Fingerprint Cards AB (publ) (FINGB) Earnings Call Transcript & Summary

Hi, and welcome to Penser Bank and our Company Day -- Corporate Day. My name is Markus Almerud, and I'm an analyst here at the bank. Today, I have with me the Head of Payment and Access from Fingerprint Cards, Michel Roig. A warm welcome.

Thank you very much, Markus. Nice to be here today.

So I'll leave the word to you. You have a short presentation, and then I'll come back with Q&A.

Perfect. So we'll get started.

Thank you.

So Fingerprint Cards Payments and Access. I want to give you a first quick introduction to the company for those who don't know us. We've been around since 1997. And I think one of the greatest achievements we have done, which has enabled us to really scale the business, which is a benefit for new segments like Payments and Access is our 1.5 billion sensors shipped. That's a great achievement for a Swedish company. So that's something we're very proud of. We work mainly in the fingerprint recognition area, but we also do have other modalities, which does include touchless solutions with iris recognition. We are the largest sensor provider to the door lock industry, which is part of our Access segment. Obviously, 9 out of 10 smartphone consumer products are launched with our sensors, more than 650-plus, actually 680-plus models have been launched. And obviously, something very dear to me is our payment card activities where we have taken a clear lead. We've been part of roughly 24-plus pilots for the last couple of years. And actually, as late as yesterday, we announced that we are now in 10 commercial launches. I'll speak a little bit more about that later. Roughly 250 people in the company with a very strong engineering background, obviously 2/3 of the company is working in R&D. Biometric card, what's that? That's a typical card, same form factor where we have added biometrics. You could say, okay, is that hard. It's a plastic card, well, actually, it's very hard. It took us several years to get here. It's -- we've obviously taken the technology and the learnings from our mobile phone business and put it into this small form factor. It's less than a millimeter thin. So obviously, the sensor has to be super slim. On top of that, the processing power that you have inside the card is 20x lower than a mobile phone. So you need to optimize your algorithms to make sure that it fits. And on top of that, of course, you still need to run all the payment applets, Mastercard and Visa applets and so on. The benefits of the card, of course, is that you can now use your fingerprint, tap and pay or dip and pay for any transaction any time and always have a secure authenticated transaction. Brings convenience without sacrificing security. And obviously, consumers are now very knowledged and very used to using biometrics from the mobile phone industry. So they actually, see this as the next type of product where they would like to see biometrics. It's secure. It's all the data is stored on the card. It's an offline product. So once you have enrolled, your fingerprints are stored in the banking chips. They never leave the card. There's no database in the cloud where you match, everything is done locally on the card, no battery powered either by the POS terminal or by the field when you do contactless. So obviously, it needs to be very optimized in terms of functionality, power consumption, latency, speed, which has taken a few years to develop, but now we're there, 10 commercial launches, as I mentioned. We also have additional features. One thing that we're very proud of is that we have sort of machine learning AI technology in our algorithm, which means that over time, we adapt the algorithm. So for example, in Sweden, we have cold winters, humid summers, that impacts the fingerprint recognition. You will have sweaty or dry fingers. We have an algorithm that adapts over the seasonalities of the year and maintains the robustness and performance of the card. We launched some 2.5 years ago commercially with Thales. That was the first generation product from their side that was fully certified Mastercard and Visa. At that time, we had our first generation T-Shape module 1321 or called T1 as well. A little bit more than a year ago, we launched T2, which is what you can see here on the picture. What I think we are also very proud of is that we took a lot of learnings from the smart card ecosystem. We studied the smart card ecosystem actually several years to see how do we package our product for this industry versus mobile industry. And what was very clear is that we needed to have the sensor on what we call super 35-millimeter tape reel. This comes from the industry, this is the way how the chips in the banking industry are packaged to be able to enable fully automated production lines. So we put our sensor in the same so that the card manufacturers would not have to adapt the production line too much. It's easier to integrate now. We have 2 side-by-side, smaller, which means more footprint on the package, but also more footprint on the card, fully compliant with the Mastercard's latest specifications, which we already certified or pre-certified, meaning that all card manufacturers that use our technology can skip the biometric testing when they go for Mastercard certification and can focus on the card level certification that they always have to do. If we look at the market a bit then, I mentioned 24 pilots, 10 launches. You can see here on the slide the different customers that we have piloted with and also the customers that we have launched with, end customer that is, as we don't sell direct to the banks. What I find very interesting with this slide on top of big banks like BNP, Credit Agricole, BBVA is a little bit of a hotspot happening now in what we call the MENA region, Middle East, North Africa. We see some