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Medium Profitability

Payments Company

#Financial Services
ProHub Comment

This is a structured profitability case requiring market selection analysis followed by detailed financial modeling. The candidate must identify NYC subways as the priority market using both quantitative (expected value = fare collection × win probability) and qualitative reasoning, then build a breakeven analysis demonstrating profitability within the 5-year target.

Estimated Time 26 minutes
Difficulty Medium
Source Chicago Booth
25 / 100

Your role on the PayCo engagement is to develop the business case for commercializing PayCo’s contactless technology.

  1. Which market and transit vertical should PayCo target as a first priority?
  2. What is the profitability of the “TAP” technology? Specifically, will PayCo breakeven on commercializing “TAP” in less than 5 years?
  3. Would you recommend that the client pursue the commercialization of this technology?

Clarifying Information

Our client, PayCo, is a global credit card company, with revenues over $5B in 2010. A recent trend in the credit card industry is the use of contactless (tap and go) payments technology to make purchases at places like fast food restaurants and convenience stores. PayCo is looking to leverage contactless payments to drive top-line growth and has identified the transit vertical (i.e. subways, trains, buses, taxis) as an opportunity for growth since this is generally a cash dominated vertical. In support of this strategy, PayCo has developed proprietary technology (called “TAP”) to process contactless transactions specifically for transit applications, and is looking to commercialize this technology. A key challenge is whether transit authorities will implement this new technology or stay with current systems for fare collection. Deloitte Consulting has been engaged to size the overall transit market globally, prioritize potential opportunities, develop a financial business case, and develop a go-to-market strategy.
Mock Interview
Interviewer

Your role on the PayCo engagement is to develop the business case for commercializing PayCo's contactless technology. 1) Which market and transit vertical should PayCo target as a first priority? 2) What is the profitability of the "TAP" technology? Specifically, will PayCo breakeven on commercializing "TAP" in less than 5 years? 3) Would you recommend that the client pursue the commercialization of this technology?

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

AI Score
Structure Analysis Communication Business Sense Quantitative
Practicing...
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Practice this case with AI Mock Interview

PayCo needs to evaluate which transit market to target for its contactless payment technology (TAP) and determine if commercialization is financially viable. The case requires comparing three city markets across two transit verticals using market data and probability-adjusted opportunity sizing, then conducting a profitability analysis to validate the 5-year breakeven criterion.

Key Insights:

  1. Expected value calculation (fare collection × win probability) is critical—Tokyo appears largest but has lowest win probability, making NYC optimal
  2. Timing consideration: NYC and London markets are ready in 2012 vs Tokyo in 2015, affecting first-mover advantage
  3. Sunk cost fallacy: $1M past investment in TAP development should be excluded from commercialization decision
  4. Revenue formula: (TAP Fare Collection × Processing Fee %) + Annual License Fee; Costs: (Transactions × Per-Transaction Cost) + Operating Expenses
  5. Breakeven achieved in year 4 with $250K cumulative profit by year 5, meeting client criteria
  6. Great answer requires sensitivity analysis on key assumptions (90% NYC win probability, transaction forecasts, advertising costs) and qualitative factors (brand strength, strategic importance, competitive response)