ASX fintech under pressure: Tyro shares dive on proposed ban on debit card surcharges

The federal government is preparing a ban on debit card surcharges from January 2026, seeking to save Australian consumers an aggregate $1 billion per annum in pesky fees.

The news has sent local payment names like Tyro Payments (ASX: TYR) and SmartPay (ASX: SMP) sharply lower, down 15.2% and 13.5% at noon.

RBA review underway

The government will outline its plans next week, in parallel with the RBA's comprehensive review of merchant card payment costs and surcharging. Here's what we know so far.

• The government has committed $2.1 million to the ACCC to investigate illegal and unfair surcharging practices

• The RBA reviewed payment policies in 2021, where it found the "current surcharging regime for card payments remains appropriate."

• The RBA has released an issues paper, inviting stakeholders to provide detailed feedback on the current regulatory framework and to suggest potential regulatory responses

• A ban on debit card surcharges could take place from 1 January 2026, subject to the RBA review

Tyro: From bad to worse

Shares in leading EFTPOS provider Tyro Payments fell 5.5% as the market opened on Tuesday and is currently down 15.2 % as of noon AEDT. The stock has been in an uphill battle since 2021, amid headwinds including:

• Increased competition: Tyro faces growing competition from large international players like Block and Zeller.

• Terminal outage in 2021: In January 2021, Tyro experienced a significant outage affecting an estimated 19% of its payment terminals. This left many SMEs unable to process payments for several days, causing a sharp decline in share price and damaging their reputation

• Takeover speculation: Tyro received non-binding takeovers from private equity firm Potentia and other co-investors in 2022. While this initially sparked interest, the prolonged negotiations and eventual rejection of the offers in May 2023 sent the share price sharply lower.

• Reliance on payments revenue: Despite efforts to diversify into banking and lending, Tyro remains heavily reliant on income payments. In FY24, banking activities contributed only 6% to gross profits, far below the company's target of 20% by FY27.

Tyro Payments 5-year price chart (Source: Market Index)

Taking a closer look

Tyro's revenue is significantly tied to merchant service fees, which include surcharges. The key numbers to note include:

• Tyro charges a flat rate of 1.4% on card transactions

• The company processed $42.9 billion in transactions in FY24

• Tyro reported $471.4 million in revenue in FY24

• Debit card transactions typically make up approximately 70% of card transactions in Australia, according to the RBA

It is unclear whether or not Tyro's business model relies heavily on debit card surcharges. Its reports do not specify how much of its earnings are derived from surcharges versus other fees.

Other factors

In 2017, the RBA introduced an initiative called least-cost routing, or LCR, which allows terminals to automatically default to the lowest-cost card network (eftpos, Visa or Mastercard) to process their debt transactions.

The RBA estimates that merchants with LCR enabled have a cost of acceptance that is 19% lower than similar merchants without LCR. The adoption rate for LCR among merchants currently sits at approximately 70%, which the RBA views as "disappointingly" low.

A higher take up rate could be another factor that weighs on Tyro's fees.

Overhang

The potential ban on debit card surcharges creates significant uncertainty for Tyro's stock. The outcome remains unknown, ranging from no impact if the government fails to pass the ban, to a worst-case scenario for Tyro.

This uncertainty represents a classic market overhang, potentially deterring dip buyers and investors from holding the stock until there is more clarity on the situation.