Thank you for standing by, and welcome to the Tyro Payments Limited H1 FY 23 results call. All participants are on a listen-only mode. There'll 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 Fiona Pak-Poy, incoming Chair of Tyro. Please go ahead.
Thank you, Rachel, and good morning, shareholders and our many registered guests. It's wonderful that there's so many who are interested in hearing our positive results. It's a great pleasure that I join you today as the incoming Chair of Tyro. After close to four years as a non-executive director and two years as Chair of the People Committee, I am really excited to chair Tyro going forward as we rejuvenate the business on our path to becoming the leading specialist payments and banking provider to Australian businesses, accelerating our delivery of innovation to our merchants. I'm joined today by Jon Davey, our CEO, and Prav Pala, our CFO.
We released our results for the first half of the 2023 financial year this morning. The results were very pleasing, showing strong performance in all key metrics, including transaction growth value, growth in merchant numbers, growth in lending originations, and improved operational leverage. Most importantly, this translates to our first statutory net profit and positive free cash flow for a reporting period since we listed on the ASX. Jon and Prav will provide you with more details on the results and our strategy going forward. While Jon and the entire Tyro team have had a single-minded focus deliver on our strategy, you would be aware that we've been dealing with interest from third parties to acquire Tyro ongoing since the start of September last year.
I would like to provide a brief update on the current process and the board's commitment to act in the interest of all shareholders. Following the drop in share price in the 2022 financial year, the board was acutely aware that the price in which Tyro shares were trading did not reflect the fundamental value of the business. Consequently, the board undertook a significant amount of work to assess the intrinsic value of the business, taking into account our attractive growth prospects as Tyro continues to take share in the Australian payments and business banking markets. Our continued improvement in operating leverage and that Tyro is well-funded and capitalized to support our growth ambitions.
The results we've achieved in the first half of the 2023 financial year and our upgraded FY 2023 guidance are a clear indication that Tyro is delivering on its strategy to be profitable and operate on a positive free cash flow basis, whilst delivering a significantly better customer experience whilst also further reducing our cost base. The share price levels at which Tyro was trading clearly made us a takeover target for strategic buyers and private equity, who see the long-term value of the Tyro Payments and banking proposition. On the 7th of September last year, Tyro received a non-binding indicative offer from Potentia to acquire Tyro at AUD 1.27 per share. This was followed by interest from other parties, including Westpac, and a further offer received from Potentia on the 11th of December 2022 at AUD 1.60 per share.
Once the board carefully considered all the offers and interest from third parties with the assistance from our legal and financial advisors, the board determined that the offers presented by the third parties significantly undervalued Tyro and as such, were not in the best interest of shareholders as a whole. I would like to take this opportunity to assure our shareholders that Tyro remains open to engaging with any credible change of control proposal it receives that represents compelling value to Tyro shareholders as a whole. We continue to engage with Potentia, who are currently undertaking forward with due diligence offers to enable them to develop a significantly improved proposal and confirm the necessary funding commitments attached to any possible future offer. Tyro notes that there is no certainty that a further non-binding indicative offer or a binding offer or indeed a transaction of any kind will eventuate.
We will engage with all shareholders and keep you updated as discussions with Potentia progress. I would like to again reiterate that the board will only consider offers that represent compelling value for you, our shareholders. With that, I would like to hand over to Jon and Prav to take you through the first half of FY 2023 results.
Thank you, Fiona , good morning to everyone. This is the first period since COVID-19 first impacted our communities. The business for customers that we support has returned to more normal conditions. It was, however, also a half characterized by rising inflation and rising interest rates. It is in this environment that Tyro delivered strong first half results, driven by growth in all our industry verticals and the continued adoption by customers of payment and banking products. The investor presentation I will refer to today was released earlier this morning and is available on the ASX platform and on our Tyro Investor Centre. In this presentation, I will talk to you about our business and our ongoing focus on growth, profitability, delivering innovation, the opportunity we have to maintain momentum, our immediate strategic priorities, and key financial and operating highlights for the half.
Prav will then take us through our financial performance before I provide a trading update and we answer questions. I will now direct you to slide four of the investor presentation. The last six months have been significant to Tyro in four areas: growth, profitability, delivering innovation, and through the renewal of leadership. We've had strong growth across several parts of our business, including the value of payments processed, the number of customers that we've added, and in the value of loans that have been originated. Transaction value growth has been significant, up 37% from the corresponding period, driven by a 9% increase in customer numbers, a reopened economy, and the impacts of inflation. We've also seen an increase of 40% in gross profit and 101% increase in the value of loans originated.
