OBR #127 Now Available for Download

Obr_iconThe latest Online Banking Report, Person-to-Person Lending: Does the eBay model lend itself to consumer credit (OBR #127) is now available for download. The 36-pages take a close look at the recently launched Prosper Marketplace (NB Feb. 6, 2005) and the market for person-to-person lending in general.

Online Banking Report and All-Access Subscribers will receive the printed report next week.

JB

 

New Credit Score Creates More FUD

Vantagescore_logoFUD (fear, uncertainty, and doubt) is a strong motivator, especially when it has something to do with your personal financial situation.

As much as financial institutions strive to maintain the perception of safety and soundness, they often benefit from the concerns and resulting risk-averse behavior of their customers.

Case in point: credit reports and identity theft protection. Sure, it’s relatively simple to request a credit report every six months to make sure the credit bureaus have accurate info on file under your name. The problem with this approach: it takes time, you must pass rigorous authentication tests each time, you have to remember to do it proactively, and once you successfully access your report, you have to figure out what it all means.

One of the more confusing aspects of the credit report world is the various credit scores available. Each of the three major credit bureaus offer a proprietary score, but the most common one, used by 75% of mortgage originators, is from Fair Isaac, whose FICO score is almost a household word.

Vantagescore_homepageThe new VantageScore is designed to simplify the confusing credit score landscape. Released today, it’s a joint effort from the three major credit bureaus, Experian, TransUnion, and Equifax, who worked together to create a single score incorporating information in all three databases. The new product will be marketed by a separate entity, VantageScore Solutions LLC, <vantagescore.com> a joint venture from the three companies (click on inset for a closer look).

Rather than the 800-point scale in use today, the VantageScore will use a more common academic letter-grade scale as follows:

900-990 A
801-900 B
701-800 C
601-700 D
501-600 F

Analysis
While it should help bring more clarity to the credit score in the long term, the immediate effect is more confusion with a new name, additional marketing campaigns, and a new grading scale. This should be good for financial institutions that can use the raised awareness and heightened concerns to sell their own credit-monitoring services, which can be a solid source of monthly fee revenue.

We’ll be taking a close look at the market during the next six weeks as we research and author an update to our 2002 analysis of the credit report-monitoring opportunity (refer to Online Banking Report #83/84).

JB

Capital One Buys North Fork Bank

Capital One Financial Corp. will be one of the nation’s 10 biggest banks based on deposits and managed loans when it buys Long Island’s $57.6 billion North Fork Bancorporation for $14.6 billion in cash and stock.

That Capital One has turned itself into a national depository institution with branches and checking accounts is yet another indication, if one is needed, that credit cards are no longer a stand-alone business.

The deal gives Capital One a toehold in the lucrative New York market, and apparent expansion prospects there. It also builds on last year’s $5.3 billion acquisition of Hibernia Bank, which closed in mid-November. According to Capital One’s 10-K, Hibernia experienced what it called substantial growth in deposits after Hurricane Katrina.

Unremarked by media coverage was the irony that a business that’s still very profitable apparently feels it needs a cheap source of funds, and customers to sell to, in order to weather the many challenges now threatening its core competency.

Unremarked by the media, perhaps, but not by the stock market, which didn’t respond well to the news: Capital One stock, which closed on Friday, March 10, at about $90, closed on Monday March 13, the day of the announcement, at $83.10, and at $82 the next day. Morgan Stanley’s Kenneth Posner estimated in an investment advisory that the deal was neutral to Capital One earnings, and allowed Capital One modest synergies from the deal, worth $400 million in strategic value at best. He recommended buying on Monday if shares fell.

Standard & Poor’s said in a note that it felt the deal was priced fairly at about 15 times their 2006 earnings estimate for North Fork of $2.08 per share, and a price/book ratio of 1.6 times earnings. “We thought the recent weakness (in North Fork stock, prompted by concerns about its deep exposure to residential mortgages) presented investors with an attractive entry point. Apparently, Capital One arrived at the same conclusion,” wrote the note’s authors, Jason Seo and Mark Hebeka.

