StratEx at BAI Payments Connect

In the post Dodd-Frank-Durbin world, the mantra chanted by many is that banks have to be more innovative and nimble. They have to provide differentiated value in the face of fierce competition from non-banks. Customers want to interact 24/7, through multiple channels, and using varied payment methods. The holy grail is a real-time, 360 degree view of the customer that includes all relationship types (deposit, loan, investment etc. etc.), channels of interaction (online and brick and mortar) , and all payment vehicles from check to card to wire.

Easy, right? Wrong!

Most financial institutions are saddled with systems that are decades old, and impossibly silo'd. The choices in front of financial institutions are to:

(a) Extend the reach of legacy systems through systems like payment hubs, or
(b) Rip out old technology completely and replace them with new systems.

The Bank Administration Institute (BAI) will address this choice between the devil and the deep blue sea, among many other interesting topics, at Payments Connect in Phoenix, March 7 through 9.

I will be providing an overview of the topic and moderating discussion on the topic at a session, aptly entitled, "Technology and Process En Route to Payments Profitability: Getting the War Elephant to Dance."

If you're planning to be at the conference, you may want to put this session on your agenda. It should be informative and interesting. If you don't plan to be in Phoenix, watch this space, I'll post a summary in the near future.

Fidavante- Merger Musings

In an era characterized by synthesized monikers a la "Brangelina" for famous couples, "Fidavante" is perhaps warranted for the entity to be created by Fidelity National Information Services's acquisition of Metavante. The combination promises to be a powerhouse to rival Metavante's cross-town rival Fiserv. With over 2200 core banking customers and 220 million cards processed, Fidavante's potential operating leverage is nothing short of phenomenal. The road to fruition, however, is dependent on the successful integration of two complex organizations.

At the core. The greatest payoff, arguably, is in the rationalization and rejuvenation of the combined core banking base. As the oft repeated watchword argues, "Core is King!" It is also the most difficult integration challenge ahead. Both companies have large customer bases with legacy systems. The Fidelity repertoire includes customers on systems as disparate as Systematics, Horizon, Mercury and Miser. The Metavante stable includes the Integrated Banking Suite (IBS) platform, as well as the Bankway products that came by way of the Kirchman acquisition- the latter marketed through both outsourced and in-house license models. In addition, Metavante has entered into an agreement with Temenos to produce a next-generation core banking solution for large U.S. banks. The Fidelity equivalent is its Profile product.

There are myriad strategy alternatives. Does it make sense to focus the new technology from either Temenos or Profile on effecting a technology turn within the existing small-to-medium sized institution base? Notwithstanding the daunting number of conversions, it can be argued that this option is easier than the heart surgery of core replacement in a large bank. Or is it better to leave the legacy base as is for now, and use the next-generation platform to go after larger institutions? How does one pick a winner between Temenos and Profile, given the shots across the bow already being fired with the recent statement from Temenos that its agreement with Metavante is binding on post acquisition successor parties? If large banks are the target market, exactly how big is big?

Whale hunting perils. I suggest the foremost prerequisite for success is to get a clearly articulated strategy for each core banking market segment. It can be argued that both companies have a predominantly small-to-medium financial institution footprint. Thus, execution of a strategy for that segment, regardless of what that ends up being, is likely to come naturally to the combined entity. Scaling the heights of large institutions, on the other hand, is a different matter. Selling to, and serving large, whale-like institutions is an art by itself, considering the long selling cycles, significant customization, and the volatility that large deals bring to the P&L lines. That said, there are elements within both companies that have come by way of acquisition that have a large-institution history. The trick will be to identify those skill sets, and allow them to succeed within an operating mileu that has long been used to the relative predictability of smaller institutions.

Switch hitting. The payments side of the business offers major synergies. The NYCE network from Metavante and the debit switching operation from Fidelity's eFunds acquisition are natural fits. The synergies between these two entities stretch back in history to when eFunds was part of Deluxe Corporation. If memory serves me right, Deluxe Data Systems provided debit switching processing services for NYCE based on the flagship CONNEX product. NYCE later took the processing in-house, based on a licensed version of CONNEX. Even today, CONNEX is a leader when it comes to very high volume switches like NYCE, and the synergy analysis should be straightforward. Looking ahead, the gap that has endured the Deluxe-eFunds-Fidelity chapters, is for a product that could compete effectively with ACI's Base 24 at smaller networks for switching and peripheral functions like ATM driving... another acquisition down the road?

It's in the cards. Fidelity brings with it a strong card processing base aimed at predominantly issuance processing for credit unions. This business has preserved its dominance in the credit union space right from its inception as Telecredit, through its acquisition by Equifax, spin-off as Certegy, and subsequent purchase by Fidelity. This is a net plus, as there is nothing on the Metavante side that enjoys a leadership position in this segment.

