Among her first orders of business, EML Payments (ASX: EML) CEO Emma Shand is tasked with explaining to shareholders how the digital payments company fell prey to fraud, amounting to losses of $7.9 million.
The fraudulent activity occurred with its Sentenial business some time in August 2022 but only came to EML’s attention on Tuesday August 23rd. As per its report, the Company believes that the culprits comprise an identified set of fraudulent merchants within its direct debit processing business.
Since the announcement, the Company knocked more than $30m off its market cap with EML shares falling 10.5% to close at $0.89.
As per EML’s FY22 investor report, the Company’s revenue was up 21% on FY21 to $234.1 million. Most of the contribution was from its recent acquisition of digital payment services provider Sentenial. In terms of digital payments revenue, Sentenial contributed $7.7 million of revenue in the nine months from its acquisition date, i.e. 30 September 2021.
Without Sentenial, the digital payments revenue driven solely by EML was rather flat, despite higher volumes. According to the Company, that was because of changes in the customer mix. Revenue yield reduced as a result of the inclusion of the Sentenial direct debit business which is a lower yielding product.
This is not the first time that EML has been at the centre of controversy. In May last year, the Central Bank of Ireland (CBI) expressed concerns related to another one of EML’s acquisitions—PFS Card Services Ireland Limited’s (PCSIL) anti-money laundering/counter terrorism financing (‘AML/CTF’), risk and control frameworks and governance.
To address that, as of July 25, 2022, the Company is undertaking a remediation programme as per CBI’s directions. EML has to work on CBI’s identified shortcomings in components of the Company’s remediation programme, most crucially the sequencing and approach taken to the risk assessment of its distributors, corporates and customers.
While these events have been met with immediate proactive responses, they have raised some red flags among shareholders. The Company has informed that it is taking steps to investigate and understand the fraud. However, it has brought negative regulatory attention to EML yet again. And more importantly, it is not a good look for Shand, who became CEO just a month ago.
Moreover, over the past year, the Company has been approached by a few companies with the intention of a takeover. However, it rejected the proposals. In June, EML confirmed that it was in discussions with two parties regarding proposals for a potential change of control. Citing best interests of shareholders, the EML Board ceased discussions.
Now, however, with one of its most profitable acquisitions, Sentenial, becoming the target of fraud, the Company might reconsider. That said, given that the Company is looking into the matter and expecting to recover some, if not all of, the sum, some shareholders remain optimistic.
As per its financial report for the past year, the Company expects to see continued inflationary cost pressures throughout FY23 in its key markets.
Alinda is a Business Reporter for The Sentiment
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