At least Capital One was acting out of relative strength: Its 2005 net income was $18 billion, up from $15.4 billion in 2004. But the company clearly felt it was wise, at a minimum, to continue diversifying away from credit cards. Capital One’s year-end credit card balances were $19.7 billion, compared with $20.5 billion in 2004, and average loan balances fell in 2005 to $12.07 billion, compared with 2004’s $12.24 billion. Interchange revenues grew to $514 million, compared with 2004’s $475 million. On a managed basis, Capital One reported $105.5 billion in outstanding loans, compared with $79.8 billion in 2004. Hibernia’s results were not included in Capital One’s 2005 results.

The company was clearly acting defensively, and recognizing that future growth in the credit card sector will be nothing like what it was only a few years ago—even for a company as well managed as Capital One—and that it won’t be again, anytime soon.

“(The deal) says a lot about their future as an entity,” says Michael Auriemma, president of Auriemma Consulting. “I’m not sure I’d have predicted they’d be buying banks, but there’s a strong realization that credit cards belong in an institution with retail customers—the amount of information- and data-sharing synergies by having both is phenomenal, and credit cards are challenged in terms of growth of new acquisitions these days.”

Capital One apparently has no bone to pick on that score. In its recent 10-K, it said that “The competitive environment is currently intense for credit card products. Industry mail volume has increased substantially in recent years, resulting in declines in response rates to the Company’s new customer solicitations over time. Additionally, the increase in other consumer loan products, such as home equity loans, puts pressure on growth throughout the credit card industry. These competitive pressures remain significant as a result of, among other things, increasing consolidation within the industry.”

Auriemma thinks, though, that Capital One can continue to be highly successful in the future. “There’s a lot of room to make a lot of money, and to grow your credit card business without growing new accounts,” he says. This, he says, includes building bigger balances, increasing consumer spending, and using the data from the payments stream to cross-sell other products to credit card customers. “This (deal) is less about new customer acquisition and more about managing existing customers, looking for a funding source, and diversifying revenues.”

By remaining on the offensive, Capital One apparently also hopes to keep Wall Street happy, and itself independent. Aside from Advanta Bank Corp., which reported 2005 net income from continuing operations of $116.7 million, America’s other monoline banks, once wildly profitable businesses, are gone with the wind. And Capital One itself isn’t entirely safe from acquisition; its float is only $25 billion, so it could clearly be bought by a large bank. Last year, Bank of America bought MBNA for about $35 billion in cash and stock, and other large banks—Wachovia Corp., for one—have said they’re interested in getting back into the credit card business.

North Fork reported 2005 net income of $948 million on revenues of $3.48 billion, and more than doubled its asset base after two 2004 acquisitions—Greenpoint Financial and The Trust Company of New Jersey. It has 360 branches in the New York area, including in northern New Jersey, and, according to Standard & Poor’s, it has about 4.8 percent of the area’s deposits. When the deal, subject to regulatory and shareholder approvals, closes in the fourth quarter, its top executives stand to get a payout of about $288 million, including chief executive John Kanas, who could receive as much as $185 million. Kanas joined the bank in 1971 and became president and chief executive in 1977. (Contact: Auriemma Consulting Inc., Michael Auriemma, 516-333-4800; Capital One Bank, 804-284-5800; North Fork Bank, 631-531-2058)

Checks Aren’t Disappearing Tomorrow: Deal with It

Reports of imminent death aside, checks aren’t vanishing, and banks need to deal with a future still filled with paper.

For one thing, people—and, especially, businesses—will keep writing them. And the efforts in the banking world have been more to electronify checks than replace them with electronic payments. So while the various methods of squeezing paper out of check processing are making progress, the day when there are no checks is far away, says Alenka Grealish, manager of Celent Communications’ banking practice.

“I don’t think we’re going to be around” when checks vanish, says Grealish, so check processing will persist. “Somebody has to be around to be the last resort—the person processing the last 100 checks.”

While people and businesses continue writing checks almost unabated, fewer of them are being processed every day: According to Grealish’s research, check processing, which has declined by 7.5 percent on a compounded annualized growth rate (CAGR) since 2002, will further decline by a 9.5 percent CAGR between now and 2010.

