Appeared on americanbanker.com on November 13, 2008
Thursday, November 13, 2008
The payment technology specialist ACI Worldwide says a transformation program initiated three years ago is paying off, as a growing number of banks are asking for help stitching together transaction systems that have long functioned independently.
The New York company is pushing the idea of a payment hub, which can handle several types of transactions, and Philip G. Heasley, its president and chief executive, said many financial companies are interested in his company's technology and advice.
ACI is transforming itself from a "product provider" to a "payments solution provider," Mr. Heasley said.
In the past it focused on sales and offered customers little support, in terms of installation or advising them how to make the software function efficiently with other payments applications, according to Mr. Heasley, who was hired to run the company in 2005. "We'd say, 'Here it is. You try to figure out how to use it.' "
Even though it does not offer consulting services, ACI has refined its sales pitch in the past few years, he said. Offering a "payments solution" means that the company now helps customers install its software, and that the contracts come bundled with ACI's extensive knowledge of how payments can work across a bank's varied business lines.
The result for banks should be better integration of different types of payment-related applications, Mr. Heasley said.
Asking for Advice
He recalled one conversation with a banker who said that even though ACI's products can cost more than other vendors' applications, he was willing to pay "twice as much for your knowledge of how payments work."
The comment helped Mr. Heasley realize that bankers need help developing their payment technology strategies just as much as they need the software. "Inherent in our 'solutions' dialogue is this kind of capability," he said.
Some banks are starting to use a "payment hub," a single switch that can handle many types of requests before transactions are initiated, he said.
For example, rather than using one system to handle automated teller machine transactions, another to support purchases at the point of sale, and a third for automated clearing house transfers, a hub can evaluate all the payments and determine how to route each one.
"It allows banks to be very flexible," Mr. Heasley said. "The larger the institution, the more it works."
In the long term, financial technology observers say, ACI's growth prospects are good, because more banks will move away from in-house payment systems in favor of software from vendors.
The company generated $366 million of revenue the fiscal year that ended Sept. 30, 2007, and it has projected $430 million in 2008 sales. The results were enough for ACI to jump five spots in the FinTech 100 rankings, to No. 27 this year.
Analysts said ACI has a strong reputation within the banking industry, though it still faces a challenge in convincing financial companies that systems that have been in place for years should be replaced.
"ACI's products are the gold standard for payment software," said Gil Luria, an analyst with Wedbush Morgan Securities in Los Angeles, and a May contract to help MasterCard Inc. overhaul its debit processing system has further enhanced its credibility as a vendor that can play a role in some of the biggest payment projects currently under way.
Even when potential customers understand that installing new systems, and perhaps replacing ones that have been in place for years, would improve operations, change is not undertaken lightly.
"The systems that have been developed in-house are not that easy to unwind," said Susan Feinberg, a senior research director for wholesale banking with TowerGroup, a Needham, Mass., independent research firm owned by MasterCard Inc.
Since these systems are typically doing the job they were designed to do, potential customers might find it easy to hold off on new payment projects, Ms. Feinberg said.
Recasting ACI as an adviser is not the only major change made since Mr. Heasley came aboard.
He has a strong background in banking. He was previously the chairman of First USA, the credit card issuer owned by Bank One Corp. Earlier he had been the No. 2 executive at U.S. Bancorp.
When he joined the technology vendor, it was named Transaction Systems Architects Inc. Last year it renamed itself, taking the name of its biggest operating unit.
Long a leader in retail payment software, ACI has bulked up its wholesale capabilities. It acquired P&H Solutions Inc. of Newton, Mass., in 2006, gaining an online cash management system. Early last year ACI picked up Visual Web Solutions Inc., a New Jersey developer of trade finance and Web-based cash management systems.
Wholesale payments, which accounted for just under 9% of its fiscal 2006 revenue, generated 24% in the first half of this calendar year. (ACI switched this year to a calendar-year reporting schedule).
Mr. Heasley said his goal is to integrate the retail and wholesale products.
"The distinction between the wholesale products and the retail products is getting very murky these days," he said. For example, cards have long been seen as a retail product, but now they are also widely used by banks' corporate customers. And the volume of ACH transfers, once primarily a wholesale product, is now just as high on the retail side for most big banking companies.
Another major change came in December of last year through a partnership with IBM that calls for ACI to rewrite its software to run on IBM hardware.
The two companies plan to conduct joint research and development, and are forming joint sales teams. In addition, IBM paid $33 million for warrants giving it the right to buy up to 8% of ACI's stock over the next five years.
Previously, ACI software was written exclusively for Hewlett-Packard's Nonstop servers, but the IBM deal will give ACI access to a broader range of banks than it had before, especially outside of the United States, and access to IBM's technical support.
ACI is also in the process of phasing out its anchor product family of many years, Base 24, and it is encouraging the 300 banks that use the products to move to a newer version, Base 24-eps.
How bankers will respond to these changes remains to be seen.
TowerGroup's Mr. Feinberg said turf-conscious bankers might find it difficult to deal with the notion that the retail and wholesale units should make joint purchases.
And for customers using HP hardware, switching to IBM, while upgrading to Base 24-eps, will be a major shift that not all users will embrace, observers say.
According to technology consultants with Gartner Inc. in Stamford, Conn., the underlying architecture of the new payment software is different enough that bankers should consider all their options, including competitors' offerings, outsourcing, and maintaining the old products themselves.
"One of the challenges over the years has been product overlap, and they're addressing that," said Kristin Moyer, a Gartner analyst. "But convincing their customers to migrate to Base 24-eps will be another matter."
Tom McCrohan, a stock analyst who covers ACI for Janney Montgomery Scott LLC, said the vendor probably will not push its U.S. customers to move from HP platforms to IBM anytime soon.
"Once they build critical mass outside the United States of referenceable clients that are running ACI software on IBM hardware, they can come back and start attacking the legacy HP base," Mr. McCrohan said.
More immediately, Aaron McPherson, a research manager for International Data Group Inc.'s Financial Insights Inc. in Framingham, Mass., said ACI is integrating payment-related tasks like fraud protection into each of its tools, but it will have to prove to bankers that the tools actually work as advertised.
Bankers see a steady parade of vendors promoting an enterprise payment vision, Mr. McPherson said. "But then when you look under the hood at what the product can actually do, there are a lot of pieces missing."
According to Mr. Heasley, bankers should consider replacing in-house systems for several key reasons. To start, he said that ACI can provide financial companies with more resiliency and significant gains in transaction speed and operating efficiency.
Years ago bankers "were really thrilled if we could get 60 or 80 transactions per second," he said, but now ACI offers banks the ability to handle as many as 2,000 transactions a second — a speed that can translate into reduced transaction costs.
Observers say the sales pitch may win chunks of new business at some point but is not doing much for ACI's financial performance at the moment. The company, which moved its headquarters (but not its operations) from Omaha to New York last year, lost $9.1 million in the fiscal year that ended in September of last year.
It lost another $2 million the following quarter, which was reported alone as the company shifted to a calendar-year schedule, and $2.6 million in the first six months of this year.
Mr. Heasley said that a complete integration of ACI's retail and wholesale payment systems is still several years away, and that it is willing to be patient while bankers realize what it can bring to the table.
The losses resulted from a combination of stalled revenue growth and significant expenses associated with new product development, he said. "We're in a heavy investment period."