interest in Middle East where we've had 1 launch in Jordan. I think we'll see more launches in that area. But what is very interesting is the uptake in the Morocco market. You could argue, okay, how significant is Morocco for this payment industry. But what I want to point out is, first of all, you have a spillover effect from the French market, of course. So big banks that are in France are also in Morocco, there's this sort of sisterhood. But in Morocco, it wasn't just 1 launch. Actually, when the first launch happened, we knew that the pipeline was coming with all major banks. Today, we have 4 banks launched in Morocco. It's showing that it's really the first market where they go across banks. We expect this, of course, to happen in other markets. We think France is coming. We know that more banks will launch in France as well. But this is a testament that 1 bank goes, everybody wants to have the offering and they really go forward. Interesting as well with the Morocco market is that they decided, of course, as many banks to start in the premium segment. If you look at BNP, they have what we call an opt-in, you sign up and you pay a little bit extra from your normal cost for getting a biometric card, whereas in Morocco, several of the banks have decided my premium card is now a biometric card. So when you sign up or get a premium card, it will be biometric. That's really the first we've seen, which is, I think it's going to be a game changer because we want to get beyond sort of the opt-in and sort of automatic distribution as with contactless. So yesterday, we had announced 2 additional launches in Morocco. They were in the previous slide. That was Societe Generale in Morocco and Bank of Africa, BMCE. We do expect Societe Generale in France to also at some point, launch. We'll come to that later on. We are still expecting timing allows and of course, we cannot control the banking launches. But from what we see, there could likely be 2 or 3 more launches imminently. It could still be this year or it slips in early next year, but we see more launches coming. And we've seen, of course, IDEMIA launching as well, which I think is very good for the industry. We need more and more banks launching with more and more suppliers. Feedback from those that are using the cards in the different pilots and launches as far as we're able to get it, is very positive. Consumers who have the card and have enrolled correctly and are using the card and start using the card, continue to use the card and have very good performance. Actually, very little failure rates, so very, very good performance, stable performance, which would be key for this type of market. As I mentioned, the banks in Morocco have taken away this opt-in. So if you're a premium customer, you will get the biometric card. Looking a little bit about the consumer appetite. I mentioned that we've done some surveys and after the smartphone and the PC, we see that cards is the form factor where consumers say, well, why is there not biometric in cards, it makes absolute sense. So we did some surveys where we looked at, okay, what does it mean for the appetite of actually getting it or switching bank if your bank doesn't offer it. And we could see that actually there's quite a high appetite. 50% said, yes, I would switch bank if my bank doesn't offer it and a competing bank offered it. And 17% maybe, which is sort of also there, right, and only 31% said, no, I would not switch. Looking at the different demographics, you can see that it varies a bit depending on income, depending on age and gender. What I think is interesting to look at is the age, which is really from millennial up to sort of mature, maybe older people have a little bit more difficulties with new technology, but it shows that there's a very strong 65-plus sort of in average here for the demographic, which I think is key for this market. Also willingness to pay is very high. So I believe for this really to become more and more mass, there should not be a differentiator. It should be sort of just deploy it from a bank perspective. But actually, banks can differentiate and can make additional revenues because people are willing to pay extra. An average EUR 3 per month, in BNP, they charge EUR 2, so it's fitting pretty well. Some of the other banks that are charging are also in that range, EUR 1.5 to EUR 2. And you can see sort of the difference. Interestingly enough, if you take the 2 lower hand here, meaning that 50% are willing to pay at least EUR 1, right, some are even willing to pay more. So very strong appetite. A little bit about how we work with the customer base and the partners, we're going to speed up here a little bit, but we obviously work with the big Tier 1 card manufacturers. We work with the chipset vendors to enable sort of what we call a plug-and-play turnkey solution that we do to be able to address Tier 2 card manufacturers, the smaller card manufacturers that don't have that much R&D and needs more of a plug-and-play solution. Obviously, working with Visa, Mastercard and the inlay providers in the ecosystem. I'm proud to announce today, we made a PM with Infineon, which is the largest chipset manufacturer in the payment ecosystem. This is very disruptive. We'll probably talk more about this at a later stage, but this basically means we have integrated sensor secure element, 1 package into 1 module. We're using inductive coupling to connect it to the card means no wires inside the card, less yield loss, higher throughput in production, lower overall costs, fully integrated, as I mentioned, with their [ chip OS ] from Infineon. It's taking a few years to get here and we will be launching this together officially by the start of next week at TRUSTECH. Of course, that's pre-series, commercial launches later end of next year. And I think with that, we go to questions.