But even when 90 percent of checks are electronically processed, and Grealish expects that day to come by 2010, plenty of checks will still flow through the system—at least 20 billion, or 80 million a day, compared with about 33.5 billion in 2004, she estimates. So even under the most optimistic scenario, banks will need to be able to process paper checks well into the future: The event horizon for a checkless world is, at best, indeterminate.

Not to say that pressure won’t keep building to minimize paper checks: Among other factors militating against paper checks, processing costs will keep rising, and transport options will keep shrinking, until the sheer economics of check processing will drive much processing into the hands of a few third-party outsourcers with enough volume to make a living out of a business that was once the average bank’s meat and potatoes.

But meanwhile, and try as they may, banks won’t be able to punish their customers enough to stop all of them from writing checks. Ghoulish as it may sound, the banking system qua system is going to have to wait until check writers who are now 50 or 60 die off, which guarantees that on the retail side alone, checks have at least another 20 years of life in them.

Meanwhile, getting businesses to stop writing checks is almost a fool’s errand. For one thing, the game of treasury management is built around checks, the post office, and float. For another, the accounts system of the typical business is still what you could call a paper-rich environment, and not every business is big enough to profit from the agony a wholesale switching to computerized systems entails. Also, even if every large corporation switched to a fully computerized accounts system tomorrow, rivers of paper checks would still flow from the nation’s small businesses. And lawyers are very attached to paper receipts, whether or not electronic ones are admissible in court.

Banks are just as bad as check writers, she adds. Business checks are a fee-generating cash-cow for banks, and even the most enthusiastic advocate of electronic payments would be hard put to convince a typical bank to abjure business check processing in a period when almost every revenue source is under attack by technology and non-bank competitors.

Still, Grealish says there are ways to encourage even businesses to write fewer checks, and eventually whittle down the volume. “There are carrots and sticks,” she says. “Banks can offer economic incentives to customers to move to electronic payments. And I think the big cash-management banks will develop products that reflect the attributes of a check, but are electronic,” like a procurement card that replicates controlled disbursement and replicates the float.

There are other factors working against a long, prosperous future for checks, she thinks. While no bank has to pay a penalty for accepting only paper payments, notes Grealish, three significant trends are conspiring to discourage the practice, aside from rising processing costs.

These include the aforementioned decline in the number of air couriers specializing in checks: Grealish expects costs to skyrocket as much as 10 percent per year as a result. Also, she points out, rising short-term interest rates inflate the cost of float: She estimates that 50 extra basis points in the federal funds rate means an extra $50 per $1 million in float for a bank.

Added to this will be that generally increasing processing cost: The Federal Reserve, for instance, has been trimming check processing facilities and raising processing prices for the past several years. Costs like that should increase as much as 23 percent by 2010, she estimates. Also, says Grealish, third-party processors will gradually stop supporting paper-based processing technology over the next five years. The result of all these pressures will be a marked diminishment of paper in the system within four years, she says.

Don’t expect paper checks to vanish, though. Paper checks, diminished in numbers or not, will be with us for a long time. It’s like what actor Art Carney’s character said in one of his last movies, Harry and Tonto: “Nothing ever changes in this town—they just move the names around.” (Contact: Celent Communications, Alenka Grealish, 503-228-0878)

M&A Finance Corner

This week’s dealing and wheeling.

JP Morgan Chase & Co. is buying Kohl’s Corp.’s private label credit card accounts and associated outstanding balances for an expected $1.5 billion in cash. The exact price will equal the receivables balances at the closing date. Kohl’s will continue handling customer service, advertising, and marketing for the portfolio, and gets an unstated percentage of future payments. All Kohl’s credit card employees remain employees of Kohl’s. The retailer, which operates 741 stores in 41 states, expects to open about 500 stores over the next five years; it hopes to be operating more than 1,200 stores by the end of 2010. (Contact: JP Morgan Chase & Co., 212-270-7013; Kohl’s Corp., 262-703-1893)

