TMF Interview With CheckFree Holdings Corp.
August 24, 1999
With Brian Graney (TMF Panic)
Based in Norcross, Georgia, CheckFree Holdings Corp. (Nasdaq: CKFR) provides services that enable its nearly 3 million customers to receive and pay bills electronically or over the Internet. Today, the company has multiyear contracts with more than 60 of the nation's top billers to provide online billing and payment through the CheckFree distribution network. We talked with CheckFree chairman and CEO Peter Kight about the electronic billing business, where his company is headed, and how the Internet is changing the world of financial services.
TMF: The way I often think of CheckFree is that you provide the back-end of electronic bill payment services. You do the dirty work, so to speak. Is that a correct characterization?
Kight: Well, we of course prefer the word "infrastructure" for electronic billing and payment rather than dirty work. But I would have to argue that your description is probably pretty accurate.
TMF: Can you go over a little bit about what that entails?
Kight: I think the thing that people understand the least about electronic billing and payment is the [infrastructure]. It's easy to understand the technology results, which is you get a bill electronically, you click a button to pay electronically, and the merchant you're paying has an electronic deposit into his account and an electronic notification of payment in his accounts receivables system. But of course, [what is] necessary to make it easy for consumers to be able to do that -- easy for a bank or a financial service company to be able to provide you with that availability and making those links to thousands of merchants, in fact tens of thousands of places that you want to pay -- is really what's involved in the overall infrastructure.
"We're not going to be the brand that actually signs up the consumer and provides them the service. We're very happy providing the infrastructure."
The big part of what we do is providing end-to-end audit transaction tracking capabilities so that we can provide both an audit trail and a customer care system. So that any point in any one of those transactions, whether it's the bill coming to you or a payment going to a biller, you can call the biller, you can call your financial service company, or you can call the technology provider [and] ask a question. And using our infrastructure, wherever it is you call or e-mail can give you the answer. It's that kind of infrastructure that really makes up the dirty work.
TMF: Is there any interest in getting into the front-end of the transaction processing system, or is that basically off limits for the company's growth plans right now?
Kight: We extend a little further than we did previously in helping companies that actually provide you the front-end. We have a Web-based set of UI tools that we can provide to people to provide you the front-ends. But as far as actually providing you the front-end, we're not going to be the brand that actually signs up the consumer and provides them the service. We're very happy providing the infrastructure.
TMF: Can you talk a little bit about the moat you've built since you started the business in 1981? What's keeping other companies from offering competing services?
Kight: Over the years, we've had lots of different competitors, mostly technology-oriented companies that think they have the ability to create the technology that we do. And what they don't recognize until they get into the business is the amount of what you referred to as dirty work and I'm going to refer to as a very significant amount of service infrastructure that has to be in place.
[That relates to] building links to thousands of merchants, most of which are links that were built one-to-one. Links to literally hundreds of banks, soon to be thousands of financial service companies. And now increasingly, links to billers, again on a one-to-one basis, [in order] to have the ability to deliver bills integrated with the ability to pay bills as well. Look at all of the infrastructure that's involved in developing electronic billing capability, developing the ability to link to thousands of merchants, links to at last count 800 financial institutions, [and] financial service providers in the U.S. that span everything from Bank One (NYSE: ONE) or Bank of America (NYSE: BAC) to Yahoo! (Nasdaq: YHOO) and Intuit (Nasdaq: INTU). It's a fairly broad amount of infrastructure you have to create.
Technology companies like to look at this and think, "I understand transaction services, I understand electronic Internet technology, I know how to do a transaction. I think I can do electronic billing." So you look at just the delivery of the bill and think that's the only thing to do. In fact, in the last six months, our PR department tracked 59 companies that had made the announcement of some expectations of future roll outs in electronic billing. When you actually get into it and realize what you have to do to provide full end-to-end electronic billing and payment, it's a very significant amount of infrastructure you have to build. That provides a pretty big barrier to entry.
TMF: You mentioned all of the financial services and other types of companies that are signing up with you to offer electronic billing services. Do you think there's going to be any one certain catalyst that will help more of these companies enter into this field?
Kight: I think the catalyst is there. A large number of banks have announced that they're going to work with us to start rolling out more aggressively electronic billing and payment services. Then we added Internet portals to that mix. So, there's going to be a clear acceleration in the distribution of electronic billing and payment to consumers. And that has brought a lot of people into the market recognizing that this is going to be a very big market.