Striking the right image. Both companies moved into image based check, remittance and document processing through acquisitions. Metavante has a comprehensive offering from its purchases of AFS, Vectorsgi, Endpoint Exchange,Vicor and Treev. Its strategy has been to grow the medium sized institution AFS business base, while taking its image work-flow expertise up market to large institutions, leveraging account relationships and IBM CPCS based product knowledge from Vectorsgi. The Fidelity offering is primarily based on its acquisition of Bankware. There will likely be a need to rationalize offerings between the erstwhile Bankware and AFS product lines.

There has always been a gap in the old AFS line at the very low end (institutions of less than $100 million in assets). There may be a case for looking at the Fidelity (Bankware) line as an alternative. I suspect, however, that both companies will look at addressing the low end through outsourced item processing services. The choice of the right platform will depend on multi-institution capability. Both Bankware and AFS originally built products for in-house licensed use. It is often the case with products initially built for in-house licensed use that functions like partitioned databases and multi-customer billing (as opposed to operating a different instance of the product to serve each customer), are part of later redesign efforts. Both companies have been at the multi-institution outsourcing business for a while, and it is entirely possible that both platforms lend themselves adequately to the needs today. Metavante's Vicor acquisition brings a high end wholesale remittance product line which doesn't have an equivalent on the Fidelity side. The Endpoint Exchange check image exchange network is unique with the many thousand routing and transit points served, although it is still challenged in its ability to offer a convincing alternative to the Federal Reserve.

Check it out. Fidelity has a check verification and guarantee business that includes the well known SCAN check verification system, courtesy eFunds. There could be interesting synergies between these check services, and Metavante's merchant capture products and services. Being able to assess payment risk at the point of check image capture can be a powerful combination, particularly if there are thoughts of launching "bank agnostic" merchant capture services. A broader approach to assessing debit risk- a debit bureau if you will- can also include Chex Systems from the erstwhile eFunds stable which is easily the most well established new account risk management system in the country.

Across the oceans. While the two companies together will operate in 27 countries and serve customers in 90, the international presence comes mostly from Fidelity. The expansion overseas has its roots in a strategy on the part of what was then Equifax Card Services to take its card processing expertise beyond U.S. shores. This has grown into a viable global presence. Fidelity's eFunds acquisition also brought with it a large presence in India, which provides a base of lower cost, high quality technology development expertise. This operation has its roots in the joint venture established between Deluxe Corporation and India's HCL Corporation in the mid-1990s to tap into India's growing technology base (eFunds was later spun off from Deluxe). Metavante's international presence is more modest, comprising mostly of distributor based product sales and recent agreements with Temenos and Monitise. The future augurs well for Fidavante's international expansion, as it is not beset with the same scale of integration challenge as the home base.

Cultural Exchange. In most mergers, getting different cultures to work together is more difficult than rationalizing products and technologies. At first glance, Fidelity and Metavante are similar in that they are both providers of banking and payment processing services to mostly mid-sized institutions. Processors tend to have a culture that is unique in that there is great emphasis on operational efficiency to keep pushing those "clicks" through. A closer examination yields a few differences. Metavante had its origins as the captive data processing center of the Marshall and Ilsley bank. Until the spin-off of a year or so ago, the company grew dramatically under the ownership of the large mid-western bank. The company prides itself on customer service, and was able to develop its culture in a relatively stable atmosphere. The Florida based Fidelity has grown through the acquisition and absorption of sizeable businesses with varied histories. As discussed previously, Fidelity is also more global in its footprint. While I don't see any "show-stoppers", it should be recognized that there will be varied perspectives at the table.

A third pole? Almost more interesting than the Fidavante saga is the potential shift in the competitive landscape. The combined entity presents a formidable challenge to Fiserv. With the exception of not being able to match Fiserv's dominance in the ACH arena with its PEP+ product, it is arguably set to becoming the second pole in this business. Does this signal a rush for scale on the part of others? Like nascent planetary systems, there is the need for a center of mass around which alternate poles develop. Will it be First Data, privatized now, and debit payment-centric in posture? Can an SAP or an Oracle morph from being horizontal players to slugging it out in this vertical market? Where does Intuit go, post the Digital Insight acquisition- was that just a toe in the water or a harbinger of a more purposeful move into banking and payments? Where does this leave the many niche players in the marketplace?

It is possible that nimbleness and innovation will serve niche players while the big players sort out the integration challenges. They will do well, however, to heed the adage that the grass gets trampled when elephants quarrel. To take on the dominant players on their terms- especially those who can leverage their core banking business base- is suicide. The niche players only have two choices: Become a bigger fish, or find a smaller pond.

Predicting course and speed in choppy waters is difficult at best. Nevertheless, the observations offered here, as well as insights from those with other perspectives, makes this a fascinating development to watch. As to the question that I know some wag will ask, "Given the Brangelina analogy, which one of these companies is Angelina Jolie?".... Sorry folks, I am not going there....

