To Watch Payments Convergence, Watch Metavante

Watching Metavante may be one of the best ways to monitor the evolution and convergence of electronic payments in the US. Through an aggressive acquisition strategy, Metavante has become a leading provider of a wide range of banking and payment services to financial institutions. But while the company has initially focused on their individual solutions and cross-selling, they have also begun to exploit the opportunity to “connect the dots” between their various offerings and offer new capabilities to their customers that others could be hard-pressed to match.

I recently discussed the company’s strategy with Jeff Lewis. A twenty-year veteran of the company and a senior vice president, Jeff is responsible for the Payment Solutions division, which generated roughly half of the company’s $1.3 billion in revenue and $119 million in net income in 2005 (the other half comes from their Banking Solutions division). Payment Solutions includes EFT Solutions, Payment Network Solutions, ePayment Solutions, and Healthcare Payment Solutions.

Jeff has a very clear perspective on the company’s strategy, and is intimately involved in executing it. As we’ve watched Metavante spend nearly $1.5 billion over the past few years to acquire 17 companies, I had one question for Jeff: what is the longer-term strategy behind all these acquisitions? At some point, do all these individual pieces create value that exceeds the sum of their parts?

Jeff acknowledged that the initial strategy has been focused on filling out their product line to compete more effectively, enhancing economies of scale, and expanding the customer base for cross-selling. Being a more full-service provider in areas like check imaging, risk and compliance, and healthcare payments has allowed Metavante to retain and expand its relationships with customers. Over the past two years, revenue has grown 25% per year while net income has grown 40% per year, according to the company. Similarly, Metavante competitors such as Fiserv and Fidelity National Information Systems (including the former Certegy) have been successful in a strong market by following similar strategies.

However, a hidden opportunity for growth and competitive advantage may come from Metavante’s efforts to “connect the dots” between the comprehensive set of networks and solutions the company has acquired. For example, Jeff noted that they are designing a payment hub and routing capability that would essentially sit between the various payment networks and solutions (e.g. ACH, paper checks, check images, NYCE) and help banks make intelligent payment routing decisions that consider float, fraud exposure (from their PRIME acquisition), and other factors. Such a solution would help their bank customers increase the profitability of their payment businesses, which have come under pressure as the migration to electronic payments has cannibalized traditional sources of profit. It may also create a compelling reason for institutions to choose Metavante over other providers.

Another example of the company exploiting an opportunity to “connect the dots”: the recent acquisition of Link2Gov, one of two companies authorized by the IRS to accept tax payments online. As an increasing amount of local and federal taxes are paid with credit and debit cards, Metavante can now shift much of Link2Gov’s debit card volume from other networks to NYCE, allowing them to offer lower pricing and add additional volume to their network. Competitors without such a cost advantage will likely have difficulty competing in this fast growing segment.

Metavante’s competitors are not standing still, however. For example, last month Fiserv announced its “Fiserv 2.0” reorganization, which will fold more than 70 mostly independent business units into five groups focused on customer segments. This could indicate a new focus within Fiserv on finding new opportunities among its diverse offerings, which like Metavante include an EFT network (Accel/Exchange) and a check image exchange network (Fiserv Clearing Network). And earlier this month, Checkfree acquired Carreker, adding one of the industry’s leading check imaging providers to its dominant bill payment and ACH processing lineup.

We look forward to hearing about future announcements like this, as convergence and market forces continue to drive consolidation in the vendor community. Few companies appear as uniquely positioned as Metavante to not only profit from the strong growth in electronic payments and banking overall, but also to create unique products and services for their bank and corporate customers by beginning to “connect the dots” between the components of their increasingly diverse and comprehensive suite of solutions and networks. We’ll be watching them closely as we continue to watch convergence shape the future of payments.