Payzone operator Alphyra's reverse takeover of Cardpoint late last year was supposed to kickstart a challenge to PayPoint's dominance in the electronic payment sector. Instead Payzone has spent the past five months seemingly lumbering from one crisis to another following a boardroom bust-up.

After being sacked in January, chief executive John Nagle and chief finance officer John Williamson took legal action claiming breach of contract. Payzone's shares were suspended and although Williamson dropped his case Nagle is fighting on.

There was further bad news last week when the company gave a disastrous trading update predicting pre-tax losses of £24m for the year ending 30 September 2008. It blamed the boardroom tussles and a weakening pound.

Its fortunes contrast sharply with those of PayPoint, which posted a glowing set of figures for the year to March. But, insists Payzone UK's MD, Paul Charmatz, the outlook for Payzone in the UK is far from bleak.

The electronic payment sector has seen massive growth in recent years through internet, mobile phone, bill payment and ATM services. PayPoint, the sector's biggest player, is the biggest beneficiary. In its annual results, it revealed revenue up 35% to £212m, pre-tax profit up 14% to £30m and a 22% increase in transaction volumes. It has also expanded its number of terminals by 13% to 19,878, although it has garnered criticism from rivals for tying its agents into exclusivity agreements.

Charmatz, however, remains confident about the future. "We have had some bad press over the past few months," he concedes. "But it doesn't reflect the business we are winning or that this is a very healthy sector."

Recent business wins including Arriva, United Utilities and Anglian Water add weight to his argument. Charmatz is keen to down play the profit warning, saying this can largely be put down to "one-off merger costs". He is also optimistic about future growth, which the company hopes to fund through a new £31.8m share issue.

For any business operating in the electronic payment arena, longer term success will depend on the ability to offer customers and retailers a diverse range of payment products, says Keith Ashworth-Lord, consultant equity analyst at broker WH Ireland.

Deals signed by Payzone and PayPoint indicate that both have realised the benefits of diversification. Payzone has signed a bill-payment contract with United Utilities and cut a deal with e-payment player 3R to provide mobile top-ups, utility payments, gift cards and travel tickets across 3R's network of 1,800 retailers.

Electronic bill payments have expanded rapidly in the UK in the wake of post office closures and escalating utility bills and will continue to do so, says Ashworth-Lord. "Post office closures are creating a void that the retail sector, through PayPoint and Payzone terminals, is filling," he says.

This is good news for retailers, which benefit from each transaction made. PayPoint's figures show that during the financial year 2007/8 its agents gained £83m commission.

However, "surcharge ATMs will do less well", believes Ashworth-Lord. "People are less willing to pay charges, growth in ATM use has slowed and with the current economic conditions they have less money to withdraw," he says.

Figures from the UK payments association APACS support this view. After an increase in terminals and transactions in 2003-4, growth has slowed since and is set to peak in 2010 at 2.9 billion withdrawals.

Internet payments, on the other hand, are yet another potential area of growth. PayPoint has already seen its volume of online transactions grow more than six fold from four million to 26 million over the past financial year.

PayPoint CEO Dominic Taylor agrees it is vital to offer a range of options to customers. He hopes to expand his company's sites by a further 1,500 before next April, partly through increased bill-paying services and another area of growth, pre-paid cards. These top-up cards provide both an alternative payment option for customers and a source of commission-fee revenue for retailers.

"What we have helped build is a whole new area of revenue from payment services for retailers that didn't exist a decade ago," says Taylor. "This will continue to develop and to offer retailers opportunities." There are plenty of opportunities for electronic payment operators too. If Payzone is to capitalise, it will need to resolve its current issues quickly.events so far

June 2007: Payzone approaches all UK Spar

shops, 1,500 of which use PayPoint terminals. Meanwhile, PayPoint's exclusivity agreements with retailers are criticised by 3R



August 2007: PayPoint strikes back in the battle for Spar, agreeing an exclusive supply contract with Northern Irish Spar wholesaler Henderson Group. Payzone, meanwhile, ditches its exclusivity agreements and urges PayPoint to follow



October 2007: Plans for the reverse takeover of Payzone-owner Alphyra by AIM-listed ATM supplier Cardpoint are unveiled



January 2008: Newly merged Payzone starts 2008 by sacking chief executive officer John Nagle and chief finance officer John Williamson. Nagle and Williamson take legal action claiming invalid dismissal and Payzone's shares on AIM are suspended



March 2008: Payzone hooks up with rival 3R to attempt to break PayPoint's dominance. At an egm Payzone officially terminates Nagle and Williamson's contracts. Nagle fights on but Williamson drops his case



May 2008: Payzone announces a profit warning and plans to raise funding with a new share issue, while PayPoint announces strong annual results, with revenue and profits up

Topics