Our customer growth has been accelerated by distribution of our products through our exclusive partnership with Telstra. Tyro terminals and the Tyro Go card reader are available in more than 350 Telstra stores. During the first half, 13% of all applications were initiated by Telstra. We can also confirm that as of this week, Tyro Go is available in over 400 Australia Post stores across the country. We are excited to partner with Telstra and Australia Post, two of Australia's most iconic brands, and we firmly believe both will make a significant contribution to Tyro's continued growth. We've also launched a digital sales and onboarding process via tyro.com and through our partner channels. This will remove some of the friction associated with our current sales process and deliver a significantly better customer experience.
We've had a strong focus on operating expense management, which, together with our growth, has helped drive Tyro's profitability. In early October, I announced the implementation of a cost reduction program to deliver a 10% reduction in the number of Tyro team members and AUD 11 million in annualized operating cost savings. Largely completed by early November, this program is on track to meet targets. Coupled with strong transaction value and lending growth, I am pleased today to confirm a statutory net profit of AUD 1.1 million and AUD 600,000 of free cash flow for the half. This is Tyro's first reporting period profit as a publicly listed company. When I started as CEO in October, we rationalized our project investments and prioritized a small number of critical initiatives. I'm pleased to confirm we've made good progress on these.
During the half, our Tyro Go card reader went live. Our next-generation Android platform terminal was launched and our automated customer onboarding experience was implemented. While there is work to do to scale these offerings, strong progress has been made, and we now have platforms we can build on. As announced two weeks ago, we've entered an in-principle settlement of the class action filed in the Federal Court of Australia relating to the terminal connectivity issue that occurred in January 2021. As noted in our ASX release, closure is subject to court approval, but payment of the settlement amount is not expected to involve any additional cost or expense to Tyro. Finally, we've seen the renewal of leadership in both board and our management team.
On our board, Fiona has been elected as our new Chair to replace David Thodey, and Claire Hatton and Shefali Roy joined our board during 2022. Our management team has also been renewed. I was appointed CEO in mid-September, taking over from Robbie Cooke on the 3rd of October. During the past six months, we've also made changes to the leadership of our technology, products, and health teams. Turning now to slide five. Our vision is to be Australia's leading financial services, technology and innovation company. We have a history of backing Australian businesses and reimagining payments and banking. Our value proposition is based on our strength as Australia's leading specialized payments provider and our differentiated industry-based customer solutions. We have direct integration to more than 330 point-of-sale systems that deliver customers a simple payment and reconciliation solution.
Our banking license is unique among local and international specialized payments companies operating in the Australian market. It allows us to deliver faster settlement for customers, offer solutions that not only support being paid, but also helping customers pay their suppliers, and it allows us to provide simple working cash flow solutions. We also provide Australian-based 24 by seven customer support. Turning to page six. The opportunity for Tyro is significant, both in our traditional in-store card payment business, but also by providing banking products and services to the over 66,000 customers that support Tyro today. With more than AUD 740 billion of in-store payments processed annually, Tyro has today captured less than 6% of the total market.
In an industry that has grown at 4.8% annually for the past five years, we've outpaced the market by a factor of almost six to deliver annual growth of more than 27%. Our 20% share in key verticals and our continued growth in hospitality, retail, and health highlight not only the opportunity that exists when industry-leading customer features are provided, but the potential we see in the broader market. On page seven now. We also see significant opportunities to leverage our banking license to deepen the relationship our customers have with us through the provision of banking products and services. We believe that Tyro's lending solution remains the leading cash flow management solution in-market. Our data highlights that customers that have a loan with us are 2.5 times more satisfied and significantly less likely to churn.
Today, less than 10% of our customers have an active Tyro bank account and only 6% have taken a loan. In the first half, we originated AUD 72.7 million of lending, of which 77% was from repeat customers. This highlights that customers that have access to lending and a simple product that helps them manage cash flow love us. The opportunity is to make it available to more of our customers. We have 25,000 inactive bank accounts. That is customers who have opened a bank account but not yet activated it. We are working to drive activation of these accounts. In turn, this will drive deposit growth and facilitate lending eligibility.
