There will be a presentation followed by a question- and- answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Robbie Cooke, CEO and Managing Director. Please go ahead.
Thanks. Good morning and welcome everybody to Tyro's half year results call. I'm here with Prav Pala, our CFO, who'll be presenting with me this morning. Our plan today is to focus on our published results for the first half of FY 21. We'll also provide an update on our trading in January and February to date, and we'll talk about some of our key areas of focus for the balance of the year. Prav and I will spend about 30 minutes running through our results, and we'll then take questions. We'll talk to the slide pack circulated earlier today, which is also available on our website. Just for noting, a recording of this morning's call will be posted on the Investors section of our site shortly after the session to ensure those who are not able to dial in live can listen at their convenience.
With the formalities out of the way, we'll get started, and if you could turn to page two of the pack, please. Before I talk about our results, I just wanted to reinforce what Tyro stands for and our position in the market. We are a technology-focused and values-driven company. We provide close to 37,000 Australian merchants with payment solutions and complementary banking products, largely developed on our core proprietary technology platform. We are creating an integrated ecosystem with payments at its core, enhanced by value-adding features and products designed to attract new merchants and to retain existing ones. The majority of our customers are small and medium-sized enterprises operating in the core verticals of health, hospitality, and retail. Our purpose-built solutions have been designed with those merchants' needs and preferences in mind. Turning to page three and just looking at the half in a glance.
It definitely remained a challenging six months for many of our merchants in our core verticals, with COVID still impacting trading. This being exacerbated by the sudden and sometimes unpredictable lockdowns occurring around the country. As was the case last year, we continued our focus on actions and initiatives to assist our merchants in navigating the COVID impacts. Despite these headwinds, we're proud to have processed a record AUD 12.1 billion in transactions for our merchants. Considering the challenges faced, our performance in the half year was strong. At a high level, we still achieved record transaction values, record gross profit, and a record EBITDA result. In summary, our transaction values were up 9.5%. Our revenue was down 2.1% at AUD 114.8 million due to a COVID-caused card mix shift, which I'll discuss in a bit more detail shortly. Our gross profit was up 21.6% to AUD 61.2 million.
Our EBITDA was a AUD 8.5+ million, a 464% improvement on the same period last year. Operating leverage was demonstrated in our results, with our operating expenses increasing a well-controlled 8.1%, whilst our EBITDA margin expanded from 3% in half 1 FY 2020 to almost 14% in the recording period. Finally, our merchant numbers were up 13.2%, with almost 37,000 merchants choosing to work with us. We've been particularly focused in the half year on pre-integration work required to commence our alliance with Bendigo Bank, I'm pleased to report that these activities are tracking well. We expect to achieve commercial completion by the end of the second half, at that point, we'll commence the rollout.
We are also soon to become the payments platform for me&u, a business we invested in in November of 2019, which provides hospitality venues a tap order and pay solution, perfect in today's COVID world. We've also invested in Paypa Plane in the half year. Paypa Plane is a payments platform which is transforming recurring payments. It has developed a proprietary solution focused on removing known pain points in recurring payments for banks and businesses alike. We will integrate the Paypa Plane technology to provide a recurring payment solution for our Tyro Bank Account. Finally, our Tyro Connect platform is building up its position in the market with 10 leading apps signed and 71 active merchants on the platform to date. Turning now to slide seven and our payments operation in a little bit more detail.
As mentioned, the value of transactions processed in the half year lifted 9.5%, reaching a record AUD 12.1 billion. This growth was assisted by a 13.2% increase in merchants selecting Tyro as their payments provider, with 36,720 active merchants on the books at the end of the half. Transactions processed in the half were impacted by COVID lockdowns, which dampened transaction volume growth for our merchants. The half year commenced well, with transaction values lifting 11% in July 2020. However, these gains were taken back in August when Victoria entered a hard lockdown. Growth returned in September and consistent improvement was experienced through to the end of the half year. In fact, December 2020 delivered 19% growth, with transaction values reaching AUD 2.6 billion, an all-time record amount for us.
Merchants in our three core verticals, health, hospitality, and retail, represented 86% of our merchant count and made up 91% of the transaction value for the half year. Our strongest growth was delivered in our retail vertical at 17%, with hospitality growing at 6%, whilst our health vertical was down slightly due to fewer elective procedures in the COVID environment. Geographically, all states other than Victoria and New South Wales experienced double-digit transaction value growth and collectively grew 29%. Victoria was down 16% and New South Wales, our largest state by transaction value, was up 7% on the PCP. At the end of the half, we've lifted merchant numbers 13% on the same period last year. COVID restrictions had limited impact on new merchant applications, and specifically in July, we attracted 1,019 new merchants. In August, that number was 924. In September, 1,133. In October, 1,182. November, 1,121.