E-monee.com Inc. has merged with Coffaro Family Products Inc. and will be operating under the E-monee name. Terms were not disclosed. E-monee,which had been privately held, now trades on the Pink Sheets under the Coffaro Family Products ticker symbol, CFRF. It has a mobile banking platform aimed at the unbanked that E-monee calls its Global Electronic Treasury System. For the 2004 fiscal year, E-monee reported $1.6 million in assets and a net loss of ($140,526). The merged company’s stock closed on March 17 at $0.32. (Contact: E-monee.com Inc., 954-229-3011)

Obopay says it raised $10 million in first-round funding from investors that include Redpoint Ventures, ONSET Ventures, and New York-based Richmond Management. Obopay has a mobile payments platform that lets subscribers get, send and spend money from their cell phones. (Contact: Obopay, 866-262-7373)

Personnel Moves from MasterCard, Optimal Group and Asia Payment Systems

Who’s gone where this week at MasterCard, Optimal Group, and Asia Payment Systems.

Javier Perez was named president of MasterCard Europe, effective March 10. Perez reports to MasterCard’s chief operating officer, Alan Heuer. Perez joined MasterCard in 1996 and has been president of MasterCard’s Latin America and Caribbean Region since 2004. (Contact: MasterCard Int’l, 914-249-5622)

Mitchell Garber resigned from Montreal, Canada-based Optimal Group Inc. on March 6 to pursue other opportunities. Garber was executive vice-president of Optimal Group, president and chief executive officer of Optimal Payments Inc. and executive chairman of FireOne Group PLC. Benjamin Dalfen, previously director and chief operating officer of FireOne Group PLC, was promoted to chief executive officer of FireOne Group, and Douglas Lewin became president of Optimal Payments. Lewin had been director and executive vice-president of Optimal Payments Inc. (Contact: Optimal Group Inc., 514-738-8885)

Rosaline Tam is joining the board of Hong Kong-based Asia Payment Systems Inc. Tam, a long-time payments veteran, replaces Matt Mecke, who resigned from the board. (Contact: Asia Payment Systems Inc., 760-918-5592)

New To Market from HSBC, GE and More

News and new products from First Data, GE Consumer Credit, HSBC, and many, many more payments companies.

The Clearing House Payments Company LLC‘s SVPCO-Electronic Clearing Services unit says daily average check image volume in its Image Payments Network grew 47 percent in February, surpassing one million items a day for the first time. The network processed 19.4 million items in February, a 40 percent increase over January. (Contact: The Clearing House Payments Company L.L.C., 212-613-9896)

Community Banking Systems says Sanderson State Bank, operating in the Houston, Texas area, is using its check imaging system.(Contact: Community Banking Systems, 678-781-7203)

ePassporte, N.V., based in Curacao, Netherlands Antilles, says it has a new product called DirectPay EU that allows European cardholders to move funds from their European bank accounts to their ePassporte accounts over the European ACH network. The platform is manufactured by 2000Charge Inc. ePassporte sells virtual Visa and Visa Electron cards online. (Contact:  ePassporte, N.V., 416-703-7200)

Fidelity National Information Services Inc. says Bankers’ Bank Northeast will courier its checks to Fidelity’s Massachusetts processing centers to be imaged. Bankers’ had been processing its checks at the Boston Fed before those operations were relocated to Windsor Locks, Ct. Bankers’ Bank Northeast is a wholesale correspondent bank for 150 New England community banks. (Contact: Fidelity National Information Services, 904-854-3282)

First Data Corp. says its First Data International unit will be processing MasterCards for Romania’s Credisson International, owned by BNP Paribas. Credisson has about 750,000 card holders. Separately, First Data says that Associated Banc-Corp renewed its credit card processing contract. Associated has been a First Data customer for 25 years. (Contact: First Data Corp., 402-222-6178; Credisson Int’l, 4021-312-02-20)

Fiserv Inc.’s Precision Computer Systems unit says it has a new Web-based compliance tool called PCS Bank Advisor, which was developed by Compass Group Consultants.(Contact: Precision Computer Systems Inc. 605-323-6252)

Gemplus International S.A.says Indonesia’s Bank Buana is using Gemplus’ EMV Dynamic Data Authentication cards. This is the first deployment of chip-based cards in that country. (Contact: Gemplus Technologies Asia, 65-6317-3333)

