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A unique story from Middle East and Africa on the secular trend of cash to digital transformation
Cash to digital payments is a secular trend happening across the world and the best way to play this trend in Middle East & Africa (MEA) market is through Network International. The geographic segment where Network International operates is highly under penetrated and it is the largest pan-regional provider of these services in this region with a presence across the entire payments value chain. The under tapped market and the long pathway for growth makes this stock an attractive buy for the long term. The revenues are expected to grow by 12.5% CAGR in 2018-21. This is a unique investment opportunity coming from a financially under penetrated region.
The Opportunity
Middle East and Africa (MEA) are in an early stage of shift from cash to digital payments when compared to the rest of the world as 85 percent of transactions are still in cash.
There are multiple trends driving adoption of digital payments in MEA and the growth in this region could average 9.8 percent per year in the 2018-2022 period. Rapid technology advancements such as automation helps in lowering the cost of access to customers and provides more flexibility in payment options. Enabling
these changes will be rising internet and smart phone penetration which is happening across Middle East and Africa, currently internet penetration is at an abysmally low level of 29 percent. As internet coverage rises customers will be showing more willingness to shop online and this is expected to boost e-commerce growth at the rate of nearly 20 percentage per annum for the next three years, the total volume reaching $80 billion by 2022. These factors will help in the value of MEA POS card transactions rising from $286 billion in 2017 to $507 billion in 2022.
One another area of opportunity is the increased outsourcing of payment processing by banks to specialized companies like Network International. Currently banks perform both the roles of an issuer and acquirer with value added services provided using software developed inhouse or purchased from third party. However high capital investment required for the payment technology, rising complexity, regulatory compliance and economies of scale means that banks are forced to outsource these functions. This is a global trend in digital payments which has still not happened in the MEA market and it is estimated that almost 82 percent of the transactions are still insourced. This represents a significant area of opportunity
Product Portfolio
Network International operates in the entire payments ecosystem which includes merchant acquisition, issuer processing, operation of switch and providing valued added services. The company developed cutting edge technology through the investment of $91.2 million between 2016 and 2018. This has enabled Network International to offer the full suite of services for merchant and issuer solutions when compared to companies like Interswitch, MEPS or AFS. Banks and financial institutions come under the Issuer solutions business, prominent among them being Emirates NBD, Commercial Bank of Dubai, Arab African International Bank, Standard Bank etc. The Merchants solutions business services over 65,000 merchant clients and processed over $40 billion of transactions in 2018.
Network International offers customizable and modular solutions ranging from N-Genius POS which caters traditional point of sale devices to N-Genius Online that provides mobile and e-commerce solutions. It has also built two platforms -Network One and Network Lite which are omnichannel, scalable and pan-regional technology platforms. There are integrated platforms which provide for gateway, risk management, issuer processing and acquiring solutions.
The platforms will help in processing 700 transactions per second which is 15.6 times current average transactions per second. This will help in improving cost efficiency and generate higher return on the technology investment. Network International’s technology strategy is cloud based to ensure development flexibility and provide on demand capacity of the platforms. The company also good talent base with 320 employees working on the engineering and technology related roles.
In addition, Network International operates local data centres in Nigeria, Egypt, South Africa, UAE and Jordan which is viewed favorably by local regulators
Investment Thesis
Network International is a leader in payment solutions across the Middle East and African region which is the most underpenetrated payments market in the world. The company has in depth local industry knowledge, high quality products and is present across the entire payments value chain. As the leader in this region, Network International will be able to sustain high sustainable longterm growth. Also, in global digital payments outsourcing of payment processing and acquisition is a key market trend. In MEA, the share of total processing outsourced is only 18 percent with approximately 82 percent still insourced. As of now only 220 banks have outsourced their processing to the company representing 20 percent of the banks in the MEA region, according to the Moody’s Analytics Bankfocus. This implies that there is a substantial opportunity for Network International to grow its business in this space.
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