In December, 879 new merchant applications were secured. Our e-commerce solution grew strongly, albeit from a low base. This solution enables merchants to work with us both for their in-store and online transactions. This solution simplifies the day-to-day for our merchants by providing one point of contact together with single settlement and reconciliation, removing the need to manage multiple payment providers. While still very much a work in progress, at 31 December, we had 379 merchants utilizing our e-commerce solution with AUD 14.8 million generated in transaction value. Our integrated Alipay offering also remains in the rollout phase, with more than 31,000 merchants now enabled to switch on Alipay as a payment option. Our Alipay offering has been significantly impacted by the lockdown of Australia's international borders, with only AUD 1.8 million in transaction value generated in the half.
We are, however, confident this payment type will return to growth once international travel resumes. We introduced a payment and rebating solution to facilitate telehealth in a direct response to COVID. It enables health practitioners processing Medicare Benefits Schedule bulk billed telehealth payments through their Tyro terminals and gap fee payments through either their Tyro terminal or our e-commerce solution. AUD 178.6 million was transacted through this channel in the reporting six months. It is our belief that telehealth will continue to be offered by health practitioners even after the risk of COVID passes, as it is popular with patients and healthcare professionals alike. Whilst transaction values and merchant numbers were up, our payment revenue was down 5.2% to AUD 107.7 million.
This is reflective of a change in our card mix and arose from a significant drop in international credit card usage due to COVID's impact on travel and an increase in debit card usage. International credit cards attract significantly higher merchant service fees and a mix shift away from transactions via these cards negatively impacts our revenues. These international cards, however, carry significantly higher interchange and scheme fee costs. Thus a mix shift away from transactions via these international cards positively impacts our profits. International credit cards represented 0.7% of our transaction value in the reporting period, compared with 4.4% in the corresponding half. The converse applies in relation to debit cards. In the period, we processed more lower merchant service fee debit card transactions, which attract lower scheme fees and interchange fees. As such, have a more positive profit impact.
Debit cards represented 61.5% of our transaction value in H1 FY 2021, compared with 56.5% in the corresponding half. Prav will talk to our merchant service fee and merchant acquiring fees later. Of note, this change in card mix, whilst impacting revenues negatively, positively impacted our payments operation gross profits, which lifted to AUD 54.3 million, up 15.9%. With close to 68,500 terminals now in the field, we remain the fifth largest merchant acquiring bank in the market, sitting behind the four major banks. Our focus on brand, customer satisfaction, and retention continued to shine through in the half. Our most recent Net Promoter Score at 31 December reached 44, up from 43 a year ago. Our prompted brand awareness has lifted to 17%, up from 12% a year ago.
Our customer retention rates remain very strong, with customer churn measured by transaction value 7.7% in the half compared to 8% a year ago. Our churn rate metric by customer number reduced from 12% a year ago to 10.2%. Turning now to slide 10 and our banking products. Although our banking operations still only represents a small part of our overall business, it presents an alternative to the major banks and has strong prospects for continued growth. Our products are focused on providing our customers with innovative ways to meet their transactional banking and unsecured lending needs. Our Tyro Bank Account is a fee-free, interest-earning transaction account. 4,150 Tyro merchants were actively using the Tyro Bank Account, up from approximately 3,100 a year ago. With AUD 99.3 million on deposit as at 31 December 2020, up from AUD 39 million the same time last year.
Our new term deposit offering, which is available through the Tyro App, held AUD 4.7 million in term deposits as at 31 December 2020. Our cashflow-based unsecured loan product is designed to assist SMEs in growing their businesses. Our business loan is repaid from a merchant-selected predetermined percentage of card transaction volumes as generated by the individual business and is offered on the basis of an upfront fee. The innovative feature of this product is that repayments cycle up or down and according to the merchant's daily card transaction volumes. Prior to the onset of COVID, our loan application process was streamlined, giving all Tyro merchants the ability to check their eligibility for a loan through the Tyro App. If eligibility was not automatically satisfied through the App, a manual review could be initiated with our loans team collecting additional information and assessing the application with the benefit of this data.
Post-COVID, from 1 April 2020, our assessment process was adjusted, making use of this manual assessment path rather than our automated functionality. This proactive step was implemented to ensure our credit risk in the COVID operating environment did not exceed our internal risk appetite. As expected, this decision to adjust the credit assessment process saw originations fall sharply in the half year. Originations in the half reduced to AUD 2.6 million, down 93% versus the AUD 37.4 million in the corresponding period. We managed the risk within the portfolio closely over the period, resulting in lower write-offs than provided for at 30 June 2020. In combination, these factors saw lending income for merchant cash advances decline 20.5% to a net AUD 2 million. The average loan size in the year was around AUD 23,000, lower than the AUD 31,000 average a year ago.
We are returning to a higher-limit automated loan assessment process currently and are hopeful that this loan offering will start to progressively return to levels experienced pre-COVID. Prav will talk in more detail on our banking operations financial performance shortly. Turning now to slide 11 and our Tyro Connect solution. In recent years, there has been much growth in the number of customer-facing apps participating in and around the payments ecosystem. These include loyalty, booking, and order-ahead apps. These apps typically seek to integrate with multiple point-of-sale systems to distribute their services into merchants' operations. This can create duplication, costs, and other inefficiencies for POS suppliers, merchants, and the app providers. Tyro Connect is a solution to this friction point. It's designed to be an integration hub for apps and POS systems, a plug-and-play solution designed to address merchant pain points around counter clutter and manual processes.