All right. So maybe we will start with a question that I get all the time in this and that we thought that a discussion topic that comes up over and over and over, and that's mobile payments. So you have the iPhone and Apple Pay and Google Pay and Samsung Pay. And I'm personally using Apple Pay the most. So where do you fit into all this? And we know that parts of the world, the mobile world is growing very rapidly, maybe less so in Europe. But if you can just discuss that topic and where you are in that development?

Yes, absolutely. First of all, I'd like to point out that we are a biometric company supplying sensors for any type of consumer device. So obviously, when you use different pay solutions that are authenticated by biometrics, there's a very high likelihood that you're using our sensors. So we are in mobile payments using biometrics. Consumers are used now ask yourself to pay either with face ID or pressing the finger. And if you think about when you do that, you authenticate a transaction and there's no PIN even above the transaction cap that exists in contactless. So that sort of user behavior people are used to. And it's actually logical that you get that same user behavior on any device. And phones is one device. Cards is another device, which is still very much used, will be around for many, many, many years. So obviously, we want to be in that device. We want to be in the phone device. We want to be in watches, in wearables, anywhere where you want to authenticate a transaction with biometrics, we want to offer solutions. Card is a big volume market. That's why we decided to go for it. We believe in both combined side-by-side.

And if we continue on that track and kind of where we're going. So -- this is, I think -- I mean, you think this will be the next generation of payment cards. And if you listen to Thales or IDEMIA, they're talking the same kind of language. If we talk about the last version of the cards or the last level, there's contactless. So we went from chip and PIN to contactless. Talk a little bit about that journey and the timing of it, the speed of it and what conclusions can be drawn from that on this?

Absolutely. First of all, I mean, I think I'm the first to say that -- it has taken longer than even I expected. Being in the ecosystem, of course, talking to banks, talking to the ecosystem, we realized that this is a totally different ecosystem than mobile phone where you have a very short lifetime, 1 phone, it launches, the next follows. This is a different type of product. It's not your own device, you're licensing this actually from the bank and the banking industry is a bit of a conservative market, if I can say so. However, we see this following the trends of contactless. I think and believe and we all do that this will go slightly faster than contactless. Contactless took around 11 years to reach 1 billion cards. And that was because you had the infrastructure rollout at the same time. This time, you don't have the infrastructure rollout, but you have a slightly higher cost burden that we need to work with as an ecosystem. As as long as we get that with Murphy's Law, Moore's Law down, which we will, we will get there and we've just really started. 2 years ago, were the first launches. Now, we're at 10. We see this multiplying. We expect it to be faster than contactless. But it will follow sort of the same trends.

Okay. And if I pick up on one thing you said there, but it's taking a bit longer than expected to kind of get started. But if you say that now you have started, are you on track now? I mean, does it develop in line with your thinking now? Or is this still a bit slow?

I think what is most important now is to get more banks. To be honest, I mean, volume is critical. It is important. But right now, the focus for me and my team is really to get more launches. More banks, they don't have to be significant volume from that perspective. But the more banks we have, the volumes will come. I have to point out one thing that has been the key as well for this taking a little bit -- sort of being a little bit more shaky early days in terms of rollouts has been that this also requires a different onboarding. You need to enroll yourself on the card, which wasn't the case with chip and PIN and contactless, right? So that's also one thing that is needed to be streamlined more for this to really take off.

And if we talk about the mass market, and we kind of tier them because right now, it's a premium product. So if we kind of tier the market into different ones, if we talk about 1 billion cards, for instance, but it will be easier, I would assume, to get to kind of penetrate the premium market than the mass market. How big is the premium market? So what are we -- what kind of numbers are we talking about? You were talking about 1 billion cards.

Yes, you can slice it a bit different, but I'll give you some numbers to give you perspective. I mean there's a premium and there's a premium premium. I mean top premium is typically what you see today with metal cards. That's maybe 50 million to 100 million cards. If you look at premium or if you would say that credit cards is considered a premium because there's also services and typically higher costs associated with having a credit card. That is roughly 1/3 of the total card. So if you look at ABI and things like that, they talk about 3.5 billion cards issued per year that are smart cards, roughly 1 billion of that is credit cards. So that's a pretty big sort of premium segment. If you say that, okay, not all credit cards are really premium, you take some type of sub-segment, you should say that at least 10% to 15% of the total market is a premium market, which means 300 million, 350 million cards per year.

Yes. Okay, okay. And if we were to go beyond that, what do you think is needed? So if I take a contactless card now, it costs $1 to $3, that kind of money. And this is a factor of x at the moment. Yes, cost is coming down. But what do you think is kind of the breaking level for this to really hit?