With average annualized interest income on loans of 24.4% and ability to fund lending at a stable and attractive cost of funding and low penetration of banking amongst our established customer base, the opportunity is significant. Turning now to page eight and our immediate strategic priorities. We have three immediate strategic priorities that guide our decision-making, our project prioritization, and our investments. Payment and banking product innovation, revenue growth and margin optimization, and operating efficiency and cost reduction. Referring firstly to payment and banking product innovation. Developing the products, features, and payment and banking solutions that our customers want is core to our planning. Our immediate focus on implementation of new payments acceptance form factors with Tyro Go, our card reader solution, and Tyro Pro, our new Android-based terminal, are progressing well. And though early days, we are pleased with the preliminary results.
In health, we've prioritized the integration of our digital platform with new third-party funding sources for private health and medical specialist claims. We will shortly launch new web banking capabilities that will open new opportunities to drive growth in our banking business. Referring to revenue and margin optimization. Optimizing revenue generation while carefully managing margin is critical to the realization of financial outcomes. During the first half, we pursued initiatives that drive value for Tyro and for our customers. We are working on products and product features that include a zero-cost acquiring solution and on enhancements to our Tap & Save least-cost routing feature. We are also in the process of finalizing strategies to undertake a rolling program of customer profitability analysis and repricing. Our banking license will drive an increase in average revenue per customer, capturing deposits, and funding a growing lending portfolio. Finally, referring to operating efficiency.
We will continue to manage our operating costs with discipline and an owner's mindset. While the October cost reduction program has been completed, changes to the operating model plan for implementation in the coming months will provide greater clarity of accountabilities and further streamline operations. We have also prioritized the ongoing digitization of customer acquisition, onboarding, and customer service. We are implementing our digital-first strategies to deliver a leading customer experience and drive cost efficiencies. Automated customer onboarding is the first of these initiatives that will be followed with a focus on digital self-service. Turning now to H1 performance on page nine. The first half of FY23 has been a strong one for Tyro. We are pleased to report a statutory AUD 1.1 million profit and to have delivered AUD 600,000 of positive free cash flow.
As I noted earlier, this is the first profitable result Tyro has delivered as a publicly listed company. Our focus on growth, profitability, delivery, and innovation is gaining momentum. We demonstrated strong performance against most operating and financial metrics. Compared to the corresponding period, our key growth metrics were all up. Transaction value was up 37%. Gross profit was up 40%. EBITDA increased from AUD 2.8 million-AUD 19.5 million. We increased our customer count by 9% and the number of activated bank accounts and loan originations increased by 10% and 101%, respectively. Our focus on profitability is highlighted by our statutory profit results, a positive free cash flow, and operating leverage that has decreased from 9 to 95.9% to 79.6% compared to the corresponding period.
We are pleased that the 2023 financial year is off to a strong start, and that we are well-positioned to maintain momentum into the second half. Turning now to page 10, our payments business overview. Our transaction value of AUD 21.7 billion was 37% higher than the prior period and resulted in a five years annual growth rate of 27%. The half did benefit from external factors, including the absence of COVID-19 lockdowns and inflation. We saw a growth of more than 60% in our hospitality vertical and 32% in our health vertical. Hospitality remains our largest industry vertical with 35% of customers, now followed by health at 26% and retail at 22%.
We also saw international card transaction value increase to 2.3%. We generated 8,473 new customer applications, an average of 1,400 per month and a 15% increase in the half. The core Tyro customer base grew by 16%. Our Bendigo customer base increased. The number excludes approximately 1,000 customers who were in transit at reporting date and were neither recorded on Bendigo or Tyro systems. Transaction value remains in line with expectations. Customer churn was 11.7%, up from 10.1% in the corresponding period. Analysis highlights that 50% of this was caused by businesses closing their doors. Transaction value churn of 8.9% is slightly down on the corresponding periods and well within acceptable levels. I refer to page 11 and an overview of our banking business.
As I've highlighted, our banking business, particularly lending, has gained momentum during the first half. Total originations of AUD 72.7 million were 101% up on the prior period. We now average AUD 3 million in lending per week. Our net interest income of AUD 5.2 million for the half was up from AUD 1.8 million. Lending losses of 1.2% of origination, though a watch point, indicate that these continue to be well managed. We believe that our lending product that sees loans repaid with a percentage of daily takings and an average loan tenure of a relatively short six months, provides a good level of risk mitigation in the event of further economic downturn. While our number of activated transaction and deposit accounts has increased by 5%, deposit balances have decreased.
