American Banker  |  Thursday, November 8, 2007

By Daniel Wolfe

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Intuit Inc. has long been considered one of the top providers of financial software to small businesses, but in the past year it has overhauled its corporate structure, its product line, and its strategy to attract the smallest of the lot.

The Mountain View, Calif., company's QuickBooks is one of the most widely used bookkeeping applications among small businesses, but internal research revealed that very small companies — those with up to four employees and up to $65,000 of annual revenue — were shunning it in favor of a pencil and a pad of paper. Even a slimmed-down Simple Start version of the software was not appealing to many of them.

As Intuit surveyed the market, it found that there was a financial management tool that had caught on with very small businesses: online banking.

"We picked our heads up a couple of years ago and saw it was growing like a weed," said Paul Rosenfeld, Intuit's vice president of small-business solutions.

So in February, Intuit spent $1.33 billion to buy the online banking technology vendor Digital Insight Corp. and began the complicated process of shifting its own strategy beyond giving small-business customers financial management technology on disks in a shrink-wrapped box. Now it is working to incorporate its tools into online banking sites — a job that has been made much easier now that it owns the company ranked No. 52 on this year's FinTech list.

Missed Customers

Last year Intuit conducted a series of studies involving thousands of businesses of all sizes, as well as one-on-one interviews with 200 small-business owners.

Brad Smith, who had been named the general manager of Intuit's small-business division that year, said, "'Let's get new insights that we never had before,'" Mr. Rosenfeld recalled. "'Let's relearn what we need to relearn.' "

From those studies, Intuit learned that most small-business owners would start banking online almost as soon as their companies were formed, but they would not purchase desktop accounting software until their finances became too complex to handle without it. "There's all these small businesses out there that we're not serving," Mr. Rosenfeld said. "The banks seem to be serving them better." Online banking offered "some real power that Intuit had, frankly, ignored."

Mr. Smith wrote in an e-mail that the small-business market is evolving. "Tomorrow's successful small-business owners will be far more reliant on technology than their current counterparts."

There are about 22 million small businesses in the country, Mr. Smith wrote, and they all want a "simple and comprehensive online banking solution to manage invoicing and cash flow."

The results of these studies, as well as the debut of competing applications from banks and other vendors, "started the chain of events that eventually led to us acquiring Digital Insight."

His ideas for reshaping his division's corporate strategy also led to some changes in the company's top offices. In August, Intuit announced that Mr. Smith would become its chief executive officer at the start of next year, but the company said he would not discuss the promotion, or his plans for running the company, until he has assumed that post.

The Digital Deal

In March of last year Mike Hallman, an Intuit director and the former president of Microsoft Corp., introduced Intuit's current CEO, Steve Bennet, to Jeff Stiefler, Digital Insight's CEO.

Soon after that the executives agreed to begin joint development of a small-business online banking application that would include elements of Intuit's Quicken and QuickBooks financial management software.

That project produced FinanceWorks, which is being tested now.

"What Intuit saw in Digital Insight was the opportunity to enter a new distribution channel for them that they historically had not served," Mr. Stiefler said.

The companies began development on FinanceWorks long before either seriously considered a merger, he said, but by late last year it had become clear to him that he needed to think about a major transaction if he wanted his business to continue growing.

"We could continue to grow and be successful and all of that, but in terms of really changing the world, I didn't think we could do that alone," Mr. Stiefler said. "Digital Insight was a very successful company since the day it was founded, but at the end of all of that success, we were a $250 million-revenue company competing in a world of businesses that were significantly larger than us with significantly greater resources."

Intuit announced in November of last year that it would buy Digital Insight. After the deal closed Mr. Stiefler became the president of Intuit's Digital Insight unit.

Bridging a Gap

Even before the acquisition closed, Mr. Stiefler was saying that his company's efforts to develop products for small businesses had been inadequate. However, he also said that banks, because they have such a strong link to their small-business customers, are the best way to reach this market.

According to Mr. Rosenfeld, FinanceWorks is Intuit's plan to bridge that gap. A version for consumers is being tested now, and one for small businesses will follow.

Both are designed to expand banks' financial management offerings.

The small-business version will include tools that have long been staples of Intuit's desktop software.

It will allow users to handle payroll and manage tax withholdings, create invoices, and accept electronic payments.

Both versions will create spending charts to categorize monthly expenses, and someone who uses both applications will be able to categorize purchases as business or personal, even when making purchases for both categories at the same merchant.

Though Intuit is not the first company to push this concept, Mr. Rosenfeld said that most such products have been developed by large financial companies, including Wells Fargo & Co. and Bank of America Corp., for their own use.

In contrast, Digital Insight historically has focused on small and midsize banks, which he said are eager to expand their small-business offerings.

Early Adopter

One such company is Heritage Bank, one of three financial companies currently testing the consumer version of FinanceWorks. The Olympia, Wash., bank also has agreed to test the small-business version when it is ready.

Lisa Welander, a senior vice president and the chief information officer of the Heritage Financial Corp. unit, said that even though small businesses are vitally important to her bank, it lacked the resources to develop a tool like this on its own.

Small businesses own 21% of its accounts (the rest are consumer accounts) but generate 52% of Heritage's monthly fee income, Ms. Welander said. "We consider ourselves a small-business bank, and so that is our niche."

However, Heritage has to offer consumer online banking products to its business customers as well, she said.

For more complex tasks, such as payroll, the businesses have to go to other providers, but "those types of services sometimes are built for the bigger customers" and are priced accordingly. "We've been wanting to do something more for this segment of the market."

The initial results from Heritage's tests of FinanceWorks seem to indicate that the product may solve the bank's problem, Ms. Welander said.

"I have never seen it before, where it's your finance package and your online banking package" she added.

Heritage completed an internal test in September and began offering FinanceWorks to a small number of customers in October. The bank expects to offer the software to all its retail customers at the start of next year and to introduce the small-business version in the second quarter.

The software could persuade the pencil-and-paper consumers to do more things online, Ms. Welander said.

"There are customers that track everything on the back end … with a check register."

FinanceWorks' ability to categorize spending will be the key difference, she said. "With FinanceWorks you go in, and that basically becomes your check register. They would start using this tool as their check register … personal and business both."

Market Opportunity

According to Christine Barry, a research director at Aite Group LLC of Boston, Intuit is coming to market at a good time. She surveyed the 30 largest U.S. banks in June and July and found that all of them are spending more on technology for small-business customers than they were three years ago; 88% said that they expect to be spending even more in that area three years from now. Online small-business banking will be a priority for 13% of those banks over the next 24 months; others are focused on other financial tools aimed at small businesses, such as remote deposit and account opening.

Forty-seven percent of the banks said they would consider purchasing a payroll application — one of the features of Finance Works — to offer to their customers. And there are opportunities for vendors; 75% of the banks said they are already running vendor-built applications aimed at small-business customers.

Some of Intuit's rivals that have historically focused on large bank customers, such as CheckFree Corp.'s Corillian and S1 Corp., are starting to move downstream to target Digital Insight's traditional customer base of small and midsize banks. Ms. Barry predicted that Intuit would follow the opposite path. "Digital Insight will start to move upmarket."

Intuit "really has the potential to change expectations of online banking for the small-business customer segment," she said.

She praised the company's strategy of using online banking to deliver its financial tools to small businesses. "I can't think of any other way that they would be able to do it."

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