It also aims to make it easier for POS system partners and app providers to meet customer needs. Tyro Connect went live in February 2020, with its first integration partner being me&u, which, as I mentioned, provides hospitality venues with a tap order and pay solution. Today, Tyro Connect has 10 industry-leading apps signed up to the platform and 71 active merchants. Tyro Connect seeks to reinforce our value proposition to merchants while embedding us more deeply in the commerce ecosystem and enhancing our ability to capture data and insights. I'll now hand over to Prav, who's going to step through our financial performance in more detail, and I'll then return to discuss our second half and our outlook. Thanks, Prav.
Thank you, Robbie, and a very good morning to all. If you could all please turn to slide 13 in the pack, and I'll go through a summary of the financial performance for the half year ended 31 December 2020. As mentioned earlier, the results are pleasingly strong in what continued to be quite a challenging environment for our merchants. We transacted AUD 12.1 billion in transaction value, a growth of 10% to the comparative period. The six-month growth was subdued largely due to the Victorian lockdowns. We have been reporting our transaction value weekly, and you would note the - 4% growth in August when the lockdowns had their full impact. Adjusting for Victoria, the growth in transaction value for the six months was 18%. December 2020 was a record month when we processed AUD 2.6 billion in transaction value, representing an exit rate of 19%.
As mentioned in our June results call, transaction value mix changed significantly in the last quarter of the 2020 financial year, and this trend continued into the first half of 2021. We processed less than 1% in international card transactions in the six months, compared to over 4% in the prior comparative period, while debit cards increased from 56%- 61%. For the six months, the schemes changed their cost structures for debit cards significantly to compete effectively in the Least Cost Routing space. As a result, our direct costs dropped, and with our portfolio structure being 47% cost-plus and 53% either blended or other, our revenue dropped. Our gross profit margin increased for the half year. This was a positive result considering we provided proactive terminal rental fee waivers of circa AUD 1 million to COVID-impacted merchants during the period.
Additionally, we continued to support our merchants who were in hardship and had borrowed from us. You would recall that on June 30th last year, 30% of our loan portfolio was on a repayment holiday of up to three months with zero additional interest. The extension did not attract any additional fees by the merchant and represented actual relief to those impacted. Pleasingly, most of the merchants on the repayment holidays settled their loans as they overcame their economic challenges. Loan balances declined over the period as we tightened our credit policies. As the portfolio is small, we were able to manage these loans at an individual level. While total lending losses for the six months was AUD 500,000 , we released AUD 1 million in provisions in the form of fair value gains during the period as a result of better-than-expected portfolio performance.
In summary, the payments business gross profit therefore grew by 16% given the improved margins, while our banking business was -23% off a small base. Together with JobKeeper income of AUD 4.5 million, our half-year gross profit of AUD 61 million was a growth of 22% and a new record. In comparison, our operating expenses, which largely comprise employee expenses, grew 8%. The operating leverage we have talked about previously was demonstrated perhaps earlier than expected. This was, in no small part, due to the support of our team, which continued to deliver despite the strict measures in place, such as a freeze on new hires since March 2020 and no remuneration reviews in the period. We continued to balance our decisions between building on our core value propositions and buying where it made sense.
This explains an increase in administrative expenses from AUD 8.2 million- AUD 9.6 million and is mainly to do with license costs as well as contracting specialized skill sets to complement our internal capabilities. Marketing expenses are an area of focus, as we have mentioned previously. For the half year, however, marketing costs were deliberately controlled and in fact were lower than the prior comparative period, given the external environment. We spent AUD 2.5 million for marketing in the half year compared to AUD 2.7 million in the first half of 2020, a decrease of AUD 0.2 million. However, prompted brand awareness was up at 17% at December 2020 compared to 14% in June. I would expect our marketing costs to increase in the future as we target merchant growth.
As a result of gross profit growing by 22% and operating expenses growing by 8%, we achieved an EBITDA of AUD 8.5+ million for the half year compared to AUD 1.5 million in the prior comparative period, a greater than fourfold increase. Excluding JobKeeper income, our EBITDA was AUD 4 million, or an increase of 167%. The return is consistent with our growth strategy, our continued close management of margins, and investing in future value creation, some of which Robbie has already spoken about. All our other expenses decreased other than depreciation, which is in line with our growing fleet of terminals and a small loss recorded from an investment in an associate. In summary, our total expenses are AUD 64.6 million for the six months compared to total expenses of AUD 69.5 million in the prior comparative half. The comparative half, however, included AUD 9 million in IPO costs.
