Every day another announcement reinforces my belief that mobile banking is here to stay, and today is no different. For those who have not heard, a recent press release is noteworthy: “mFoundry and First Data Team Up for Mobile Solutions.”  This announcement by itself is impressive; however, when you also consider the other partnerships in place, such as last November's “CheckFree and Firethorn Partner To Deliver Mobile Banking and Bill Payment Services for Financial Institutions,” you realize the true scope of what is unfolding. 

Let me step back just for a moment to frame what is taking place. As of June 2006, according to fdic.gov, there were 8,767 commercial banks and savings institutions operating within the United States. In addition, there are 8,535 credit unions, according to cuna.org, as of May 2007. This represents a total of 17,300 U.S. financial institutions. Now, let’s look at some of the figures quoted in the press releases listed above. 

According to the First Data press release, “As a component of this relationship, First Data's STAR(R) Network and mFoundry expect to offer mobile banking opportunities to more than 5,400 financial institutions.” CheckFree, which already served thousands of financial institutions itself, was just acquired by Fiserv (pending approval). When we dig into that press release we see that, “Fiserv currently serves almost 6,000 core processing clients and all top 100 banks in the U.S.”

Now, I understand that there are overlapping institutions and that not everyone will provide mobile banking; therefore, I will not attempt to estimate the number of institutions that will implement the Rich UX solution via their preferred vendor. However, I’ve worked with scores of vendors over the years and they all agree on one thing – the toughest part of signing a new institution is simply getting a foot in the door. So once you realize that Firethorn and mFoundry have literally thousands and thousands of “open doors,” you begin to see why the estimates of quick mobile banking uptake are more and more likely.

With the recent Motorola/C-Sam mobile payments announcement followed by similar payments platform launches from PayPal, Black Lab Mobile Inc., Commerciant LP, Sify Ltd. in India, Q-Pass, and SVC Financial Services Inc., it’s obvious that mobile payments aren’t the mere pipedream they seemed to be last year.

What’s less obvious is the change about to befall the payments industry and, especially,  banks, that mobile payments embodies. To hear Ray Kurzweil tell it in his newest book, The Singularity is Near (Viking, 2005), the rate of such change in the next ten years will be exponential, and a line graph of it will be vertical. The change grows slowly and imperceptibly at first, he says, but when the pieces are all in place, its acceleration explodes.

This is important not just because the world we’ve lived in is about to more or less end, but because of the backdrop against which innovations like mobile payments will take place. The current crop of cell phone-based payments will preserve bank and card brands, but the second generation of mobile payments will be made with very small devices that will eliminate the possibility of displaying any sort of logo and, thus, branding. The third generation—taking place in hyperspace, for all we know—will follow in less than ten years, and make the second generation’s futuristic world seem quaint.

Technology has ceased being only a more efficient tool to accomplish traditional jobs; now, it’s changing the jobs themselves. The capabilities created by technology create the premise for ever-greater changes in what’s achievable, in turn raising expectations of what can be accomplished; meanwhile, the abilities of that transforming technology lay a foundation for even more change. Banking and payments is unlikely to escape this phenomenon, and in the approaching world, the past is a poor predictor for future performance.

Sound familiar? Sure. Consultants and other wise men have been intoning about this for 20 years, and financial professionals can be excused for being skeptical about this latest round of warnings that the sky is falling—especially since the sky’s still blue.

But technology has always been the instigator of change and not just its messenger. The telephone and private automobile turned concentrated cities with economic specialties into sprawling, economically-diversified megalopoli, eventually allowing people like this reporter to live in rural America and still make a living in the mass market (I was doing this before the Internet). The idea of just-in-time delivery didn’t just turn Indianapolis and Nashville into thriving metro areas because each is at a nexus of the Interstate Highway system. It made the idea of a national industrial base obsolete, which in turn paved the way for the minimization of the nation state.

That still-evolving transformation took two generations following World War II to become visible, even though the pieces were in place before World War I. But this next chapter will take much less time, and be more transformational: Scientists, for instance, have already created two different types of machine-based muscle tissue, paving the way for real androids right out of Bladerunner, while experiments leading to computer-enhanced humans—cyborgs—are underway today.

Finance cannot escape the revolution it helped create. Ten years ago, foreign-exchange trades were cleared over long time periods, all over the globe. Today, most are cleared outside Coventry, England, at the Continuous-Linked Settlements Bank. Credit derivatives, now a multi-trillion dollar market made possible by computers, barely existed ten years ago; today, the global hedging market is probably bigger than the equities market being hedged. And certainly Basle II compliance, which frees so much capital for business purposes from regulatory reserves, is built entirely on the idea that creating a computer-generated, intraday picture of institutional risks is achievable.

But in most cases, banks have been following change and trying to adapt it to their internal considerations. They have rarely embraced it. This may be rational and seems prudent—both virtues in a period of great change.

But as Harvard’s Clayton Christensen points out in his work, this is also what destroys institutions—even industries. Acting rationally and prudently, institutions focus on building on their core competencies, and serving their best customers: Little-regarded businesses pick up the unwanted crumbs, and sooner or later, the market for the big company’s products is hollowed out, and the disregarded company, now a dominating giant, is buying the former colossus.

That phenomenon is what created First Data Corp., and what today undermines the business case for credit cards. It’s also what underlays the idea of the so-called “cannibal” bank of the 1990s: An entirely new institution sponsored by a traditional bank that, using the latest technology, would create the next generation of banking and eventually “eat” the parent.

