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Vendor Review: hyperWALLET Systems

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18 May 2010

I’ve been fairly negative on a few vendors lately. In the long term, Capital is attracted to success and growth and it is time to look at a few “successful” start ups.

Criteria for “success”:

  • Consumer Metrics (Active Customer Growth, Revenue)
  • Dependencies (Behavior, infrastructure, technology, …)
  • Value Proposition
  • Market Opportunity
  • Financials (Invested Capital, Burn Rate)
  • Competition
  • Ability to Execute (Team/Partnerships/Regulatory Issues)
  • Intellectual Property

hyperWALLET Systems

The first step in assessing any company is to look at their customer base and legacy. hyperWALLET is a 10 yr old private Canadian company that delivers both a software platform and payment network to over 200 companies and government agencies. They have references in telecommunication (Enstream), banking (HSBC, Canadian Banks and credit unions), Government (paylution), Commercial B2P payments (Monavie), Card (FIS, First Data, ..), online/mobile wallet, and are themselves a licensed money services business (in Canada).

The focus of hyperWALLET is payments to an individual, supporting payments from: another individual (P2P), a corporation (B2P) or government (G2P). The key issue in supporting payments to individuals is addressing lack of homogeneity in banking relationships and preferences. For example, an unbanked consumer may have preference for a pre-paid card or distribution through an agent network. Similarly a banked consumer may have preference for funds deposited directly in their bank, or split between banks depending on whether the payment is for dividends, commission or pension.

hyperWALLET has 2 businesses that support this focus: Platform and Network. Their platform provides white label payment services in either a license or hosted model. Allowing customers to “brand” payments and integrate into the online customer experience. For example, Canadian credit unions which allow customers to move funds to other banks internationally would have the “transfer funds” service as another tab to their existing online banking service. In addition to supporting white label, the platform upports 12 languages and 15 currencies in multiple channels (online, VRU, CSR and mobile phone). As an ex Oracle and ex Citi exec I couldn’t help but be impressed by the product design and architecture. Certainly a credit to the MIT educated CEO Lisa Shields.

The platform can serve as either the system of record for multiple products (ex. Card, ACH, Wallet, Airtime) or aggregate this information from other sources. For example, as a certified ISO 8583 issuing platform hyperWALLET can issue pre-paid cards and serve as processor, or it can integrate to systems from FIS, First Data (…etc.) and act as a program manager.  Another example is where hyperWALLET acts as an agent of the bank to provide customers with an “integrated” account view of card, ACH and other (Airtime, wallet, ..etc.) balances IN MULTIPLE CURRENCIES. Customer’s have the capability to turn these functions on and off in order to restrict functions based upon customer segment and location (regulatory regime).

The key barrier for HW’s competition is their payment network. By establishing banking relationships in over 40 countries over the last 10 years, HW can process both domestic and international payments through local ACH networks. This allows HW to centrally manage Treasury, and FX (thereby cost) which provides them with the capability for disruptive pricing. For readers of my previous blogs, I consistently credit PayPal and Cashedge for their payment operations teams. I now put hyperWALLET into this group and place them in the leader category from an international perspective. The HW team manages card, ACH, MSB, SWIFT, Agent networks, MNOs, and Wire across their broad customer portfolio (consumers, banks, corporates and government) for 40 core markets and their associated regulatory regimes. They even have a call center that speaks 12 languages.  Truly a rarified group.

The only companies that come close to offering this level of functionality are within commercial banks (Citi GTS, Deutsche, JPMorgan, HSBC GTB, Barclays GPU). Unfortunately for the banks, few are adapt at making their transaction services functions consumer friendly. Thus these institutions largely focus on the top end needs of large corporations, leaving everyone else to companies like hyperWALLET. 

HyperWALLET is a payments company in the hot spot of payments to consumers. They sell their platform to MNOs like Enstream as they lead Canada into mobile payments, and deliver cost effective global transfers through their Global clearing network in a way that allows individual consumers to manage where and how they get their funds. The deep payment expertise, and diverse customer base, leads them to rock solid product design based on real world problems.

HyperWALLET recently expanded its board of directors with the addition of Peter Burridge, former CEO of Travelex Global Business Payments and President of Seibel Asia Pacific and Japan. hyperWALLET’s CEO Lisa Shields is a leader in Canadian Payment community. In addition to her role as Co-Chair of the Canadian Payment Association meeting in June, and her 200+ customers, she is heavily involved in working to address the needs of the unbanked.