"There's going to be a clear acceleration in the distribution of electronic billing and payment to consumers."
Twenty-nine million bills were mailed to consumers last year, some sixty billion bills were mailed altogether if you include consumers and businesses. That's a pretty big market that brings in a lot of people. There's a ton of venture capital pouring into startups who want to have some role, some part of the electronic billing process.
I really think we are in that catalyst mode now where lots of people are coming in wanting to see if they can carve out a niche. The thing that remains to be seen is how many of them can actually figure out how to carve out a niche in a business that we really believe needs to be provided on an end-to-end basis. It's very difficult to pick any one part of electronic billing [so that] you can pay everyone, receive many bills, do it through any front-end of your choice, any service provider, and [any] financial institution. It's hard to break that down and say, "Well, here's the one really valuable piece I can carve out." We clearly have built a system that will do all of that on an end-to-end basis.
It's going to be very interesting to see just exactly where the many new entrants find their niches and how well that works. But I do believe, to answer your question, the catalyst is there and it is Internet distribution. Probably it's portals before anything else and their entry into the market that's providing that catalyst.
TMF: Can you shed some light on your company's relationship with Intuit? What's the right way for a CheckFree investor to think of Intuit?
Kight: Intuit is by a wide margin a leading brand in providing financial information via computer technology. [According to] the last number I saw, Quicken is a brand under which 12 million people use their PCs to manage their finances either at home, in their small business, or managing their taxes. [Quicken has] a very powerful distribution partnership with us. Intuit and CheckFree also provide services co-branded with some 50 different leading banks in the country. That's a very good partnership we have with Intuit and our banks. And then Quicken.com is obviously one of the most successful financial portals on the Net, and CheckFree is a provider of electronic billing and payment to that portal site. So I would say in almost every area where CheckFree is providing leadership, we have a partnership with Intuit in that area.
At the same time, we sometimes have our differences. We're both very aggressive companies that are working very hard to make sure that we serve our constituents. Where there's disagreement, neither Intuit nor CheckFree have ever been shy about fighting for our way, fighting for what it is we believe in. But if you look at CheckFree and Intuit over the last decade, as hard as we've fought and as hard as we've competed in the market place, we've always figured out a way to work very successfully together. I think you'll continue to see that.
TMF: What do you think is the company's biggest near-term challenge and what are you doing to overcome that challenge?
Kight: I think the biggest challenge is the potential for confusion in the marketplace with the number of people entering in wanting to find a role. Some of our bank clients, while working with us on the retail side, would like to find a role for their commercial side of their bank in electronic billing. Many new small companies starting up want to find ways to provide, again, a niche for themselves in electronic billing, a niche in electronic payment services. There's going to be a lot of people talking in the marketplace. The media notoriously does like to do a great deal of work and figure who's mainly doing what. So I think there's potential for a lot of confusion in the marketplace.
We're going to try very hard to make sure that our billers and our financial service customers stay focused on what's really important, which is getting their content made available to the widest Internet population, the widest number of consumers online. Clearly, CheckFree has the infrastructure to be able to do that. We'll work very hard to try to make sure the confusion in the media doesn't affect the speed in which we are bringing our customers to market.
TMF: Finally, what other companies in the electronic financial services marketplace do you respect the most?
Kight: Today, the financial services marketplace is a pretty broad definition. We clearly think that Bank Of America is exceedingly well-positioned, given the huge distribution reach they have with their physical infrastructure. If they get aggressive in being able to add increasingly better electronic access to their consumers, the combination of physical access and electronic access is tough to beat. That is something Charles Schwab (NYSE: SCH) has [also] recognized. Clearly, Schwab is setting the pace on being aggressive in extending their physical reach and being very aggressive in innovating the electronic reach.
Bank One and WingSpan is another dynamic example of a traditional bank extending their traditional reach, but also coming up with an innovative way to extend that on the Net. And obviously you have Yahoo!, AOL (NYSE: AOL), Microsoft (Nasdaq: MSFT), Lycos (Nasdaq: LCOS), and other organizations which have done a fabulous job of creating financial information service businesses as part of their portal distribution. You could clearly argue that they are now financial service companies in regard to the amount of information they provide to consumers. Really on both sides -- on the traditional side and on the very new side -- we have a lot of respect for a number of players.
TMF: I appreciate you sharing some of your time with us today.
Kight: Thanks. I appreciate the opportunity.
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