Global Payments Inc. says nine casinos in the United States and Canada have signed to use its new VIP LightSpeed cash access products. (Contact: Global Payments Inc., 770 829 8245)

HSBC – North America will be issuing a private label card for Brunswick Corp., which manufactures various recreational products, including outboard motors and boats. (Contact: HSBC – North America, 847-564-6761; Brunswick Corp., 847-735-4617)

Jack Henry & Associates Inc. says it will be offering its customers RSA Security Corp.’s Cyota Consumer Solutions authentication products. (Contact: Jack Henry & Associates Inc., 417-235-6652; RSA Security Inc., 781-515-6212)

JPMorgan Chase & Co. says it has a new prepaid debit card that speeds tax refunds to unbanked taxpayers. The money is available to the taxpayer as soon as the IRS electronically deposits refunds and is designed for people eligible for an earned-income tax credit. (Contact: JP Morgan Chase & Co., 212-270-7013)

Lowes Companys is launching a new credit card issued by GE Consumer Finance called The Project Card, which gives users a six-month project window to make as many purchases as they like without incurring any interest or required payments. (Contact: Lowes Cos., 704-758-3504; GE Consumer Finance, 203-585-6252)

NCR Corp. says Germany’s Kreissparkasse Bank will use NCR’s Personas M Series ATMs in its main branch in Koethen, Germany. NCR will also maintain all of the bank’s ATMs for at least three years. (Contact: NCR Corp., 937-445-3784)

Open Solutions Inc. says that $1.5 billion Provident Savings Bank was the beta test for Open Solutions’ new two-factor authentication product, called Security Matrix Two-Factor Authentication. Provident will be rolling the feature out to its customers in April. (Contact: Open Solutions Inc., 860-652-3153)

P&H Solutions says that $40 billion TD Banknorth will be offering P&H Web Cash Manager to its corporate customers. (Contact: P&H Solutions, 781-235-3424)

PaymentOne Corp. says is has a two-factor authentication product called the Identity Verification Service. (Contact: PaymentOne Corp., 408-362-4100)

Payment Processing Inc. says that AccountMate Software Corp. will be offering Payment Processing’s credit card processing services, operating on a platform from software developer ProgRes, to AccountMate’s customers. (Contact: Payment Processing Inc. 510-795-4988; AccountMate Software Corp., 415-883-8873)

Paymetric Inc., says it’s expanding its business relationship with CyberSource Corp. The companies will be offering their respective customers Paymetric’s Web-based payment portal, and CyberSource’s card processing platform. (Contact: Paymetric Inc., 713-895-2066; CyberSource Corp., 650-965-6000)

Qpass says it’s expanding its five-year business relationship with Cingular Wireless. Qpass, which operates Cingluar’s mobile payments operations, bought the assets of First Data Corp.’s Encorous mobile payments platform last year. Now Qpass will power Cingular’s third-party, off-portal business, including merchant management, billing, and subscription management. (Contact: Qpass, 206-267-2023; Cingular Wireless, 404-236-6321)

SVC Financial Services Inc. says it will be using Cardmarte Inc. to process its Scoot Mobile Money product, a cell phone-based, prepaid, re-loadable ATM card. (Contact: SVC Financial Services Inc., 866-370-9600; Cardmarte Inc., 818-325-9925)

U.S. Bank has adopted the Universal Payment Identification Code, or UPIC, which was developed by The Clearing House Payments Co. The UPIC lifts ACH-based payments information from a trade document in a way that allows the information to be processed and re-inserted in the document without revealing the payer’s banking information. (Contact: U.S. Bank, 612-303-0733)

VSoft Corp. says that Integrated Media Management is integrating several of VSoft’s check imaging products into Integrated’s TotaleReceipts software package. (Contact: VSoft Corp., 678-781-7232)

E*Trade Looks for Investment Funds at Logout

The best time to grab the attention of your online banking customers is immediately after they log in. Many financial institutions post offers and important information on a "splash screen" shown to customers before they see their account info. PayPal has been especially active in this area, placing new info in front of users every month or so for the past four years.

