RS2 enters the acquiring business

Article #629 by Edward Rizzo - Published Weekly

One of the first major company announcements on the Malta Stock Exchange in 2020 was of RS2 Software plc when it announced on 8 January that it purchased KALICOM Liebers Zahlungssysteme KG (“Kalicom”) which RS2 described as ‘one of the most successful commercial network operators for electronic, card-based payment systems in Germany’.

In the announcement, RS2 explained the rationale for the acquisition by claiming that the business of Kalicom is a perfect fit for the company as it will enhance its product portfolio enabling RS2 a quick start into the direct acquiring business with immediate capabilities of selling, installing and servicing terminals and processing card transactions in the German market for small and medium-sized accounts.

RS2 also stated that the acquisition of Kalicom is in line with RS2’s strategic shift away from the traditional focus of selling perpetual licences of its BankWorks platform to managed services, merchant acquiring services and issuing services across the world.

The announcement did not indicate the cost of the acquisition, how it is being financed and details of the recent financial performance of Kalicom. These were provided to the market via a meeting with financial analysts on 28 January followed by a further company announcement on 31 January when the presentation delivered to financial analysts was made public.

The meeting was addressed by CEO Radi El Haj and the CFO Jens Mahlke who joined RS2 in June 2019 and who is also responsible for building the European acquiring business of RS2 having similar experience over the years at Concardis Payment Group and Deutsche Bank. Mr Mahlke started off the meeting by explaining the dynamics of the German market. He stated that although it is the largest economy in Europe, it is only the third largest payment market. Mr Mahlke added that since Germany is an underserved market with a poor service level and lower innovation rate, it offers exceptional growth potential.

Although Kalicom is a small company with only 10 employees and revenue of circa €1.1 million, Mr Mahlke described the acquisition as an attractive market entry opportunity for RS2 with huge potential. The presentation also disclosed the five-year financial forecasts of Kalicom which envisages a jump in EBITDA to €900,000 by 2024 which will enable Kalicom to repay the bank financing taken by RS2 for the acquisition which amounted to €2.5 million inclusive of professional fees and other transaction costs.

The forecasts are based on RS2’s plans to carry out an investment in Kalicom’s sales force to drive revenue growth, increase cross-selling opportunities, obtaining higher margins through in-house coverage of other parts of the payments value chain and converting Kalicom’s terminal business predominantly to a rental model while currently most terminals are sold to merchants. Moreover, the forecasts of Kalicom also assume that the use of credit cards will accelerate towards the market average.

RS2’s CFO stated that despite the current small size of Kalicom, it is an important ISO business in Germany which can also be used as a vehicle for further acquisitions. An ISO is an ‘Independent Sales Organization’ which is a formal designation that a company must have in order to sell branded credit card processing services under its own company name. Both Mr El Haj and Mr Mahlke confirmed that they are already looking at other ISO portfolios in Germany, some of which are larger than the size of Kalicom currently at circa 4,000 terminals.

During the meeting with financial analysts, RS2’s CEO also spoke about the importance of the entry into the acquiring business for the overall business model of RS2. Similar to his statements in meetings over recent years as well as during the past few Annual General Meetings, Mr El Haj described how RS2 shifted its business model away from its dependency on the sale of perpetual licences of its BankWorks platform.

RS2 had set up its managed services subsidiary in 2011 to enter the transacting processing area and the CEO claimed at the analyst meeting on 28 January that a number of important announcements in the weeks and months ahead in the managed services business will enable the company to achieve the scale of business originally envisaged for this important business pillar. Mr El Haj also hinted that these announcements will not only relate to the business pipeline in the US but also in other regions as part of the company’s global ambitions. In fact, the CEO also indicated that as a result of the scale being achieved with the immediate business pipeline, RS2 will become more selective in the future on which clients to onboard for managed services so as not to enable competition in the acquiring business in certain markets.

