First Data Corp. hopes buying FundsXpress Financial Network Inc. would help it expand its business with small banks.
The Denver processing company announced the deal Monday for FundsXpress, an Austin online banking and bill payment provider, but did not give a price. The deal is expected to close next month.
FundsXpress has about 500 banking clients, mostly community banks.
“We see the online banking and bill-pay component being critically important to our financial institution clients,” Todd Strubbe, the president of First Data Debit Services, said in an interview Tuesday. First Data already has a debit and automated teller machine operation, Star Network, and online banking and bill payment is “an adjacent market.”
Large and regional banks, and even some small ones, already offer online banking and bill payment, but many community banks and credit unions “either do not have one or the other, or have a very limited implementation,” Mr. Strubbe said. “In the long term, they need a much better solution than what they’ve implemented.”
First Data offers a service, through its debit network, that lets people make bill payments with their debit cards at biller Web sites. Western Union Co., which First Data spun off in September, also offers bill payment.
By buying FundsXpress, First Data would cement its relationships with banks that use its online service, and it would gain a recurring revenue stream.
FundsXpress does not have its own bill-payment technology. Instead, it resells payment services from two of the top providers, CheckFree Corp. and Marshall & Ilsley Corp.’s Metavante Corp.
Mr. Strubbe said FundsXpress would dovetail with Instant Cash Services, an ATM processor First Data acquired this month from Wells Fargo & Co.
That purchase demonstrated “the importance we place on, and the investment we anticipate putting into, the Tier 3 segment of the financial institution market, the smaller banks and credit unions,” he said. “FundsXpress is another example of our investment in that market segment.”
Gwenn Bezard, a research director at Aite Group LLC in Boston, said that buying FundsXpress would give First Data “a foot in the door to get into the bill payment processing business with the banks,” and that the processor would be “buying relationships with banks.”
Online banking software, which FundsXpress provides on its own, would not bring in the same, valuable recurring revenue as bill payment, he said.
“I suspect First Data is more after bill-pay dollars than online banking dollars,” Mr. Bezard said. “When you look at bill payment, you have billions and billions that can be converted. The room for growth is huge. The room for growth is far more limited for online banking.”
He also speculated that First Data eventually would want to offer its own bill-payment technology.
Some analysts said they did not understand how FundsXpress would fit into First Data.
John Kraft, an analyst with D.A. Davidson & Co., said that bill payment “doesn’t seem like a natural extension” of First Data’s product line. “It’s pretty different from what it normally” acquires.
First Data does “have a ton of business with the community small banks,” he said, but these deals “have been mostly merchant card-based stuff, and not consumer Internet banking.”
Also, the FundsXpress deal was “surprising” in light of First Data’s pending acquisition by Kohlberg Kravis Roberts & Co., he said. That $29 billion deal is expected to close next quarter. “I would have expected” First Data “to think about how they’re going to be making divestitures, not making acquisitions.”
But Craig J. Maurer, an analyst with Credit Agricole SA’s Calyon Securities, said that First Data still has to manage the “business as if KKR won’t close,” since the KKR deal has not closed. “If they feel this is the right move for the business, why would KKR feel this isn’t the right move for the business, unless KKR’s simple goal is to break it up and sell it?”
