Payments/Worldline: rough reckoning for sector suffering a tale fail

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Digital payment companies are sorely in need of a new narrative. As Worldline’s disastrous profit warning highlights, their last one — a tale of secular growth, consolidation and network benefits — no longer inspires belief. 

The Paris-listed stock halved in value. That hair trigger reaction embodied a massive loss of faith, rather than a purely arithmetical reaction to bad numbers.

Worldline missed a whole shooting gallery of targets. Growth for the year might now reach 6-7 per cent, from 10 per cent expected previously. Operating profits will be around 12 per cent lower for the full year.

Other payments stocks dropped in response. Adyen, already down sharply after a profits warning in the summer, fell a further 10 per cent. Italy’s Nexi, boosted by recent takeover speculation, lost as much as one-fifth.

The sales pitch for stocks such as Worldline focused on rapid growth in digital payments. A spike in pandemic-induced online shopping sent valuations for processors soaring.

The sector has two parts. Consolidators have aimed to build bulk through takeovers, such as Worldine’s €7.8bn purchase of Ingenico. Fintechs like Block, Stripe and Adyen have sought to disrupt the payments establishment.

The growth story of both groups is fragmenting amid economic shocks. Worldline blamed softer sentiment, particularly in Germany, for its poor performance.

The secular issue is that new entrants are pushing down prices. There is less differentiation in services than optimists suppose. Payments capacity may become commoditised in the same way that telecoms bandwidth has.

Through that lens, a slew of takeovers by consolidators would look destructive rather than transformative. The market is already writing down the value of the deals, informed by an $18bn hit taken by FIS on Worldpay, acquired for $43bn in 2019.

While there is still plenty of room for growth, with around half of European payments settled through banks, these too are under pressure to lower their fees. A digital euro — or Lagardecoin, as christened by Lex — would also put pressure on the sector.

Companies that have built scale — witness Worldline’s €400bn of processed transactions — have high margins and something of a moat. But, unlike physical infrastructure networks, moats for technological infrastructure can be vaulted by the next wave of innovators. Margins can only go one way: down.