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How FDC Will Gain From ICICI Bank's PoS Deal

04 January, 2010

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.

 


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6 Comments
Sidharth . 6 years ago

This doesnt seem to take into account any operating costs! Even if one assumes a net profit margin of 50% on revenues, the break-even is 4 years and not 2 years!

Pallavi . 6 years ago

Siddharth, I guess even 50% net margin would be an underestimate in this case.. but you are right it would be more than two years.. the idea was not to generate the exact beakeven point(thats better left to I-bankers involved in the deal).. It was just to look at the deal economics assuming a lot of things..

Jitendra . 6 years ago

I am not sure how many Indian banks are making 50% net margin in this business. Moreover, retention of 40 to 50 bps is a wrong assumption to start with.

Industry data suggest that POS acquirers in India typically have 20-25 bps retention and is on decreasing trend due to fierce competition

MNV . 6 years ago

The financial analysis is important to understand whether financially the deal is a ‘smart move’ for ICICI or FDC. Just from that perspective Sidharth’s comments about operating costs [which are fairly critical if consider people costs. terminal servicing costs, merchant servicing costs, fraud & risk costs] are relevant. The ofcourse you have to consider transaction funding costs..

Given all this, the deal may well be a 4-5 year breakeven deal. But to the extent that it gets FDC a foothold in the Indian market, maybe the cost is worth it.

Pallavai -it would have been interesting to have seen some research on whether financially this a good deal for ICICI or not!

Sidharth . 6 years ago

Sure. But it is imperative to take this into consideration because 2 years versus 4 is not really getting exact but still at a broad level and could well be the difference between a deal versus no deal and it being profitable versus not.

Jitendra . 6 years ago

It is important to understand why Banks go for such businesses?

the reason may be current accounts sourced along with Merchant and another may be interchange fees on card issued by that bank.

This kind of deal definately makes sense for India bank for reasons mentioned below:

a)Bank is able to leverage on technology deployed by technology expert

b) Bank is able to focus on core businesses of selling liability products i.e current accounts

c) As far as interchange fees is concerned, banks would anyway be able to get it, since companies like FDC would like to dominate the market as they have done globally, so more the card acceptance, more the interchange fees for the bank.

How FDC Will Gain From ICICI Bank's PoS Deal

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