For JPMorgan Chase, a major corporate treasury services bank, to buy Xign Inc., a software/services company in the cash conversion cycle space, is a sign of the times, treasury services analysts agree. "Expect to see more deals of this type," says consultant Craig Jeffery, managing director of Strategic Treasurer in Atlanta.
Faced with flat revenue from traditional products, banks are moving aggressively to expand into value-added components of the financial supply chain, notes Anthony Carfang, founding partner of Treasury Strategies Inc. "Processing payables, receivables, order entry–everything that touches the working capital chain–is fair game for banks now," he notes. "They are radically expanding the definition of payment processing."
The first wave has seen JPMC buying Vastera and Fisacare; Mellon Bank acquiring SourceNet and ClearTran; and Bank of America adding Works and HealthLogic, notes David Robertson, Chicago-based partner of Treasury Strategies.
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The motivation behind the trend: Banks have to address the cash conversion cycle, and they need a partner to do it. All of the far-sighted treasury banks are working with partners or exploring partnerships, some of which will lead to acquisitions, Jeffery notes. "Banks have been partnering with technology-based service firms in the order-to-pay and order-to-collect space to expand their treasury services," he explains. "Chase has partnered with Xign for three-and-a-half years and they have a number of joint customers."
The announced deals "put chum in the water and will instigate a minor feeding frenzy," Jeffery suggests, pushing other banks to make their own moves." That frenzy could spread to the treasury workstation market, he says. Banks with strong ambitions to expand their role as concentration banks could target a treasury workstation vendor, he speculates.
Xign, of course, has other banking partners, who now have to decide whether to remain customers of an operation owned by a rival bank when current contracts expire. However, the number of alternative providers is limited, and strong providers like TradeCard and Payformance could also become bank acquisitions anyway, he adds.
Banks exited the treasury software business in the 1980s because of the high cost of supporting upgrades, but today's hosted solutions have lowered those barriers, and companies like Xign are at least as much service companies as they are software companies, Jeffery points out. "They're likely to hesitate over a treasury workstation acquisition due to painful memories of trying to offer client/server solutions in the past, but today's technology makes it far easier to integrate a hosted treasury workstation into bank systems than that older technology did," he says. "Technology doesn't change everything, but it certainly is changing treasury operations in the transaction and treasury workstation/cash system arena," he concludes.
While independent software/service companies tend to be focused on one part of the working capital chain and don't immediately offer holistic, integrated solutions, Carfang concedes, he doesn't think integrated treasury workstation solutions would be high on banks' target lists at this time.
The Xign acquisition is "symptomatic of banks going after the 93% of spend by treasurers and controllers that banks are not getting," Robertson points out. "Large banks like Morgan have the resources to buy new solutions and integrate them into their core offerings. They're determined to move beyond the maturity plateau and extend their scope and tap into new revenue streams from their existing clients. The end game is to provide deeper solutions and advise clients on a wider range of issues, making them more important to those clients."
"This is an exciting time in the payments arena," Carfang concludes. "Most of the major players are rethinking their strategies and building out their product lines. "In addition to the bank acquisitions, we have Warburg Pincus investing in Metavante, on top of its investments in the merged Trema and Wall Street Systems companies, and we have KKR buying FirstData, which is huge. This is truly a time when sea changes are starting to emerge."
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