Credit Card Processing Company

I: Our client is a credit processing company. They do background processing services for credit cards, debit cards and gift cards. They take profit as a percentage of every transaction. The growth rate of credit card transactions is 3%. Due to slow growth in the credit card market, suggest how to grow the company. 

C: Where is the client operating? What market share we command for all 3 markets?

I: The client is operating in India. Out of the top 20 credit card companies, 10 are our clients which occupy 90% of the current credit card user base. The debit card market is fragmented, and we have a 5% market share. No other player with more than 10% share. In the gift card, 50% growth rate. No major player, we have not entered the market yet. 

C: I would assess all 3 divisions individually. First, in credit cards, I would like to look into organic and inorganic growth opportunities.

I: What could be inorganic growth avenues?

C: Since there are other competitors companies and we are market leaders, we can acquire other companies to expand our company.

I: What would you do in organic?

C: I would like to break it down into a formula: Revenue= %revenue/transaction * transaction/customer * amount/transaction * # of customers. 

C: For % revenue/ transaction, we can increase the commission percentage, but that could lead to a decrease in market share. So I would suggest not doing this. Second, we can increase the amount/transaction. For this, we can look into where the credit card is used. We can focus on big items like televisions, refrigerators etc. We can partner with those companies and provide incentives to customers to use credit cards for payments. Third to increase no. of transactions, we can incorporate systems like loyalty points or reward points. And lastly for increasing # of customers, since we are present mostly in their 1 cities, we can look into expanding into tier 2/ tier 3 cities. 

I: Okay, let's talk about debit cards. What would you do in that segment? 

C: It would be similar as the credit card for inorganic growth, we can acquire a few competitors companies. For organic growth, the formula would be same, just the usage purpose would change. The debit card is usually used for daily usage, so we can collaborate with retail grocery and other shops and would increase our penetration through them. Also we would do cross selling and push to sell debit cards to customer who are buying credit cards. 

I: Alright, we can leave the gift card for now. Let me give you some data and based on that evaluate 2 models. First is our current model per transaction charge and the second model is the SAAS model. We have estimated that if we go via the SAAS model, we can convert 50% of existing clients to that model and capture 50% of companies which are not currently out clients. For SAAS, we would charge $3m as an upfront fee and we would charge a maintenance fee of  $300K annually. So, calculate revenue of 5 years for both models.

C: Since we currently have 10 clients, so we would retain 5 of those clients in SAAS model. Also we would be able to capture 5 more clients from the rest of 10 companies which are not our clients currently. Thus, we would have 10 clients. Per clients, we would charge $3m upfront and $.3m/ year for 5 years which would amount to $4.5m/year. So total revenue would be $45m in 5 years. I would like to know if we are continuing our earlier services for the 5 clients who didn't opt for the SAAS model.

I: No, we are not providing them the services for now. We would close the previous service model completely. For 1st model, we earn $1m/ year from each client.

C: So for first model, we were earning $50m in 5 years in revenues. Since we have a growth rate of 3%, we can take that into account for more accurate calculation.

I: No, you can ignore that for now. Can you calculate if we work on a mix model, what would be our revenues?

C: Sure, if we go by mixed model, we would earn $45m from SAAS model and $25m from current model as there would be 5 clients. So total would be $70m in 5 years. 

I: Okay we can close the case here!