Electronic payment processing may lure tech giants

BANGALORE (Reuters) - Fidelity National Information Services Inc's (FIS.N) recent bid to buy Metavante Technologies Inc MV.N could spark a wave of consolidations in the electronic payment processing business, and technology behemoths may join in.

The highly revenue-recurring nature of the business and a chance for technology firms to cross sell their products could lure companies such as IBM (IBM.N) and Intuit Inc (INTU.O) to jump into the space.

While discussing its $2.94 billion bid with analysts on April 1, Fidelity said, along with peers Jack Henry & Associates Inc (JKHY.O) and Fiserv Inc (FISV.O), it "is conscious and aware of the future competition from the IBMs, the Oracles, the HPs and others."

"IBM is looking at this space as we speak," Fidelity CEO Lee Kennedy said in the conference call.

In the same call, Metavante CEO Frank Martire said: "If you look at the IBMs and the Oracles and maybe others, they have the resources. They have the capital to quickly become very competitive."

IBM, Oracle Corp (ORCL.O) and Intuit declined to comment.

Fidelity's view was backed by another company in the sector, Online Resources Corp (ORCC.O).

"IBM and Oracle are already major players in banking technology software and services. It's hard not to see them get into payments and other processing in the next couple of years," Online Resources' Chief Executive Matthew Lawlor said in an e-mail.

And one of the possible ways to enter the market is by buying an existing core processor.

Analysts think if IBM or Oracle wants to make an entry they will most likely buy a bigger company than try to jam a whole bunch of systems together.

David Koning, an analyst at Robert W Baird, said the technology companies will be attracted by the highly recurring revenue of close to 90 percent the payment processors generate, and as banks generally tend to buy a lot of technology, they can cross sell their products over time.

Another potential lure for the big firms is the global presence of payment processors. Fidelity, for example, has offices in 27 countries and does business in 90 countries.

But analysts believe that the bigger companies may take some time to enter the space.

"You hear rumblings from those guys that they want to move in the financial services sector though we haven't seen a lot," DA Davidson & Co analyst John Kraft said.

Oracle and IBM will get more aggressive in the big banks space before moving down market, he added.

SECTOR CONSOLIDATION MAY PICK UP

"I think it goes a long way in pre-empting what is likely to happen in this industry space and that's consolidation," Fidelity's Lee said after its deal with Metavante.

The sector witnessed a lot of M&A activity in 2007, when Fidelity, Fiserv and other companies made multiple major acquisitions, but it slowed down a lot in 2008.

There could be more consolidations in the sector and companies like privately held Open Solutions Inc and Heartland Payment Systems Inc (HPY.N) may come up for sale over time, analyst Koning said.

Analyst John Kraft said Online Resources would be a strategic value to several industry players, such as Intuit, and Jack Henry continues to be a good fit for Fidelity as well as Fiserv.

These companies provide transaction processing, banking and payments technologies, software services, card issuing and outsourcing services to financial institutions.

"With the trend toward convergence, the number of potential acquirers of Online Resources is increasing, not decreasing," Online Resources' CEO Lawlor said.

Fiserv declined to comment.

Analyst Kraft identified two reasons for an acquisition in this space: to lower costs and integrate systems and to add a suite of products to existing offerings.

The bulk of these acquisitions is not to steal competitors' customers but to penetrate existing customers better, Kraft added.

"Clients are very sticky. They don't want to move from one processor to another. So, one nice thing about the industry is that once you have a set of clients they are not that likely to leave," analyst Koning said.

A day after Fidelity's bid, smaller rival Fundtech Ltd (FNDT.O) bought U.K.-based InterSoftware Ltd to increase its customer base.

"But, I don't see any major deal at least in the next year," analyst Koning said.

(Additional reporting by Jim Finkle in Boston; Editing by Ratul Ray Chaudhuri)