Adjusting for this, the growth in total expenses was 7%. Of the AUD 64.6 million, AUD 52.7 million are operating expenses, of which 70% is staff-related, and that grew 8% on the comparative half. Permanent headcount was steady to the prior comparative period, increasing by net one to 482. The half year had strict cost controls. Project resourcing will increase as we move towards completing the Bendigo alliance in the second half. Breaking this down in a different way, 38% of our total operating costs related to product development and management. Around 21% was in sales and marketing, with the remainder in product delivery and general overhead. Of the non-cash items, share-based expenses were AUD 4.3 million, down from AUD 5.3 million in the prior comparative period. Of these, AUD 2 million relates to general accruals for 2021 short-term incentives, while AUD 1 million relates to performance instruments issued in prior periods.
These instruments will only vest on meeting specific growth and profitability hurdles prior to their expiry, and the expense assumes 100% probability of vesting. The remaining expenses comprise the tail of the liquidity event's performance rights and various annual and monthly linear vesting instruments issued in prior years. Share-based expenses decreased 19%. As a result of all of the above, Tyro recorded a statutory loss of AUD 3.4 million before tax compared to a statutory loss of AUD 19.2 million in the prior comparative period. On the next slide, I provide an update of our key operating metrics, which graphically summarizes our profitability trend on one page. If you could now please turn to page 14. Over the last five years, our merchant service fee, or MSF, has been relatively stable, and that's including up to February 2020, when the MSF for the eight months was 91.4 basis points.
As reported in our June results, the last quarter of the 2020 financial year changed dramatically in terms of card mix, partially from international border lockdowns, which carried it on into this half. As I mentioned earlier, the expensive international card volume dropped from over 4% to less than 1%. Debit cards increased in proportion from over 56% of total transaction value to 61%, while the costs of the debit cards came down. As a result, the MSF dropped to under 80 basis points as 47% of our portfolio by transaction value is on a cost-plus basis.
The drop in the underlying cost, which you can see in the gray line dropping from 56 basis points to 40 basis points, was passed straight through for these transactions. For the remaining 53%, the decrease in the underlying costs increased our unit margin and compensated for the lower transaction value, as well as providing us the ability to support our merchants in any ways we could. There are other cost changes that may come through later in 2021, and I expect the weighted average cost to gradually rise again. Notwithstanding this, the results for the half year are pleasing, as the 15 basis points drop in direct costs more than outweighed the 11 basis points drop in MSF and improved our unit margin for the first time in over four years.
We manage our payments business as a portfolio, and with the pricing composition of our portfolio, we are well-placed to work through any structural cost changes in the near future. Achieving operating leverage with scale is the key takeaway from this page again. The red line is our operating expenses as a proportion of transaction value. As mentioned previously, we are on a trajectory to profitability as we leverage the scale of the business, demonstrated by the positive jaws between the green and the red lines. Admittedly, this leverage has come earlier than expected, both due to the changes in the debit cards' cost structures and our strong cost management in the last year, including hiring and remuneration freezes. As we move back into a business-as-usual mode, you should factor in some one-off distortion in this line over the next year.
The half-year graphs, nevertheless, demonstrate our ability to manage the business profitability at short notice where required. Please turn to slide 15 for a summary of our financial position. The IPO in the 2020 financial year saw a net capital injection of AUD 109 million, further strengthening our balance sheet and positioning us for growth even under challenging conditions. This was never truer than in 2020. Our capital ratio was a healthy 143% at balance date. The drop from June's ratio of 162% is as a result of our investment in Bendigo and Paypa Plane in the half year, as well as an increase in cash from merchant deposits, which ended the year at AUD 104 million.
As we complete Bendigo under the accounting standards, we will recognize significant assets and payables upfront, being the present value of the transaction. You will see the ratio drop to a more efficient level by 30th June 2021. More details on these have been provided in our capital commitments note. Our loans balance reduced significantly to AUD 4.4 million. We originated only AUD 2.6 million compared to AUD 37.4 million in the comparative half, given the downturn in the economy. While small, our loans book performed better than expected, and we recorded lending losses of only AUD 500,000 . As a result, we were able to release AUD 1 million of provisions reflected in the form of fair value gains on loans in the income statement for the half year.
In terms of other investments, we booked AUD 3 million in intangible assets, being the upfront deposit for our alliance with Bendigo, and acquired shares in Paypa Plane for AUD 1.9 million. On the other side of the balance sheet, our deposit account balance more than doubled from June 2020, closing at just under AUD 104 million. This has been a very successful product for the company. We moderated the interest rates in the half year as the growth in this book is not required until our loans book starts building up again. At 31 December 2020, the balance comprised AUD 99.3 million in the Tyro Bank Account, up from AUD 49.6 million at June, and AUD 4.7 million in term deposits, up from AUD 0.9 million in June. Tyro has continued to capitalize projects as appropriate. At reporting date, AUD 5.2 million was carried on the balance sheet from internally developed assets.