Tyro has two deposit products, a transaction account and term deposit accounts. Outstanding balances in the transaction accounts at the half were AUD 88.1 million. Our term deposit increased to AUD 6.9 million from AUD 5.8 million. We believe our deposit products provide a compelling proposition to customers, including seven-day settlement not available to customers using non-Tyro accounts. However, enhancements are required to add further value, and we must improve our marketing and customer onboarding. Much of this activity will complete in the second half. While needing to be addressed, our deposit to loan book ratio of 2.1 times provides headroom for future loan book growth. I will now hand over to Praveen, who will take us through the detailed financial performance.
Thank you, Jon. If you could all please turn to slide 13. The financials for the first half were strong, and we delivered what we committed to, which is strong growth and improving EBITDA margin, assisted by our cost reduction program announced in early October, and positive free cash flow for the half year. Importantly, this was achieved earlier than forecast. The best measure of our growth is gross profit, which performed strongly as we continually balance our payments portfolio for potential volatility in card mix and margins. For the half, we posted a gross profit of AUD 95.2 million, which represented a solid growth of 40% compared to the first half of FY 2022.
Part of this growth is attributed to the COVID impact in the comparative half, with the vast majority of our merchants managing through this period and now trading strongly, especially in our hospitality vertical. I will talk about performance by vertical later in this presentation. Growth in gross profit resulted in a strong positive EBITDA for the half year. At $19.5 million, EBITDA was more than seven times greater than the prior comparative period. For the first time, the EBITDA margin exceeded 20%, moving closer to our global peers as we begin to demonstrate the long-term profitability potential of the business. The cost reduction program announced in October 2022 also assisted in driving up the improved EBITDA margin, although the realization of the benefits of the program will be more meaningful in the second half of the financial year.
Our focus on free cash flow meant that Tyro finished the half year in positive territory and posted its first statutory profit since listing. While we had guided to exit the end of FY 2023 positive free cash flow, merchant trading surpassed our internal forecast, partially driven by the impact of inflation on customer trading volumes. We consequently upgraded our guidance for the full year in January. As Jon will talk about shortly, we are confident of achieving our revised guidance. If you could please turn to slide 14 to review our first half in more detail. Our strong growth was underpinned by transaction value growth of 37% versus the prior comparative period. The growth was driven by a number of factors that favorably impacted our business. Firstly, the comparative half was significantly impacted by COVID, with both New South Wales and Victoria being in extended lockdowns.
Under normal conditions, these states represent around 60% of our total transaction value. The six months to December 2022 was the first half in the last three years, which was free from lockdowns and border closures. Merchant trading grew strongly, and merchant churn of 11.7% per annum was better than our internal forecast. We saw inflation drive up our average transaction basket size for our customers. For the six months to December 2022, the average basket size per transaction was AUD 44 compared to AUD 42 for the six months to December 2021, an increase of AUD 0.04. Our hypothesis is that some of this increase, especially for products with inelastic demand, will now be embedded into our future portfolio growth. However, this is yet to be tested.
For the first half, while interest rates have risen, we have not yet seen a significant decrease in discretionary spend. We have, however, exercised appropriate caution in guiding for the transaction value growth for the second half of the year. These factors resulted in us processing a record AUD 21.7 billion for the half. Of this, the Tyro core book represented AUD 19 billion, which is a growth rate of 42%. At a five-year CAGR of 27.6%, we are outpacing overall market growth by six times. In analyzing this performance, our hospitality vertical continued to be our strongest performer. At AUD 9.3 billion, it comprised 49% of the trans-core transaction value and grew by an impressive 60% for the comparative half.
The retail vertical processed AUD 5.5 billion, up 24% from the comparative half, while the health vertical comprised AUD 2.5 billion, up 32% from the comparative half. The remaining AUD 1.6 billion was outside of our core three verticals, which also grew strongly at 35%. The Bendigo book contributed a further AUD 2.8 billion for the half year. Further adding to our gross profit performance, although from a smaller base, was our banking business. Our loan originations more than doubled for the half year with close to AUD 73 million in lending. With only 6% of our merchants currently using this unique and innovative cash flow management product, a large opportunity remains untapped.