As you can tell, I’m quite high on this vendor. They are light on marketing and high on references, product, payment operations and thought leadership. The key market opportunities which will drive hyperWALLET are:

  • Pre-paid card
  • Mobile Money (from Enstream, Apple, Bharti, …)
  • Business payments to Consumers (dividends, commission, expense, …)
  • Government Payments to Consumers


hyperWALLET is a private company with no published financials. As a payment network, they are classified within Payment Processors. Not withstanding the inflationary multiples from the Visa/CYBS transaction, companies within this group have average 2009 P/E multiples of 14.3, and 12.9 for 2010. Comparable acquisition transactions are listed below

Thus, I estimate hyperWALLETs current value between $70M and $120M

Written by tomnoyes

May 18, 2010 at 2:38 pm

Verifone – Paywaremobile

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Verifone – Paywaremobile

December 10, 2009-12-10

 Super move by Verifone, a “serious” device for merchants. As an investor, be glad you skipped on the SquareUp opportunity. Advantages of the Verifone’s device:

Down side

  • Merchants must sign a merchant agreement with an acquirer
  • Costs associated with merchant agreement (below)
  • Paywaremobile could add chip and pin functionality… There is life outside of the US

Summary, for small merchants that don’t want to sign a merchant agreement there are payment solutions out there today (paypal). If you want to accept a card directly, you’d be best served by going through an acquirer and using a certified device like paywaremobile… as your risks are not inconsequential in accepting cards through without a merchant agreement in an uncertified device.

Written by tomnoyes

December 10, 2009 at 3:08 pm

Amex Revolution (update 4)

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Amex Acquires Revolution Money – $300MM (Update 4)

18 November 2009

QUICK Take Analysis

Company Website

Investor Webcast – Amex Acquisition


Card Holders: 300,000
Merchants: TBD
TPV (FY 2009 Estimate): $200M-$400M

Revenue (2009 Estimate)
Interchange:   $1.0M (Est 50bps)
Fees:                 $0.30M *Est
NRFF:               $0.60M *Est
Other:               $0.20M *Est
Total 2009 Rev:  $2.1M (Estimated)

Invested Capital
Series A – $10 (Estimate)
Series B – $50M 9/07 Deutsche Bank, Morgan Stanley, Ted Leonsis
Series C – $42M 4/09 Goldman Sachs, Steve Case, Ted Leonsis, David Pottruck, David Golden, Citigroup, Morgan Stanley.

Total Invested Capital: $112MM (Estimate)

Post Money Valuation – Series C $200M (April 09) *Est
Purchase Price: $300M (11/18/09 Press Release)

Deal Analysis
• 142.8 times Forward Revenue
• 2.68 times Invested Capital
• Profitability. Assuming ACH funding costs of 42bps, gross margin on TPV is less than 8bps. If consumer fees remain consistent,  and merchants bear marketing costs, break even is TPV of $1.9-2.5B (12x+  current TPV). Note PayPal TPV is $60B.

Bank License: First Bank & Trust
Partnerships: Chase Paymenttech, 5th 3rd

Business Overview

The most telling data on this business is from the conference call above. CEO said “I don’t know what the numbers are, and if I did I probably wouldn’t tell you”. Revolution efforts to date, and their value proposition, are heavily merchant focused.  Early vision was to own the rails and act as both issuer and acquirer. Realizing that this was too much to bite off for a small company they chose to focus on a platform and partner w/ acquirer, selecting the most cost effective network (PIN Debit) as “rails to ride”.

Revolution has “tested” the platform, a platform which provides unique cards that resemble US Bank’s existing PIN Debit (ATM) card plus some additional security features.  Given the break in their acquisition strategy, Revolution’s margins are extremely compressed, with merchants provided a flat 50bps MDR. All accounts are funded by ACH transfer and no interest is paid to customer on funds held.  Payments funded though ACH typically carry a flat processing fee, usually less than 25c (this represents cost of less than 40 bps on an average PayPal transaction of $62). By comparison, PayPal’s funding mix includes option for credit which carries funding cost of 200-250bps.

Under existing US regulations (Reg E/ Reg Z) merchants suffer heavily in losses on Card Not Present (CNP) fraudulent transactions.  Visa and MC networks have had challenges implementing improved CNP risk controls as 4 parties (issuer, acquirer, merchant, network) have very different incentives. Revolution’s enhanced security controls attempt to address merchant liability in CNP fraud , and could lower costs for merchant, and issuer (Revolution).

