4411 E. Jones Bridge Road
Company Perspectives
At CheckFree, our vision is to make complex financial activities easier for businesses and consumers. For 25 years, we've been turning that vision into a reality by setting the standard for leadership, innovation and quality of financial electronic commerce. Today, CheckFree provides software and services to thousands of businesses and millions of consumers every day.
CheckFree Corporation is a NASDAQ-listed company based in Norcross, Georgia, that provides a wide range of financial electronic commerce services and products to consumers through financial management software, banks, brokerage firms, and web sites. CheckFree divides its business between three divisions: Electronic Commerce, Investment Services, and Software.
The Electronic Commerce Division offers electronic billing, payment, and electronic funds transfer services to both consumers and businesses. Some 2,000 Internet sites rely on the company's electronic billing and payment technology. CheckFree also offers a walk-in bill payment system to accommodate consumers who prefer to pay bills in person, and subsidiary PhoneCharge Inc. allows billers to accept payments by way of the telephone. CheckFree's Investment Services Division offers portfolio management services to brokers, money managers, and investment advisers. The main product of this unit is CheckFree APL, a real-time portfolio management system used by 80 percent of the top-50 brokers in the United States and virtually all of the leading money managers. Finally, CheckFree's Software Division licenses, installs, and maintains bank payment, operational risk management/reconciliation, financial messaging/corporate actions, compliance, and electronic billing software solutions. CheckFree maintains offices in more than a dozen U.S. cities, as well as international offices in countries such as Luxembourg, the United Kingdom, and Australia.
Founding the Company in 1981
CheckFree was founded in 1981 by Chairman and CEO Peter J. Kight. Raised in Columbus, Ohio, Kight studied philosophy at California State University, but his real interest, as he readily admitted, was finding a major that required little memorization and gave him the best chance to remain eligible for the school's track and field team to continue to participate in his specialty, the decathlon. When he injured his hamstring in his senior year and was unable to compete in 1977 he simply dropped out of school. To remain involved in the sport, he organized a track meet, which led him to rent a Bakersfield, California auditorium for a weightlifting and bodybuilding competition. There he met the publisher of Muscle Digest, who immediately hired Kight as the magazine's editor-in-chief. Over the next two years Kight grew Muscle Digest, along the way making the acquaintance of Arnold Schwarzenegger before the legendary bodybuilder made his transition to movies and politics. Kight's next stop was Texas, where he was hired as general manager of a small health club chain that was contending with new state laws that tried to rein in some of the industry's notorious sales practices. Knowing that a large number of people joining a health club would fail to keep up a commitment to exercise, owners tried to get customers to pay for a year's membership upfront, meaning in essence that they had to be signed up every year. It was Kight's desire to find an alternative to this practice that led to the creation of CheckFree.
Instead of charging a $250 lump sum annual payment, Kight wanted to charge customers $75 upfront and a $12-a-month automatic payment. To avoid the problem of billing he made an arrangement with a local bank so that a new member gave the club a voided check, delivered to the bank, which automatically made a transfer of money from the customers' checking account to the health club. In this way, after six months the club became profitable at the beginning of each month. Rather than fueling his excitement about the health club business, however, his success led him to quit, sensing there was a far greater opportunity in developing automatic payment systems for businesses other than health clubs.
In 1981 Kight returned to Columbus to pursue his new dream. With just $700 to his name, he moved into his grandmother's basement where he could live, and eat, for free. Unable to afford a computer needed for his endeavor, Kight worked out a barter arrangement with an apartment manager: In exchange for use of the manager's IBM 5120 at night (from 6 p.m. until 8:00 the next morning), he put the man's tenants on an automated payment schedule. To do his programming, Kight hired a man who took on moonlighting assignments and together they developed an automated clearinghouse (ACH) program. After about seven months they had a working system.