Etrade_logoff_offersWhere’s the second-best place to position an offer to online banking customers? In our view, it’s the screen displayed after successfully logging out. At that point, customers have completed their tasks, but you still have their attention as they wait to see that they’ve successfully ended their session. Last month, we looked at Bank of America’s preapproved credit card offer at logout (NetBanker Feb. 23).

E*Trade is another financial institution using the logoff-screen real estate effectively. Today, they displayed two offers designed to attract additional customer assets to the bank (click on inset for a closeup):

  1. Free one-year subscription to MorningStar’s stock-information service ($135 value) for transferring $20,000 or more into a new E*Trade Complete Investment Account (see the landing page below)
  2. 4.4% teaser rate (good for three months) for deposits into the bank’s Money Market Account. New customers earn the rate on any deposit amount, existing customers must deposit $25,000 or more to earn the special rate. After three months, rates revert to the normal, 3.6% for $50k or more or 2.75% for $5k to $25k (see the landing page below).Etrade_morningstar_offer

MorningStar offer landing page >>>

4.4% APY offer landing page>>> Etrade_logoff_mmda

JB

Improving Your Website’s Welcome Message

When your customer makes a significant purchase or signs up for online banking, make sure you take the time to send a well-designed welcome/thank-you email message. It not only helps make a good impression with your new customer, but also can pay for itself by decreasing telephone inquiries about the status of the new account. The message can also be used for SUBTLE upselling, such as a balance transfer offer for new credit card accounts.

Dell’s Welcome Message

Dell_welcom_mainToday we received this message from Dell thanking us for purchasing a new PC. Even though we’ve been frequent Dell buyers for years, they are not taking us for granted. The welcome message includes friendly graphics and a short welcome message with an embedded link to the "order status" page (click on inset left for a closeup).

The bottom of the message, which requires scrolling for most users, contains Dell_welcome_bottomkey information for future use such as serial number, customer number, support numbers, rebate info and so on. There is also a link to purchase add-ons (click on inset right for a closeup).

Click here to download the entire email message on one screenshot.

JB

Outsourced Rewards Program for Online Banking

BankingbonusIncreased competition, both online and at the branch level, has forced banks to consider a wide range of strategies for customer attraction and retention. One such strategy developed by Rennhack Marketing Services (RMS) <rennhack.com> leverages current technology to supercharge the old-fashioned free toaster concept.

In recent years, many banks have tempted consumers to open new accounts by giving away iPods, DVD players, and even free travel or cash incentives. While effective at bringing in new accounts, there seems to be less evidence to suggest that this approach does anything for customer retention over the long term. The RMS Banking Bonus program is intended to boost business and increase retention by rewarding both customers and employees for a range of activities.

First, each time an employee signs up a new customer, that employee is awarded points on the online system. By logging in to the RMS website, the employee can redeem their points online for gift cards, merchandise, or other services. Points are also awarded to employees for a range of business-generating activities, such as helping an existing customer apply for a credit card or open additional accounts.

Second, an additional and perhaps more powerful aspect of the program is that banks can also offer the same incentives to new or existing customers. By awarding points for enrollment in add-on services like direct deposit or automatic bill pay, banks can streamline service delivery and increase customer retention in one fell swoop. As an added bonus for customers and banks alike, participants can also win points by referring family and friends to open new accounts. In support of these initiatives, RMS offers banks a customizable online interface as part of the Banking Bonus system that can be bank branded for both customer and employee use.

RMS offers a large variety of products and consumer brands meant to provide the strongest incentives. Over 380 brands are represented in the system. Merchandise, gift cards, and “personal leisure rewards” from companies like Callaway Golf, Godiva, Dell Computer, and Walt Disney World are currently available to participants in the program.

Expect M&A to Stir the Pot in 2006

Dust off your resumes. Companies large and small will be embracing or fending off suitors this year, and since merger-and-acquisition (M&A)activity always means staff consolidation—also known as layoffs—some of the biggest beneficiaries of such deals will be outplacement firms and headhunters.

There’s plenty of money around to make this happen. Private equity firms have identified payments as an area ripe for their attentions, in part because the sector offers their investors predictable and recurring revenues, but also because it has high organic growth rates and, aside from a handful of giants, many small firms that can be picked up cheaply.