We expect the banking business to meaningfully contribute to our gross profit into the future, allowing our strong growth momentum to continue. Translating the above drivers to the income statement, starting with the payments business, growth in both revenue and direct expenses exceeded transaction value growth. Revenue grew by AUD 63.4 million, or 43.5%, driven by Merchant Service Fee increases in the period and a shift in card mix. As expected, there were increases in more expensive international and premium card categories as trading conditions returned to normal. Offsetting the AUD 63.4 million increase in revenue was an increase of AUD 40.1 million in direct expenses. The net increase in gross profit contributed by payments was therefore AUD 23.3 million, which was an increase of 36% to the prior comparative period.
This correlates to the 37% growth in transaction value. I will talk to the margin trends in more detail shortly, covering both the impact of pricing and changes in card mix. Moving on to our growing banking business. We originated AUD 72.7 million in lending in the first half of FY23 compared to AUD 36.2 million in the corresponding period. Of the AUD 72.7 million, AUD 56.1 million in loans were to repeat borrowers, demonstrating the strong value proposition of this product. We recognized interest income of AUD 5.2 million from lending, but offsetting this income was a negative fair valuation of AUD 0.8 million, which includes a conservative estimate from management on the potential impact of a downturn in the economy in the second half.
As a result, banking contributed AUD 4.2 million in gross profit compared to AUD 2.4 million in the comparative half. While we remain cautious of the macroeconomic environment in the short term, we aim to grow the banking business in line with our strategy and within our risk appetite. For the first half of this year, we were targeting to originate AUD 3 million per week, which we achieved. Adding value to the banking business is our ability to fund loans and working capital via stable and attractively priced deposits, which we will grow as the need arises. In aggregate, therefore, we report a gross profit of AUD 95.2 million, up from AUD 68.1 million in the corresponding period, a growth of 40% or AUD 27.1 million.
Operating expenses of AUD 75.7 million was up AUD 10.4 million or 16% to the comparative half, but a 4% increase to the second half of FY22. You will find details of these in the appendix. Walking through the large variances, a AUD 4.6 million increase in employee and contractor costs, representing AUD 2.6 million increase in permanent salaries and AUD 2 million for short-term contractors. AUD 2 million were in terminal repairs and logistics costs. We rolled out 5,200 terminals to Bendigo merchants through the year and refurbished terminals to mitigate any terminal supply issues. AUD 1.4 million was in license and hosting costs, including cyber security.
As a result, we reported an EBITDA of $19.5 million, being a combination of the growth in both the payment and banking business and a disciplined approach to expenses. As payments comprise more than 90% of our gross profit, it will be useful to analyze the margin trends, which I will do so on the next slide. Please turn to slide 15. This slide analyzes the performance of the Tyro core book. The MSF or Merchant Service Fee, which is the topmost line you see on the graph, was up four basis points compared to the second half of FY 2022 and about six basis points compared to the first half. MSF is largely driven by pricing and card mix changes.
Of the seven basis points increase, around five basis points relates to the price increases we implemented in March and September last year, while the remainder is due to more expensive carding processed in the half year and their fees being passed on to merchants on certain pricing plans. More specifically, we processed 31% in premium cards, up from 28% in the comparative half. While international transactions increased to 2.3%, up from 0.6% on the comparative half. Net merchant acquiring fees, which is the light blue line in the graph, is our indicator of transaction margin. This was up 1.2 basis points compared to the first half of FY 2022. The last two price rises have served to offset any cost increases and the dilutionary impact of the more expensive cards.
We improved our net margin while at the same time grew our total transaction value by 37%. Gross profit, which is the light green line, remained steady at 41.3 basis points. Gross profit includes income other than net merchant acquiring fees, notably terminal rental income, which is a fixed monthly fee not related to transaction value. Turning now to slide 18. We have consistently spoken about the business's long-term ability to achieve improved operating leverage and ultimately generate free cash flow. From the chart on the left, you can see the operating leverage improving consistently year-over-year from 116% in FY 2017 down to 88% in FY 2021. In FY 2022, however, there was an increase as we continued to invest in the business while the economy went into extended lockdown.
