The Reserve Bank of Australia (RBA) has recently proposed a ban on surcharging for debit card transactions, a move that could reshape the landscape for Australia’s payments sector. This proposal, currently under a review phase expected to last six to nine months, aims to alleviate payment acceptance costs for merchants while simultaneously restricting their ability to pass these expenses on to consumers. Beyond this proposal, there’s a broader review underway to reassess fees associated with Mastercard, Visa, and bank interchange fees, amplifying the potential regulatory shake-up within the sector.

Ron Shamgar, Head of Australian Equities at TAMIM Asset Management, shares valuable insights into how three ASX listed companies in the payments space – Tyro Payments, Smartpay, and Cuscal could each be impacted by these prospective regulatory shifts. For investors, understanding these impacts is crucial for assessing the strengths and challenges of each company as they navigate potential changes in Australia’s evolving financial landscape.

Tyro Payments: Positioned to Capitalise on Change

Tyro Payments (ASX: TYR) stands out among its peers for its resilience against the adverse effects of the proposed surcharge ban. With a market capitalisation of $400 million and a healthy balance sheet with $70 million in net cash, Tyro’s business model is more diversified than others in the sector, which buffers it from heavy reliance on surcharges. Additionally, Tyro’s forecast EBITDA stands at $62 million for FY25, placing its valuation at an attractive 5.5x EBITDA multiple.

Unlike many competitors, Tyro’s revenue model does not depend heavily on surcharge fees. Presently, only about 30% of Tyro’s merchants voluntarily apply surcharges on both credit and debit transactions, and its “zero-cost EFTPOS solution” offering merchants the option to accept payments with surcharging represents only a small percentage of Tyro’s transaction volume (2% of TTV and is what at risk from RBA review). This means the company has minimal reliance on card surcharges, thus reducing its risk exposure to potential regulatory impacts from the RBA’s ban proposal.

According to Ron Shamgar, Tyro could perceive this regulatory shift not as a threat but as an opportunity. Tyro anticipates that merchants, newly cost-sensitive due to restricted surcharging, may increasingly seek competitive pricing solutions. Tyro’s POS terminals are already equipped to distinguish between credit and debit cards, allowing merchants to apply surcharges selectively to credit transactions if needed. This unique flexibility positions Tyro to attract new business while retaining its existing client base under the new regulatory environment.

Moreover, Tyro’s resilience in the face of these changes and its low valuation relative to its earnings make it a compelling choice for investors. Shamgar points out that Tyro’s current share price appears undervalued, especially given the company’s limited exposure to debit surcharging and a strong market position in the health sector. As the payments landscape evolves, Tyro’s strategic focus on retaining pricing flexibility and catering to a cost-sensitive merchant base could make it a potential market leader.

Smartpay: Facing a Potential Margin Squeeze

Smartpay (ASX: SMP), a Kiwi-based payments company with a substantial presence in Australia, finds itself more exposed to the potential impacts of the RBA’s proposed surcharge ban. With a market cap of $150 million and an EBITDA of $18 million, Smartpay’s model is more reliant on debit card surcharges for its Australian operations, particularly within its zero-cost EFTPOS solution, which constitutes around 80% of its Australian revenue.

If the RBA’s proposed ban on debit card surcharges takes effect, Smartpay will likely have to renegotiate its contracts with Australian merchants to offset the lost revenue generated from these high-margin fees. The company’s profitability in Australia could face considerable pressure, as debit surcharging has been a significant source of revenue for Smartpay, helping to compensate for low transaction fees within the payments space. This change may reduce its operating margins, potentially putting Smartpay’s valuation under strain.

However, Smartpay has a promising growth trajectory in New Zealand that could provide a counterbalance to the headwinds in Australia. The company is launching new terminals across its 35,000-strong fleet in New Zealand, transitioning from a rental-based revenue model to one where Smartpay captures the full merchant service fee for each transaction. This strategic shift could add an estimated $30 to $40 million in incremental EBITDA if the rollout proves successful, providing a valuable growth avenue outside Australia.

