Open Solutions Inc.'s acquisition of the item processor Financial Data Solutions Inc. might seem to fly in the face of the relentless decline in check volume.
But the vendor's pickup of the subsidiary of Southwest Community Bancorp of San Diego demonstrates that the business case for outsourcing operations remains viable even though the reasons for individual banks to keep handling their own checks are getting ever shakier.
Financial Data Solutions has three processing centers, all in California. Open Solutions, of Glastonbury, Conn., said it plans to retain all of Financial Data Solutions' roughly 100 employees.
"We wanted to move west, and this deal gives us a beachhead in California," said David Krystowiak, a senior vice president with Open Solutions and the general manager of its strategic solutions group, in an interview Wednesday. "We didn't have a West Coast check processing business, but we have a lot of core processing clients on the West Coast. We definitely need to be there."
Open Solutions, which announced the acquisition Tuesday, provides core processing, online banking, item processing, and other banking services, mostly to small banks and credit unions. It has more than 3,400 bank customers, and its nearly 1,000 core processing bank customers include 81 in California.
Financial Data Solutions offers image processing and lockbox remittance services. Mr. Krystowiak said these capabilities complement Open Solutions' services and that having processing sites on the West Coast could help the Connecticut company get more business from its existing West Coast customers and attract new ones.
Consumers are using debit cards and credit cards more frequently at the point of sale, lockboxes are converting many of the consumer checks they receive into electronic payments, and banks are converting some checks into digital images and settling them across image-exchange networks. As a result, the demand for traditional item processing centers will continue to fall.
"We see the whole industry moving to a total-image environment and getting away from traditional paper-based processing," Mr. Krystowiak said.
Checks' long-term prospects are poor, but the opportunities to draw new business in California made this acquisition opportunity attractive, Mr. Krystowiak said. "Sometimes you have to make acquisitions of traditional businesses, while knowing that you need to move in a different direction."
Bert Ely, an independent banking consultant in Alexandria, Va., said that more and more banks are likely to get out of the item-processing business because they will not have enough volume to justify the fixed costs of running their own check handling centers.
"When you get a declining industry, you start getting a lot of excess capacity, and that's when you see a lot of consolidation mergers," Mr. Ely said. "This deal is a classic example."
Noting that Financial Data Services reported 2004 revenue of $6 million, Mr. Ely said the $9 million Open Solutions spent was "pricey" given the seller's line of business.
He said the real challenge for item-processing outsourcing providers "is how they adapt to the check volume decline even as they play this consolidation role."
Open Solutions might have found Financial Data Services' customer especially valuable, Mr. Ely said. "I suspect they are buying a customer list," he said.
