Hogg Robinson Centers On Payments For SME Growth In North America

By | May 17, 2016

[UPDATE, Jan. 25, 2017: HRG apparently released a new app sometime in the last few weeks. It’s available on Android and iOS, and offers typical TMC app features like itinerary sync and touch-to-call. “This app is only available to existing HRG clients who have the app enabled in their technology configuration,” according to the iTunes store. The iOS app reached version 1.01 on Jan. 13 after some bug fixes. An Android download site indicates the app was added in December. It makes a reference to Fraedom, suggesting the app was based on tech from the payment and expense-oriented subsidiary, as anticipated in this article.]

With a spate of acquisitions, U.K. travel management leader Hogg Robinson Group entered the United States on its own a decade ago. As its partnership with the predecessor of BCD Travel dismantled, HRG had to rebuild in the largest business travel market. The moves didn’t set the world on fire. Some accounts left. A major recession hit. The most interesting thing HRG did in the region was a big but challenging travel and expense deal with the government of Canada. This did little to excite those in U.S. corporate travel.

HRG’s performance in North America has been up and down. With a fair amount of executive turnover and a shifting strategy on mobile, the company hasn’t achieved the kind of leadership position to which it is accustomed in some other markets. HRG is addressing those matters now with new blood and an upcoming mobile app. More interesting is its ambitious bet on competing with Concur.

HRG’s Fraedom subsidiary (formerly Spendvision) offers expense management technology and a little-known bank card platform that HRG sees as the path to signing small and medium enterprises. HRG also believes it has an advantage that the other expense providers do not — a travel management company.

After acquiring full ownership of Spendvision in 2012, HRG announced Fraedom more than a year ago. As a brand, it has taken arrows. This may not matter so much as it’s a behind-the-scenes provider anyway. Roughly four in five clients access the technology through a partner.

HRG-financials

HRG’s revenue from North America peaked in 2012 after weathering the 2008-2009 recession. Eighty percent of the 2013 dip was related to a restructuring of HRG’s loyalty business in Canada, according to the company. Whitman Howard analyst Andy Smith said “the U.S. doesn’t feature that highly” in HRG’s financial discussions. Canaccord Genuity’s Matt Walker said HRG’s organic annual U.S. growth of 3 percent to 5 percent since 2006 was higher than in other regions. Going forward, he said, HRG is “probably right” to expect “good growth” in the U.S. for its Fraedom division.

According to an HRG presentation in March, Fraedom serves 135,000 clients, processes more than 400,000 transactions per day and has 365 employees. It generated revenue of £22 million in fiscal 2015, up 14 percent year over year.

“We’re not some startup that doesn’t make money,” said HRG CIO Bill Brindle. Underlying operating profit last year was £3.2 million, up 10 percent.

Direct customers include De Beers, Deloitte, Mitsubishi and Staples. It’s the company’s partner network, though, which executives see as unique. Partners largely are financial institutions like Barclaycard, BMO and Suntrust. A relationship with Visa offers access to more than 100 more banks under the card network’s IntelliLink spend management service.

Concur and other expense management systems import card data from banks for mutual clients, but “we go a step further and integrate with the bank’s processor,” said Fraedom CEO Kyle Ferguson in March. “We control the provision of credit, we can issue virtual cards, can produce cards, increase or decrease limits, cancel cards. We believe that puts us in a unique position.”

So does BMO. The bank is replacing its internally developed card management platform with Fraedom’s. This is the technology that allows users to see statements. It enables administrators to issue cards, close accounts and execute other functions. BMO is replacing platforms because its expertise is not in developing technology, said BMO Financial Group vice president and head of North American corporate card products Steve Pedersen.

Kyle Ferguson

Fraedom CEO Kyle Ferguson

Complementing that, BMO then offers clients the Fraedom expense management capability. “We’re here for the cards, not to compete with Concur,” said Pedersen. “I’m agnostic. But not everyone wants Concur. It has elaborate capabilities and there are costs to that.”

Pressed by financial analysts in March to differentiate Fraedom from Concur, HRG chief David Radcliffe claimed an advantage in owning the travel operation.

“Concur doesn’t own the travel system,” Radcliffe said. “There have been instances with Concur where they have had some difficulty controlling service delivery when outsourcing.”

Both Pedersen and Radcliffe referenced their existing partnerships with Concur. But given its card management technology, there is potential for Fraedom to become a more important partner to banks. A combined travel, payment and expense capability from a business bank could be attractive to small and medium enterprises.

“We do referrals,” said Pedersen. “I could see an evolution where we offer a travel capability in our portal. We’re not there yet.”

Fraedom isn’t in a rush. Card payment is disrupting checks as expense automation disrupts spreadsheets, and the markets are huge. HRG execs described an addressable B2B payments market growing to $2 trillion by next year.

They expect 60 percent of Fraedom’s revenue ultimately to come from the Americas. Payments revenue will grow about twice as quickly as expense revenue, which also will grow faster than travel revenue. On payments, the company takes a small fraction of the merchant fee. For expense, it charges a per-user fee. In travel, the technology is free but Fraedom makes money on commissions.

Financial analysts who follow HRG are interested in but guarded about Fraedom.

“It’s a good thing they’re doing it,” said Whitman Howard’s Andy Smith. “The core business of corporate travel management is — I won’t say under pressure, but — doesn’t seem to be growing as much. [There is] cost cutting as people move from call centers to online. So certainly this is diversifying the income stream. It makes sense but whether they can monetize it remains to be seen. Fraedom is still a small part of the group, and it’s taken a long time to come to fruition.”

Canaccord Genuity’s Matt Walker called Fraedom “quite an interesting” proposition. “A lot of the reason American Express did travel was as a retention tool for corporate customers using Amex cards,” he said. “Fraedom’s banking partners also could use this as a retention tool.”

Walker said he wasn’t sold on how much of a competitive advantage owning the travel component offers over, for example, Concur partnered with BCD Travel.

Fraedom’s payment platform “sounds genuinely innovative and valuable to us,” according to Michael Donnelly of Panmure Gordon.

WIIFM?

Larger clients may ask what’s in this for them. They represent the bread and butter for the biggest piece of HRG. Brindle in April said there’s no shift in strategy there.

Like for every TMC, though, big clients bring mixed blessings. HRG recently lost Novartis to Carlson Wagonlit Travel (a decision made in 2014 but not implemented until this year). On board since HRG first invested in the United States back in 2004, Disney has recently considered other providers. Condé Nast is another larger client that recently went out to bid.

One of HRG’s challenges is that its answer on mobile has been evolving. Here again the investment in Fraedom could pay off. A new downloadable mobile app is in the works, continuing a turnaround in thinking on mobile technology. HRG earlier had prioritized mobile-enabled websites rather than downloadable apps, unlike competitors including CWT and Egencia. HRG had tried to keep to a mobile-web strategy because of the difficulties and expense in maintaining and updating apps. Those still are challenges. Corporate customers in the past limited downloading, but Brindle said companies now are more relaxed. Meanwhile, he said, the advantages of using the device operating systems — for example, for the camera or offline processing — have grown.

The new app also could help HRG match up with Concur, which embraced downloadable apps earlier than just about anyone in corporate travel.

When it comes to development, HRG now has a “mobile-first” approach to travel, payment and expense, executives said.

Meanwhile, former American Express Global Business Travel and BCD Travel sales exec Mary Ellen George-Hess recently joined HRG as senior vice president of sales in North America. Her job is to reinvigorate the brand and get the company in the door of more large-corporate clients. She’s also hiring.

HRG’s next earnings statement is due out next week.

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