The deal to acquire 42% of I.Destinasi will allow IOUpay to cross-sell its BNPL products, accessing the high credit quality civil servants of Malaysia.
In an exciting development, fintech provider IOUpay (ASX:IOU) is about to acquire 42% of Malaysian company I.Destinasi Sdn Bhd (IDSB), in a deal worth 126 million ringgit (or around A$41.3m at today’s exchange rate).
IDSB is a specialised finance company focusing on providing instalment-based consumer credit services to civil servants for and on behalf of Malaysian banks.
Under bi-lateral collaboration agreements with its Malaysian bank partners, IDSB acts as a specialist contracted service provider for the banks providing in-field execution, credit processing, account set up and ongoing account management services that generate upfront transaction fees and recurring account servicing revenues.
Each bank partner provides funding for and assumes the credit risk of the customers they refer.
The business complements IOUPay’s own offering, and opens the door to collaboration and cross-selling opportunities between the two companies.
Specifically, there are clear cross-selling opportunities between IOUPay’s short term BNPL offering (up to 6 months), and IDSB’s longer term consumer loan products (10 years).
The acquisition price will be paid in cash over two equal tranches over a six-month period, with 50% being paid upfront.
Rationale for acquisition
Apart from the cross selling opportunities mentioned, there are also other benefits and synergies that could be gained from this investment.
Both IOUpay and IDSB have a well-established history in servicing Malaysia’s largest banks, leveraging their expertise to provide transaction services to bank customers.
With the investment, each company has significant latent value through leveraging its respective bank relationships to develop opportunities for each other.
In particular, the partnership presents a strategic opportunity for IOUpay to secure IDSB bank customers for its own BNPL service offering, which could add significant new revenue streams for the company.
Both businesses could also leverage each others’ network of merchants across Malaysia, and cross-pollinate business opportunities by offering customers each other’s finance products.
In 2013, IDSB was granted an Accountant General Salary Deduction Code (AG code) which allows it to deduct salaries of Malaysian civil servants directly at the source, prior to payment to the employee.
This AG code is only one of two licences given out by the Malaysian government (with the other being held by the co-op financial entity, ANGKASA).
The ability to deduct instalment payment obligations directly from a customer’s salary at source is a valuable asset for a provider of unsecured term finance like IDSB, as it reduces credit risk and processing costs. This provides a unique competitive advantage to IDSB over the retail trading banks.
Both IOUPay and IDSB are now looking at ways to collaborate on how to maximise the AG code facility.
Importantly, IDSB services over 50,000 civil servants who generally represent high quality credit counterparties given their long term stable employment with government.
IOUpay hopes to acquire many new customers for its myIOU BNPL service through marketing into the IDSB customer base.
What’s next
As part of the acquisition terms, IOUPay was able to negotiate a reduction of the purchase price in the event of a 10% or more variance to the RM 30 million PBT (profit before tax) threshold for the full year ending 31 December 2021.
In that situation, the total variance will be adjusted against the second tranche payment as reduction in payment for IOUPay.
IOU says it will assess its cash position closer to the due date of Tranche 2, and make a decision on how it will fund the payment.
At that time the company will decide on different options, including capital raising, cash, or combination of both.
After completion, IOUPay will own 42% of IDSB, with the remaining 58% held by Jiraniaga Sdn Bhd, a company owned by Dato’ Husain and Datin Malik.
Both individuals are currently the directors and shareholders of IDSB.
IOUPay has just come off a solid first quarter, where it announced a 333% growth in its BNPL service accounts, and a 340% increase in downloads of its myIOU app since June 30.
This article was developed in collaboration with IOUpay, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
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