With a combination of strong growth and the focus on cost management in the first half of FY 2023, we saw the operating leverage drop to below 80%, a significant improvement of 13 percentage points from FY 2022. The impact of the cost reduction program is best seen by comparing cards with the drop in expenses only 4% compared to the second half of FY 2022. Only two months of the cost reduction program were realized in the reporting period, with the rest to come through in the second half. For your modeling purposes, I would call out that our salary review cycle is the first of January each year. You should factor in the increases from salary reviews and the benefit of the cost reduction program in your forecast.
We are guiding towards an operating leverage for the full year of 79%, allowing us to balance profitability with appropriate investment into the business as required. Turning to the next slide. We are committed to delivering positive free cash flow, which we did earlier than forecast. For the first half, starting with our normalized EBITDA of AUD 19.5 million, AUD 17 million was spent on capital expenditure, which included AUD 10.2 million on terminals and approximately AUD 6.2 million on project capitalization. These were largely for the three main projects we have spoken about delivering, being the Android-based Tyro Pro, Tyro Go Reader, and automated onboarding. We continue to guide the full-year CapEx to circa AUD 35 million.
Redundancy payments of AUD 1.2 million and other cash payments of an aggregate amount of AUD 0.5 million were incurred in the half. We expect the full-year free cash flow to be similar. In addition to the guidance we have provided, additional cash outflows that should be modeled in for the second half, which are not in the first, are office rentals, change of control costs, and Bendigo warranty payments. As part of the incentives for our offices at 55 Market Street, we had negotiated a rent-free period for year one. As such, the first half has no rent payments. However, an outflow of AUD 2 million should be factored in for the second half of the year. Secondly, AUD 1.9 million of change of control costs have been accrued for in the first half but remain unpaid.
Finally, any shortfall in the annual Bendigo commission payment, which is currently estimated at circa $1 million, will be paid in the second half. Moving on to slide 18, which is more for information. We will clearly show the reconciliation between our first half statutory results to underlying normalized results. The largest adjustment to statutory results is the removal of the gross profit share from our Bendigo line. The payment to Bendigo is essentially a commission expense, and we therefore reflect the payment by reducing gross profit. Switching costs incurred from merchants who are yet to transition to Tyro Switch are temporary and will disappear in the next financial year. Our investment in me&u fell below 5% this half. We have historically accounted for this investment using the equity accounting method.
Given the revised shareholding, we now carry the asset at fair value and therefore recognize a gain of circa AUD 4 million in our accounts. This was a one-off non-cash adjustment, which we have removed from our reported revenue. Finally, AUD 3.1 million in expenses were removed, being the cost incurred in change of control methods as well as redundancy payments. That concludes the financial section of our presentation. Recapping the three key messages. Firstly, continued strong growth for the year. Secondly, an improving EBITDA margin, which for the first time was over 20%. Finally, positive free cash flow achieved earlier than forecast. We look forward to delivering the second half of the year as guided to the market. Thank you for your attention. I will now pass back to Jon for a trading update.
Thank you, Prav. Moving to slide 19. We've seen a strong start to the second half. Transaction value for the period of January 1 until last Friday, February 24, was AUD 6.3 billion, 23% higher than the corresponding period. Loan originations of AUD 22.5 million or 30% up, slightly lower than our AUD 3 million per week average from the first half, in line with forecasts for the January holiday period. In the end of January, group pro-group profit was AUD 15.4 million, up 39%. EBITDA was AUD 3.6 million. Our operating leverage was 76.6%. I would highlight that the months of December and in particular January typically have lower expenses as we benefit from annual leave provisioning releases. As a result, operating leverage was lower in the short term.
Finally, if you could turn to slide 20. On January 16, we upgraded our earnings guidance for the 2023 financial year. I am pleased to reaffirm that we are on track to deliver all metrics within the guided range. To conclude, and before we turn to questions, over the past six months, we've had a strong focus on growth, cost management, delivery, and innovation. This has led to a very good first half results, including record EBITDA, profitability, and achieving positive free cash flow for the first time. We have delivered important initiatives which have delivered benefits to our customers, our competitiveness, and to our current and future growth. We believe that Tyro has a long runway, both in our traditional payment business, but also by leveraging our banking license, which is unique among our specialized payment competitors.
We remain as ambitious today as we were when we were founded 20 years ago. We believe that the market opportunity is as compelling as ever. This financial year is off to a strong start. We are well positioned to maintain this momentum into the second half. I now invite any questions as directed by our call host.
