I recently touched on the topic of online banking electronic payments (OBEP) and related players in the market. Evolution of retail opened up a lot of opportunities in this arena, and payment services industry is in the midst of growth. However, the geographic balance is different. Europe favors the online banking electronic services as compared to other alternatives. Credit cards only make up 21% of the transactions in German e-commerce market. iDeal is among the leading provider in Netherlands with Sofort GmbH leads in Germany and Europe. But, investors can’t get a piece of action as both of these are private companies.
GH Capital Inc (GHHC) is one of the companies involved in providing the online banking electronic payment (OBeP) services, which can be accessed through OTC markets. The company is taking on the likes of iDeal and Sofort GmbH. The bull case for GH Capital was discussed in detail previously. Here’s the summary of why GH Capital is a good opportunity.
First, the company is focusing on the European market with its online baking electronic payment services. Online banking payments are supported by banks as they try to ward-off alternative competition. GH Capital can create problems for its competitors through its unique pricing strategy. Despite widely accepted volume based pricing model, GH Capital has adopted a stepped fixed model, which allows merchants to scale at lower costs. As switching costs are almost none for the consumer, and merchants see no harm in integrating cheaper solutions, this pricing model creates problem for big players like iDeal and Sofort GmbH.
Reasons for potential takeover
Big corporations are usually reluctant to slash prices in order to protect margin. They usually ignore small competition until it becomes a theat. And, the safest course of action is to acquire a small company that has potential of gaining market share. This seems to be the case for GH Capital Inc. The company supports only around 350 merchants as of now, but it’s planning to hit a 10,000 target by 2018. A low number of merchants don’t hurt competitors but this is changing.
1. More visibility across merchants
Fixed pricing and low switching costs is attracting merchants to sign up for GH Capital’s ClickDirectPay (CDP) solution. According to recent reports, GH Capital is in talks with a leading online payment provision aggregator, Allied Wallet, to make CDP available through their platform. The deal will make CDP visible across Europe including Germany. It is worth mentioning that Allied Wallet, a leading provider of online payment processing offering various payment solutions in 196 countries, has seen large-scale, trending growth in e-commerce transactions and a spike in new merchants by accepting alternative payment methods in Germany. Inclusion of GH Capital’s CDP in Allied Wallet’s portfolio will solve the merchant visibility problem for the CDP. This is one of the primary reasons competitors will seriously think about making a bid for the subsidiary of GH Capital.
2. Partnership with hyper scale retailers
Further, the management is in talks with one of the largest retailers in Germany to integrate CDP with their payment systems. Being able to secure a deal with a large retailer also puts a question mark on competitors’ market share. The deal, if finalized, will strengthen potential acquisition prospects for CDP. Note that GH Capital also competes in the high risk merchant space where mainstream service providers like PayPal (PYPL) have no presence.
Bottom line
The point is that increasing merchant exposure and a few big merchant inclusions will force some of the large competitors to bid for CDP. Cutting competition on prices isn’t a choice as it affects margin and GH Capital’s management believe that competitors are unable to slash prices. Therefore, it is probable that CDP will gain material market share if competitors don’t revisit their pricing model.
From an investor’s perspective, it’s a win-win. In case of a takeover, a hefty gain is in the cards as takeover bids for OTC companies are materially above the trading market price. Without a takeover, CDP has the potential to gain market share amid stepped fixed pricing and European exposure. However, be aware – OTC markets entail high risk and limited liquidity.
Disclosure:Ă‚ We have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
