GonzoBankers, did you see the recent major bank tech news? It’s a whopper for bank tech geeks like me. Looks like Bottomline Technologies (NASDAQ: EPAY) is going to acquire online account opening powerhouse Andera for $45 million in cash and 102,000 shares of Bottomline stock (trading at about $35 per share as of mid-day 4/3/14). If you missed the press release from The Wall Street Journal, check it out here.

While it saddens me to see this deal from the perspective of Andera/oFlows employees who may dearly miss their independence, I think it is a superb play for Bottomline. First, Bottomline picks up Andera’s 500 bank and credit union clients and a workforce that has slogged through the detailed, fine points of processing more than 4.5 million online account applications, according to the press release. That’s a Metric Crap-Ton of hyper-relevant experience.

The move to acquire Andera’s oFlows loan and deposit origination software beefs up Bottomline’s growing remote delivery product set that already includes business mobile banking, business online banking/cash management, payments settlement, payables/invoice automation software, and several other platforms. If Bottomline does the right thing with integrating its own products, the company is really only a retail online/mobile banking product away from being a significant powerhouse. Bottomline could be a Bruiser in the making.

What I liked even more about the Bottomline/Andera deal is how it underscores the need for ancillary vendors to get bigger in order to deal with the core providers, some of which are making it nearly impossible for banks and credit unions to work with third party vendors. Some core providers make it so expensive for their customers, third party vendors or both to integrate with the core that smaller banks and CUs have to just bite the bullet and go with the core provider’s ancillary option.

Why, just last week a client told me about a nearly $100,000 invoice (half up front, the rest over five years) he received from his CRM vendor for the privilege of integrating to his core product. My client’s research indicated that the bill was due to the large core processor going completely nuts when it renegotiated its integration fee with the much smaller CRM vendor.

The CRM vendor said that it is not marking up the fee from the core provider at all. Could the CRM vendor be lying exaggerating? Maybe, but my gut says this vendor has been victimized at least to some extent by the big core player getting cranky about its clients using a third party for CRM. So, they make it crazy expensive for the CRM vendor to integrate to core. The Evil Genius here is that the core vendor is not directly billing its core clients; it’s just making integration so expensive that the Internet banking vendor HAS to pass on the rising costs to its clients. So not only does the core vendor make things difficult and expensive for the CRM vendor, in doing so it makes the CRM vendor look like the bad guy to their shared clients. And it seals the deal with the threat of a law suit if the ancillary vendor discusses with its clients why it had to send a $100,000 “integration” invoice. Evil Genius, indeed.

This kind of bully tactic is going to get worse unless we do something about it. In my last Gonzo post, I detailed how banks and credit unions could fight the Power of the core oligarchy. Unfortunately, banks can’t win this war on their own. No, it’s going to take the ancillary vendors to join the banks and credit unions to stop the Core Vendor Weirdness.

First, ancillary vendors are simply going to have to get size to negotiate with their core “partners.” In numerous creative and painful ways, a core provider can bully a small Internet banking vendor with 50 clients. Like it or not, specialty vendors are going to have to grow to the point that they can browbeat respect from the core providers simply due to the long list of clients they have and the many prospects still clamoring for their products. Bottomline took a big step toward doing just that with its acquisition of Andera. CRIF is also doing it. ACI, too. These ancillary vendors and those like them have a fighting chance to hash it out with the core vendors because they have two key assets:

1. A LONG list of bank and CU clients, and
2. The ability to deliver innovative products in high demand. Core vendors do some things right, but innovation and market responsiveness are cellar dwellers on that list.

As fellow GonzoBankers Bob Roth, Terence Roche and I were discussing as we sipped champagne and Chivas in the Cornerstone hot tub, an interesting tactic to strong-arm the core strong-arms could be for ancillary vendors to band together to produce tightly integrated, highly functional product strings that would create the market demand necessary to bring the core players to the bargaining table in earnest. Think about it. What could a partnership between an ATM/debit processor, an Internet banking provider and an online account origination vendor do? Together, they could deliver a death punch to the nards of the core processors trying to use price to stop their mojo. What if Internet banking vendors banded together to make their own payments company to eradicate the core-owned CheckFrees and FIS ePayment Solutions of the world? And what if ancillary providers figured out a cheap but effective way to work together to make core integration superfluous?

It’s that kind of scale-building and what-if thinking by our ancillary vendors that will be necessary to correct the core players’ price-bullying going on now. That, and a lot of table pounding by bank and CU execs across the country who have the stones to fight this troubling, expensive tactic by the core players.
-Hodgins

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