RS2’s CEO also claimed that the large industry players are now truly starting to recognise the value of the BankWorks platform due to its ability to consolidate all the global business of merchants on a single platform. Mr El Haj also indicated that there are very few competitors worldwide that can truly boast of such capabilities.

RS2 has a single, integrated platform (BankWorks) operating across the entire value chain and enables merchants to eliminate the need to work with different groups of gateways, risk management providers, processors and acquirers.

Meanwhile, last week RS2 announced its first global launch of its direct acquiring business in Latin America in partnership with MoviiRed in Colombia to offer consumers and merchants direct issuing and acquiring services. In the press release, RS2 explained that Colombia is one of Latin America’s fastest-growing markets and widely seen around the world as a market with outstanding potential. In fact, in the detailed press release it was noted that currently only 8% of merchants in Colombia accept card-payments, compared to neighbouring countries such as Brazil at 32%. On average, merchant payment acceptance for non-cash transactions across Latin America is around 23%.

MOViiRED is one of the leading digital challenger banks in Colombia, providing mobile and digital payments coverage. It has a strong network of partners which includes large retailers, pharmacies, convenience stores and “mom & pop” shops and other businesses. Currently, MOViiRED services more than 15 million people each month on its 60,000 points of sale network offering various services from mobile top-up, bill payments, sale of public transport tickets, prepaid digital content and money transfers.

RS2 and Moviired claim that as a result of the Colombian market being underserved, they expect to see exponential growth in its direct acquiring and issuing business from the strong base of 60,000 POS terminals.

In the press release, the CEO of Moviired highlighted RS2’s competitive advantage by stating that the new direct acquiring business will enable merchants and consumers to transact using a single digital platform. The CEO also stated that their objective is to disrupt the current payment system in Colombia.

Given these two important announcements during the first few weeks of 2020, it would be good for investors to look back at some of the recent statements made by RS2 with respect to the evolving strategic initiatives. In its most recent Interim Directors Statement published on 30 December 2019, RS2 confirmed that its current customers in the managed services business have been ramping up their volumes and consolidating their entire cross-regional business on the platform while new customers in Europe are concluding processing agreements to launch their services during the second half of 2020. RS2 had also confirmed that it is obtaining its financial institution licence from the German regulator which is expected to be issued during mid-2020 and the company was already engaged with merchants from different industries to start direct acquiring in Europe and Latin America. Moreover, RS2 had stated that its subsidiary in the US is in the final stages of signing several agreements in different industries. It is also worth recalling that at the time of the publication of the financial statements as at 30 June 2019, the Directors of RS2 had indicated that the company is in the process of securing a couple of significant deals in the US to support the acquiring and issuing business of these customers to expand in more than twenty countries globally. At the time of this announcement in August 2019, RS2 had said that these deals were planned to be concluded before the end of the year. Moreover, in the 2018 Annual Report published on 30 April 2019, RS2’s CEO had stated that its subsidiary in the US is currently attracting some of the largest US acquirers to on board as managed services clients. In his review, the CEO had argued that “winning such business will be tantamount to proving our exceptional international reputation highlighted in the US market and these opportunities will translate to significant revenue over the coming years”.

Moreover, in the June 2019 half-year financial report, RS2’s Directors had also re-iterated that the company’s strategy is based on four main pillars – namely: (i) growing and expanding the managed services business; (ii) ramping up the US expansion; (iii) building the direct acquiring business; and (iv) creating a partner network to deliver a true global acquiring solution.

The announcements issued since the start of 2020 with respect to Kalicom in Germany and Moviired in Columbia must be seen within the context of these four main pillars of growth.

Given the consistent indications by RS2 over recent months of its immediate business pipeline, investors expect further announcements by the company in the months ahead confirming other important client additions in various parts of the world most notably in the US market. Hopefully, this will then provide the company will sufficient information to issue financial forecasts to the market. This is very important given the company’s evolving business model.

The payments landscape is changing rapidly with large scale acquisitions taking place leading to consolidation across the sector as a result of the evident worldwide trend of a strong shift from cash to electronic payments.

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This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.