eFunds made the invisible worth $1.8 billion

In March 2007, eFunds had a problem that had nothing to do with moving money. People kept mistaking it for somebody else. Its name suggested mutual funds, a dot-com survivor, even an online broker. “I can't tell you how many times we get calls for E-Trade,” marketing executive Keith Kendrick told American Banker. The proposed remedy was wonderfully economical: call the company EFD, its stock symbol.

Three months later, FIS agreed to buy it for approximately $1.8 billion. The name needed explaining. The business had attracted a buyer.

A check printer's electronic offspring

eFunds emerged from Deluxe, the check-printing company. Its legal predecessor was incorporated in 1984, but the recognizable business took shape in 1999 as Deluxe brought together electronic payments and risk operations, including ChexSystems and DebitBureau. Professional services joined in 2000. An IPO followed that June; the remaining Deluxe stake was distributed to shareholders in December.

This origin explains the company's peculiar range. Payments and information arrived together. One operation helped a transaction reach its destination. Another helped a bank decide whether to begin a relationship with the person requesting an account. Outsourcing supplied people and processes around those systems.

For a financial institution, these were connected chores. A payment had to work. A suspicious application had to be examined. Somebody had to maintain the machinery. eFunds sold expertise in those chores to institutions that had their own customers to serve.

Read that collection as a map of where a bank might need help. Account opening comes before spending; verification accompanies it; processing carries the payment onward. Selling across those moments gave eFunds several ways into an institution. It also required competence in several businesses whose risks and economics differed.

The money was in the machinery

The product names were a tour of banking's back rooms: CONNEX and IST for electronic funds transfer, SCAN for check verification, ClearCommerce for online payments and fraud prevention. ChexSystems brought account-screening information. Prepaid processing supported gift and payroll cards. Government clients used electronic benefits processing.

These were business services, purchased by banks, networks, retailers and public agencies. Revenue came through processing, information, software and outsourcing. Transaction fees could accrue each time a payment was handled; software also created licensing and maintenance work. A consumer buying a gift card saw the card's brand. The processor's economics sat underneath.

That position brought competition from First Data, Fiserv and Metavante, as well as banks' own processing operations. eFunds described payments competition in terms of price, service and functionality. In risk management, the quantity and quality of available data mattered. Its distinguishing combination was payment infrastructure plus information about the people using it.

Sell the machine. Keep the relationship.

In November 2004, eFunds sold its ATM portfolio and entered a five-year management services agreement with the buyer. Processing, cash management, help-desk work and related services continued. The company could step away from owning a portfolio of machines while remaining involved in their operation.

Here is a useful distinction for anyone studying the company: an asset and the work it generates can have different owners. The move fitted eFunds' stated effort to concentrate on higher-growth, higher-margin businesses. It also made the remaining service relationship worth examining separately from the equipment sale.

The next purchase pushed in another direction. In July 2005, eFunds acquired WildCard Systems, adding prepaid capabilities to its debit-processing business. The announced base price was $228.8 million, with a holdback and an additional revenue-dependent earn-out of up to $58.8 million. Cash and bank financing would fund the deal.

The logic was easy to understand: an existing bank customer might also need prepaid processing. Offering both could simplify the purchasing conversation. The harder question was whether that broader offering would produce the expected revenue after the purchase price, financing and operating work had all entered the picture.

The forecast blinked first

The prepaid expansion did not follow its forecast. eFunds reported that the business produced lower-than-expected revenue and a larger-than-expected loss in 2006. WildCard missed the revenue objectives attached to its earn-out. A legacy Bank of America contract ended in May 2006; notice had arrived before the acquisition documents were signed.

The distinction matters. Buying processing capability did not guarantee that every inherited revenue stream would continue. A contract can disappear while the technology remains perfectly capable of doing its job.

There was new business too. A 9.5-year American Express agreement covered prepaid processing, including exclusive processing of U.S. mall and universal gift cards after migration. Initial processing was anticipated in mid-2007, with conversions continuing into 2008. Winning a customer and transferring its programs were separate stages, with separate calendars.

Then the neighborhood changed

By May 2007, chairman and CEO Paul Walsh was reconsidering acquisition approaches. His explanation pointed outward: payments companies and financial institutions were consolidating. American Banker reported that deals involving First Data and Metavante had helped change his view of remaining independent.

FIS offered a larger distribution network and a broader set of products. Its June announcement put eFunds' reach at more than 10,000 financial services companies in over 80 countries. Full-year 2006 revenue was about $552 million, with operating income of about $83 million. The acquisition closed on September 12 at $36.50 cash per common share.

An asset and the work it generates can have different owners.An editorial reading of the ATM transaction

The sequence makes the sale more interesting than a simple finish line. Independence had given eFunds room to assemble a particular bundle of services. Consolidation changed the setting in which that bundle competed. Management could value what it had built and still conclude that a larger owner offered useful reach.

The part you can still use

The history remains tangible in ChexSystems. The Consumer Financial Protection Bureau identifies it as owned by the eFunds subsidiary of FIS. It collects information about checking-account applications, openings and closures. Consumers can request their report and examine the information behind an account-screening decision.

For operators, the transferable lesson is to examine the service relationship, the contract and the asset separately. The approach needs customers who stay, usable data and dependable execution. Lost contracts or inaccurate information weaken it. eFunds' prepaid experience supplies the caution; its continuing account-screening footprint supplies the reason to pay attention.