Fiserv's deal to buy CashEdge eliminates a key contender in the growing person-to-person payments space and underscores how much the newest entrant, clearXchange, has rocked the industry.
As one of banking's most recent innovations, P-to-P has been finding its footing the past few years. The May arrival of the bank-owned clearXchange put immediate pressure on both Fiserv and CashEdge, which have been selling competing P-to-P systems to banks for more than a year.
Ostensibly, clearXchange's system will streamline the process of making electronic payments to the accounts of its outsize backers — Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. To Fiserv's and CashEdge's concern, analysts have cautioned that other banks might switch to clearXchange to provide their customers with the most seamless experience. Fiserv's purchase of CashEdge could give it the technological boost it needs to stay competitive.
"With this deal, we see a two-horse race in the bank-centric arena: Fiserv and clearXchange," Tien-tsin Huang, an analyst with J.P. Morgan Securities, wrote in a research report Thursday.
Fiserv said late Wednesday that it struck a deal to buy CashEdge for $465 million to bolster its digital payments capabilities, particularly for online P-to-P payments, which in general are dominated by eBay Inc.'s PayPal. Fiserv expects the deal to close by September.
"We think this market is going to move fast, and the ability to make sure we have the best technology and the best people to deliver that technology is most important," Jeffery Yabuki, the president and chief executive of the Brookfield, Wis., vendor, said in an interview.
CashEdge, of New York, has 500 clients for its various invoicing, account aggregation and payments software programs. Its Popmoney P-to-P payments software, first deployed in January 2010, is in use by 200 banks and competes directly with Fiserv's ZashPay, which debuted in the middle of last year. More than 730 banks and credit unions have agreed to offer the service as of March 31, according to a Fiserv spokeswoman.
Fiserv mostly sells core processing systems, online banking platforms, bill-payment tools, debit processing and mobile software, mostly to small and midsize financial institutions. The company widely expanded its technology portfolio with its $4.4 billion purchase of CheckFree Corp. in 2007, its last large acquisition.
While that deal was more transformational for Fiserv's business, the CashEdge acquisition is more of an "accelerant in … the P-to-P movement," Yabuki said.
Yabuki said he does not view clearXchange as a threat. "I believe that the more people who are exercising their opportunity to engage in electronic P-to-P [payments], the better," he said.
Andrew Jeffrey, an analyst with SunTrust Robinson Humphrey, said he is skeptical of the long-term viability of bank-owned technology consortiums like clearXchange because of the past records of similar ventures. He also sounded skeptical about the benefits of Fiserv's deal for CashEdge.
"It has me scratching my head a little bit," Jeffrey said. "Either, in my mind, Fiserv decided that ZashPay wasn't sufficiently robust or that Popmoney is that much better that it was worth acquiring. I realize CashEdge has other functionality in addition to just the P-to-P piece. My sense is that P-to-P is kind of the crown jewel of their technology portfolio, and it seems a little bit duplicative."
Yabuki said the acquisition is not because ZashPay lacks features, though he noted that CashEdge has been a leader in money transfer and P-to-P services.
"They're multiple generations ahead of anyone in the market, including us," Yabuki said. "That will allow us to bring a far more advanced set of capabilities to our clients." Yabuki added that CashEdge's management team has "been living and breathing this at a degree we think is really important for growing this solution."
A report from Aite Group LLC found that U.S. households made more than 11 billion P-to-P payments totaling more than $865 billion in the last year.
Ron Shevlin, a senior analyst with Aite Group, said the acquisition could allow for "a much tighter integration" of P-to-P with Fiserv's online banking and core banking applications.
Yabuki said Fiserv was attracted to CashEdge because it has several platforms that would "enhance our Internet banking and eventually our mobile experience," including programs to open and fund new bank accounts online and to transfer money between accounts.
CashEdge's AllData aggregation technology, which wealth managers and financial advisors use to view clients' various accounts at once, was appealing, Yabuki said.
Fiserv has account-to-account transfer tools, but CashEdge has a "much more sophisticated" transfer platform used by many of the 30 largest financial institutions.
Fiserv plans to evaluate the components of the companies' respective P-to-P platforms and make decisions on which pieces to keep. "We think that ultimately the winning strategy is a single network strategy," Yabuki said.
The price Fiserv agreed to pay, which values CashEdge at more than six times the $75 million in projected revenue Fiserv expects CashEdge to take in next year, is "richer than usual," Huang said.
Huang noted in his report that Fiserv paid 4.5 times revenue for CheckFree. Jack Henry & Associates Inc., a Fiserv competitor, acquired iPay Technologies for $300 million in 2010, valuing the bill-payment software company at 5.5 times iPay's revenue.
"The multiples appear quite high," said Peter Heckmann, a senior research analyst with Avondale Partners LLC. "That suggests to me that Fiserv management did in fact see something that is strategically important."
While "the market may balk a little bit at the purchase price," Heckmann said, Yabuki and other Fiserv executives have done a good job integrating past acquisitions. That experience should bode well for the CashEdge deal, he said.
Huang said there are more "revenue synergies" with CashEdge than CheckFree because the deal "marries CashEdge's digital payment and data aggregation capabilities" with Fiserv's online banking, electronic bill pay and other services, which are linked to about 70 million customer accounts.
Fiserv's shares rose as much as 1% Thursday, to $62.43.