Breakthrough in 1984
Kight convinced Columbus-based Banc One Corp. to originate ACH payments and host transactions, provided that he met security requirements, did all the data entry, and found someone who actually wanted the service. Not surprisingly, Kight's first customers were apartment complexes and health clubs. It was slow going at first, with Kight the only employee for two years until he was able to afford a part-time clerk. Looking to expand, in 1983 and 1984 he sought out venture capital firms, none of which saw the merit in an ACH business. By his count he was rejected more than 30 times. Kight also hit the road in the hope of landing larger accounts. According to the Wall Street Journal, "He stayed at the worst, cheapest hotels, the kinds of places that gave 2-nights-for-1 coupons. A low point occurred in a ratty New York hotel, where plaster crumbled onto his head as he showered. He tried to shampoo his hair holding a towel over his head, as plaster collected around his feet." Kight's devotion to his business also cost him his new marriage after a year, but he persevered until a Columbus attorney made a suggestion that provided a breakthrough. He suggested Kight talk to life insurance companies, which were familiar with similar backoffice operations. In short order, Kight lined up four Columbus life insurers to invest $3 million in CheckFree. Moreover, in 1984 Columbus Internet service provider CompuServe Incorporated agreed to offer the CheckFree system to its subscribers. The $3 million seed money and the CompuServe contract allowed Kight to develop a consumer personal computer-based business.
One major problem at this point was that banks and billers had been reluctant to participate in an electronic funds transfer system. In fact, some major billers refused to accept electronic payments, forcing CheckFree to cut and send paper checks on behalf of consumers who had given the company permission to pay their bills. When an automatic payment system was offered directly to consumers, who were empowered by personal computers, the advantages became apparent to all. Once consumers demonstrated their interest, the banks and the billers changed their minds. To further persuade reluctant billers, Kight inflicted what he called "paper pain," sending in all of his customers' checks in massive batches at one time. To get around banks that would not participate, CheckFree in 1988 began offering an electronic payment service to consumers who took advantage of the Federal Reserve's automatic clearinghouse network. Although the product (which cost a one-time $25 charge and a $9-a-month service fee for the first 20 transactions) allowed users to pay any creditor electronically, customers did not have the ability to check account balances or transfer money from one account to the other.
CheckFree experienced a steady rise in revenues in the early 1990s, growing from $22.2 million in 1992 to nearly $50 million in 1995. However, the company also had to contend with an infusion of competition. According to Business Week in a 2006 profile, "Major banks and software companies jumped into the bill-paying game, including a consortium comprised of Microsoft, Citicorp, and First Data. 'They all thought they could create a technological shortcut,' says Kight, 'but there is [none]. They underestimated how hard the details of the business are.'" To protect its position in the marketplace, CheckFree sued National Payment Clearinghouse, a subsidiary of personal finance software publisher Intuit Inc., claiming an infringement of patented technology that linked PCs to electronic methods of bill paying. Intuit had been a CheckFree customer until 1993 when it acquired National Payment, which had by then been renamed Intuit Services Corp. (ISC). The two parties went on to settle the matter and in January 1997 CheckFree acquired ISC in a $199 million deal that gave Intuit a 23 percent stake in CheckFree.
By this point, CheckFree was becoming increasingly more involved in developing a system to make safe financial transactions over the Internet and had become a public company, having made an initial public offering of stock in September 1995. CheckFree took advantage of Wall Street's rising interest in Internet-related businesses to net more than $50 million for corporate purposes while allowing stockholders, including Kight, to cash in on some of their investment in the company. The proceeds and stock were then put to use in making three key acquisitions that fleshed out the business.
In February 1996 CheckFree spent $165.1 million in cash and stock for Servantis Systems, Inc., a Norcross, Georgia-based company that was a leader, and competitor, in electronic commerce and financial applications software. Subsequently, CheckFree moved its corporate offices from Columbus, Ohio, to Norcross. Next, in May 1996, CheckFree completed the acquisition of Security APL for $53.3 million in stock. The New Jersey-based company was a leading provider of portfolio management and software services for institutional investment managers. The third major acquisition of the mid-1990s was the ISC purchase. The key product introduction during this period was CheckFree E-Bill, the first available complete electronic billing and payment solution.
