France-based smart card and security vendor Gemalto will operate the mobile-payment platform for U.S. merchant group MCX, earning a fee for every transaction, in addition to what appears to be a hosting fee it says is worth tens of millions.
Gemalto CEO Olivier Piou in speaking to financial analysts today following release of the vendor’s first quarter results, revealed some details of the vendor’s contract with MCX, which Gemalto announced April 17. He told analysts that the platform it is providing to MCX could potentially earn the vendor hundreds of millions in fees over the course of the contract, though only if it takes off with consumers.
MCX, or the Merchant Customer Exchange, hired Gemalto to secure the bar-code based payment service or services it plans to offer to consumers through MCX-based mobile wallets or other apps introduced by member merchants. Gemalto is also providing wallet software, including development kits enabling member merchants to build their own MCX-enabled wallet apps.
The merchant consortium, which formed last year, counts among its members some of the largest retail chains in the U.S., including Wal-Mart, Target, Best Buy, 7-Eleven and Shell gas stations. The group said it will start with bar-code and cloud-based payment and would also offer other mobile-commerce services, such as loyalty and couponing. It might support NFC-based services later.
“The way we are interested in the success is that because it’s a managed service, we have a basic fee, which covers our expense from hosting and running the operation,” explained Piou, in response to a question from a financial analyst. “And we are paid by transaction. We are not paid a percentage of the transaction, but we are paid by transaction. So the more there will be transactions, the more it will make generic revenues for Gemalto.
“And to give you an order of magnitude, over the course of the contract, the basic operation, if there is no transaction at all, it is a few tens of millions (of dollars), and if there are many transactions, it will be many hundreds of millions.”
He did not disclose the number of years the contract is scheduled to run. An MCX spokesman when contacted by NFC Times, declined to comment on the business terms of the deal with Gemalto.
While Gemalto’s April 17 announcement of the deal emphasized the mobile-wallet software it is providing, it appears the mobile-payment piece is the key part of the service the vendor is offering to MCX. Piou didn’t specify if the per-transaction fees extend to nonpayment services that Gemalto might handle from consumers using an MCX-based wallet or app.
Gemalto’s Allynis mobile-payment platform is expected to secure the bar-code transactions and communication between the consumers, merchants and acquiring banks.
Piou, apparently keen to demonstrate to financial analysts the potential profitability of the MCX contract, noted that Gemalto has already built the mobile-payment platform, and it is in use in Mexico for the Transfer joint venture, formed by mobile operator América Móvil, Citibank’s Mexican unit, Banamex, and Banco Inbursa. The contract with Transfer, which Gemalto announced a year ago, uses SMS messaging to enable Mexican subscribers to transfer funds, top up airtime and make cash withdrawals.
“MCX is an operated service, so this software that we have and which already operates in Mexico will run in our premises, (at) one of the data centers that we invested in last year,” said Piou. “It doesn’t use NFC simply because the customer (MCX) prefers to use bar codes, because they have some established base, but it doesn’t prevent that it goes to NFC later on.”
He said the platform Gemalto will operate for MCX is “mostly a back-office transaction system,” but Gemalto also will provide a software development toolkit “so that each of the participants in MCX can design their user interface to have a wallet for the look and feel that they like.”
The MCX contract also plays into a major theme Piou has pushed for years–that of Gemalto moving away from its roots in manufacturing smart cards and toward providing more services that earn recurring revenue.
Despite that, the revenue potential from the MCX contract, and a projection by the company of low double-digit growth in both overall revenue and profit this year, Gemalto’s shares were slightly lower in trading today in Paris. The vendor’s stock price is down by 15% over the past seven weeks.
‘They are Two Years Behind Isis’
It remains to be seen what type of payment services the MCX merchants launch.
Most insiders agree that the main goal of the MCX initiative is to reduce payment transaction fees for member merchants.
Among the likely scenarios is for the merchants to issue private-label payment cards for the wallet, which don’t require as much security as open-loop credit and debit cards. Closed-loop payment could use bar codes, which are less secure than open-loop applications. The closed-loop Starbucks mobile payments service uses QR codes, for example.
MCX, however, has said it would be willing to partner with banks or other financial institutions.
MCX has declined to say when it would launch services; and Piou wouldn’t be drawn on the question or when Gemalto would see its first revenue from the project, but he added:
“I can tell you they are very eager to do it, because they simply know they are two years behind Isis and others,” he said, referring to the Isis mobile operator joint venture. “So it’s going to be an interesting competition.”
Nine NFC Projects Launched, 24 on Tap
Piou also promoted Gemalto’s trusted service management business for NFC payment and other services during the presentation today. This is also part of his pitch to try to portray the vendor as more of a services company than a manufacturer.
Gemalto said it generated €52 million (US$66.6 million) in its Mobile Communication division from platform and services business. That mainly takes in fees to activate and manage 4G LTE subscriptions and to provide TSM services to mobile operators launching NFC. The platform and services business grew by 33% in the division, Gemalto said, though it didn’t specify how much of the €52 million was TSM revenue.
The vendor separately accounts for other TSM revenue from banks and other service providers in its Secure Transactions division. It didn’t break out a figure for platforms and services revenue in this unit, however.
But Gemalto reported a total of €95 million for platform and services business for the quarter. That represented 18.3% of the company’s total revenue for the period of €518 million (US$673.5 million).
Gemalto didn’t say how much of the €95 million was from TSM revenue, though one slide in the company’s financial presentation today indicated that Gemalto had launched TSM projects in nine countries in 2012 or before and had 24 projects in the pipeline to launch in 2013 or 2014. The company did not indicate the scale of the projects.
“User penetration of NFC is also just beginning,” Piou said. “Both of these migrations (LTE and NFC) will remain important engines for growth for Gemalto, as we move into our next long-term development plan.”
Gemalto said last fall it had a total of 50 NFC TSM projects in the pipeline. Piou predicted at the time that the vendor would begin to see substantial recurring revenue from TSM business starting in 2014 as mobile payment starts to roll out globally over the following three to five years. But he said mobile payments wouldn’t be large-scale until after 2013.
‘Space to Hang Themselves’
Gemalto reported total revenue of €239 million in Mobile Communication, its largest division, which mainly sells SIM cards. The revenue was up 4% from a year ago based on constant exchange rates.
That is despite a drop in revenue for entry-level SIM cards of €7 million for the quarter. Gemalto attributed the fall to a market contraction in India and “disciplined pricing.”
When asked to explain the latter factor by financial analysts, Piou noted that there was a price war waged over low-end SIM cards beginning last year and extending into the first quarter. He claims Gemalto sat it out, focusing on higher-end SIMs, including those supporting LTE and NFC.
Piou took the opportunity to knock competitors Oberthur Technologies and Giesecke & Devrient, the second and third largest smart card vendors, respectively, after Gemalto. According to Piou, the rival vendors fought the price war and lost money because of it.
“The fact that we did not ship or refuse to take some orders, gave them some space to hang themselves,” he contends. “So I think tactically, the mobile communication growth (at Gemalto) is going well to offer this type of exit, which means that both G&D and Oberthur killed themselves on this low-end (business).”