How a Shakeout in Processing Is Culling the Ranks of Major Players

Inexorable forces are reducing the ranks of payments processors and electronic bill-payment providers, as the planned buy-out of Metavante Corp. by Fidelity National Information Services Inc. (FIS) shows. Remaining ones such Online Resources Corp. are vulnerable to Wall Street pressure, as a proxy fight in progress shows. But some companies will survive the consolidation trend and new ones may come along before the number of suppliers in payment processing and bill pay gets anywhere close to a monopoly. That's the assessment of an Aite Group LLC researcher who closely follows the processing market. “We've seen a lot of consolidation in financial-services providers in the past,” says Gwenn Bézard, research director at Boston-based Aite. “It's always a trend to have consolidation, but things never end up where you have just one company having the pie.” Two companies, however, will have some hefty pieces of the bill-pay pie. Jacksonville, Fla.-based FIS has made a $2.94 billion offer to buy Metavante, a Milwaukee processor with a sizable bill-payment business (Digital Transactions News, April 1). And Metavante rival Fiserv Inc. in 2007 bought the leading bill-pay services provider, CheckFree Corp. Barring a surprise that would derail the friendly FIS-Metavante merger, electronic bill-payment services will be concentrated with two big processors and a handful of remaining smaller providers, most notably Chantilly, Va.-based Online Resources. Online Resources itself played a role in the industry's consolidation when it bought Princeton eCom Corp. in 2006. But the company's stock has lost about 70% of its value in the past decade. Now, in a proxy contest, hedge fund Tennenbaum Capital Partners LLC has nominated its own slate of nominees for three director positions up for election at Online Resources' May 6 annual meeting. Tennenbaum helped finance the Princeton eCom acquisition with a $160 million investment in Online Resources and currently owns about 22% of the company. In a regulatory filing, Online Resources says Santa Monica, Calif.-based Tennenbaum is seeking a quick sale of the company. Proxy contests aren't unusual when institutional investors feel they're not getting adequate returns, but Online Resources put a different twist on the game Monday when it issued a press release criticizing a company that assesses corporate governance, RiskMetrics Group Inc. (RMG). That firm, according to Online Resources, is recommending that its subscribers who hold Online Resources shares vote for two of Tennenbaum's three nominees. Online Resources called that position “inconsistent,” saying RMG's Corporate Governance Quotient, a proprietary assessment of how a company governs its affairs and the quality of its board of directors, in March rated Online Resources better than 92% among Russell 3000 (small cap) companies and 91% among software and services firms. “RMG's subscribers should also be concerned with its incomplete and superficial analysis,” Matthew P. Lawlor, Online Resources' chairman and chief executive, said in the release. Lawlor claimed RMG failed to address what Online Resources called Tennenbaum's “clear conflict of interest” because it holds Online Resources preferred stock, and focused too heavily on Online Resources' stock performance but ignored its strong performance (at least until 2008's fourth quarter) against its peers. Lawlor also alleged that RMG apparently didn't do an independent evaluation of Tennenbaum's nominees. Spokespersons for RMG and Tennenbaum couldn't be reached for comment. While not commenting about the specifics of the Online Resources-Tennenbaum dispute, analyst Bézard isn't surprised it's happening. Competition often can make it hard for payments-industry vendors to make a profit, and the financial institutions that are their major customers are showing a marked preference for dealing with fewer service providers, he notes. “Banks are asking … for greater consolidation of vendors,” Bézard says. When they announced their planned merger, FIS and Metavante said they could cut $260 million in annual costs. The combined firm would be better able to compete with the likes of very large tech companies such as IBM Corp., Hewlett-Packard Co., and Oracle Corp., which may have their eyes on payment processing, FIS said.