With the integration of its acquisitions, CheckFree grew revenues from $51 million in fiscal 1996 to $176.5 million in fiscal 1997 and $233.9 million a year later. Although the company was not yet turning a profit, it had plenty of working capital and was establishing itself in an industry that with the inevitable rise of e-commerce held great promise. At the start of fiscal 1998, only four of the hundreds of financial institutions that offered CheckFree services made those services available over the Internet. By the end of the year 30 more would be added, a number that would continue to grow exponentially. CheckFree closed the 1990s by implementing the Genesis technology platform that had been created to integrate the different data centers it had acquired from Servantis, Security APL, and ISC. Not only did Genesis better serve the electronic billing and payment processing needs of CheckFree's two million customers, its engineering architecture could accommodate the business of 30 million households, making CheckFree a clear leader at a time when electronic bill paying was expected to become commonplace in the new century.
Acquisition of Blue Gill Technologies in 2000
CheckFree began the 2000s with another important acquisition, the $239.9 million stock purchase of BlueGill Technologies, an international software developer of electronic bill payment solutions. As a result, CheckFree became the only company able to offer a complete, single-source electronic billing solution. Later in the year CheckFree solidified its position in the marketplace by acquiring a key competitor, TransPoint L.L.C., the business launched by Microsoft, First Data, and Citibank. The price tag was a hefty $1.4 billion in stock, but an amount that management believed was warranted. Many billers had been reluctant to chose between market leader CheckFree, or TransPoint, backed by a corporate heavyweight, and simply remained on the sidelines. Once TransPoint was acquired, however, an increasing number of corporate billers signed up for e-billing services. Also an important development in 2000 was an agreement with Bank of America for CheckFree to assume its electronic billing and payment operations. Moreover, CheckFree renewed multiyear contracts with four top U.S. banks: Bank of America, BankOne, Chase Manhattan, and Wells Fargo.
Consumer demand for electronic bill paying did not grow as quickly as expected, creating some disgruntled investors. The price of CheckFree stock, which topped $125 per share at the time of the TransPoint acquisition announcement in February 2000, dipped below $30 a year later. The company also had to contend with a sputtering economy. To placate Wall Street it moved to cut costs and took other steps to improve the balance sheet in fiscal 2001 and 2002 while maintaining its market-leading position. Sales increased to $490.5 million in fiscal 2002, then reached $551.6 million in fiscal 2003 as the company's net loss fell from $441 million to $52.2 million. Moreover, the number of electronic transactions the company completed rose at a strong pace, increasing from 169 million in 2000 to 316 million in 2002 and 434 million in 2003. It appeared that online bill paying was finally becoming a mainstream occurrence, due in large measure to major banks eliminating their monthly online bill payment fees and providing incentives for customers to go "paperless."
In the first quarter of 2004 CheckFree reported its first profit after 18 straight quarters of losing money. The company also took a major step in expanding its international business, establishing a joint venture with BACS, Ltd. to provide electronic bill paying services in the United Kingdom. CheckFree added further to its U.K. business through the May 2005 acquisition of Accurate Software, which was folded into CheckFree's Software Division. For the full year in 2004, CheckFree recorded revenues of $606.5 million and net income of $10.5 million. In 2005, revenues soared to $757.8 million and net income increased to $46.8 million. Business proved to be even stronger in the early quarters of 2006, as CheckFree appeared to have finally turned the corner and taken advantage of its hard-fought position in the marketplace. Far from content, Kight continued to look for ways to expand the reach of the company. In early 2006 the company paid $100 million to acquire PhoneCharge Inc. to add pay-by-phone capabilities it had previously lacked, which along with walk-in bill-pay services CheckFree hoped to serve the 20 percent of the nation's population that lacked bank accounts. On the other end of the scale, Kight also was interested in providing the back-office infrastructure service needed by Wall Street firms to create customized portfolios for individual investors. After 25 years in business, CheckFree was in many ways just beginning to realize its vast potential.
Principal Divisions
Electronic Commerce; Investment Services; Software.
Principal Competitors
Mastercard Incorporated; Metavante Corporation; Online Resources Corporation.
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