These assets relate to developing our capability to offer new payment types and enhancing our core technology platform. Finally, we capitalized the new term deposit product, which was piloted last year and since launch in July 2020 to active banking customers has demonstrated its attractiveness in the first half, as mentioned just now. Tyro's cash flows are provided on the next slide. Notable cash items other than our EBITDA included AUD 53 million in inflows from our retail deposits, net AUD 8 million in repayments from our loan product, investments in associates and the Bendigo alliance of AUD 4.9 million, purchase of AUD 3.7 million of terminals. Our CapEx will ramp up significantly for terminals in the second half as we complete the Bendigo transaction. Those are the key financial call-outs for the half year. In summary, payments was the predominant business for Tyro and the main driver for its results.
While COVID impacted our top-line growth, the underlying business performed strongly with improved unit margins. Gross profit growth of 22% in the half year, combined with expense growth of 8%, returned a positive record EBITDA of AUD 8.5 million. The banking business was small in the half year. Deposits grew strongly. However, loans were deliberately paused and are expected to provide an ancillary income stream as it grows in line with economic recovery. Expenses were tightly controlled. The results show strong operating leverage achieved earlier than expected. Most importantly, our capital position remains strong. It allowed us to continue investing in our people, our customers, and our products despite the challenges of 2020. Finally, in considering our second half FY 2021 performance for your modeling, you should consider potential changes from the first half.
For example, any remuneration reviews and removal of hiring freezes, no contribution from JobKeeper, any costs associated with the terminal connectivity issue, CapEx and costs associated with the Bendigo alliance commercial completion. That is the financial update for the half year. I will now pass back to Robbie for a trading update. Thanks, Robbie.
Thanks, Prav. Look, maybe just starting with the terminal connectivity issue. Clearly our ambitions for the second half of the year were interrupted by this event, which we experienced on the 5th of January. It has been an impact of approximately 30% of our merchants, either fully or partially. I've got to say, it did not sit comfortably with me nor the team at Tyro. Notwithstanding 18 years of operation with no similar issue, we are now building a failover solution. This will see us provide all our merchants with a dongle device in combination with their standard terminals as an extra level of redundancy. This is an industry-first move.
Whilst we continue at pace with our planned initiatives to drive growth and to build our payments ecosystem, our key priority over the next six months is to do all that we can to rebuild trust with those of our merchants who are impacted. To this end, we have proactively contacted and requested all impacted merchants who have suffered financial loss to register with us. We are also closely monitoring merchant terminations, and to date, we've not seen any material changes to our normal termination rates. We paused onboarding of new merchants during the course of the incident to ensure all our efforts were deployed on reestablishing normal operations for those impacted. Pleasingly, we've now seen new merchant application rates return to near normal levels, with the last three weeks delivering 224 merchants in the week ending the 7th of February.
The week ending the 14th of February, we saw 185 new merchant applications come through. In the week ending the 21st of February, we saw 190 new merchant applications come through. Our transaction value for the second half commenced with a growth rate of 3% for the first two weeks of January, impacted by the terminal connectivity issue. Growth rates returned to between 14%-18% for the remainder of January and into early February. The third week of February fell to an 8% growth rate as a result of Victoria reinstating lockdowns. Our financial year-to-date growth rate is sitting at about 10%. In terms of outlook, whilst we're not providing specific profit guidance for the full year, we do take this opportunity to discuss some early trading indicators beyond what I've mentioned for the second half, and noting these data points are unaudited.
To highlight that we've maintained our customer acquisition momentum, as I mentioned, with 818 new merchant applications received since 1st of January. As mentioned, our transaction value for 19 February grew 10.1% on the prior corresponding period to AUD 15.4 billion. Our payments gross profit for January was AUD 8.1 million, down 0.7% on January 2020. Look, that ends the formal presentation, and we'll now move into Q&A.
Thank you. If you wish to ask a question please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request please press star two. If you're on a speakerphone please pick up your handset to ask your question. Your first question comes from Ash Chandra with Goldman Sachs. Please go ahead.
Good morning, gentlemen. Thanks very much for the question. Just a couple of quick ones from me. The normalization that you referred to or some degree of normalization in that gross profit margin due to more normalizing, I guess, card mix. Is there anything in that by way of assumed repricing or anything you might need to do by way of PR or remediation for merchants? Is this a reference purely to mix shift of card volumes?
Hey, Ash. It's Robbie here. Look, no, that's just the mix shift it's got. There's no factoring in there of remediation or anything of that ilk.
Okay, terrific. Thank you. With the churn that you've indicated in January being 10.3%, is it fair to assume that that skews to the smaller end of your merchants, i.e., the merchants that would be perhaps most affected and susceptible to churn are those that might have been just sort of one terminal operators?
Yeah, look, Ash, the terminations we've seen to date have been very consistent with what we saw before the event. Typically, that is the smaller merchants, so not at the bigger end of town. Look, I think I'd just call out and make it clear, I think we're in a good position. We haven't seen any dramatic changes, but I err on the cautious side of things. I think we need to wait for the two or three months of just settling down. How we actually handle this next phase with merchants who have been financially impacted will be very important. I do think it's one of those things where we just need to spend a little bit more time just seeing how everything settles down.
