,000 terminals in the market.

In Australia, SmartPay operates a terminal rental plus transactional revenue model.

The company’s SmartConnect cloud-based platform provides a competitive advantage that provides connectivity of terminals to third-party applications and software, such as point-of-sale providers.

By tailoring its offerings to the needs of SME’s, the company is gradually disrupting the monopolistic stronghold the major banks have historically held over payments, explains Canaccord.

Impact of potential regulation

After considering additional areas of investigation by the RBA beyond surcharges, Wilsons believes there may be an overall neutral impact on both SmartPay and Tyro Payments.

The RBA is looking at whether interchange fees (paid by retailers to card-issuing banks) on both domestic and foreign-issued cards, particularly credit, is too high.

Scheme fees (charged to retailers for processing payments) will also be looked at given Visa and Mastercard are running a duopoly without being required to furnish facts and figures on fees charged to merchants.

Merchant acquirers would benefit from lower interchange/scheme pay-aways and/or negative impacts to bundled competitors, explains the analyst at Wilsons, potentially increasing net merchant additions.

Regarding interchange fees, as debit cards do not extend credit, Bell Potter believes there is no cost rationale for ad valorem fees (based on the value of the item or transaction, rather than being a fixed amount).

On the subject of scheme fees, which are paid by acquirers and issuers to the card networks, the broker points to the RBA comment noting a material variance in fees, which is pronounced in certain channels.

Importantly for SmartPay, notes Bell Potter, the Australian government is not looking to place a blanket ban on surcharging as has occurred in the UK, where credit cards are also captured.

While the broker leaves earnings forecasts for the company broadly unchanged, the analysts now adopt a new valuation method and risk average revenue per user (ARPU) with a lower asset duration, noting potential for heightened enterprise churn and the need for a hybrid payments solution.

The result is a target of 75 cents, down from $1.30 prior, while the broker’s Hold rating is maintained.

Following the RBA consultation paper, Canaccord hasn’t adjusted its forecasts, ratings or targets for Tyro Payments and SmartPay given uncertainty around the outcome and how both companies will adjust their revenue/fee structure.

This broker suggests both companies will be potential targets for private equity as listed investors potentially overreact due to the uncertainty around future cash flows.

Ratings and targets

None of the six daily covered brokers in the FNArena database that cover Tyro Payments have yet updated research coverage post last week’s announcements by the RBA and the Australian government.

Of these brokers, five have a Buy or equivalent rating with Morgan Stanley on Equal-weight. The average target price is $1.52 which suggests 88% upside to the latest share price at the time of writing.

Outside of daily coverage, Canaccord Genuity and Wilsons have Buy or equivalent ratings with respective targets of $1.65 and $1.18.

Canaccord and Wilsons are also Buy-rated or equivalent for SmartPay with targets of $1.40 and $1.60, respectively.

Returning to the FNArena database, Bell Potter (Hold) and Shaw and Partners (Buy) have targets of 75 cents and $2.20, respectively. Shaw has not refreshed its research since September 5.

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