TCS Group - Acquiring Strategy Day

Tinkoff Acquiring yesterday hosted a strategy session, the third event in a series of scheduled deep dives into key verticals within TCS's digital ecosystem.> What is Tinkoff Acquiring? Tinkoff Acquiring is based around two businesses: Tinkoff Kassa, which services mainly large and medium-sized companies and marketplaces; and Cloudpayments, which works with the long tail of smaller businesses. They provide payment and acquiring services for both online and offline merchants, with a roughly 80/20 TPV split between online and offline. > How big a player is Tinkoff? Tinkoff Acquiring's R474 bln online TPV in 1H21 puts it at number three in Russia behind Sber and VTB, with 15% market share, and makes it the number 16 online acquirer in Europe. Given its smaller offline presence, its share in total retail payments is just 2%, which the management thinks it can grow materially by investing heavily in marketing and building a best-in-class user experience. > Customer segmentation. It worked with 46k online and 55k offline merchants as of end-1H21, up from 32k and 44k at end-2020. The online TPV is split fairly evenly between large and small merchants, with the largest merchants (with more than R1 bln in monthly turnover) contributing 37% and the smallest (less than R50 mln) 27%. Goods, electronics and non-food retail make up about a quarter of e-commerce payments, followed by education, travel and groceries.> Key features. Tinkoff Acquiring offers a wide range of payment services through which it aims to differentiate itself, including easy merchant on-boarding, business analytics, fraud prevention, marketplace solutions, P2P settlements and, most recently, Russia's first Buy Now Pay Later (BNPL) offering, which is merchant-funded with a 2-4% average fee. It also offers Koshelok Pay for the offline market. > Market growth. Non-cash payments look to have strong growth potential, with e-commerce at just 11% of retail sales in Russia compared to the global average of 16%, and with almost 40% of retail payments still in cash. As the cashless economy grows, so should this business. Tinkoff sees the overall net acquiring revenue TAM at R200 bln in 2023, while it posted just R4 bln in net acquiring revenues in 2020, equivalent to 2% of the potential 2023 TAM. > Monetization. Tinkoff Acquiring generated R11 bln in gross acquiring revenues in 2020, which is essentially the result of multiplying its TPV (R623 bln) by the gross acquiring margin (around 1.8%). The net acquiring margin in 2020 was about 0.7% - this is effectively the acquiring fee minus interchange and payment rail fees. Its R2.3 bln pre-tax profit in 2020 was 4% of the group result. Tinkoff expects a broadly flat net margin going forward, supported by on-boarding more higher-yielding smaller merchants, adding more value-added payment services and any downward acquiring fee pressure also potentially feeding into lower interchange too. When asked about the potential impact of online FPS payments via QR, the acquiring team suggested that, while a long-term risk to fees, this accounts for just around 1% of B2C payments, and with an inferior user experience than cards.> Financial targets. Tinkoff aims for acquiring TPV to increase at an over 50% 2020-23 CAGR (from R0.6 trln in 2020 to above R2 trln in 2023). We currently model R1.9 trln TPV in 2023, so we are close to this guidance. There is also an aim to more or less double the number of merchants each year. > International opportunities. The acquiring business is looking closely at international expansion within the CIS (this is distinct to TCS's overall international expansion plans, which appear to focus on Asia), and Cloudpayments already operates in Kazakhstan. > How it fits into the ecosystem. The acquiring business is obviously a key element of TCS's merchant offering and monetization, and it sits alongside the overall SME segment, the subject of the previous strategy deep-dive. > Competition and regulation. Competition in this space comes primarily on the acquiring side from the two largest state banks, as well as Russian Standard and Gazprombank. According to Tinkoff, its $7.2 bln online acquiring TPV in 2020 lagged VTB's $7.9 bln and Sber's $19.9 bln, but it has VTB in its sights this year. On regulation, while there was some market noise around high interchange rates a couple of years back, and the CBR temporarily capped acquiring fees on socially important goods during the pandemic, all is currently quiet on the regulatory front.