Okay. Terrific. Sorry, I'll just squeeze in one last question before I jump in the queue. The Bendigo commercial completion that's expected by the end of this second half of fiscal 2021, does that mean, just to be clear, we shouldn't be assuming anything or much by way of transaction volume coming through from this and that that really becomes a full fiscal 2022?
Yeah. That's depending on when that completion happens relative to the end of the half. I mean, there is on completion, the transaction value is being moved to us. There's obviously costs associated with that, while we rotate our terminals in and the Bendigo terminals out. I would be working on the basis that it's later in the half, so the impact would not be particularly material.
Okay, brilliant. Thank you, gentlemen. I'll jump back in the queue.
Thank you. Your next question comes from Bob Chen with JP Morgan. Please go ahead.
Hey, morning, guys. Just a few questions from me. Just in terms of that MSF sort of coming off pretty strongly over the first half. Aside from the card mix, was there any sort of pricing or competition sort of impacting that as well?
Yeah. Morning, Bob. It's Prav here. It's a double whammy, probably just also to, in answer to Ash as well. It is an increase in the card mix, which went from 56%- 61%. Also, as I mentioned, with the schemes coming out competitively in the debit card space, you'd see the underlying costs have actually gone down. Our portfolio being 53% blended or normalized, that added to our unit profit margin.
Okay, great. That makes sense. Just in terms of the outlook on sort of cost investment for the business going forward now that you're sort of starting to hire again, how should we think about that, given that you said you did 8% over the first half?
Yeah. Look, Bob, on that front, and as we've said before on pre-COVID, I mean, the things that we did in the period as we called out in the body of the call, we put in place hiring freezes. We have said in the past, we do have the bench that we need to do the key initiatives we've got in place. There are some areas, and we've talked about this before, such as e-commerce, where we do want to invest more. They are areas where we will bring more headcount on board. That will typically be involved in a project which would more likely than not be capitalized. There will be some increase in headcount, but how that actually gets treated from a financial point of view will depend on the project that headcount's allocated to.
The other thing, as I think Prav mentioned, or Prav did mention, was that Bendigo, there will be additional headcount brought on as part of that project in terms of customer servicing.
Okay, great. Just from a new merchant application perspective, can you talk a little bit about the sort of channel mix you're seeing the merchants coming through from, and also the types of merchants that are skewing towards the larger style sort of merchants or the sort of smaller? How does that sit in compare?
Yeah. Look, Bob, the channels that the applications are coming through are our typical channels. Through our direct, through our online channels, through our ISOs, our independent sales organizations, and through our close partners. There hasn't been any particular change in the mix. As is normally the case, the lion's share of applications coming through tend to be in the SME space, where we obviously still have live conversations going on with larger merchants, which our key account team typically source. No real change in the application mix.
Okay. Just a final one for me. Just on me&u, you sort of mentioned earlier that some of those volumes or low volumes are coming on to just the Tyro platform. I mean, can you provide an estimate of how material that those volumes would be?
Yeah, look, we haven't put any numbers out there yet, Bob, but it's a significant channel. The me&u team has been very successful in deploying their solution, particularly with the advent of COVID. That solution has been particularly attractive in the hospitality space. It will be a meaningful client, if I put it that way, in the terms of our book. It'd be in our top 20.
Perfect. Thanks, guys.
Thank you. Once again, if you wish to ask a question, please press star one. Your next question comes from Brendan Carrig with Macquarie. Please go ahead.
Hi. Can you hear me?
Yeah, Brendan. Robbie here. How are you?
Yeah. Yeah, great, thanks. Just a couple from me. Just in terms of the CapEx of AUD 1 million, do you think this might be a little conservative, just given the terminal issues? Is there potentially a need to maybe refresh a larger proportion of the terminal network? In the absence of the Bendigo transaction, would you have been more proactive in maybe directing more CapEx towards your terminal fleet?
Brendan, the issue we had, this connectivity issue, actually had nothing to do with the hardware. It actually had to do with the source code on the device. There's no issue with needing to apply more terminals. As we have called out in the past, there were, in the fleet, a limited number of very old terminals, which we've been attempting to encourage some of our merchants to cycle off. The thing with those units, and they had ages between seven to 10 years old, we're talking about 1,000 odd units. They were owned by those merchants, so they weren't under our typical rental model. We've been trying over the years to get those retired from the fleet.
They're the ones we actually had to replace as a result of the incident because they were not capable of actually having a new software injection put into them. Otherwise, there's no issue with the hardware the fleet has got out in the field.
That's clear. Next question was just in terms of the estimated financial impacts from the connectivity issue, the AUD 3 million of costs and the AUD 15 million of claims. Is there costs to review claims incorporated in that AUD 3 million and then the AUD 15 million is just more remediation for lost revenues of merchants or something along those lines?