Consumer Fees


  • 140x revenue represents a significant premium for a business model that has not proven itself, only “tested” its platform, requires substantial changes to consumer behavior, and leverages bank networks without providing bank incentives. It will take a 500%+ annual growth rate for this transaction to be accretive in a 5 year view with current pricing structure. American Express acquisition may be able to accelerate merchant growth, but marketing costs remain a challenge.
  • Current MDR and Consumer fee structure will likely remain until a TPV of $2-$3B to drive merchant adoption and offset merchant costs associated with integrating (and marketing) a new payment instrument.
  • Merchants may distrust AMEX intentions here as AMEX’s MDRs are among the highest of any payment type. Internally, AMEX will be challenged to allocate resources to Revolution’s given cannibalization issues surrounding fee structure. It may however, align with AMEX recent activity to form a deposit business.
  • Amex merchant connectivity may be able to provide the low cost rails that were initially envisioned in Revolution’s early business model. Internal incentives will prove challenging.
  • Price driven product. As the head of payments at a top 4 bank told me last week, what about this can I not do? The margins in this model have not driven earnings, and pricing will likely increase to support a sustainable business. A key element to pricing (and adoption) will be the degree to which merchants take ownership of marketing, loyalty and consumer adoption.
  • Companies like LifeLock have demonstrated that there are profitable consumer segments that care deeply about security. Uptake of Revolution money may be influence heavily by customer awareness. Under Reg E and Reg Z, maximum consumer liability for a fraudulent Credit Card transaction is $50. The liability for a PIN Debit is much different (note below). If consumers realize that their existing card liability is superior (then this instrument), it may impact adoption.
  • As with any new payment instrument, consumer adoption often proceeds much more gradually than predicted. PayPal solved a critical problem for an emerging market. Paypal’s ability to manage fraud and losses may justify their higher take rate (300-350bps), as the PIN debit model does not address merchant liability (see Chicago Fed Overview).
  • It is Critical that Chase Paymenttech stay engaged in merchant acquisition, as they are the leading acquirer for online merchants (addressing CNP issues).
  • (Aug 2010) learned that Revolution paid acquirers $1-$2M to integrate product.
  • Message to banks and issuers: set aside $10-$30M to invest in solutions to address CNP fraud.

Banks have invested enormous capital in building the ACH and PIN Debit (ATM) network, Revolution money leverages ACH to to fund their accounts, and then leverages the ATM PIN Debit network to conduct transactions. This flow of funds completely eliminates Debit card interchange revenue for “originating” banks (~150bps). Banks have not acted to date as current TPV is not of concern. In the event that TPV expands significantly, expect Bank involvement in restricting both the funding of accounts and use of PIN debit network. NACHA members have been very active in enforcing limits on clearing of non-bank payments, particularly if total transaction volume exceeds bank’s assets.

Non-bank money transfer services are typically a regulated activity. In addition to regulatory challenges, the unique regulatory environment (Reg E, 3rd party sender to ODFI) in the US may prohibit international expansion of this model. Another unique aspect to the US market is the card issuing business is typically separate from the merchant acquisition side (exceptions are American Express and Discover). Internationally, banks with both issuing and acquisition businesses are in a much better competitive position.

American Express will likely look to supplant role of Chase Paymenttech in merchant acquisition. Chase Paymenttech has several unique capabilities that will be challenging for AMEX to match. Look for AMEX to provide incentives for continued Chase Paymenttech involvement.

Value proposition is heavily merchant focused. Merchants may bear marketing costs to drive consumer adoption given the enormous cost benefits, however an integrated (merchant funded) marketing campaign will be challenged. Branding payments will eventually provoke a bank reaction. Paypal supported bank profitability through some interchange (50% funding mix w/ ACH). This model completely disintermediates banks (all while leveraging network in which they have influence/ownership).

Fraud does not typically attack a new payment system until it reaches critical mass, as fraud perpetrators must invest time to explore weaknesses and develop new tools. PayPal suffered losses of 7.4% of Revenue (over $300M gross fraud last year). This would obviously impact a business model with a margin of less then 10bps. The funding of the initial account is certainly a key weakness in this arrangement, as witnessed by both “direct banks” and transfer agents like Cashedge. Cashedge has a dedicated team of 30 risk analysts that have developed tools over 5 years to address fraud. See Mule Accounts.

Is the merchant value proposition strong enough that merchants will invest in building business teams that are capable of creating marketing and loyalty plans that can drive consumer adoption?

Written by tomnoyes

November 18, 2009 at 9:19 pm