Mixing It Up

  Bank consolidation, slowing growth in traditional payments such as credit cards, and consumer demand for access to emerging transaction methods are spurring processors to enter new markets. In fact, it is becoming increasingly likely financial institutions will hear sales pitches that ask, Want some online bill payment with your core bank processing? How about health savings account services? And everyone loves prepaid gift cards, right?
  Expanding into new markets takes not only knowledge of what markets to pursue, but careful assessment of how and when to expand. It also helps to know whether the company's goals can best be met through acquisition, partnerships or the development of homegrown products and services.
  Though some processors enter new markets to grow their businesses, just as often they do so because their customers want to keep up with the services their competitors are able to provide through broader processing capabilities. For example, online bill payment is spreading as more consumers start to expect their financial institutions, utilities and other billers to let them see their accounts and pay bills online, via telephone and by mail.
  "Many of them are adding these capabilities because their customers are demanding it," says Scott Strumello, associate consultant with Westbury, N.Y.-based Auriemma Consulting Group Inc.
  Customer demand was one reason Brookfield, Wis.-based Fiserv Inc., which started as a provider of such traditional services as ATM, check and payment card transaction processing for financial institutions, ventured into new markets. Fiserv now also offers software and services to support insurance products and has gradually begun to support health-plan administration services and online bill payments.
  "Today, transactions take place in a variety of forms and locations-on the Internet, at ATMs and with handheld devices," says Pat Foy, president of Fiserv's Banking Services and E-Products group. "We've expanded because we not only want to help financial institutions, but we want to be wherever that financial transaction takes place."
  How to expand into a new market can be a more complicated matter than where to expand. That decision often is based on the usual return-on-investment factors, such as cost, fiscal health, available technology and intellectual capital.
  "Build, buy or partner is always at the front end of any discussion," says David Foss, general manager of mergers, acquisitions and business integration for Jack Henry & Associates Inc. "We want to get into this area. How are we going to do it?"
  The Monett, Mo.-based processor built its business by selling to financial institutions core processing software and services, including those that keep track of deposits and withdrawals from demand-deposit accounts. Since April 2004, Jack Henry has bought 10 other companies and has built or partnered with others to expand its capabilities so that it now can offer online banking services, prepaid debit card processing and biometric-access security for financial and health care data.
  Sometimes, a payment method is so new that processors have little choice but to build their own services around it to capitalize on a promising market early. Health Savings Accounts, created by the Medicare Prescription Drug Improvement and Modernization Act of 2003, is one such emerging market (HSAs: Debit's New Cash Cow, July).
  HSAs allow consumers to deposit pretax money into accounts that they control (rather than their employers) to cover qualified medical expenses not covered under high-deductible health insurance plans. "That's a market that has really only started to see any adoption in terms of debit card payments, so it's in a hypergrowth stage right now," says Jim Bunn, director of the transaction processing and financial services technology group at Lane, Berry & Co., a Boston-based investment bank that advises financial-services companies on mergers and acquisitions.
  The number of debit cards issued thus far for use in accessing HSAs is small but is expected to grow dramatically as companies and consumers familiarize themselves with the health-insurance option. Cambridge, Mass.-based Forrester Research predicts the number of HSAs will grow from about 391,000 this year to 6.3 million in 2008. Forrester says the dollar amount flowing through HSAs will increase from $282 million today to $6 billion in 2008.
  Ways to tap those funds are still being developed, but checks and nationally branded debit cards sponsored by Visa and MasterCard International are common methods now.
  Processors, equipment vendors, and payment and health data networks are racing to be among the first to deliver that Holy Grail of HSA capability: a combined debit and information card that would enable doctors, drug stores, health insurers and financial institutions to quickly exchange price, account availability, deductible, allergy and other data, and bill the cardholder accordingly, even at the point of sale.
  "The next generation of health care-processing needs and the next generation of payment-processing needs are going to come closer and closer together," says Patricia Hewitt, vice president of business development of Fiserv's credit processing services division.
  For now, expanding into HSA processing is not that big of a stretch for Fiserv, which processes insurance and employee-benefit payments such as flexible spending accounts, or FSAs, she says. Building the service internally has been a good option for Fiserv.
  In essence, the HSA represents one of many emerging products that focus on what is now one of the hottest emerging markets: prepaid debit. If a processor is looking to buy its way into some prepaid verticals, there are many companies with experience and market contacts, and some are open to acquisition.
  But the further a processor ventures from its traditional market, the more challenging it is to build a new service from scratch, says Auriemma's Strumello. New markets have their own legal, technical and marketing issues that require expertise and experience to understand.
  Take gift card processing, for example. Although it relies on core processing capabilities, the ability to market and offer those services to retailers or other organizations requires a specific type of sales force, Strumello says. "You can't say this is like card processing, so only minor modifications will help us succeed," he says.
  That is why acquiring a company already active in the target market has advantages. Purchases may carry fiscal and workplace baggage, but they also can bring talented staff with connections in a new industry.
  "In many cases, the processors could build it on their own. What the issue comes down to is, are they able to establish [human] networks in those areas?" Strumello says. "That's where a lot of the acquisitions play a key role-the ability to reach out to industries where they may not have credibility."
  Even if a company already has started to expand into a market, an acquisition can certainly speed up its growth in that area. Metavante Corp., the Milwaukee-based processing and technology subsidiary of Marshall & Ilsley Corp., in May bought Waltham, Mass.-based Med-i-Bank Inc. (MBI) for $145 million. As its name implies, MBI provides electronic payment services for employee benefit and consumer-directed health care accounts, including HSAs, FSAs and health reimbursement arrangement accounts.