“Private equity companies pulled in something like $111 billion for this year, and they’ve got to use it somewhere,” says Richard X. Bove, a banking analyst with Punk Ziegle & Co. “They have to buy a lot of things, and a lot of big things, and they have to put that money to work.”

Another reason for accelerating M&A activity: Payments is a commodity business so competitive that almost the only way to grow is to buy companies for their customers. And larger, established companies need to grow, or suffer the wrath of Wall Street. That combination will prove deadly this year to attractive targets.

When they do put that money to work, expect long-established company names to disappear, along with many of their jobs. “They have to add value, and add value quickly, and since they don’t know how to build businesses, they strip them, so there will be a lot of pieces (of acquired businesses) available if they buy them,” says Bove.

There were 113 closed acquisitions of various sizes last year, according to Mercator Advisory Group, and while Mercator has no estimate of the dollar value of those deals, it expects the pace of this year’s M&A deals to be brisk in the payments space—especially those originating from private equity funds, which find such deals relatively easy to sell to their investors.

“They have a hard time finding businesses that have recurring and predictable revenues going forward, and payments companies are like that, so even if the growth rate (of individual companies) isn’t what it used to be because of the maturation of the industry, private equity firms are interested,” says Evren Bayri, who tracks deals as director for the company’s credit advisory service.

Predictable, recurring revenues play a useful role in smoothing investment results, an important quality for organizations like pension funds, which need reliable revenues to fulfill obligations to their pensioners. That smoothing effect is widely considered to be one reason Morgan Stanley decided to hold on to, and grow, its Discover Financial Co. unit, even if its performance trails its competitors.

This year’s deals may be largely emerging from private equity firms, but that’s hardly to say all those deals will be small; last year, a consortium of private equity groups bought IT giant SunGard for a reported $10.8 billion. Also last year, Texas Pacific Group and Thomas H. Lee Partners, both private equity investors, invested $500 million in Fidelity National Financial Inc.’s Fidelity Information Services unit, following a failed attempt to raise several billion dollars intended to buy the whole company. Later last year, Fidelity merged the unit with Certegy, effectively spinning off Information Services and, in what was widely viewed as a side-benefit, diluting the holdings of Texas Pacific and Lee, while giving them an exit if they wanted one.

Private equity-financed deals aside, expect some really big, traditional corporate M&A deals to make headlines this year, says Bove. Think J.P. Morgan Chase & Co. buying First Data Corp., he says, or Marshall & Ilsley Corp. spinning off Metavante.

First Data, thinks Bove, may sell itself off piece by piece and distribute the proceeds to its shareholders. There’s some indication this may occur: On March 7, First Data Inc. sold its BidPay.com unit to CyberSource for $1.8 million in cash—an admittedly tiny deal, but one that may promise more to come. But in his opinion, it’s more likely that Morgan/Chase will buy it.

“I’m convinced that Heidi Miller is going to do the next major acquisition—she took control of that operating division to prove she could run a company, and she’s proved it—and First Data would be right up her alley” because First Data would fit into Chase’s plans to dominate the payment processing space, says Bove.  Miller is a Morgan/Chase executive vice president, and ceo of its enormous Treasury & Securities Services unit. First Data and Morgan/Chase say they don’t comment on market speculation.

As for Metavante: Bove has long thought that Marshall & Ilsley needs to spin off its payments unit in order to realize its value. “M&I has reached the point where they can’t get the overall holding company stock to go higher, and I think the only rational solution is to spin out Metavante, which they tried to do before,” he says. Marshall & Ilsley says it has no plans to spin off the unit.

One other possibility for a big deal this year? Bove expects Mellon Financial Corp. to beef up its large and well-regarded payments business this year through acquisitions.
“I think Bob Kelly (Mellon’s new CEO) was put in place for the purpose of expanding that business through acquisitions,” says Bove. Mellon denies this, saying that “Bob Kelly’s focus at Mellon is on organic growth.”

