7… 6… 5… 4?
Yowza, two weeks ago Fidelity National purchased Sanchez, now Aurum accepts a big check. Consolidation of the banking vendor market continues at a torrid pace. If you missed the news, Fidelity National issued a press release on Monday, Feb. 9, announcing its acquisition of Aurum Technology. Fidelity paid 1.6 times revenue for the former EDS business unit, a total of $305 million. When you consider that Fidelity trades at seven times earnings while the banking core vendors trade at multiples of 23 to 30, it is no wonder Fidelity has an appetite for this sector.
Aurum competitors and customers are asking two questions about the transaction.
1. Why did Fidelity want Aurum?
2. What is the future for Aurum’s five banking core system products?
My take on the acquisition is that Fidelity likes buying bank core system vendors but the thrill of the purchase lasts for shorter and shorter periods of time. ALLTEL was purchased on Jan. 29, 2003. A year later nearly to the day, acquisition of Sanchez was announced. (My fellow GonzoBanker Scott Hodgins gave his perspective on the Sanchez acquisition in FIS Continues its Acquisitive Ways.) Now, only 12 days later, Aurum’s acquisition is detailed in the press. I expect the next acquisition announcement will be made before this edition of GonzoBanker arrives in your in-box.
Why did Fidelity want five more core banking systems? Fidelity’s current inventory includes the following:
To this portfolio, Fidelity now adds:
In addition to the core system products, Aurum also brings a sizeable image item processing business delivered in 19 regional processing centers spread across the United States .
Looking at Fidelity’s before-Aurum portfolio, there is room for a small bank solution. Perhaps the Aurum Banking System, BMIS and Premier were attractive to fill this niche? Nah, most vendors have been pushing their products upstream to larger banks seeking larger revenue streams and improved margins.
Perhaps another mid-size bank and thrift product would fit nicely with the Horizon product? Nah, they’ve already got one, so why bother with another market-confusing Fiserv strategy with multiple products pitched to the same customers?
Perhaps Fidelity wanted to enter the small credit union market with Mercury? Nah, this is not a big revenue producer with little upside even by winning a large share of the small CU marketplace.
What about Aurum’s item processing business? Hmmmm. Fidelity does not have this capability. Could this be the diamond in the Aurum purchase? Vendors serving the mid-size and smaller market must provide an item processing solution to meet the needs of this market segment. Without it, a revenue stream often larger than core banking revenue goes to someone else. Item processing also helps sell the package of products. The idea of “one provider to meet every technology need” sits well with many bankers.
Item processing will be 2004’s hot technology due to passage and implementation of Check 21 late this year. Check 21 will legalize use of check images in place of paper documents in the check clearing process. It is likely most banks will choose to outsource item processing if faced with large capital expenditures to comply with Check 21.
Aurum has invested heavily in its item processing business unit. It has implemented Advanced Financial Solutions’s state-of-the-art, image enabled software capabilities in most of its regional centers. Plans are in place to push this technology to every center. This technology is leading edge and well positioned for Check 21. My guess is revenue growth in this business could well outpace every other Fidelity portfolio product.
Metavante, Jack Henry and Fiserv are the only other national non-bank alternatives providing item processing services. Aurum was controlled by a venture capitalist firm ready to listen to a good offer. They obviously liked what they heard!
OK, so what’s to become of Aurum’s five banking core system products? It certainly seems logical that some will not make the cut. Which ones will remain viable remains to be seen. Of course it is far too early for Fidelity to address this issue. It will need to digest Sanchez and begin the assimilation process for Aurum.
Here are my guesses.
Of course, this is all just speculation. My advice to Fidelity is this: decide what to do with every product as quickly as possible and communicate your decision to your entire customer base, clearly and concisely. Indecision will cause your customers to look to another vendor’s product.