Payments

Back in 2001 I worked for a big US internet company that was moving into the payment space. I was on the business development team, and we spent a lot of time trying to figure out where best to play. Even then, it just seemed like such an uphill battle, because of the entrenched players (banks, Visa/Mastercard, payment processing companies). All of them benefited from the current system.

Now I am working with a small US non-profit that puts grocery stores in food deserts, and one of our big expenses is the cost of payments. We spend more than 2.5% of all transactions just to pay off all of these middle-men. That’s about what small businesses were paying back in 2001, and it hasn’t changed, despite all of the new companies coming into the space. The big problem in the United States is that interchange fees are still extremely high. For example, we still need a merchant processing company, and we still take credit cards. Each one wants a cut. The payment processing part of the chain has seen competition, but mainly on convenience. Fees are still high.

Places outside of the US has much lower fees. For example, the EU just negotiated a new deal with Visa and Mastercard that lowered interchange fees to just 0.2% for debit cards and 0.3% for credit cards. That would save our store more than 2% off every transaction, which would mean a lot for the bottom line, given that margins for grocery stores are so low.

In other countries, without the legacies that the developed countries have, we have seen significant advances in payments. Kenya is the premier example, with M-Pesa by Safaricom owning more than 3/4s of the mobile commerce market in 2018, and, according to one stat, in 2013, 43 per cent of the Kenyan GDP flowed through the service.

Vietnam is a ripe market, because there is little legacy that needs to be overthrown there. According to the World Bank, in 2017 almost 50 million adults (out of 71m in total) had no “transaction account” meaning no account to make payments either with a bank or a non-bank. That includes a mobile account that can be used to make payments.

Companies are going after this space..hard. There have been almost 80 companies set up in Vietnam. Momo is one of the bigger ones, and is now the best funded after a big investment round led by Warburg Pincus (sources say it could have been $100m). The company is growing quickly, has 2 million registered users, and can be used at 100,000 places in Vietnam.

TRANSACTIONS MAY NEED TO BE EXTREMELY HIGH ($100BN) TO JUSTIFY MOMO’S VALUATION. FEES MATTER A LOT, NO DUH! SOURCE: VIETECON.COM

Doing some quick back of the envelope calculations, let’s say that the lastest round at Momo valued the company at $500m (so Warburg and others bought 20%, which is just a guess). The PE guys want this to grow to $3bn (6x) before they exit in an IPO. And let’s make a big assumption here: that the company will trade at a 50x P/E when it goes public. This is probably too conservative. Paypal currently trades at over 50x. Visa trades at 30x and Mastercard at 40x. But let’s take this as a given, so at 50x and a valuation of $3bn, the company would need earnings of $60m a year at the time of the IPO. And let’s say they are able to make a profit of just 0.2% of each transaction. That means they need to have transactions of $30bn. Ouch. That’s a lot. Nominal GDP in Vietnam was $224bn in 2017.

I did a quick sensitivity in the table up at the right that shows what the transactions could be at different P/E multiples and transaction fees (assuming these are all profit, which is unlikely). If fees are really low, then the amount of transactions needed would be close to half of all transactions in Vietnam, which seems unlikely until you look at M-Pesa. Obviously the company could make money in other ways rather than just with fees: selling data, offering bank accounts, advertising, lots of different things. If they truly own all of the customer’s money needs, then the potential profits per transaction would be so much more than just 0.2%.

The reason why I started thinking about this is because I saw this story about cashless bus rides in HCMC. It’s steps like these that are going to be extremely important in driving cashless payments demand in Vietnam. And cashless payments are great for the government, because they get a much more comprehensive record of where money is going in the country. So we should expect to see much more of this over time. And Momo may be a beneficiary of all of it.