Fiserv's proposed purchase of CheckFree could be considered the capstone deal of a trend in e-banking mergers that propagated for much of the past year. But will it also be known as the deal that ultimately buried independent, pure-play options for banks' back offices?
With the $4.4 billion acquisition, core services provider Fiserv would absorb the complementary software, processing and market-dominant online banking/bill-pay products of CheckFree, with each firm gaining entry to thousands of new financial-services clients on the other's roster. Wall Street largely applauds what would be a combined $6 billion revenue company, as well as the clean fit of Fiserv's products that largely support the small-to-regional bank set with CheckFree's bill-pay, presentment and/or electronic payments processing relationships. CheckFree has deals with 21 of the top 25 banks, including Bank of America, Wells Fargo and Wachovia.
But when two Goliaths join forces, there's bound to be competitive pressures, which in this case may be the balance of interests between rival core, online and remittance value-added resellers, even in a market where consolidations and bank demands for bundling are prevalent. Fiserv, of Brookfield, WI, will have in CheckFree an ACH processing system, known as PEP+, which has 80 percent market share along with a bill-pay and presentment product with a veritable bear hug on industry volume.
In a conference call last month, CheckFree CEO Peter Kight acknowledged that the Norcross, GA-based firm has "significant relationships" with as many as 10 different resellers. While some may consider the Fiserv connection "benign," he says others are okay with a "coopetition" gentleman's agreement whereby CheckFree services are maintained at banks served by Fiserv rivals.
Conflicts are not new in the financial-technology space, as disparate channel providers have merged. Metavante's widely deployed bill-pay offering also interfaces with other core providers, and CheckFree's own $245 million acquisition of online banking firm Corillian in January went off without major impact on a reseller arrangement with rival platform Digital Insight, according to analysts.
Jennifer Roth, a TowerGroup senior analyst, believes the conflicts may spur new bill-pay opportunities for CheckFree competitors, chiefly Metavante or Online Resources. "Online Resources, because they do not have any core processing capabilities, may be a preferred partner," she says.
Potential friction may be mitigated in how Fiserv, which serves about 6,000 financial institutions, has traditionally operated; it acts more as a holding company of disparate products compiled through years of acquisitions, rather than a single-branded conglomerate. Some have criticized Fiserv's approach, but to William Blair & Co. senior equity analyst Franco Turrinelli, that had more to do with a need for minimal client disruption. "The corollary is sometimes you suffer a significant amount of customer attrition [with integration]," he says. "So you tolerate some inefficiencies."
One wrinkle in Fiserv's bid, which was a 30 percent premium over CheckFree's stock price, is the persistent analyst speculation that Bank of America is ready to bring electronic processing in-house, cutting up to 20 percent of CheckFree revenues. Fiserv president and CEO Jeff Yabuki and Kight wouldn't speculate, but both were bullish on the electronic-payments market, particularly in the low-adoption segment of community and regional banks.
Banks have to adapt to the challenges of complex relationships, warns TowerGroup research director George Tubin. Vendors are more motivated to overprice or underperform single-product deployments, so "banks have to become more proficient at managing vendor relationships, instead of relying [on them] to take care of you," says Tubin. "When you go to single source, you expect some of these things to happen."
