AFR Article by James Eyers:Tyro CEO ‘will need to rebuild...

AFR Article by James Eyers:


Tyro CEO ‘will need to rebuild trust’after outage

Tyro CEO Robbie Cooke said January’s terminal outages, which were due a bug in code written by the device manufacturer, will require the payments system provider to “to do all that we can to rebuild trust” with merchants but new application rates have bounced back and customer churn has not risen in the wake of the failures.

Tyro said all of its merchant customers will receive a physical dongle that will provide a new ‘failover’ solution, to protect them from potential outages in the future, while also helping Tyro compete with US-player Square in categories like tradies.

The fifth-largest merchant acquiring bank saw 30 per cent of customers lose terminal connections in mid-January, when a key certificate in the machines - made by the payments giant Worldline, which struck an alliance with ANZ in December - failed to conduct a proper ‘hankshake’ with the Tyro payments switch when customers logged on to the system. The date of January 5, 2021 was showing the certificate had expired. Most machines were back on-line by the end of January and all devices are now fixed.

“There is no issue with the hardware the fleet has got out in the field,” Mr Cooke told analysts as Tyro reported a record positive earnings before interest, tax, depreciation and amortisation (EBITDA) of $8.5 million and a statutory net loss after tax of $3.4 million, an 82 per cent improvement.

The terminal problems triggered a short-selling attack as class action lawyers circled and hit Tyro’s COVID-19 momentum in recovering from the pandemic as it had to stop taking on new customers. Tyro is encouraging merchants who suffered financial loss from the outage to register for compensation, which Mr Cooke said was the right thing to do for customers and should cut expensive lawyers out from profiting from claims and he defended disclosures in January, saying “we reported as events unfolded and reflected what the impact was”.

Tyro said it may face a remediation cost around $15 million and it is understood the company is exploring the potential of using its own insurance coverage to meet the claims. It has already incurred costs of $3 million, including collecting the “bricked” terminals from merchants for the required software update.

Tyro shares were up 6 per cent to $2.88 in Monday morning trade but are still 17 per cent below the level they were trading at when the problem struck on the night of January 5, triggering a major incident response. “I can tell you everything humanly possible was done to mitigate the impact on our merchants, and I am very comfortable that all due process and procedures were implemented and everything that was possible to be done was done,” Mr Cooke said.

As analysts probed for information on the impact of the outage, which Mr Cooke described as a black swan event that could not happen again, he said new applications had returned to “near normal” levels. “We are closely monitoring merchant terminations and to date have not seen any material changes to our normal termination rates,” he said. “We have maintained customer acquisition momentum” he said, but added it may be another two to three months before the company can get a complete picture of the impact, as it assesses compensation claims.

Transaction volume growth for the financial year to date is around 10 per cent, although the February lock-down in Victoria has reduced that to 8 per cent over the middle week in February. The outages came at a bad time for Tyro merchants, particularly those in its core hospitality, health and retail verticals, where trading conditions remain difficult.

Tyro’s overall results showed the strength of the economy, with its retail vertical showing a 17 per cent lift in transaction value, while hospitality was up 6 per cent compared to the previous first half. Despite all the challenges, Tyro recorded an all-time record $12.1 billion in transactions over the half and a record 36,720 merchants, up 13 per cent.

Tyro is continuing to push into new banking products, including a cash flow based unsecured loan which is prepaid from a pre-determined proportion of card volume and goes up or down depending on the level of business. It was largely shuttered during COVID, meaning Tyro hasn’t had to compete for deposits, but as the recovery gathers pace Mr Cooke said it would be turned on again.

E-commerce transaction value increased 376 per cent to $14.8 million, but off a very low base. It also will rollout next year more terminals after striking a deal with Bendigo Bank, and pointed to an 86 per cent increase in tele-health transactions boosted by COVID.

There was some revenue pressure. Payments revenue down 5.2 per cent as fewer international credit cards were swiped - that have higher payments attached. However, there was a counterbalance to profit, with the rise in debit card use leading to to higher interchange fees and lower costs paid out to the credit card schemes, which increased profit.

Asked whether the terminal issues would result in higher capital expenditure, Mr Cooke said: “The connectivity issue we had had nothing to do with the hardware, it was to do with the source code on the device.” He said the fleet had around 1000 terminals aged between seven to 10 years which were owned by merchants rather than hired out, as is current policy, and could not take the new software update so had to be replaced, but “otherwise there is no issue with the hardware the fleet has got out in the field”.