Can a paper check business become a diverse fintech?
NEW YORK — Deluxe has spent many years working to diversify beyond paper checks, which are in an inevitable decline. But that diversity led to confusion.
When Barry McCarthy became Deluxe's president and CEO in 2018, the extent of that confusion became clear at his first meetings with clients.
"I went to see some of the senior execs at one of our largest banks, and they asked me if I was the CEO of the check company, the CEO of the data company, if I was the CEO of the web hosting company — which CEO was I?" McCarthy said in an interview at Deluxe's analyst day this week in New York.
It's a fair question. Up until last year, Deluxe was an active buyer, acquiring companies such as Wausau Financial Systems, Datamyx LLC, First Manhattan Consulting Group, RDM Corp., LogoMix and Fiserv's Remittance Solutions. It's now taking time to break down the walls between those businesses.
Despite these additions, Deluxe's most prominent business line is still paper checks — and the future of payments isn't paper. That's as clear to Deluxe as it is to anyone else, but the company expects that those paper-check relationships will give it an edge in transitioning heavily check-based clients to a new platform.
This may be a tough sell to investors. After the company's Feb. 6 release of its fourth-quarter earnings — where revenue dipped 0.5%, to $522.1 million, and net income dropped 21.7%, to $44.8 million, compared with a year earlier — Deluxe's stock price entered a sharp decline. Having closed at $49.01 a share on Feb. 5, Deluxe's stock price closed at $42.75 the following day and continued to decline, ending at $35.94 at the close of the day on Feb. 26.
There is still room to grow in the check business, Deluxe has found. Although it has sold checks to consumers in Canada for 47 years, Deluxe has only recently begun working directly with Canadian banks, starting in late 2019 by onboarding CIBC.
"Checks are a sticky product for the bank," said Tracey Engelhardt, general manager of checks at Deluxe, during the analyst day. "New business checking accounts are 40% more likely to be retained 90 days after opening an account, provided they are offered checks at account opening," she said, citing internal research.
Deluxe has watched check volumes decline year-over-year since 1997, but it still sees those relationships as crucial to its growth.
"Each year we receive approximately 3.5 million inbound phone calls from customers" to order or reorder checks, Engelhardt said. "We have the opportunity to cross-sell them … one of the many other products or services we have at Deluxe. Checks make our phones ring."
Deluxe predicts it will earn revenue of $750 to $760 million from checks this year, Engelhardt said. Its total forecast revenue for 2020 is $2 billion to $2.04 billion.
Eventually, someone will develop a digital alternative that supports the same remittance information and ubiquity as paper checks. Deluxe wants to be the provider of that next generation of payments technology.
To enable this, Deluxe had to change its culture to more closely resemble that of a technology company. The first step was to make every employee a shareholder.
"It's the hallmark of technology companies," McCarthy explained. "If you go to work for any technology company, it doesn't matter if you're sweeping floors or the CEO — everyone gets equity in the company, because it aligns employees' interests and shareholders' interests."
In addition to this cultural change, Deluxe also had to evaluate which businesses to drop. It's planning to sell its loyalty platform, Deluxe Rewards, because the company wants to focus resources instead on digital payments, McCarthy said.
"Everybody knows how to process a payment, they've been doing it for 105 years. The challenge, though, is everybody thinks electronic payments are easier," said Michael Reed, general manager of payments for Deluxe, at the analyst day. "Electronic payments are actually more difficult to process and can add additional time and manual steps."
A common example of this would be a payment from an insurance company to an out-of-network urgent-care clinic. Because that provider is out of network, "they mail a paper check," Reed said. "After all, it's the only way to make a one-time payment with the explanation of benefits information the urgent care needs to reconcile."
This may seem like an opportunity for Deluxe to defend its turf as a supplier of checks, but the scenario also gives Deluxe a chance to transform that part of its business. It needs to do that before another company takes its place — and it needs to act before its clients realize they're ready to move beyond checks.
"With digital payments, we're … creating a digital payments platform disguised as a check," Reed said. "Since most ERP systems were designed to operate with checks, we've developed a platform that looks like a check but transitions to digital payouts for the recipient."
Reed joined Deluxe in November. He previously held roles at Barclays, Bank of America Merchant Services and First Data. Reed likened the current opportunity in the market to when fast food restaurants began accepting card payments.
In Deluxe's view, the holy grail for digital payments would be a system that transmits the same remittance information as a check, but is compatible with multiple digital options. Deluxe has an e-check platform built on an API-enabled architecture, which works with its Deluxe Payment Exchange to allow payers to use checks that get converted to the payment instrument of the recipient's choice.
The plan is to support conversions to debit, credit, PayPal, The Clearing House's Real-Time Payments, and Zelle. The platform currently supports ACH and virtual cards.
And of course, checks.
"By supporting checks, we maintain customer relationships and gain insights that will help us digitize processes," Reed said.