[Update]: Automatic Bank Services (SHVA.TA) Major Pricing Update
Finally.
I mentioned some important updates in the last piece of this series below:
This requires some detailed review. As opposed to its Israeli demutualisation counterpart TASE (which has more than 16-bagged since being listed at about the same time), the monopoly Israeli payments scheme operator has caught local investor scepticism over its extremely lackadaisical approach to optimising itself. And that criticism has been warranted. However, the path to value creation has always been simple, but hardly ever pursued. I outlined the general idea in my last update:
I am comforted, somewhat, by these developments. We will get more details in April during the shareholder call about what management is envisaging in 26’. The agonising thing, as always, is simply that an effective plan for value realisation is so simple: 1). get the switching take rate moving in the right direction, 2). realise whatever additional value is possible out of infrastructure, and ATM services, 3). curtail unnecessary expenses in the VAS rollout (which appears flailing, and the company has disclosed its products are now all being sold be resellers!), 4). work to move the banks and Visa and Mastercard off the register (use excess cash to buy their shares if they are open to it), 5). continue to tighten up the security infrastructure, 6). make timely reporting disclosures available in English and invest in an IR representative.
You can strike off #6 (even the recent pricing announcement was made one day after management’s own self imposed deadline!), but there’s considerable movement on nearly every other piece of the puzzle.
I’m pretty convinced at this point that summarisation is all but dead in the text medium, so I’ll keep this post to insights and secrets only. You can enjoy my complimentary AI-powered slop summary of the pricing changes across products. Read on for non-slop.
I. Switching
While SHVA’s switching take rate will improve meaningfully as a result of this change, I believe it will receive a double kick as the transaction mix moves back towards NOT ON US.
For quick reference, SHVA’s switching take-rate has been declining in the last year or so because of the poorly constructed 2023 repricing, and the consolidation of merchant accounts by the large Israeli banks. In addition, overall transaction volumes have been periodically slowing below trend with any intermittent outbreak of hostilities.
At the start of this year ‘[t]he Bank of Israel decided to expand the identification codes used by banking corporations and nonbank entities to connect to the payment systems. The code, which was previously known as a “bank code”, is currently composed of two digits. It will be expanded to three digits.’ Until now, the BOI has only allowed 99 separate organisations to connect to the payments networks operated by SHVA (cards) and MASAV (interbank transfers). “Three digits”, expands the number of companies that can secure a licence to 999. This is a positive development for SHVA.
While many new entrants have made their way into Israel’s payments space in the last few years, many have done so by essentially partnering with a domestic bank, and operating through that bank’s infrastructure. I’m left to wonder how much of this kind of thing has encouraged the mix shift toward ON US transactions. In any event, this change will allow for more players to join the wider payments network, and encourage more NOT ON US transactions. Most of SHVA’s transactional business is heavily consolidated in the large banks (about 80%), and so directionally this will allow for a more robust competitive network environment, while increasing their network proposition.
As of this writing the issuer side of the equation is even more consolidated. Isracard, and by extension Premium Express, represent a little shy of 50% of the market. This is followed by Cal, and Max It Finance, who represent another 50% between them. There have been no significant issuers enter the market in decades, until now. Revolut is set to go live later on this year as the first new card issuer. On the merchant acquirer side, things have been more competitive, but strange legacy issues persist. In a notable instance of transaction leakage, Stripe current operates in Israel through a US LLC workaround, routing payments through US Visa and Mastercard rails instead of the domestic payments switch. Part of the reason for this is licencing and integration difficulties, which regulators have been working towards remediating. The regulatory impulse since 2017 has been to move away from the traditional closed oligopoly dominated by the large banking interests. This benefits SHVA directionally.
The headline switching pricing changes are positive (verging on extremely positive), however, there remains a pocket of future transactions which might experience little or no pricing movement.
Switching fees, for all three components (authorisation, processing, and settlement) were taken up both ON US and NOT ON US. Authorisation gets charged on virtually attempted transactions. Processing and settlement, for the most part, are charged for transactions that ultimately end up getting cleared in one way or another (including refunds). The fees are charged per transaction. Good, good, good.
The important caveat is tokenisation. Tokenisation is this little piece of technology which enables, amongst other things, digital wallet transactions. The uptake in digital wallet transactions have been moving the delta in terms of the per transaction take rate in recent years. This is done in a strange way in which tokenised volumes are charged for on a flat monthly amount depending on how many transactions you process. The top transaction band has experienced heavy incentivisation (-%33.3 in terms of pricing compared to the last tariff sheet). This kicks in at 45mm tokenised transaction p/mo. My stab in the dark would be that no single player hits this band… yet. In any event, there’s only really one issuer who could get there any time soon (Isracard).
The takeaway, is that more price will be levied onto smaller issuers and acquirers, quite a few of whom will be lining up for a licence under the new three digit mandate. Many product lines experience minimum monthly floors for volumes, so proportionally new entrants are very accretive for SHVA.
What are reasonable expectations on pricing from the changes?