Turning over a New Leaf

Posted by Mark Brousseau

Vijay Balakrishnan, president of StratEx LLC (770-598-5747, www.stratexllc.blogspot.com) passes along his insights on the recent acquisition of Goldleaf Financial Solutions by Jack Henry and Associates.

The recent announcement that Jack Henry and Associates (Nasdaq: JKHY) would acquire Goldleaf Financial Solutions, Inc. (Nasdaq: GFSI) is yet another marker in the clear trend towards consolidation in the banking and payment solutions space. While significantly modest in scale and scope than the Fidelity- Metavante merger, it fits the template du jour of core solution providers filling out their payments repertoires, with a particular focus on the check and ACH vehicles.

Goldleaf has grown through acquisitions: Community Banking Systems, Data Trade, Alogent, and the original Goldleaf to name a few. Many of these acquisitions were predominantly debt financed. Low revenue growth, an increasingly difficult EBITDA (earnings before interest, taxes, depreciation and amortization) picture, and the debt load explain Goldleaf's decision to seek an exit through divestiture. At a purchase price of about $19 million (not including the retirement of some $42 million in Goldleaf debt), Jack Henry is getting value for its money, given that Goldleaf had paid $42 million for Alogent alone in January, 2008.

The less than stellar performance of Goldleaf does not vitiate the value of its component business units. Alogent was arguably the pace setter for distributed check capture in the run-up to, and in the couple of years following the passage of Check 21. They are the leaders in teller capture, and have implemented their solution integrated with varied teller systems like Argo, Getronics, Siebel, S1 and other in-house platforms. Their customers include JP Morgan Chase, SunTrust, Key Bank, HSBC, and international names like Lloyds TSB, Barclays Bank and Servipag- all with sizable distributed capture implementations. Less known is Goldleaf's strong presence in ACH solutions for small institutions. "It is the PEP+ for small banks", according to an industry insider, drawing an analogy with Fiserv's dominant big bank PEP+ solution.

The dark cloud in the Goldleaf story is the lack of exploited synergy between the business units. There are product overlaps- multiple merchant capture offerings between Goldleaf, Alogent and Community Banking Systems for example. The component companies appear to operate as independent units without the benefit of a cohesive brand and product strategy. The rationalization of overlapping Goldleaf product lines and those already existing within the Jack Henry family, and the development of a clear and consistent go-to-market strategy would be one of the immediate challenges at Jack Henry's doorstep.While a blog is not the right vehicle to articulate a comprehensive strategy, it is interesting to consider a few possibilities:

... Reducing the overlap in branch, merchant and other distributed capture offerings (both licensed and outsourced) makes eminent sense, from market messaging, cost of development and support perspectives.

... Exploiting the synergies between Goldleaf's strong ACH presence and Jack Henry's significant market share in small institution core processing is another obvious opportunity. Less intuitive perhaps is a possible link between the check and ACH lines of business as the convergence between imaging and ACH conversion plays out.

... It should be a no-brainer to integrate the Goldleaf (Alogent) teller capture solution and strong expertise with Symitar, Core Director and other teller platforms. As previously observed on StratEx Insights, teller capture will increasingly be brought to market bundled with teller platforms.

... The Data Trade division brings Document Management and Remittance Processing capability to the mix. There are multiple converging paradigms at play here. There is obvious synergy between the loan and deposit modules of Jack Henry core systems and document management. Remittance processing is headed in two directions. There is an emerging opportunity for retail "remote remittance" which dovetails nicely with merchant capture. Both "whole-tail" and wholesale remittance processing increasingly have a need for document management, within the ambit of a well thought out Content Management strategy.

... The Alogent part of Goldleaf brings international expertise to Jack Henry with customers in the UK, and Chile. Goldleaf is the dominant player in the UK check market. While it can be argued that the UK check market is declining rapidly, the account presence with leading banks can perhaps be leveraged to introduce other products from within the Jack Henry portfolio to markets beyond U.S. shores.

... While Jack Henry has historically served smaller institutions, Goldleaf (via Alogent) brings a Global 50 customer list. The peaks and valleys of whale-size deals, and the high customization needs of these institutions are radically different from Jack Henry's traditional customer base. With the opportunity to scale these heights comes the challenge of getting one's head around a very different business model.

Lastly, consider this possibility. As I said earlier, it is a no-brainer to integrate the Goldleaf teller capture solution with Jack Henry teller platforms. But what if they went the other way?

Goldleaf's biggest potential competitor in the teller capture market in the top 50 banks is Argo Data Systems, Inc.. Argo enjoys an 80% market share in big bank teller deployments. While Goldleaf has successfully integrated its solution with Argo's teller system in the past, Argo has in the past few years, hired away a team of check processing experts from Metavante to build their own capture solution. It is likely to be increasingly difficult to compete against such a bundled Argo offering. But what if Jack Henry went the other way, scaled up one of its teller platforms, bundled it with Goldleaf's teller capture, and took Argo head on in the top 50 banks?

Now.....that would be a turning leaf worth watching!