Card Manufacturer’s IPO Filing Opens a Window Into the U.S. EMV Conversion

The conversion of U.S. general-purpose payment cards to the EMV chip card standard is providing windfalls for all sorts of card-industry vendors. A new example comes from the big plastic card manufacturer CPI Card Group Inc., which has filed for a possible initial public offering of stock.

EMV cards accounted for 37% of Littleton, Colo.-based CPI’s net sales of $338.1 million and net income of $30.5 million for the 12 months ending June 30, according to documents the company filed with the Securities and Exchange Commission. In all, CPI produced more than 360 million credit, debit, and prepaid cards in 2014 for 3,200 banks, credit unions, and prepaid card issuers. The company claims it makes 35% of all financial payment cards in the U.S., “which we believe gives us the No. 1 market position by unit volume.”

While card issuers, merchants, and networks are bracing for the big EMV liability shift coming Oct. 1, an amended registration statement CPI filed Sept. 4 shows the company expects to get a lift from the EMV conversion for quite some time. CPI commissioned Annapolis, Md.-based First Annapolis Consulting Inc. to study the payment card market, and according to the firm’s analysis, EMV cards accounted for only 2% of all financial cards in 2013 but will command an estimated 42% share this year and 71% by 2019.

Driven by normal replacements, replacements due to fraud, and the beginning of the EMV conversion, the financial card market, excluding services, more than doubled from $180 million in 2013 to $371 million in 2014. “The conversion of U.S. financial payment cards to the EMV standard is expected to further increase this market size by more than three-fold to $1.2 billion by 2019,” the filing says.

The study estimates that card manufacturers made 976 million financial cards for the U.S. market in 2014. Bank debit cards accounted for 368 million and and will have a compounded annual growth rate of 1.4% between 2014 and 2019. The general-purpose credit card market had 332 million plastics produced for it last year, and the sector has a projected five-year CAGR of 4%.

Prepaid cards are the fastest-growing sector, with 276 million cards produced last year and a five-year CAGR of 8% that will result in 405 million cards in 2019.

CPI’s filing confirms comments from card issuers that EMV cards are much more expensive than the mag-stripe cards they’re replacing. The company says that, excluding services, industrywide average prices are 20 cents per card for a mag-stripe card, $1 for a contact EMV card, and $2 for a dual-interface card that supports both contact and contactless payments. CPI notes that actual prices will vary significantly depending on issuer and order size, card features and finishes, and chip features.

Higher EMV prices apparently aren’t hurting CPI’s profitability. “Comparing our costs to selling prices, we achieve similar gross margin percentages across these three card types,” the filing says.

CPI notes that most EMV cards issued so far in the U.S. are of the contact variety, but the company said it believes that in Canada, which had its EMV liability shift in 2011, the majority of cards being issued are dual-interface because of their transaction speed and convenience. “We believe that as the U.S. market migrates to the EMV standard, dual-interface EMV cards … will gain share relative to contact EMV cards, further expanding the dollar value of our market opportunity,” the prospectus says.

Non-EMV payment cards and retail gift cards accounted for 22% of CPI’s sales in the year ended June 30, followed by tamper-evident security packaging, 19%, card personalization services, 18%, and instant card-issuing systems, 4%.

The Sept. 4 filing, which follows CPI’s first publicly filed IPO prospectus from Aug. 7, still does not state how much company hopes to raise. CPI plans to use the proceeds to redeem $11.5 million in preferred stock, pay off other stock-related liabilities, and repay some of its $435 million in term loans.

Affiliates of Tricor Pacific Capital Inc., a private-equity firm with offices in Lake Forest, Ill., and Vancouver, British Columbia, own 91% of CPI’s preferred stock and 83% of its common stock.

On the opposite end of the card industry, leading point-of-sale terminal manufacturer VeriFone Systems Inc. last week reported a 61% year-over-year quarterly increase in North American revenues, much of driven by the replacement of old terminals that could read only magnetic-stripe cards with new devices that also can process EMV transactions.