Nausea…a low level queasiness coming from the gut … hard to pinpoint.
On the morning of April Fool’s Day, the chatter started early at the Gonzo HQ known as Cornerstone Advisors. Clients started rumbling about rumors they heard earlier in the week. Bill McFarland popped the Gonzo team a quick email. CEO Scott Sommer grabbed his always-on cell phone to field calls. The ever-gadget driven Quintin Sykes began to Twitter like a teenage girl.
Deals are exciting and always interesting, but around the Gonzo team, there was also a clear sense of uneasiness that morning as we pondered the industry and the fate of our bank and credit union client base.
Make no mistake. Our sudden threat of hurling had nothing to do with the quality of these companies, the solid reputation of their products, nor the impressive talent of the two management teams. Rather, it was the painful threat of future listlessness, arrogance and bureaucracy in the bank technology world that made the team feel as if they had been given an extra 25 minutes on the Disney teacup ride.
Capitalism ultimately works. Companies get started, they grow, they merge, they rationalize, a new one starts, etc. However, capitalism is also punctuated by certain periods of bright, vibrant competition and darker moments of high switching costs, opportunistic pricing and milking the cash cows. Today, there is a serious threat that the banking industry will enter a period of slower innovation and shallow partnerships. Let’s hope not.
This deal is so large and far-reaching it has many ramifications for the industry. So, Gonzomongers, here’s an initial take on the deal from our team:
#1: The Deal Itself
From a structural and financial perspective, the deal itself is fairly straightforward. Metavante went for a 23% premium in a tough equity market or roughly 1.7 times 2008 revenue. This is a solid price – nowhere close to initial multiples aspired to when Metavante was first created within M&I Bancorp, but decent for sure. Fidelity’s acquisition of the highly respected Metavante, with its diverse revenue sources and complimentary businesses, was reasonable beyond argument. The cost cutting target of 5% ($260 million) also seems credible given the large payment businesses the two companies run.
The chart below illustrates that Metavante has shown a bit stronger performance during the stock market struggles of the past two quarters, but both companies have remained solid compared to most equity investments.
In addition, the team of Frank Martire, Gary Norcross, Mike Hayford and Frank Sanchez has as much industry experience and credibility as one could imagine. Martire taking the CEO role provides comfort that blending the two companies is a sincere intent – his personal approach to customers and accessibility is also a positive sign for all involved. Round the block, no one can have qualms with the business justification here. But it’s important to understand how this shakes out for the overall bank processing market. Now, Fidelity and Fiserv stand at roughly $5 billion in annual revenue with the next three players (Jack Henry, Open Solutions and Harland Financial Solutions) all well below $1 billion – very oligopolistic from how this industry looked 10 to 20 years ago.
#2: The Core Market
This deal certainly shakes up the core processing market and clearly positions FIS as a multi-solution company very similar to Fiserv. As the chart below shows, the merger of the two companies creates several questions about product direction, though clearly the party line will be “we continue to support all our competitive products.”
#3: The Payments Cartel?
While banks will certainly jump to the issues mentioned above on core banking systems, this deal was certainly driven more by the payments business than the legacy core business. The strength of Fidelity’s credit card business coupled with the ATM/debit of Metavante is a formidable combination. With Certegy, eFunds and Metavante (NYCE) under its belt, Fidelity is simply a payments powerhouse, and this should be the most disconcerting aspect of the deal from a pricing perspective. In recent years, the healthy competition between these two players both looking to expand payments has helped control bank processing costs in the rapidly growing e-payments channel. Now, it will take spoilers like Star, Fiserv, Visa DPS, Fifth Third (MPS), and US Bank (Elan) to keep this market vibrant. The integration of Metavante’s and Certegy’s bill pay solutions will also provide new scale and pricing power for Fidelity but certainly not at the same level as POS and signature credit/debit processing.
#4: The Client Relationship Impact?
There will undoubtedly be thousands of clients that will immediately have a relationship that has one foot in the old Metavante and one foot in Fidelity. The combined entity should look carefully at a lesson painfully learned from big bank mergers – the perception of the new “partner” will be determined by how the customer is treated in the first three to four months. The message that commitment will not suffer and this will actually improve service is all well and good, but it only has an impact until the appearance of the first business issue the client needs resolved. The proof will in faster decisions for clients and pricing that ultimately reflects the new, combined relationship. Fidelity and Metavante are joining two complex support and delivery structures with two different approaches to client management. Case law indicates that the “walk” most often does not match the “talk”.
#5: Wither Innovation?
The biggest question mark out there on this deal is not whether it will work financially. Neither is it who stays or goes, nor which current legacy product will survive. The big industry issues sparked by this deal center around innovation, growth and collaboration. As we sit here today watching the fate of too-big-to-fail banks and so-big-and-slow auto companies, it’s hard to get excited about rapid consolidation among a bank’s most critical supplier and strategic partner. Scale is wonderful, but so is competitive pricing. Resources are comforting, but creativity and cleverness are what really get the blood pumping. Being served by a company with tens of thousands of customers is impressive, but not as important as getting a quick call back from the help desk or account manager. Can this formation of the Big Two be checked by the financial-technology equivalents of Honda, Toyota and Volkswagen in the auto industry?
The Gonzo team hopes that the Big Two (Fidelity and Fiserv) aspire to be the most pumped up and innovative dancing fat elephants this industry has ever seen. We hope that Jack Henry, Open Solutions and Harland see some daylight here and move into opportunistic mode to out-develop and out-hustle the bigger guys. We hope the emergence of the Big Two acts to awaken some hungry capitalistic disrupter out there that smells a tired market ready for a game change. Could it be an overseas company or Oracle iFlex prepared to swallow the real effort required to break into the U.S. market? Could it be an IBM, Oracle or Microsoft deciding to dump an agnostic approach to applications and fiercely compete with current partners? Could it be someone gutsy enough to build a new core with the Google cloud and open source in mind?
This type of competitive heat will be required to keep the bank technology market growing and evolving. In the meantime, we hope the innovation spurred at the edges with smaller Internet, online account opening, credit origination, analytics and ECM/workflow vendors continues to help banks stay fresh and on the offensive.
For all the bankers out there worried about seeing a slow HMO-like industry for bank technology, it’s up to all of us to be rugged individualists – managing vendors to performance, taking risk on credible upstarts and never sitting around passively like a victim, no matter what new merger press release hits the Outlook inbox on a holiday known for irony and humor.
Stay tuned, Gonzomongers …
Cornerstone Advisors has assisted more than 100 financial institutions weigh their options and make educated decisions about whether to stay or switch core vendors. We’re here to help you through any and every stage of the process – from determining whether your current core and ancillary systems are meeting your needs, to soliciting bids for a new system, to managing the conversion.