The phenomena of companies hiving off or selling out allied infrastructure to focus on their core business is gaining traction. What started with telecom towers is now moving across sectors including finance.
ICICI Bank announced early this month that it is hiving off its credit card point-of-sale (POS) terminals into a joint venture with US-based payments solutions provider First Data Corp (FDC).
The deal involved FDC paying $80 million (Rs 368 crore) to get 81% of the business (which will be called ICICI Merchant Services) with assets of 1.5 lakh POS terminals.
Given that the actual cost of POS terminals that connect customers to the bank ranges between Rs 6,000 to Rs 10,000 for basic terminals (mostly in use in India), FDC appears to have paid a premium of almost 200% over the cost price (not accounting for depreciation in the value of the terminals).
Now, POS owning banks typically get a margin of around 0.4-0.5% of any transaction. So, if there is a transaction worth Rs 100, the POS owner will get around 40-50 paise.
To recover the Rs 250 crore (over and above the cost of the terminals) extra paid by FDC for the deal, the business would need to earn Rs 312.5 crore (as FDC will get around four fifths of the total earnings of the JV).
So the JV needs to see through transaction worth Rs 62,500 crore to allow FDC (potentially) to recover its cost of purchase. Now since the overall value of credit card purchases in the country is pegged at around Rs 80,000 crore and ICICI Bank’s POS terminals account for a little less than one third of all such terminals in the country, the JV can potentially see through transactions worth Rs 25,000 crore.
Assuming everything is constant (such as discounting the cost of replacement of damaged or inoperational POS besides other operations cost of maintaining the terminals and same level of POS terminals and expenditure level), it would take over two years for FDC to recover its money, sooner if the JV expands aggressively and domestic expenditure surges.
But, the move is a smart one as after the two years that would be required for a breakeven, the business will be running pure profits for FDC. This could actually lead to other banks hiving off their own POS to other investors.