Intuit Inc. is strengthening its foothold in online payroll, a service that is becoming more important to banks.
The Mountain View, Calif., company has long expressed interest in providing such services online through bank Web sites, and it has said that developing these capabilities was one goal of its 2007 purchase of the online banking vendor Digital Insight Corp.
Intuit's announcement Tuesday that it would buy PayCycle Inc., a Palo Alto, Calif., provider of online payroll services, furthers this goal with new capabilities and customers.
Observers say a significant, and growing, number of businesses have expressed interest in handling their payroll online through banks.
PayCycle already offers online payroll services through banking companies including Bank of America Corp., Capital One Financial Corp. and PNC Financial Services Group Inc.
Intuit has said that payroll services would be a key part of Small Business FinanceWorks, its online financial management application developed with Digital Insight and introduced in February; the payroll module went live in March, said Intuit spokeswoman Holly Perez.
Perez wrote in an e-mail Wednesday that Intuit would detail its integration plans for PayCycle once the deal closes. The $170 million purchase is expected to close in the third quarter.
Christine Barry, a research director at Aite Group LLC, said that PayCycle would give Intuit a chance to reach small businesses through its bank connections.
"Right now, because a lot of banks haven't been offering these capabilities," business owners "have been going to nonbank providers," she said.
Bank of America "started this trend" several years ago with its payroll offering, she said, and many other banking companies are eyeing the market.
However, technology vendors have been slow to meet this rising demand, Barry said, and Intuit was ahead of its peers even before the PayCycle deal. "The vendors have been a little slower as far as offering them, but just about all of the leading small-business banking vendors are either in the process of developing this, or it's at least on their roadmap," she said.
About 25% of small businesses said they would definitely or very likely use an online payroll service if their bank offered it, according to a survey last year, she said.
Though PayCycle's technology would complement Intuit's Quickbooks desktop and online financial management software, it would be a better fit as part of FinanceWorks, she said.
Donna Arce, the managing director of business Internet banking at Barlow Research Associates Inc., said that her own survey data showed that more than one-third of small businesses that bank online were interested in payroll services from their banks. Of the 16 banks that her firm tracks, four offer such a service today: Bank of America, JPMorgan Chase & Co., PNC's National City Corp. and SunTrust Banks Inc.
Mark Schwanhausser, a research analyst at Javelin Strategy and Research, said that it is important for Intuit to pick up better technology for its online business offerings, even if it has no immediate plan to integrate it.
"Nobody's got the complete package yet," he said, and this includes Intuit. Acquiring PayCycle would prevent competitors from buying it, he said, and with many companies cutting spending it may have been hard for rivals to bid. "A time like this is an ideal time to be buying things."