Such headlines will be flashy if they appear, but the most disruptive force on day-to-day life in the payments space is more likely to be smaller, less ostentatious acquisitions by private equity firms or the companies they invest in, intended by those shops as the kernels of new businesses, built around newer technology and innovative business models.

“The whole idea is to make a small-margin business into a wide-margin business,” says Andrew Dresner of Mercer Oliver Wyman. “What (acquirers) are looking for is a scalable model, where if you add volume, you increase your margins.”

Payments has those characteristics, says Dresner, because the underlying payments sectors have high growth rates in and of themselves—whether individual companies are matching that growth or not—and because the areas with the highest growth rates are still the domain of relatively small, innovative companies.

“That offers opportunities to do rollups,” he says. “You buy a pretty good company, and use it as an acquisition engine to pick off a lot of small companies. So you turn a small company in a high-growth industry into a big company in a high-growth industry; they’re not looking at these companies for what they have on the table today.”

One such suspect: Pay By Touch, which has attracted $320 million in new investment capital since last September—much from private equity funds—for its biometrics-based payments model. The company says it’s using that money to, among other things, grow by buying customers.

Last year, for instance, Pay By Touch bought 120,000 merchants when it acquired the assets of CardSystems Solutions late last year for $47 million in cash and stock. And in January, it closed on an $82 million acquisition of Bio-Pay, a former competitor with more than 2 million customers.

Companies like Pay by Touch may be the beneficiaries of this phenomenon, but the companies they buy are not. “If it’s a vendor play, and they’re buying a smaller company with similar technology for its customer base, I certainly see people losing jobs,” says Bayri. Even in the case of a real merger, with both parties bringing something to the table, he adds, “You see engineering jobs being cut as they consolidate the R&D staff; then they beef up the sales staff.”

The companies doing the buying—or financing it—really shouldn’t be blamed for any job losses, though, even if they are the agents of it. It’s more in the nature of business:  The private equity companies, for instance, are under pressure to perform financially, so following an acquisition, they typically begin by claiming they are returning the acquired firm to its core competencies.

As a practical matter, however, they begin laying people off, avoiding new investment in areas like research and development, and selling off subsidiaries. “They strip down the company, eliminate the costs, and make it look profitable in the short term,” says Mercator’s Bayri.

Such activity isn’t common yet, but he expects it will, if more private equity firms enter the fray; in the last year, Bayri says most M&A activity was “mostly bigger players buying smaller players, or vendors buying specific products that target specific segments.” Likely sectors: Mobile payments, health care payments, micropayments, stored-value cards, and e-commerce generally, says Dresner.

When the dust settles, the result will be mushrooming companies apparently coming out of nowhere to dominate their niche and eventually get very big. “The forces for consolidation in payments are enormous,” says Dresner. “It’s a scale business with a heavy technology business, so they all go down that path, be it merchant acquiring or PIN debit or what have you.” (Contact: Punk, Ziegel & Co., Richard Bove, 727-545-0505; Mercator Advisory Group, Evren Bayri, 781-419-1700; Mercer Oliver & Wyman, Andrew Dresner, 646-364-8444)

Capturing the Blog Buzz about Prosper

Prosper_blogger_listings If you’ve got it, flaunt it. Or so the saying goes.

In an online financial services first, newly launched person-to-person loan marketplace Prosper (Netbanker Archives) includes an "In the Blogs" section in its online Media Room. The link, positioned between the traditional "In the News" and "Press Releases" sections, allows users to easily read about the company in pre-selected online blogs (click on inset for a closeup).

This provides much more material to view than the three news articles and single press release the 3-week-old company has posted. The company has control over the content; so don’t expect to see links to any ProsperSucks blogs down the road. 

For Prosper, the blog links provide several benefits:

  • Several are authored by Prosper group leaders, so they contain ongoing encouragement for the lending exchange
  • The newness of their business model provides good fodder for inclusion in wide variety of blogs
  • They are too new to have much negative talk in the blogs

Action items
Most financial institutions receive little press play, there just isn’t that much newsworthy in the daily battle to sell and service deposit and loan accounts. However, if you are well received in your community, you may be receiving good feedback from local bloggers. Linking to these posts could be a valuable addition to your "About Us" section.

–JB