Jamie Dimon pretty much scuttled that latter idea when he shut down Wingspan Bank and took the reins of Bank One. The dot-com bust did the rest. But the dot-com bust didn’t bury technology or technological change—it just weeded out businesses whose primary asset was a preposterous story, and left the adults in charge. The Internet is still growing, and computers are faster, smaller, more common and more capable than ever.

It’s not impossible that the Wingspan idea was just a little early. Certainly banks, which rely more and more on payments—entirely a computer operation—can’t afford to minimize how computers are changing the nature of their business, just because their internal politics finds “Wingspan” to be a convenient buzzword for dismissing a threatening new idea.

Those discussions typically revolve around banks being either this, or that—fully automated, or merely assisted by useful tools. This premise is nonsense. The world banks and payments operations we live in today wasn’t created by Kierkegaard; it was created by people like Ray Kurzweil and Andy Grove. The Medici Bank closed a long time ago.

Mobile payments is the path to the next generation of retail payments, and even if they do threaten to minimize—or atomize—the idea of what a bank’s brand is worth, that’s no reason to avoid the reality that there’s plenty of money to be made in the future of payments, and that clinging to old forms is unlikely to prove a useful response to new facts.

In the American Civil War, infantry doctrine was still attached to ideas of how to overwhelm the enemy’s position, based on the idea that slow-loading muskets made it possible to march up to their line in formation, and give ‘em the bayonet. But new guns made mincemeat of that idea—and of the men who charged entrenched positions defended with those guns. There’s no reason for banks and their payments operations to suffer similar fates if they embrace change.

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)

Last week’s news that First Data Corp. will spin off its Western Union operations to First Data shareholders and create a company worth an estimated $20 billion is probably good news for Western Union. Noting that the parent company will be keeping its card processing, card services, and international business lines, observers were asking what had otherwise changed.

The answer: Nothing. “The bottom line for me is that this doesn’t change the realities, which are that even though they’re going to reconstitute what First Data will be, it doesn’t change the facts that Western Union, while it’s a good business, is facing increasing competition around the world, that the card business is struggling mightily, and that merchant processing is a commoditized business,” says Scott Kessler, who follows First Data for Standard & Poor’s.

Continue reading "Western Union Spin Off May Do Little for First Data" »

MSFDC

www.msfdc.com

The Microsoft, First Data joint venture, MSFDC,
has posted sample bills from four industries: telecom, utilities, mortgage and credit card.

MSFDC’s Web site was well-prepared for launch date.

Microsoft, with more than 150 million users of its software products, and First Data Corp. processor of 150 million credit card accounts, announced a joint venture, MSFDC, that will compete with CheckFree and others in the growing field of digital bill payment. But MSFDC’s approach is radically different, focusing on Web-based bill presentment with a business model based on the biller paying the tab rather than the consumer (or consumer’s bank).

This approach promises to speed consumer adoption, which in turn will finally get billers interested in making the necessary electronic connections. Finally, a solution to the age-old “chicken and egg” conundrum. Which comes first, billers able to accept payments electronically, or consumers wanting to make electronic payments? It no longer matters. The combined Microsoft/First Data entity has the credibility, resources, and customer base to bring both chickens and eggs to the table by the time the service launches in 1998.

While the focus is bill presentment, the service also includes “pay anyone” bill payment so that users know they can get all their bills paid online, not just the ones presented online. Pay anyone bill payment will function in the same manner as competitive services from CheckFree, Travelers Express, and others. Users initiate payment requests online and MSFDC remits the payment to the merchant in the fastest way possible, either electronically or by mailing a paper check. Banks offering the service will be charged fees competitive with other bill pay processors, $0.40 per payment plus or minus a couple cents which banks can pass on to users or absorb.

Bill presentment is more complicated, but far more appealing to everyone involved: end-user, biller, bank, and MSFDC. Billers use Microsoft software to send statements to the MSFDC data center in Denver. Bills are posted to customer mailboxes on the MSFDC server. Users accessing the service through a bank would first log-in to their bank’s Web, then select pay bills to be transported to the MSFDC Web. The transition would be seamless with all screens retaining bank branding and navigation. After authorizing payment, users would be returned to their bank’s Web.

In the background, MSFDC would debit the user’s bank account that evening and send a message to the biller alerting them that payment had been authorized and a debit item had been submitted. At that point, the biller could elect to update the user’s account to show payment was on the way, or they could wait another 24 hours until “good funds” were assured. Either way, it will provide needed relief to bill pay users, and their bank providers, tired of the tedious tracking of “electronic” payments languishing on a postal truck or in the biller’s exception-item bin.

Whether MSFDC pulls it off is yet to be seen, but given the track records of its parents, we think they will. Here’s why:

• It’s Bank Branded: MSFDC could have gone directly to the end-user in the same manner as Microsoft Expedia and Investor. But this would have required a significant investment in time and money building consumer trust. Instead, it appears MSFDC will remain largely behind the scenes, acting as a secure electronic messenger (not unlike the postal service delivering letters and payments). Instead of facing competition from 20,000 U.S. financial institutions, MSFDC has 20,000 potential partners serving 100% of the banking market. The crucial selling point in getting billers off the dime.
• It’s Free: More precisely, billers are picking up the tab instead of consumers. It’s the only proven model for Web success, and it will speed adoption like no amount of advertising and promotion could. Assuming MSFDC can deliver the user base, billers will save considerably more than the $0.30 they are anteing up to MSFDC.
• It Saves Banks Money: Bill payment has been a customer service headache since it was invented. Now banks can offer a state-of-the-art Web service for no cost and minimal customer service expense. With true next day payment, customer service should be a breeze. In fact, once the bugs are worked out, we think your overall expense on an MSFDC bill presentment payment will be negligible. Maybe even less than the support costs of traditional hand-written checks.