Fiserv Inc.’s deal to buy the software vendor CashEdge Inc. narrows the field of contenders vying for dominance in the growing person-to-person payments space.
The May arrival of the bank-owned digital payments rival clearXchange put pressure on Fiserv and CashEdge, which have been selling competing P2P systems to banks for more than a year.
Since clearXchange’s system would streamline the process of making electronic payments to the accounts of its backers–Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co.–analysts cautioned that other banks might switch to that service to provide the best experience to their customers. Fiserv’s purchase of CashEdge could give it the technological boost it needs to stay competitive.
“With this deal, we see a two-horse race in the bank-centric arena: Fiserv and clearXchange,” Tien-tsin Huang, an analyst with J.P. Morgan Securities, wrote in a research report published Thursday.
Fiserv announced June 29 that it struck a deal to buy CashEdge for $465 million to bolster its digital-payments capabilities, particularly for online P2P payments, a market which eBay Inc.’s PayPal service has dominated. Fiserv expects the deal to close by September (
“We think this market is going to move fast and the ability to make sure we have the best technology and the best people to deliver that technology is most important,” Jeffery Yabuki, the president and chief executive of the Brookfield, Wis.-based vendor, said in an interview.
CashEdge, of New York, has 500 clients for its various invoicing, account aggregation and payments software programs. Its Popmoney P2P payments software, first deployed in January 2010, is in use by 200 banks and competes directly with Fiserv’s ZashPay, which debuted in the middle of last year (
Fiserv sells core processing systems, online banking platforms, bill-payment tools, debit processing and mobile software mostly to small and midsize financial institutions. The company widely expanded its technology portfolio with its $4.4 billion acquisition of CheckFree Corp. in 2007, its last large acquisition.
That deal was more transformational for Fiserv’s business, but the CashEdge acquisition is more of an “accelerant in … the P2P movement,” Yabuki said.
Yabuki said he does not view clearXchange as a threat. “I believe that the more people who are exercising their opportunity to engage in electronic P2P [payments], the better,” Yabuki said.
Andrew Jeffrey, an analyst with SunTrust Robinson Humphrey, says he is skeptical of the long-term viability of bank-owned technology consortiums such as clearXchange because of the past records of similar ventures. However, he also expressed skepticism over the benefits of Fiserv’s deal to buy CashEdge.
“It has me scratching my head a little bit,” Jeffrey says. “Either, in my mind, Fiserv decided that ZashPay wasn’t sufficiently robust or that Popmoney is that much better that it was worth acquiring. I realize CashEdge has other functionality in addition to just the P2P piece. My sense is that P2P is kind of the crown jewel of their technology portfolio and it seems a little bit duplicative.”
Yabuki said the acquisition is not being done because ZashPay lacks features, though he noted that CashEdge has been a leader in money transfer and P2P services.
“They’re multiple generations ahead of anyone in the market, including us,” Yabuki said. “That will allow us to bring a far more advanced set of capabilities to our clients.”
Yabuki added that CashEdge’s management team has “been living and breathing this at a degree we think is really important for growing this solution.”
An October report from Aite Group LLC found that U.S. households performed more than 11 billion P2P payments totaling more than $865 billion in the last year.
Ron Shevlin, a senior analyst with Aite Group, said the acquisition could allow for “a much tighter integration” of P2P with Fiserv’s online banking and core banking applications.
Yabuki said Fiserv was also attracted to CashEdge for several of its platforms that would “enhance our Internet banking and eventually our mobile experience,” including programs for opening and funding new bank accounts online and transferring money between accounts. CashEdge’s AllData aggregation technology, which wealth managers and financial advisors use to view their clients’ various accounts at once, was also appealing, Yabuki said.
Fiserv has account-to-account transfer tools, but CashEdge has a “much more sophisticated” transfer platform that is used by many of the 30 largest financial institutions.
Fiserv plans to evaluate the components of the companies’ respective P2P platforms and make decisions on which pieces to keep in the future.
“We think that ultimately the winning strategy is a single network strategy,” Yabuki said.
Huang says the price Fiserv will pay, with CashEdge valued at more than six times the $75 million in projected revenue it expects CashEdge to make in 2012, is “richer than usual.”
Huang noted in his report that Fiserv paid 4.5 times revenue for CheckFree. Competing vendor Jack Henry & Associates Inc.’s $300 million acquisition of iPay Technologies valued the bill-payment software company at 5.5 times iPay’s revenue.
“The multiples appear quite high,” said Peter Heckmann, a senior research analyst with Avondale Partners LLC in Leawood, Kan. “That suggests to me that Fiserv management did in fact see something that is strategically important.”
While “the market may balk a little bit at the purchase price,” Heckmann said, Yabuki and other Fiserv executives have done a good job of integrating past acquisitions. That experience should bode well for the CashEdge deal, he said.
Huang’s note said there are more “revenue synergies” with CashEdge than CheckFree given the deal “marries CashEdge’s digital payment and data aggregation capabilities” with Fiserv’s online banking, electronic bill pay and other services, which are linked to about 70 million customer accounts.
Fiserv’s shares rose as much as 1% on Thursday, to $62.43.