Payment Convergence- Vision or Hallucination?

According to a recent study by McKinsey, the U.S. payments industry is a $282 billion business. In a report entitled "Weathering the Storm: Global Payments 2009", The Boston Consulting Group estimates the global payments business at $805 billion, ramping to $1.4 trillion by 2016. It goes without saying that payments is big business. But is big beautiful? It could be, if those that ascribe to a converging payments paradigm are right.

Silo'd be thy name. Payment during early times was as simple as trading bartered goods or exchanging coins. The last two hundred years have seen an explosion in the many ways value can be transferred, including cash, checks, wire transfers, automated clearing houses (ACH), card payments in various hues, mobile- the list is endless. Each of these evolved separately to meet a specific need, creating distinct processing systems and organizations in their wake. Today's financial institutions have multiple systems, with separate rules of governance, and organizational fiefdoms that resist attempts to blur boundaries.

Holy Grail anyone? The idea of a unified infrastructure to process all payment types has been mooted for decades. It is argued that, at a notional level, there is little difference between "capture-validate-clear-settle" in check-speak, and "acquire-authorize-switch-settle" in card-talk. So, would it not be simpler, as some would argue, to have one system that did it all? But given that we have spent the better part of a century perfecting these older systems, does it makes sense to go where angels fear to tread? If it is not broken, why fix it?

Can I call you Sybil? The world, unfortunately, is not that simple. Checks can now be converted to ACH payments forcing an erosion of previously impervious walls. In an even more bizarre twist, checks can be imaged, transmitted, and reprinted as paper substitute checks. Newer forms of payment like mobile and prepaid use the debit or ACH rails as the basic underpinning for moving money. Automated bill payment is essentially an Internet front end to ACH transfers. With payments morphing from one to another with the skill of Dickens's artful dodger, financial institutions are pressed to ensure profitability across payment channels, adherence to disparate rule sets, and risk management that spans silos.

Brave new world. The 21st century has ushered in the need for compliance with a dizzying array of legislation. There is the Patriot Act, Sarbanes-Oxley, Basel II, and OFAC- to name just a few. The post bailout era will likely herald significant new legislation, if I am reading the winds from Washington correctly. The cost and complexity of updating legacy systems one at a time to ensure compliance is prohibitive. Moreover, it is difficult to find skill sets to modify dated systems within an acceptable lead time.

If there is one reason that trumps all others, it is the need for improved customer service. Customers are decidedly unsympathetic to the self-inflicted tribulations of their financial institutions. They need to be able to interact through branches, call centers and the Internet to get information across accounts and payment vehicles. The new "millenial" generation is not likely to have the patience to wait while an operator logs in and out of multiple systems.

End or the beginning? While few would argue against the case for convergence, there are practical considerations to be addressed. Does one begin with the settlement end of the value chain and work one's way forward? The move towards Real Time Gross Settlement (RTGS) systems, particularly in emerging economies, suggests that "the end as a beginning" idea has some takers. Nevertheless, I suggest that the greater payoff is at the other end of the telescope. The conversions from one payment to another take place closer to the point of origination, and that is where the greatest benefits are to be garnered from a unified infrastructure. It is also where the functional and technical challenges are acute.

Buckets or pipes? While there are varied perspectives on how to get there, all are agreed on one thing- do not try to redesign existing legacy systems. There are two approaches to a convergent payments platform. There is the data-centric model based on a central repository for all payments information, and customized one-to-one interfaces with the various payment and core processing systems. An alternate approach is message-centric with a central hub through which all communication between payment, core and other systems is routed. The nirvana is a combination of both, governed by versatile business rules engines that financial institutions can control.

Does size matter? The technology vendors in this space are faced with an interesting choice. Does it make sense to target large financial institutions where the payoff from convergence is likely to be greatest? Or is it better to focus on smaller institutions, where implementations of this kind are not akin to open-heart surgery? The answer depends squarely on the vendor's positioning and business model. If the major contribution to profits is from systems integration and professional services, the high end segment suggests itself. On the other hand, if the model is tilted towards license sales with a modest service component, the lower end would make sense. Technology vendors would be well advised to pick their poison. It is a toss up as to whether it is harder to scale up or scale down. They are both incredibly difficult. This is an instance of clear positioning and alignment at the outset being critically important.

Back to the future. It is perhaps counter-intuitive to suggest that the way forward involves re-engineering legacy processes with the introduction of new convergent systems. Nevertheless, evidence indicates that there is an emerging synthesis between checks and ACH to be followed by online debit. The path is fraught with challenges, some of which I have touched upon.

A mentor of mine once told me that there is a very thin line separating a vision from a hallucination. Where do you think payment convergence lies? Let me know.