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 speakerphone, please pick up the handset to ask your question. Your first question comes from Timothy Piper with UBS. Please go ahead.
Morning, Jon, Praveen. Thanks for taking the questions. Good to see that trading net margin's flat half-on-half. Maybe just a comment around what you're thinking in terms of pricing reviews over the next 6-12 months. Just noting that obviously mix with debit card transactions dropping off and international mix moving higher, and it sort of accelerated through the half. Also looks like it's changed sort of up 30 basis points or so half-on-half. What's your expectation in those trends and when do you plan to put through further pricing?
I might, I might ask Praveen to take that one.
Hey, Tim. Good morning. In terms of pricing changes, we have done two pricing changes over the last 12 months, being in March and September. One of them was a delayed one as the merchants were in COVID and we delayed the pricing change. We're doing a small pricing change as it is right now. Other than that, we probably don't expect any further pricing changes for the till the end of the financial year. I think we are back into our cadence of regular price reviews, so the next one will be scheduled for about six months. I think we've got a couple of other initiatives where Jon, as Jon spoke about, so we've got zero plus acquiring, which we're expecting to generate greater margin in terms of new businesses coming on board.
We also are looking to do a continual portfolio performance review much regularly than every six months on smaller scale each month. Again, from a margin management perspective, we are looking to maintain or improve our margin. The increase in interchange and PIN costs are purely driven by the changing card mix. These national cards competitive with price comparative went up from 0.6% to 2.3%. Commercial and premium cards, which are both not as expensive but more expensive than the average MSF in direct costs, went up from 28% to 31%. We ended the year with the debit cards about 67% compared to 60% last year.
Okay. Got it. Is that small pricing increase for Inter at the moment, would that keep your net MAF margin sort of plunged through this half compared to the first half?
It would. I would probably not read too much into that, though, because it's on a much smaller scale. It's on merchants that have not been priced last time, which was a larger cohort. I think what we factored into our guidance, if you look at our second half, is pretty much flat or slightly lower margin, as international improves a little bit. That guidance of roughly AUD 187-AUD 191 remains valid.
Okay. It sounds like you're going to now be a little bit more active on an ongoing basis in terms of reviewing pricing across merchants rather than sort of your annualized price increases as well. Is that a fair statement?
Exactly right. Yeah.
Got it. Thanks. Sorry, can you just quickly run through those second half cash flow items that you outlined in the press? I just missed a couple of those.
The first one is rental expense. We had negotiated a rent-free period for year one for our new premises. We expect approximately AUD 2 million to come through in the second half, which would be from January to June. We have accrued about AUD 1.9 million being legal fees and consulting costs in the first half, which are yet to be paid, so that should come through in the second half. Finally, as we've noted before, we've got guaranteed payments to Bendigo for the first four years. Any shortfall in that guaranteed amount actually would need to be paid. It doesn't hit the PNL, though. It actually comes from our cash flow. We're expecting that shortfall to be about AUD 1 million to be paid around about June this year.
That's a total of about AUD 5 million.
Thanks. Thanks for that. Mo just a question on the, on the merchant churn level. It's picked up a note that, you know, payments churn sort of sluggish. You said it's sort of ahead of where you're expecting that to come in. I mean, was there an expectation that the macro was gonna impact in terms of churn, and what are you sort of expecting through the second half?
I mean, I think, Tim, that this is something that we would obviously watch as you note the merchant churn has increased. We actually see this as being perhaps more related to a number of what's commonly called the zombie businesses that have sort of closed in that post-COVID-19 period. When we've actually looked at our analysis, as I indicated in my speech, about 50% of the volume seems to be coming from businesses that are closing. It is something that we are watching. As you also noted, when we look at transaction value churn, that's slightly down on the half. We're reasonably comfortable with where that's at.
Okay, thanks. Just sorry, another one on the financials, the scheme receivables uptick. I know there's usual seasonality in that. Seasonality looks a little bit larger. Was there some particular timing issues there?
Yeah. Our net scheme receivables are always high on weekends because, effectively we'll pre-fund merchants, and we are yet to receive the monies from the schemes, which will then happen on the Monday or the Tuesday. December thirty-first happened to be on a Saturday. Which also, by the way, compresses our capital ratio temporarily, which was at 33%. Still very strong, but at 33% for that month.
