Chronopay founder Pavel Vrublevsky:
“E-globalization and the economy of demand are redefining the global payment industry”
Where is the global electronic payment market heading to in your view?
Deep changes are in process. Some trends might not be fully apparent at first glance, but the record M&A and investment deals we’re witnessing are a symptom.
In May, Global Payments announced a $21.5 billion all-stock deal for Total System Services Inc. This merger followed Fiserv Inc.’s acquisition of First Data Corp. in January and Fidelity National Information Services Inc.’s merger with Worldpay in March.
According to Dealogic, there were 102 M&A transactions in the payment industry, entailing a value of $46 billion in the first half of 2018 alone — up from $32.9 billion in full-year 2017. Investment activity in the payments sector was also notable in public markets, with Dutch PayPal competitor Adyen reaching a valuation of $22 billion in Q4 2018 — a 175% jump since its IPO last June.
Another striking example is Wirecard. Neither the investigative media reports about this company’s fraudulent accounting practices nor the German regulator’s complaint against it prevented Wirecard from attracting $1 billion in new investment from SoftBank.
The Adyen IPO had a ripple effect across the European payments sector, raising the valuation of German competitor Wirecard AG near the $20-billion mark as well. The capitalization of Ayden and Wirecard combined now exceed — by more than $10 billion! — those of Germany’s Deutsche Bank and CommerzBank put together.
Meanwhile, earlier this year, British payment startup Checkout raised $230 million at a $2 billion valuation. And this is not even counting American investors’ moves in the Indian payments industry: last summer, Walmart acquired e-commerce giant Flipkart Online Services Pvt for $16 billion while Berkshire Hathaway took a $300-million stake in Paytm.
What does this frenzy mean?
The industry is being redefined by the convergence of two trends: e-globalization and the economy of demand. E-globalization is a characteristic of today’s e-commerce, where an exclusive cluster of firms — namely Facebook, Google, Apple, AliExpress, Steam, BattleNet, PokerStars and a few others — process 30% of global transactions.
E-globalization significantly affects M&A activity in the payment industry because roughly half of the fees paid to by e-merchants to payment companies constitute their revenue (the other half goes to banks and such operators as Visa and MasterCard). Therefore, 1-2% of the extra cost the merchant pays can be kept if the owner of the e-commerce company is also the owner of the payment company. Thus, for the shareholders of large e-commerce companies, it makes perfect sense to buy out payment companies.
The introduction of national personal data legislations in many countries has contributed to this trend, since these laws have attracted e-globalization players’ attention to local payment companies.
Meanwhile, a second trend is much less noticeable, more difficult to understand yet perhaps even more important: the rise of the demand economy. Traditionally, in an offer-led economy, marketers measure how many people can buy their products. Further, they determine market size, followed by their own market share, and then calculate how much advertising is needed to increase this market share.
The widespread development of e-commerce, e-payments and digital retail has led to the emergence of a new approach. Instead of counting the market and market share, you can analyze customer purchasing behavior in real time, enabling enterprises to adjust their marketing strategy accordingly. Before the rise of e-commerce and e-payments, such an approach was impossible, because real-time sales data didn’t exist.
This real-time, demand-tracking capability gives a serious edge to shareholders, since it instantly reflects the changing demand dynamics of a product. Investments and resources are immediately allocated to the most promising products. This is why Facebook and PayPal are exploring new payment technologies, which enable them to measure demand in real time.
As real-time sales data empower investors with greater insight into customer demand, these new metrics enable a more certain path for economic value creation. Ultimately growth and investment in the payments sector creates a virtuous cycle, stimulating online commerce and scaling prosperity through consumer, vendor and investor ecosystems.
Are such trends also visible in Russia? Are local e-payment companies courted by investors and acquirers?
