Paying it forward: A view from the South
Payments businesses are transforming the way consumers, businesses and governments transact in growth markets. And unsurprisingly, it is the growth markets which are home to the fastest growing, most innovative and dynamic electronic payments companies in the world. The move away from cash has taken decades in North America and Europe; in our markets, it is happening quicker, more dramatically, and on an unprecedented scale.
According to BCG, 70% of global growth in the US$500bn payments market will come from ‘emerging’ Asia, Latin America and Africa. Astonishingly, by 2025, emerging Asia will be a bigger payments market (by revenue) than North America, and Latin America larger than Western Europe.
This has not escaped the notice of many developed market institutions and investors. Billions have been spent, including by some of the most successful payment businesses from developed markets, trying to replicate their success at home on the frontier. The scorecard is at best mixed. Where there is opportunity, there is disappointment; where there are dreams, there are nightmares. I recall a conversation with the head of a successful Japanese investment firm who incredulously asked, ‘how do you make money in payments in these markets?’, having lost almost as much as they had invested in the sector.
Successful payments business are successful in their own way, failed payments companies are alike in their failure. One recurring reason – employing the same technology and business models as they would in America or Europe, on the assumption that emerging and developed payments will mature along the same trajectory and that ‘best practice’ must surely flow from the North to South. This is not the case.
Emerging markets are different. They are developing their own ecosystems, without path dependency but often sharing common features between themselves. There is no American precedent for the QR scanning ubiquity behind much of the growth in mobile payments in China (nor is there likely to be with the evolution of Near Field Communication rendering it of limited use in the US).
In 2010, Actis made its first investment in payments, a small Egyptian based processor called MSCC. Today, we can claim to be the leading financial investor in emerging market payments. We have invested in 17 payments companies across 6 platforms operating across 50 countries. Collectively this portfolio has more than a billion retail points of presence providing processing services for hundreds of banks and mobile network operators across 5 continents. It is an unparalleled network, with an expanding portfolio of market leading payment companies stretching from Brazil to South Africa, from India to the Philippines.
This enables a cross-pollination between our portfolio companies in the sector, which support each other, with past experience in one business offering ways of addressing particular issues in another. While there are distinct differences in the technology employed and payments systems preferred, there is also commonality across our markets that can provide a blueprint for portfolio company growth. Payments markets seldom repeat, but along the frontier they often rhyme.
In the process of building out this portfolio, we have developed some views that may seem counter-intuitive but continue to guide our strategy and ( we hope) add value in a unique fashion.
It is possible to succeed in a market and with a business which an international strategic wishes to exit and sees no value in. Our market breadth and sector expertise means that we recognise the country-by-country nuances and can see value in non-core businesses that have failed to thrive as corporate orphans. In South Africa, for example, Actis backed EMP acquired a loss-making processing business called ACET, which had been founded by First Data. For several years the business had been burning cash and was only processing a couple of hundred thousand accounts. Within six months of the transaction, it was processing 10 million accounts and was highly profitable.
Our activity in Latin America serves as another example. Brazil has one of the world’s largest card processing markets in the world. Yet despite its attractive features, Elavon Brazil, a joint venture between two US financial institutions that had been extremely successful in their home market, Elavon Inc. and Citibank, was unprofitable throughout its five-year existence despite substantial investment, and the shareholders wanted to exit. Actis backed the Stone Group (at the time a loss making Brazilian start-up) to acquire Elavon Brazil. Within just a few months, both businesses were profitable, today Stone is one of the fastest-growing scale payments businesses in the world.
One of the reasons for Stone and EMP’s success is their independence. They are not tied to platforms developed by parent organizations as a means to cross sell other products. As ‘independent’ businesses, they can focus on facilitating the payment process between parties by creating neutral ‘interoperable’ solutions for merchants and consumers, rather than being captive to the agenda of a particular bank. Independence and Interoperability are the two greatest competitive advantages a payment business can have.
In some ways, the rollout of payments infrastructure in our markets, is reminiscent of the golden age of US railroads in the 19th century. Those railroads were built and funded by the granite, coal and cotton companies to move goods from their production and extraction bases to end markets. Ultimately, this proved highly inefficient and anti-competitive. In a similar vein, banks and telecoms companies in emerging markets are developing their own apps and technologies for use by a captive customer base, resulting in a proliferation of platforms. Independent companies, by contrast, can offer services that enable merchants to accept payment via the different systems in the market and create a network that should ultimately benefit all stakeholders and create positive externalities for the market as a whole.
So, while others have focused on providing products and services for consumers, we are particularly excited about backing payment companies, in the first instance, looking to solve merchant’s needs. This led us to make an investment in GHL, the leading independent payment provider for merchants in South East Asia with c.150k points of presence across Malaysia, Thailand and the Philippines, and more recently an investment in Pinelabs, the leading independent payment provider for merchants in India with c.200k points of presence in India.
Both GHL and Pinelabs have succeeded partly because rather than looking north for solutions, they developed local propositions that drew on other growth markets for inspiration. For example, GHL provides it merchants not just with Visa and MasterCard card acceptance but also AliPay acceptance through QR scanners.
The realisation that emerging markets can be exporters of new payment technologies as well as importers provides us with our third view, that payments markets are at the forefront at South-South connectedness.
We have seen this clearly though our portfolio. A striking example is a South African based business called Tutuka, a subsidiary of PayCorp, a diversified payments company which Actis led an MBO of in 2013. When PayCorp acquired Tutuka in 2014 it was a South African prepaid processor. Less than 4 years later, and having expanded across Africa, it is now the largest prepaid processor in South East Asia. Tutuka is a payments enabler that partners with MasterCard and Visa to allow banks and MNOs to provide their customers with ‘interoperable’ payment solutions. It provides the plumbing that connects new technologies (e.g. mobile payments) with existing infrastructure and widely accepted payments methods (card schemes). What is striking though, is that whether it be in Cameroon or Cambodia, corporates in our markets are now looking south for their payment needs.
Sao Paulo and Shanghai have more to learn from themselves than they do from San Francisco. New Delhi and Nairobi are answering mobile payments questions New York hasn’t thought of to ask. The winds of change in Kuala Lumpur will be blowing across from Cape Town not Chicago. This South-South axis, core to Actis’ DNA, represents an exciting opportunity to unlock value.