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Why Did Optimal Payments Plc Crash 20% Today?

Would you risk your money on one of the competing mobile payments systems right now? You might be put off by the Monitise collapse, which has seen a bone-jarring 96% price crash since February 2014’s peak. But one competitor down means there’s a better chance for Optimal Payments (LSE: OPAY), surely?

Optimal Payments shares have been a bit erratic of late, but were up 500% over the past five years, to 348p by the close of business on Wednesday. But then the price crashed by 20% in early trading on Thursday morning, as the firm admitted it had suffered breaches in its customer data security.

The immediate price fall seems to have been something of an over-reaction, and as it has become clear that these breaches took place around 2011 to 2012 or earlier, the price recovered to stand 12% down at 306p approaching midday. But that’s still a significant dent, and with the news breaking so soon after the cyber attack at TalkTalk Telecom, users of the system and shareholders of Optimal Payments are understandably worried, especially at a time when Apple Pay is taking the market by storm.

Repeated breaches

The breaches reported by Optimal, which have resulted in “a small amount of customers’ personal data” now being in the public domain, with allegations suggesting that the same has happened to “a more material amount of customers’ personal data“, apparently took place at the company’s NETELLER subsidiary in or before 2011, and at Moneybookers Limited (which is now owned by Optimal via a series of acquisitions) in or before 2012.

Both had previously been targets of cyber attacks in 2009 and 2010, although the company assured us that no financial losses were incurred. The latest breaches don’t sound likely to lead to direct financial loss either, with Reuters reporting that it is only names and email address of customers that have been accessed, and which are now available for sale on the so-called dark web.

But even if no money is lost, the apparent fact that companies can suffer repeated breaches of security is a serious concern, and it’s one that could kill a smaller operator’s prospects.

Is Optimal Payments a company to invest in now? Well, I wouldn’t have bought it even before this news, because it’s in a heavily competitive market, and it doesn’t have the barriers to entry needed to differentiate it from the likes of Apple Pay. (As an aside, I think one payments processor that has built itself a barrier is PayPoint, with its network of terminals in shops for handling the payment of bills.)

Bargepole

The mobile payments market is set to soar in turnover in the next few years, and that is reflected in the growth pricing attached to shares in the candidates for success. But a couple of things conspire to make the smaller operators unattractive to me.

Firstly, I’m always minded of Warren Buffett’s observation that it is rarely the first movers who make it big in a new technological business. And in the payments business, I reckon the advantages lie very much with the big players who have the muscle to expand rapidly — and to invest in industry-leading cyber security.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Monitise and PayPoint. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.