  Metavante had already begun to provide customers with support to set up and administer HSAs and process HSA transactions. Buying MBI added access to 200 third-party account administrators and health plans that serve 15,500 employers and 1.3 million employees. MBI claims to have 70% of the nation's prepaid health care debit card business.
  Columbus, Ga.-based processor Total System Services Inc. tried to expand into various prepaid services on its own, first by partnering in 1999 with an independent sales organization to offer gift cards, then by trying to build a variety of services, including those for closed-loop and branded gift cards and health care benefits cards.
  But after a few years, TSYS decided it was time to try the acquisition route. "We were dabbling [in prepaid] and didn't have the bandwidth, didn't have the talent, didn't have what we needed," says M. Troy Woods, TSYS president and chief operating officer.
  TSYS found a lot of what it needed in Clarity Payment Solutions Inc., a New York-based provider of prepaid card services that used the Visa, MasterCard and electronic funds transfer networks. TSYS bought Clarity in August 2004 for $53 million and renamed it TSYS Prepaid.
  The acquisition brought talented staff and a processing platform capable of more complex functions, says Bob Borneman, vice president of healthcare product development for TSYS Prepaid. "TSYS Prepaid brought the ability to have multiple purses on the same card," he says. "There's an additional level of complexity that can be managed through the TSYS platform. It gives additional flexibility."
  That flexibility will make it easier for TSYS to add other payment functions in other markets as they emerge, he says.
  Though Fiserv executives felt comfortable venturing into HSAs on their own, their desire to offer online bill-payment services for utilities and other billers would bring them farther outside their traditional processing turf. That is one reason why in July the company paid $350 million to acquire BillMatrix Corp. The Dallas vendor provides online and telephone bill-payment technology and services for more than 120 clients, including telephone companies, insurers and lenders.
  "BillMatrix has capabilities that fit within our traditional market, but they bring customers and solutions that are outside our traditional markets," Foy says.
  Lane, Berry's Bunn, who advised BillMatrix executives in the Fiserv deal, says credit and debit card use for online payments is one of the fastest growing payment methods. As such, it represents for processors a big opportunity for growth.
  Beth Robertson, a senior analyst at TowerGroup, a Needham, Mass.-based subsidiary of MasterCard International, says BillMatrix had other suitors interested in the company for the same reason as Fiserv. "Bill payment's a very big area," she says. "There were some other companies that are not traditionally in this market that were bidding for BillMatrix as well." She would not disclose the names of the other bidders.
  Fiserv surprised many industry insiders with the acquisition, Robertson says. "I don't think it's a bad move," she says. "I see the logic behind the purchase. From [Fiserv's] standpoint they work with banks, and lots of banks use bill-payment services. So they have a lot of good cross-sell opportunities within their customer base."
  Whether any merger proves successful depends on a number of factors, according to Robertson. These include how the new services are integrated, how much the purchaser paid and how quickly the buyer is able to recover that expense as it moves into a new market. "BillMatrix is a profitable business, but [Fiserv] also paid a premium for it," Robertson says.
  EFunds Corp. is another processor that used an acquisition to enter the prepaid market. In June, the Scottsdale, Ariz.-based company, which offers EFT software and processing services to financial institutions, acquired WildCard Systems Inc. for $228.8 million. EFunds will pay WildCard's current owners an "earn-out" payment of $58.8 million if it meets financial goals next year, and EFunds also will assume about $10 million of WildCard's debt.
  Gary Palmer and Larry Park were working for a small processor of homeowners' insurance payments called Wholesale Services when, in 1997, they developed what would become WildCard to help property- and casualty-insurance companies to pay their claims using prepaid cards instead of checks, tokens or other traditional methods. The Sunrise, Fla.-based company now provides a variety of Visa-, MasterCard- and Discover-branded prepaid card products to financial institutions and retailers.
  Many mergers start as temporary partnerships for specific services. Whether intended or not, those partnerships can be like the dates that lead to marriage once both parties realize they are a good match.
  When WildCard began to provide prepaid processing services for eFunds, neither thought it would lead to something bigger, according to Palmer, WildCard's chief operating officer. "In our case, it wasn't contemplated. It just naturally happened," he says.
  Palmer says the employees of both companies worked well together and realized that they each had something to offer-WildCard had the prepaid card expertise, and eFunds had the access to financial-institution customers.
  Sometimes, though, a partnership is as far as a processor will or can go in a relationship with another company. Jack Henry, for example, wanted to offer prepaid services to its financial institution customers, too. At the beginning of this year, Jack Henry hired Prepaid Technologies Inc., a Birmingham, Ala.-based prepaid marketing company that uses WildCard as its processor, rather than acquire its own prepaid processor.
  "There is enough of a difference from what we do on debit card processing that it is really a leap," Jack Henry's Foss says.
  While the growth rate for one form of payment may shrink over time, the total number of payments still will rise as new markets emerge. Whether processors build, buy or partner their way into new markets, they must act to meet the changes or face customer defection to companies better able to meet their demands.
  How Some Transaction Processors Entered New Markets:
  BY DEVELOPING INTERNALLY:
  * Fiserv Inc. built its own Health Savings Account services.
  BY BUYING:
  * Fiserv bought BillMatrix Corp. to provide online bill-payment services.
  * Metavante Corp. bought Med-i-Bank to expand its capabilities in providing HSA services.
  BY PARTNERING:
  * Jack Henry partnered with Prepaid Technologies for WildCard prepaid processing services.
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