Fast-growing payment upstarts can make up for Europe’s lack of large tech firms

Source:Global Times Published: 2018/9/11 18:53:40

Europeans often bemoan the lack of home-grown technology groups. Germany's Wirecard and Netherlands-based Adyen, whose combined value has soared to 43 billion euros ($50 billion), are notable exceptions.

Wirecard passed a symbolic milestone last week when the company replaced Commerzbank in Germany's blue-chip DAX index. The 23-billion-euro group is worth more than Deutsche Bank, and trades at 40 times forward EBITDA - roughly double the valuation of Visa, Mastercard and others who process electronic payments. Adyen, whose shares are up 174 percent since its June listing, is valued at an even headier 118 times 2018 EBITDA.

These are relatively simple businesses. Adyen hooks companies like Netflix and Spotify up to networks run by Visa and Mastercard. It charges a small fee for taking on the risk that transactions fail. Wirecard does the same, although for smaller businesses, and sells services like payment cards. Customers like the pair's low transaction costs and slick technology, which drops relatively few payments and allows merchants to see useful shopper data.

Last year, global electronic payments hit $23 trillion according to the Nilson Report. The data provider reckons the market will grow 10 percent a year, implying volumes of $40 trillion by 2023.

Assume Adyen's net revenue increases by 30 percent a year while Wirecard's top line expands by 20 percent annually, and together the two would have net sales of $4.4 billion by 2023. That would be equivalent to a 2 percent share of the market. They're currently at 1 percent, using last year's results and the same fee structure. Increased scale should boost already-high margins.

Risks are plentiful, however. Competition may force down fees, while tech giants could cut out middlemen altogether: In China, Alibaba and Tencent connect buyers and sellers directly without the need for payment processors.

Still, Adyen and Wirecard's technology took years to develop. Western tech giants are just getting started on their payment networks. That gives the European pair a greater chance of fulfilling their growth expectations - and rewarding giddy investors' prepayment.

The authors are Liam Proud and Karen Kwok, Reuters Breakingviews columnists. The article was first published on Reuters Breakingviews.

Posted in: INSIDER'S EYE

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