Last week's acquisition of ClearCheck Inc. by TeleCheck Services Inc., a Houston unit of First Data Corp., demonstrates that check-handling service providers are continuing to consolidate as consumer check volume drops.
Analysts say the same trends behind the numerous acquisitions among providers of outsourced check processing services to banks are driving consolidation among companies, like TeleCheck, that provide check verification and risk management services to merchants.
Brian Mooney, TeleCheck's president, said ClearCheck's services are complementary to the ones his unit offers. He expects the acquisition to make TeleCheck more competitive in drawing customers.
"I don't think anyone's going to dispute that there are less checks being written at the point of sale today than there were five years ago," Mr. Mooney said. "But checks continue to be an important payment stream for merchants to take over the counter. We believe that continuing to expand our capabilities will allow us to provide value to our merchants and grow the business."
TeleCheck announced the purchase of the privately held ClearCheck, of Greenville, S.C., on Thursday but did not give the price.
Check-writing has been falling steadily for years, but the drop is accelerating, according to TowerGroup, a Needham, Mass., advisory unit of MasterCard International. The number of checks written in 2002 fell 4.2% from 2001, to 38.8 billion; last year's total fell 5.1% from 2004, to 33.5 billion.
John Kraft, an analyst with D.A. Davidson & Co., said the shrinking market for check services had led to some speculation that First Data wanted to sell TeleCheck. The Denver processor, which recently completed a companywide assessment of its business lines, announced a major restructuring in January, and is planning to spin off its money transfer business.
Selling TeleCheck was "something that's been on the strategic review," he said. "Obviously, they thought they could expand rather than sell. The mentality at TeleCheck is, 'Let's get an increasing slice of this declining pie.' "
Other companies that process checks are also trying to expand their market share. In June the Glastonbury, Conn., banking technology and outsourcing provider Open Solutions Inc. bought the San Diego item processor Financial Data Solutions Inc.
And in September 2004, Fidelity National Financial Inc. of Jacksonville, Fla., purchased the Atlanta core systems and outsourcing provider InterCept Inc. to become the No. 2 check-processing outsourcer, behind Fiserv Inc., of Brookfield, Wis.
"Declining check volume logically drives consolidation," among both check processors and verification vendors, said Robert Hunt, a research director at TowerGroup.
Alenka Grealish, the manager of the banking practice at the Boston research company Celent LLC, said the search by merchants for low-cost check verification services is also driving consolidation.
Check verification is "a real scale business," she said. "It's price-driven, and if you have scale, you can price out smaller firms." Big companies, such as TeleCheck, "have scale, so they can price the service cheaply."
TeleCheck is one of the leading providers of check verification services - comparing checks to those in various databases to spot potential fraud.
It also offers check guarantee services, in which it warrants that the checks are good and accepts the liability for bad ones - and the responsibility for tracking down the customer to collect the funds.
Mr. Mooney said ClearCheck's strength is in collections. It will "process return checks for merchants and then collect on behalf of those return checks, but they are generally not in the business of risking transactions on the front end and clearing and settling them through a banking system."
ClearCheck has worked with his unit in the past, he said, and some of ClearCheck's customers have included such companies as CVS Corp., J.C. Penney Co., and Bashas' Supermarkets, which operates stores in Arizona, California, and New Mexico.
"We felt that adding them to our portfolio and adding their clients to our portfolio, and bringing their management team and their expertise into the picture, was a natural fit for us," Mr. Mooney said.
He also expects the acquisition to yield cross-selling opportunities.
"We'll look to provide to their customers that don't currently use us risk management services on the front end," he said. "At the same time we have customers today that utilize us for the front end and might utilize ClearCheck for the back end. Now they'll have a single provider for those solutions."
Mr. Hunt said that because the two businesses have different strengths, TeleCheck has added both economies of scale and new services.
Though check volume is falling, First Data seems determined to be the dominant player in its market, he said. "They are saying, 'If I'm going to be in it, and volumes are dropping, I have to be the 800-pound gorilla.' "