I understand. Got it. Sorry, if I could just squeeze one more in, just on the Bendigo merchant count. I know that's been sort of coming down a bit. You mentioned there's about 1,000 merchants that are sort of in transition there. I mean, do you expect all 1,000 of those to remain as merchants, or should we knock a few out of that number?
No, look, I think that there's really a timing issue here, Tim, where as we are transitioning customers from the Bendigo switch onto the Tyro Switch, we've just got a short period there where they're, where they're not recorded there on either system. We would expect those merchants to migrate. When we look at the transaction value that's coming through the Bendigo relationship, it's in line with our forecasts and expectations. I would expect those 1,000 to come across.
Great. Thanks. I'll leave it there. Thanks for taking the questions.
The next question comes from Brendan Carrig with Macquarie. Please go ahead. Brendan, your line is live and to the call.
Rachel, can we, move on to the next question, please?
The next question comes from Elias Ayoub with CVC. Please go ahead.
Good morning, guys. Just a couple from me. Maybe if we could go into the trading update in a bit more detail. Are you able to split the transaction value growth between January and February? I'm just conscious that January 2022 would have still had a bit of a hangover of mandatory isolation within that period. Just was wondering if you could give a split maybe between the January growth and the February growth?
Look, we'll probably have to come back to you on that one. We're not really able to provide any more detail than is included here. I mean, I think the-- on a prior period, if we go back to January last year, while there were not lockdowns in place, I think that there was in many cases sort of stop-and-go lockdowns that we saw. That perhaps explains some of the pretty significant increase. Any sort of further detail, I think we'd need to come back to you.
I might just add that the media release, we've got actually breaks it down by month. You can take January and deduct from the cumulative you can arrive at February.
No problem. I'll have a look into that in more detail. Thank you. Are you able to make some comments on the merchant growth number for the first two months into second half 2023?
We don't normally comment on merchants for the month of January, the reason being, we report active merchants, which by definition is any merchant that has transacted at least once during the month. A large number of our merchants actually are not active in the month of January from a seasonal perspective. While we monitor it internally, we effectively report merchants on from February onwards, which happens to be today. Unfortunately, we're not able to add any more color to that yet.
No problem. Maybe just one final one, maybe in a more general sense. I mean, over the last sort of 12 months, there's been some changes from big four banks in terms of terminals offered and pricing. Has there been any change, I guess, on who you're taking share from across the big banks or from the international competitors? Has there been a shift in where you're winning merchants or is that largely unchanged?
I would say it's largely unchanged. We do continue to take share from the major banks. We haven't seen any noticeable changes over the last 12 months in that.
Are there any banks that you can sort of call out, I guess, that you're sort of taking more share from or ones that are performing better than others?
No, we're not able to provide any of that kind of color.
No problem. Thanks for the questions.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Jon Campbell with Jefferies. Please go ahead.
Hi, guys. Thanks for the opportunity. Just one question from me around the lending book. The loss rate versus originations obviously went up, sort of significantly on PCP. It's obviously a very small absolute figure. You know, given the consumer environment sort of and the macro environment we seem to be heading into, I mean, how are you feeling about that sort of loss rate to originations of 1.2% if around that level, as a sort of a go-forward assumption?
Look, Jon, I think we're feeling pretty comfortable about it at the moment. Yes, I acknowledge that on a comparative period that it is well up, but it's certainly well within our risk tolerance level. While it's something that we want to be able to or that we are actively tracking and managing, there's no alarm bells ringing for us at the moment. We're pretty comfortable with where we stand at 1.2% of originations.
I might just add to that as well. While we are headed to the into a complex environment, the risk we don't see as the same as a normal unsecure lending product as well. With the nature of it, we take an up-front fee and the balance actually reduces on a daily basis with even the credit risk on a daily basis as well, and the loans are fairly short-term, mostly repayments in six months.
Are there any sort of learnings at all from the past six months in terms of managing, bad and doubtful debts going forward? Do you feel your processes are pretty much, you know, as you want them to be?
You know, I know, again, I think it's something that we've watched continually, and we're looking at ways we can improve, but there's nothing that we've learned over the last six months which has had any significant impact on the way that we're managing the bad and doubtful. Yeah, we're pretty comfortable with where we're at.
Okay. Thanks, guys.
Thank you. There are no further questions at this time. I'll now hand back to Jon for closing remarks.
Okay. Thank you, everyone. Thank you for joining today. We'll call that to an end then.