Not really. Russia is a bit dead in this respect. The payment industry traditionally is linked to banks and larger Russian lbanks are more or less under fire. I was surprised was when I learned that it’s literally impossible to find investors for a bank in Russia. The market is in my view very undervalued because investors fear the Russian Central Bank sometimes unexplainable policies.
On the other hand, I have never heard that the Russian central bank would have attacked any Russian bank with reputable international investors.
Which other trends do you see in the Russian payment market?
This market will soon be cleaned up with a stricter application of Russian personal data laws. Almost four years after the personal data storage law became applicable [in Sept. 2015], a range of international companies are still not in compliance. The regulator Roskomnadzor has checked a relatively small number of sites so far — which, however, has led to blocking access to LinkedIn and threatening Facebook and Twitter with small fines.
But Roskomnadzor hasn’t gone far in this direction, being too busy with other things like the illegal gambling industry. This is likely to change soon, and the authorities have given signals about it (see Section 3). Particular attention will be brought to the e-commerce sector. We will ask the State Duma [lower house of parliament] to request the regulator to check the actual compliance of a range of international players with this law — not just their statements or commitments about it.
Has a list of such players been made public?
This is the list of international resources that generate the biggest payment volumes from Russia. It includes Aerobilet. com, Airbnb, AliExpress, Amazon, ASOS, Elama. com, Eshopworld. com, Facebook, Booking. com, Farfetch. com, Google, Hotels. com, iHerb, iTunes, Microsoft. com, Moneta. trade, Netflix, Olymptrade. com, PayPal, Playstationnetwork. com, Rentalcars. com, Steamgames. com, Terminal-5, Tiburon. com, Uber, Yoox. com, 7pm. com — as well as such airlines as Air France, Finnair, KLM, Pegasus and Turkish Airlines. I’m not saying these companies violate the law, but that the authorities should check up on them due to the massive payment volumes they generate.
Are payment service providers also concerned by this law?
Absolutely, since any transaction is necessarily related to a person’s name and surname. This is personal data in essence, so PSPs fall under this legislation. Needless to say, a range of international PSPs are not compliance. They will have to make big changes in the way they handle and store Russian users’ personal data. Otherwise, these PSPs will lose online retailers that are serious about working with Russia.
Does your company Chronopay fully comply?
It definitely does — and this will soon become an obvious competitive advantage.
Not too many PSPs offer simultaneously offer the two key benefits of full compliance with data laws and a legal presence both within and outside Russia. Having a branch outside Russia is not a legal obligation, but it makes things easier for international clients.
What are your plans for Chronopay?
Once the geopolitical context stabilizes, we will seek to develop in three directions. First, we’ll set out to obtain a specific type of banking license in Russia — called an NKO — to launch an e-wallet just like PayPal or Yandex. Money. This goal may be attained via the acquisition of an existing licensed organization.
Second, we are preparing a new PSP offer and sales strategy both for Europe and Russia. We will target small and mid-sized business, aiming to win over PayPal and Yandex Money in Russia. We’re also in the process of restructuring our business in the Netherlands.
Third, ChronoPay has a top-secret crypto project called ’Pandora.’ We designed it two years ago but postponed its introduction until we can fund it properly and determine an adequate jurisdiction. Pandora is an exchange for investing in real-time sales of e-commerce companies. This will be an entirely new way of investing in business.
Interview conducted in June 2019
Founder
Chronopay
A renowned, internationally-connected entrepreneur, Pavel Vrublevsky is the founder and CEO of Chronopay, a major payment service provider. He also has backed several Russian Internet projects such as Habrahabr. ru, Russia’s #1 high-tech guru community; Rospravosudie. ru, the largest legal database in Russia; and Russia’s Financial Newspaper, the oldest Russian business publication. Mr. Vrublevsky graduated from the Maurice Thorez Institute for Foreign Languages and holds a Master’s Degree in Sociology from Moscow State University. He is a member of Russian billing software think tanks and holds a column in Forbes Russia about electronic payments and cryptocurrencies.