Zwipe’s solid traction reported in Q1 has continued over the summer, in line with the progress for contactless. In a survey of 17 000 users, Mastercard concluded that 79% are using contactless payments and 46% have changed their top-of-wallet cards to contactless ones. 52% want to entirely remove the transaction limits. Zwipe’s true contactless solution removes the safety risk in 100% of all cases, as opposed to today’s contactless solutions that have a cumulative limit of e.g. 1 500 NOK in Norway, or five transactions before a PIN code must be entered. This is why Zwipe calls its solution next-gen contactless. It is not so much the actual fraud from higher caps but the fear of fraud that is important. Zwipe said on Redeye’s Growth Day that it believes this perceived fraud from raised caps and contactless will increase the willingness to pay.
Zwipe has added safety to its mission of making convenience secure by biometrics, highlighting the importance of hygiene, propelled by the Coronavirus. In our view, this is a new paradigm. There are few places, if any, with more virus and bacteria than a payment terminal.
Other newer market data points discussed by Zwipe includes a survey of over 120 payment industry professionals. 97% of the payment professionals preferred contactless cards. Over 80% thought biometric cards were more secure and safe, and 56% would be willing to pay for them. These results are in line with previous similar surveys and further drives demand. Fingerprint Cards expects big European banks to launch biometric cards this year, and thinks the industry has passed the big tech hurdles when it comes to volume production.
We believe Zwipe’s card manufacturing partners, outside of the big three, in total shipped almost 600 million payment cards during 2018 (see the graph below). If Zwipe can win a big stake of these existing partners, it should be a home run. Then, one should perhaps not entirely rule out the theoretical potential to sell to G&D or Gemalto, which would add another 1.4 bn payment cards to the addressable market.
Looking at market news from other players, BNP Paribas has recently announced that it will launch a biometric card. The Scandinavian news coverage only pointed out that the first batch will just be 10 000 – 15 000 cards for Premium and Gold customers. However, the Bank’s Head of Electronic Money and Innovative Payments verbatim said (French translation) “The objective is to make the biometric card accessible to all our customers afterwards”. BNP Paribas serves nearly 33 million retail clients worldwide, suggesting a substantial potential. In our view, the solution from Zwipe’s competitor that is used by BNP Paribas is significantly more expensive than Zwipe’s and Idemia’s technology. Thus, if BNP Paribas is willing to do a full scale rollout with expensive cards (cost of USD ~20, by our best guess), it indicates positive prospects for Zwipe’s more cost-efficient solution.
During Redeye Growth Day, Zwipe commented eventual future competition from Chinese copycats. In short, there are major differences between the payment industry vs. the notorious, Chinese-associated smartphones industry that came to be known through Fingerprint Cards’s previous rise and fall.
Speaking of FIngerprint Cards, we believe Idemia wants its own, unique solution. The IDEX sensor was chosen for the “first round” of the Pay ONE platform. Considering the dual sourcing paradigm in the industry, we think Fingerprint Cards will eventually be allowed to join the platform. It is hard to guess how things will play out, but if IDEX, due to e.g. high power consumption, will turn out to be the weak link in the partnership, we think it would be possible for Zwipe to use Fingerprint Cards, from how we interpret the Idemia setup. If Idemia sticks with IDEX in such a situation, we think that its market share could be significantly lower than its 20% market share in conventional payment cards. In that case, the remaining market of other card manufacturers for Zwipe will logically be a lot larger, i.e. more potential sales for Zwipe.
We have already commented on the new partnerships with Watchdata and Toppan. Here are a few additional comments on the many, new partnerships announced during the past months:
Publicenter is Italy’s largest domestic card manufdacturer, and hence a major player. We have not been able yet to pin down exactly how many cards it sells but several sources points to well over 100m cards. We also note that the Publicenter partnership is not only for cards but wearables as well. When Zwipe launch the G&D pilot or can share more information about it, we think it could add several other existing partners to the wearables bandwagon.
Moreover, the renewed partnership with TGS was extra important as it verifies that old partners from before the Idemia deal are still relevant. We expect more old partnerships to be renewed to include Pay ONE.
We also find the Liveo partnership interesting, although we are not yet sure exactly what the setup is. The press release says Liveo will “roll out and promote Pay ONE”. which suggests some kind of reseller or distribution arrangement.
Zwipe has strengthened its management team and board significantly. Bishwajit Choudhary assumes the position as Executive Vice President Strategy & Channels. In this role, he will lead Zwipe’s direct engagement and contact with card issuers (banks, neo-banks, and retailers etc.) as well as global and domestic schemes, and other important ecosystem stakeholders. We think this is a very good and important addition to the management team as it is crucial to understand the end customers by getting close to them. Choudhary has 20 years of experience from the payment industry, and we therefore think he is likely to succeed in this mission, which could accelerate the growth. Choudhary was with the payment solutions company Nets for 20 years. During about half of this time he worked with strategy and expansion. In his last four years, he was SVP of Strategy. The rest of the tenure he worked as manager of sales & business development and product development, suggesting an all-round background and a profound understanding of the ecosystem.
Zwipe has also added a significant amount of payment experience (35 years to be exact) to the board, by getting Diderik Schonheyder onboard. Schonheyder was Senior Vice President at Visa, where he started out and spent 22 years. He later had the same role for four years at Mastercard, until 2006. Since then he runs his own consultancy company focusing on payment ecosystems. In between Visa and Mastercard he was General Manager for nine years at the payment processor Europay. Europay is the “E” in EMV – that created the EMV standard (the “M” and “V” being Mastercard and Visa). Europay later merged with Mastercard.
Entrepreneur, investor and longtime major Zwipe owner Pål Eivind Vegard has also joined the Board. Vegard started up Tele1 Europe in Norway and then funded several companies. Following his 2011-2016 tenure in Zwipe’s board he should know the company and its market inside out.
We argue that Choudhary, Schonheyder and Vegard is a perfect fit for Zwipe, and we are impressed by the company’s ability to attract talent and experience. In sum, both the management and the board has been significantly strengthened.
The streamlining program implemented in 2019 is on track, with full effect from Q2. The company has reached a monthly cash burn of NOK 5.9m, which in relation to the cash of NOK 55m implies a 9-month run rate from Q2 (10 months including the approved grant from a Norwegian government run R&D tax incentive scheme of NOK 5m). Our estimates include new capital raising around year-end.
We raise our fair value range based on the new partnerships and a higher expected addressable market (20% penetration of the total card market), as we believe Corona has accelerated the transition to biometric payment cards. Our new base case is NOK 20 (previously 9). The new bear and bull case amount to NOK 6 and 35, respectively. We expect Zwipe to have an initial market share of 17%, which gradually drops down to 8% in 2030. We have totally excluded G&D and Gemalto in our new estimates, meaning a Zwipe market share of 20%, excluding the big three. Our new scenarios imply a total market of 450 and 900 million cards in 2030 in our base and bull case, respecitvely (the market share is still the same in both scenarios).
In order for us to maintain our new fair value range, we now want to see several pilots, contracts and purchase orders to back up the company’s strategy.
Zwipe will not use the important wait time extension patent in Europe, US and Asia to sabotage the market, but it will try to monetize the patent in the longer run. We view this an option in our valuation.
The stock started the year at extremely depressed levels (NOK 5-6 in January and later NOK 2-3 in March), which was driven by a high, temporary sell pressure from the guarantors in the rights issue. Most of the ~600% stock performance since March is therefore simply a recovery to more reasonable levels in line with 2019.
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