Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Sometimes, controlling 80 percent of a market doesn't offer much protection.

Verifone Concerns Hit Ingenico
Worries over U.S. tech switch and emerging-markets competition spread to payments sector
Source: Bloomberg
Intraday times are displayed in ET.

U.S. payments technology provider Verifone cut its guidance for full-year earnings on Tuesday by around 17 percent, blaming pricing pressure in Asia and delays in implementing chip-card technology in the U.S.

That sent the firm's stock down almost 30 percent on Wednesday. Ingenico, the company's biggest European competitor, also slipped as much as 7 percent, suggesting these worries aren't unique to Verifone.

Cooling Growth
Adjusted annual revenue growth rates for top payments terminal providers are seen slowing
Source: Bloomberg data

Together the two, which were both founded in the 1980s, account for 80 percent of the market for payment terminals -- their core bread-and-butter $3.4 billion market.

While it may be a stretch to compare them with much younger fintech start-ups like LendingClub or Square, all of them are being forced to curb their growth expectations as boom times threaten to peter out. And Verifone and Ingenico are finding their long-standing competitive advantages -- high barriers to entry and a market duopoly -- are under threat.

VeriFone warned that the economic slowdown in China -- which accounts for 12 percent of sales -- is "real." Across Asia, retailers and other clients are increasingly looking for cheaper payment terminals that do the job with fewer bells and whistles. The company has had troubles in China in the past -- it has lost market share as it's tried to adapt to local regulations.  Asia revenue was down almost 11 percent in 2015.

But the worry is that growth targets for the big players in Asia may turn out to be too optimistic -- even for Ingenico, whose Asia-Pacific revenue grew 19 percent last year. Technavio analysts estimate demand for payment terminals in China is expected to grow by 18 percent between 2014 and 2019, while Ingenico has said emerging markets will see a 50 percent rise in point-of-sale terminal penetration by 2020.

Terminal Growth
Ingenico expects the U.S. and China to drive growth in the payment terminal market through 2020
Source: Ingenico

Verifone's warning may give investors cause to think twice about those forecasts -- especially if taking share is set to get tougher than expected.

Growing competition from smaller rivals such as Hong Kong-listed PAX or Lakala of China is squeezing prices in Asia and Latin America. Even though investors have already taken into account recent turmoil in emerging markets, if competition gets much tougher, valuations for the whole sector may start to look stretched.

Verifone trades at a little more than 18 times projected 2016 earnings, and Ingenico at about 22 times, according to Bloomberg data. Ingenico has less exposure to the U.S. market, where Verifone has been hurt. Whether it can continue to command that premium will depend on whether the concerns about emerging market growth are overdone.

Ingenico Outperforms
Ingenico's stock has solidly outperformed Verifone's thanks to stronger global revenue growth
Source: Bloomberg

Ingenico's adjusted revenue has been growing at a rate of between 14 percent and 37 percent in the past four years. That's set to slow to more like 9 to 10 percent. That's the kind of rate Verifone has grown at in recent years -- which is also seen slowing to below 6 percent from this year.

Both companies are a reminder that fintech has its own old guard -- and that age and market share offer only little protection from competition and disruption.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. 80% share is based on number of terminals delivered in 2015, according to Ingenico. ABI Research estimated Ingenico & VeriFone's combined market share at 78% in 2014.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net