Shamgar emphasises that Smartpay’s partnership with Cuscal, a payments processor in Australia (and soon in New Zealand), could play a strategic role in buffering Smartpay from the potential impacts of a debit surcharge ban. With close operational alignment, the two companies may have a smoother transition into the new regulatory framework, potentially even opening the door for acquisition opportunities down the line. Such a move could help Smartpay reduce costs and streamline its payments processing, particularly if Cuscal brings additional efficiencies to the table.

In short, Smartpay’s exposure to the RBA’s regulatory proposal presents both a challenge and a growth opportunity. If successful in New Zealand, Smartpay could leverage its expanded revenue model to offset some of the negative impacts in Australia, giving it a chance to stabilise and grow even as regulatory pressures mount.

Cuscal: Minimal Direct Impact, Positioned for Growth

Cuscal occupies a unique position in the payments sector, focusing primarily on infrastructure and processing for banks, fintechs, and corporate clients. Unlike Tyro and Smartpay, Cuscal does not directly engage in merchant acquiring or impose interchange fees, making it less vulnerable to changes in surcharging regulations. As a result, Cuscal stands relatively insulated from the potential impacts of the RBA’s proposed ban, providing it with a certain degree of stability in an otherwise turbulent market.

Cuscal’s market position as a backend processor within the payments ecosystem is advantageous, as it allows the company to support a wide range of clients without directly competing with them. Cuscal is also one of only five organisations in Australia that hold the full range of licensing, connectivity, and capabilities required to manufacture payment products, which makes it a critical player behind the scenes in Australia’s payments industry.

Shamgar notes that Cuscal’s infrastructure focus is further strengthened by Australia’s increasing shift towards real-time payment systems and the rise in debit card usage, both of which play into Cuscal’s growth trajectory. The proposed surcharge ban may actually benefit Cuscal indirectly, as merchants could steer more consumers towards debit transactions, which would increase processing volumes within Cuscal’s system. This shift may add incremental revenue from increased debit card usage without subjecting Cuscal to the volatility associated with surcharge-dependent revenue.

With a potential IPO on the horizon, Cuscal could use the capital raised to pursue mergers and acquisitions (M&A) in complementary areas of the payments sector. Shamgar suggests that Cuscal’s unique positioning within the payments infrastructure space makes it a prime candidate for strategic acquisitions that could broaden its market reach. Cuscal’s potential to merge with companies like EML’s (ASX: EML) Australian division, for example, would be both complementary and accretive, further reinforcing Cuscal’s role in Australia’s payment processing landscape.

The TAMIM Takeaway

The RBA’s proposed surcharge ban marks a pivotal shift in Australia’s payments landscape, presenting both challenges and opportunities for companies across the sector. With regulatory reviews targeting not only debit card surcharges but also interchange fees and other cost structures, the payments industry is on the brink of significant change. This shift will demand that companies demonstrate resilience, adaptability, and strategic foresight to thrive under a new regulatory framework.

For companies like Tyro, Smartpay, and Cuscal, the key lies in aligning their business models with evolving merchant needs while remaining competitive. The anticipated ban could lead to increased price sensitivity among merchants, driving demand for innovative, cost-effective payment solutions. Companies positioned to offer flexibility and a streamlined cost structure are likely to attract greater market share as merchants navigate these changes.

At TAMIM, we believe that while some companies may face margin pressures, others will discover growth opportunities by expanding into underserved markets, innovating with new technologies, or pursuing strategic partnerships and acquisitions. For investors, this regulatory environment underscores the importance of a diversified approach. By balancing near-term challenges with long-term growth potential, investors can better capture value in a sector poised for transformation. The evolution of Australia’s payments landscape signals that adaptability and strategic positioning will be paramount for sustained success.

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Disclaimer: Tyro Payments (ASX: TYR), Smartpay (ASX: SMP) and EML Payments Limited (ASX: EML) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.