What we've called out there, Brendan, in the note, we've called out the actual cost we've incurred, which is that AUD 3 million line item, which significant portion relates to harvesting in from the field the impacted terminals. The AUD 15 million approximation is put there as a indicator of where we think things may land in terms of claims. They do not include just the processing cost of handling any claims that come in, we're doing that internally with existing resources.
Okay. I might touch on Mix later because we've already asked a few questions, but I might take that offline. My last question is just in terms of the current merchant numbers of 36,720. How many inactive merchants are included in that, given that there was 3,200 or so in the inactive merchant column last half?
The number we called out, Brendan, is our active merchants.
Yes. Sorry, can you provide what the inactive number is? Just given that it is quite important, just given you are talking about merchant growth in active, I guess there is a redirection of, I would assume, some inactive merchants have switched to active during the period.
We don't normally call out the inactives, Brendan. We've given you the actives, and you can compare that active number with the same for PCP. We always have a number of inactive merchants on the books, and that's just normal and that's not unusual. I'd suggest you just focus on the active merchants because they're the ones that are generating revenue.
Okay. I'll leave it there then.
Thank you. Your next question comes from Michael Aspinall with Jefferies. Please go ahead.
Yeah, good morning, Robbie and Prav. Just some from me. Just starting on the financial impact of the connectivity issue. The Jan gross profit number was impacted by waivers on terminal rental. Can you give us just some context of how many of your customers that's over and for how long that'll continue?
We can probably give you the amount that we waived in January. I think we're working through the remediation process as we speak, so probably wouldn't give any guidance other than the total number that was included in the pack. In January, if you look at the total number of merchants impacted, we provided rental relief or rental waivers rather of about AUD 0.8 million. That's included in the AUD 3 million that we have already quoted as the cost of the incident so far.
Okay. That AUD 15 million that you've called out is effectively terminal rental relief and potentially some MSF reduction for some impacted businesses. Is that right?
The AUD 15 million is an indicative number that we've put as a bucket, and it could be a combination of however that comes through. I'm just calling out the actual cost that we incurred in January, where we waived AUD 0.8 million in fee waivers to merchants.
Yeah. Okay. Just that AUD 15 million would include something like terminal rental?
Yeah, Michael, the AUD 15 million will depend on what actions we take in relation to the next wave in terms of remediation. That could be deployed in a number of different ways.
Okay, great. Thanks. You mentioned your reduced remuneration reviews after 18 months. Does that mean there hasn't been any reviews in the last 18 months? With wages 75% of OpEx, what drove the 8% increase?
A couple of things. As Prav mentioned, we have frozen any salary increases. It is correct that none of the team has had an increase for 18 months. The increase has been driven by the annualization, the headcount that we onboarded during the course of the year. If we hire somebody mid-year, you get the full annual impact in the following year. That's where that increase has come from.
Okay, great.
New headcount, pay increases, et cetera. New headcount, that might have come in part in the prior year, you get the full impact in the FY 2021 period.
Yeah. Okay. You showed Tyro Connect. Do you charge for that product, or is it being pitched as kind of another part of your offering to customers?
No charge for that product and no foreseeable charges being deployed for that product. We're very much looking at it and have looked at it as just a value add proposition. It cements people in our ecosystem, and it provides just another reason why as a merchant you'd choose Tyro.
Okay, great. Just one. Prav, in your comments, you mentioned that you're well-placed to adjust to any upcoming structural changes in cost. Can you just provide us with a bit more color on what you might have been referring to there?
Yeah, sure. I think I've spoken about this previously. Our payments business, we manage as a portfolio. In the last six months, there was an example of where costs dropped significantly. We were able to actually benefit from that, given, say, roughly half of our portfolio is on a cost-plus basis, which gets passed through. The other half is on a normalized basis, so it improves the gross profit margin. If it was the converse, we manage the whole portfolio pricing in an aggregate, and we do pricing reviews at least once a year to make sure that the costs are in line with what we're incurring and what we're passing on to our merchants. I think an increase in costs. We would be looking at overall with changes in cost structures and any pricing reviews that we might have to do.
Okay, great. Just while we're on that, can you quantify what the impact to the average interchange and scheme fees were then from that structural cost you mentioned versus debit cards?
Yeah. Probably not in too much detail because the scheme fees are quite confidential. I think on a weighted average basis, our margin actually improved by 4 basis points. A higher amount of that was skewed towards the debit cards. You have to probably do the multiplier effect of the 4 basis points average, together with the mix of the value changing from international to debit cards as well.
Okay, great. Thanks for that, guys. Thanks very much.
Thank you. Your next question comes from Elijah Mayr with CLSA. Please go ahead.
Good morning, guys. Thanks for taking my questions. Firstly, I just wanted to touch on just the performance of the verticals, just specifically on the other vertical I can understand. Could you just maybe just talk to specifically what was driving that, sort of going into the trades and the accommodating side of things and maybe just talking about the prospects of that going forward?
