GH Capital Inc. (OTCBB: GHHC)
Technology; FinTech; Buy - Risky
Source: World Payment Report, 2016
Cost structure of similar providers
Stepped fixed payment structure allows merchants to budget their payment processing costs accurately. More importantly, the cost per transaction is substantially lower than counterparts, as depicted in the chart above, which will benefit GH Capital Inc.
Growth in online
retail is reshaping industries, especially FinTech. Retailers are always
looking for new, secure and cost effective payment systems. Adoption of
internet retail has benefited many online payment service infrastructure
providers including PayPal (PYPL), Mastercard Inc (MA) and Visa Inc (V). The
growth story in the industry is so attractive that all star growers of the last
decade are trying to get in to the payment game. Apple (AAPL) Pay, Google
(GOOGL) Wallet and Amazon (AMZN) Pay are all evidence of potential lucrative
growth in the payment market.
However, online
payments are shifting towards more secure and hassle free payment methods like
Online Banking Electronic Payment, or OBeP. GH Capital Inc. (GHHC) is exposed to the growth of online
banking electronic payment industry through its subsidiary ClickDirectPay. The company is focusing on
the European payment market, which has witnessed the highest adoption of OBeP
services. Further, the company is positioned uniquely amid its creative pricing
structure. The growth of OBeP industry along with merchants’ willingness to
switch for costs advantage makes GH Capital Inc a good buy candidate in the OTC
space. Details follow.
Industry Prospects
According to
global payment report, total e-commerce payment through online bank transfers
including real-time transfers is set to reach $440 billion by 2020 translating
to CAGR of 12% p.a. Credit cards will become less dominant going forward,
according to global payment report 2016. The info graphic below depicts the
increase in market share of bank transfers going forward while eWallet, credit
cards and debit cards are set to lose or maintain market share.
Boston Consulting
Group cites inconvenience of remembering credentials as one of the reasons
users revert to cash, cards and online banking. Further, WorldPay forecasts
internet banking transactional value is expected to reach $245 billion in 2017.
All in all, payment market is set to witness a minor shift during the next few
years, and online banking transfers including OBeP will become more common.
Europe is
already among the leaders in OBeP adoption with companies like Sofort GmbH and
iDeal. OBeP will gain more traction going forward amid security, low chargeback
risk and the fact that no one wants to sign up for multiple payment accounts. It’s
convenient to use bank details to pay for purchases.
As banks are threatened by new payment
systems, OBeP will keep banks in the online arena.
And, given the
resources at the disposal of commercial banks, they will push OBeP adoption
even higher going forward. To review, online banking payment systems are set to
witness growth in coming year amid security, convenience and support from the
banking system. But, which payment provider has the potential to lead? The
answer lies in the pricing structure.
Pricing is a Critical Success Factor
The success
factor in this growing industry will be pricing. A survey by A.T. Kearney shows
that cost is the deciding factor among most of the retailers choosing a payment
service provider. See the chart above.
BI intelligence
notes that no one company or gateway has an overwhelming share of the market,
and competition among these companies remains strong. This indicates that new
companies can emerge to dominate if they hold a strong competitive advantage
like cost. A.T. Kearney further notes that
Decreasing transaction fees in many
countries like France provide additional incentive to switch.
GH Capital Inc is Set to Benefit from OBeP
This puts
companies like ClickDirectPay in a spotlight. ClickDirectPay, a subsidiary of
GH Capital Inc (GHHC), has a simple new pricing model. It offers small
merchants with very low processing volume and little amount of transaction its
service toll free at until they have reached the amount of 30 transactions. CDP
offers every online merchant, small to large volume, 30 transactions for toll
free every month, independent of the processing volume. The pricing plans
seem attractive. See the chart below:
Stepped fixed payment structure allows merchants to budget their payment processing costs accurately. More importantly, the cost per transaction is substantially lower than counterparts, as depicted in the chart above, which will benefit GH Capital Inc.
PayPal charges a
2.9%, or $290 for transactions around $10,000. Note that PayPal, on average,
charges around 30 cents per transaction. The European leading alternative
payment method Sofort GmbH charges fees starting from 0.95% + 0.35 Euro per
transaction.
ClickDirectPay offers a unique pricing solution
if you’re a low transaction, high value business.
To put it in
perspective, it’s worth mentioning that you will be charged nothing if the transaction
volume is below 30 even if a single transaction is of high value. CDP’s cost
table above shows cost per transaction as low as 1.7 cents, which is materially
lower as compared to cost per transaction charged by PayPal and Sofort GmbH, a
direct competitor.
This indicates
that ClickDirectPay and GH Capital Inc. are planning to target high value, low
transaction volume businesses. Further, the proposition is also attractive for
smaller businesses that don’t have hyper scale volume, and because of the cost
sensitivity of smaller businesses, they are likely to opt for CDP’s stepped
fixed pricing solution. According the CDP’s management:
“By accepting ClickDirectPay payments,
Merchant can save millions of Euros month by month of payment processing costs
and it doesn’t matter if we are talking about large online retailer or
airlines. We are offering every merchant 30 transactions toll free.”
Fixed pricing has the potential to change online payment services
competitive landscape in Europe.
As this a two-sided
market, fixed pricing can change the landscape of the European online payments
market. Lower cost will bring more
merchants on board, which in turn will lead to more customers using CDP as
payment option. The pricing on the merchant side is very important as consumers
have no switching costs. CDP is set to take market share from competitors
because of two key pricing decisions. First, small merchants will integrate
CDP’s gateway because the company is offering fee-less low volume transaction.
For large merchants, fixed fees will allow saving on large volumes, which is
not possible with conventional online pricing models offered by Sofort and
PayPal. The pricing strategy of CDP has the ability to change the competitive
landscape of European online payment technologies.
Doesn’t
competing on costs mean low margins? Yes, it does at inception. But, as fixed
investments are higher during the development phase of a software product, the
companies in the space can benefit from strong economies once scale is
achieved. And, this is expected to be the case for the ClickDirectPay and GH
Capital Inc. Once scale is achieved, margin will go up amid scale economies.
Our Take
We believe that ClickDirectPay has a pricing advantage and it will certainly attract high value, low volume customers along with small and medium businesses, or SMBs. ClickDirectPay has around 350 online merchants as of now; the management is forecasting 10,000 online merchants by 2018. And, this seems plausible given the low cost, creative pricing solution designed to target SMBs. All in all, GH Capital Inc (GHHC) is a good prospect for payment industry exposure in the OTC market. Big gains are in the cards amid explosive merchant growth going forward.
Disclosure: This publication is for informational purpose only and reflects the opinion of Focus Equity’s analysts. This opinion doesn’t constitute a professional investment advice. We have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Our technology analyst compiled this research piece. Focus Equity is a team of analysts that strives to provide investment ideas to the U.S. equity investors. This research piece is sponsored by a third party.
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