So today, as you said, $1 to $3 depends on volumes, it depends on now there's sustainability coming. Prices are going up a little bit again. But if you look at when it was launched, actually, the contactless was 4 to 8x of the chip and PIN. The chip and PIN was 8x of the max right card. So obviously, the industry has gone through this before. I think for this to become true mass market, you need to be in sort of the 2 to 3x range for that deployment to happen, which is somewhere between $5 to $8 for a card.

Okay. Okay. And with this new -- you were talking a little bit about the SECORA Bio that you're launching together with Infineon. And is this a game changer? I mean are we moving -- are we really moving in terms of cost of the card with this?

Yes. I mean the main thing with the integration and collaboration with Infineon is that, first of all, we are integrating 2 chips in 1 package. So the secure element and the sensor we're putting in 1 package and making 1 module out of that. On top of that, that's fully integrated with the chip OS, fully integrated with biometric algorithms, 1 package. The key differentiator with that solution is that it's built on what we call inductive coupling technology, something that you will interface, the contactless market is using very much today, meaning that there's no connections into the card, meaning that you don't have points that can break in production, meaning that you can get a much, much higher yield in production. And that, of course, means lower cost. So yes, we think this is unique, unique solution.

Okay. And if we talk about opt-in opt-out, you were talking about that a little bit. You now have a Moroccan bank who is not charging their customers, their premium customers for it, who is sending out cards automatically with the sensor. Is this a trend? Or is it a one-off? I mean what kind of discussions are you having with banks?

Good question. It's a bit mixed. We have been pushing that quite hard actually. If you're anyway in the premium, the differentiation in cost is limited because you have a pretty high entry fee to be part of that premium segment. Why don't just go automatic. Some banks are still trying sort of charging. But I think in the last 4 to 5 to 6 months as the Moroccan banks have launched and we have pushed this message, we're seeing more and more of a trend that, that makes sense. And I think it's the way it happened in the past. Contactless cards in Sweden was available earlier in other countries. But as your expiry date came to an end, you would then get contactless. And that's really what we want to get to.

Yes. Okay. Okay. And you mostly work with Thales. You work with all of them, IDEMIA and G+D and all of the second tier as well. But Thales is the biggest one. And IDEMIA mainly work with your key competitor, IDEX. And it seems to me like IDEX is ramping up. No, no. That IDEMIA is kind of accelerating. So are you thinking the same or seeing the same? And how is Thales in this? And how are they reacting to this? And is it market which is driving this? Or are they pushing and what is, again, how is Thales acting in all this?

If you look at what has been publicly announced, which is what I can talk about, you have to go back to 2020 when Thales announced the card certified Mastercard and Visa. That's the reason we have 10 launches today. I mean, some were with G+D as well, but mainly all the launches were with Thales. So they have that 2-year advance because they had a certified product. IDEMIA certified their new generation because the first generation wasn't fully certified and they really wanted to go for that next-generation card. That was certified more or less a year ago. So obviously, what we're seeing now from IDEMIA is what Thales did 2 years ago. So we should see them ramping up, getting more launches. But of course, now Thales is established, IDEMIA is coming. Now we're getting that sort of competition that the market needs. So for sure, in our dialogue with Thales, this is something that they welcome but also makes them stand more on their toes and be more aggressive.

So healthy competition moving forward. And if we talk about Tier 2 and Tier 3 because we have -- I mean, in all of these parts of the value chain, we have a couple of big ones and then you have kind of a tail. How important is this tail to kind of get this moving? Because you see a few larger banks, but you have, for instance, in Sweden, you have Rocker, but you have none of the big banks. So how important is this tail?

I think the tail is very important. If we take a market like Sweden, for example, we have a very strong player in Tietoevry that is doing the personalization for most banks. IDEMIA is also present for sure. And Tieto works with not only Thales and G+D, but they also work with Tier 2s like TAG and others. So obviously, it is -- if you look at the global sphere, you have the big 3 guys that more or less cover 75% of the market. So they will be globally, but there can be banks or regions where the Tier 2s are more regional, more local, more present, are able to take business that maybe the big guys are not so interested in. So first of all, I think the Tier 2, Tier 3 is needed to create this healthy competition, but also because they are on the [ AVL ] of certain banks and the big guys are not. So if we want this to be mass deployed, we need all the players in the ecosystem to be on board, and we're really seeing that happening now. So for me, it's key.

I think actually, our time is up. So I could go on forever, but thank you very much for coming here and talk to us. Looking forward very much to see the next steps and I think acceleration is a good word to describe what's going on right now.

Perfect. And thanks for being here. I appreciate it a lot and we'll be back.

Thank you for listening.

Thank you.