Hi, Elijah. Yeah, look, the other includes quite a mix of industries. It's sort of hard to draw out any particular theme. It does pick up some accommodation venues. It picks up transportation. In there, for example, CabFare, one of our big clients, sits in that area. It's actually hard to draw any particular themes because it is quite a diverse group of merchants.
There's no single sort of area that's larger than the others?
No. Look, the transportation one's significant in there, but it would get muted out with other industries in there, as I sort of said. It's hard to draw any themes.
Yep, understand. Just on the churn, I guess specifically, the churns are going to come from, I guess, merchants going to competitors or sort of going out of business. Have you sort of seen any change in that mix, or that composition of churn, I guess, through the start of this year with the trading update or through the first half 2021?
No, look, definitely not in the start of this half. It's sort of too short to draw any real conclusions. Look, in the six months for the reporting period, it's no real change in the dynamic there. As we've said in the past, the biggest component of our churn rate is businesses going out of business. Unfortunately, it is just the nature of the SME space. There's no losses of any major clients in that mix. It really comes down to the larger portion is businesses going out of business. Then there is always, and has always been the case, that we do on occasion lose some merchants to other competitors.
Great. Thanks for the question.
Thank you. Your next question comes from Gary Duursma, Private Investor. Please go ahead.
Hello, Robbie. Can you hear me?
Gary, we can. Loud and clear.
Good stuff. Okay. I understand that the business now has a direct cost recovery surcharge solution where the actual cost of the card is surcharged directly to the cardholder, which I suspect delivers essentially a zero-cost acquiring solution to the merchant. Could you comment on that? What percentage of the base is using that, and how does the margin look for that part of the portfolio versus other parts of the portfolio?
Yeah. Look, it's absolutely true. We do offer an ability for our merchants to surcharge, and that is a merchant-by-merchant proposition. It's up to the merchant to make the decision whether they want to offer that product. It is a product which, for more and more merchants, they've seen that as something that they wish to do, and we provide a really convenient way for that surcharge to be done in a compliant way, which is important. In terms of the split out as to a portion of merchants surcharging, not surcharging, Gary, it's not something we put out in the public domain. We've obviously got those stats, but it's just not one we put out there.
Can you comment on the profitability of that part of the portfolio, those merchants that do choose to invoke that feature versus those that choose not to?
From our point of view, it really doesn't make any difference. It's just whether they recover that cost or not. It's an attractive feature in merchant acquisitions. Having that product in market is a good feature, and there's others that are pushing that offering quite aggressively in market. Having that feature is important. It works very well from a merchant acquisition point of view. The profitability, there's no differential there.
Thank you.
Thank you. Your next question comes from Andrew Anagnostellis from Umgeni Investments. Please go ahead.
Thanks for taking the question, guys. Look, I just wanted to go back to the connectivity issue. Firstly, just to say congratulations on the disclosures, very timely and comprehensive. My question really goes to your initial point where you said you were very concerned about the issue itself the first time in many years. Isn't the concern here that it sort of seems to have crept up on Tyro? I note 7th of January, the disclosure talked about 15%, in fact, the next week it was 30% impact. Isn't it a concern that the outage seems to have been much more serious and much quicker? Is it something, looking back on it, that should have been attended to quicker?
Were the company's existing procedures and policies in place, and you're comfortable that this was properly handled in accordance with the disaster recovery plans you would have had in place? Thank you.
Yeah. Thanks for the question, Andrew. Now, look, just trying to answer that in an overall way. The disclosures, the first disclosure we made related to the number of terminals which were impacted at that point in time. There were more terminals that lost connectivity over the first series of days. We've reported as events unfolded and reflected what the impact was. As I called out, it was circa 30% of our merchants, of which 19% at the peak were fully impacted and 11% were partially impacted. In terms of the event itself, as we have disclosed in the releases we made in the past, this was something that arose from an issue sitting on the terminal. It was not something that was able to be foreseen.
When the incident happened on the evening of the 5th of January at 10:00 that evening, a major incident event was called. All our emergency response and disaster recovery initiatives kicked in at that point, and I can tell you everything humanly possible was done to mitigate the impact on our merchants. I'm very comfortable that all due process and procedures were implemented and everything that was possible to be done was done. As I called out, though, this is something that has never happened in our history. This has happened with other institutions, though, in the past. What Tyro is doing, which is quite different to anybody else, we are not comfortable sitting here today, and I'm not comfortable sitting here today without a failover solution, which is why we are developing our dongle, which will be issued to every merchant as a failover.
Now, that's something no other institution has done, notwithstanding the fact others have had incidences like this occur. We are taking this. We recognize it could happen. I'm not prepared to sit here and ignore it going forward. I don't think it will ever happen again due to the root cause of this issue. However, I'm not prepared to ask people just to trust us. We will actually have an alternate path for people to transact with us.
Right. Thanks for that.
There are no further questions at this time. I'll now hand back to Mr. Cooke.
Thank you very much. Look, I'd just like to thank everybody for their time. I appreciate attending the call and have a great day.
Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.