With a thrust on financial inclusion, banks are focusing on expanding their reach in a cost-effective way. This has spawned the need for heavy investment in technology and electronic payment channels.
As banks are looking at such infrastructure as ancillary assets, wanting to focus on core activity, they’re reluctant to commit their resources here, throwing space open for other players. Much of this activity is getting outsourced to the private sector.
Automated Teller Machines (ATMs), a key segment in electronic payments, are set to more than double in number over the next two to three years. At present, they number a little over 1,00,000, according to National Payments Corporation data.
A senior public sector bank official said there was a robust business opportunity for private equity (PE) players. The stable fee income flow from banks that use the services of ATM companies is a glue. Given the low penetration of ATMs, this revenue is expected to move up in tandem with a rise in transactions, he asserts.
H V Harish, partner, Grant Thornton India, a tax and business consultancy, said PE firms weren’t enthusiastic about making direct investment in finance companies. PEs did invest in the finance segment around 2007, attracted by the huge potential and returns. But their experience was not satisfactory.
For them, investing in providing technology and support services to the financial sector is easier. This gives the benefits of returns from the sector without exposure to the risks of direct investments (in banks and non-bank finance companies), said Harish.
Those gearing for white label ATM space (these are ATMs owned and operated by non-banks; bank customers pay a fee for withdrawing money from these) and those working under contracts with public sector banks for ATM expansion have been raising funds.
Mumbai-based ASG Transact Technologies, keen on the white lable space, raised $40 million from PE firm Actis in 2012. Another Mumbai-based payment solutions company, Electronic Payment and Services (EPS), raised $4 million in the first round of equity funds from Aavishkaar in October 2012. EPS has a PSU bank contract for deployment of 5,500 ATMs in Maharashtra over the next two years. It is now in the market for a second round of funding, to raise up to $25 million. Centrum Capital is working as advisor to EPS for fund raising plans.
Accura Infotech, another ATM entity, is said to be in the market to raise up to $36 million and is scouting for investors. Motilal Oswal Securities is advising the company.
PEs are looking at a 20 per cent internal rate of return for investments in ATM companies, said an investment banker.
Companies providing support services like cash management and network security to ATM deployers would also be expanding and need capital infusion.
Private equity is one source. In fact, CMS Infosystems is backed by PE major Blackstone.
For now, the sector will see high investment action. Bankers and analysts say initially the white label ATM segment will see a proliferation of entities, driven by the growth opportunity. Consolidation will follow, as many find the going tough and investors begin to demand returns on the investments.