If consumers warm up to online banking, Intuit Inc.’s $1.35 billion purchase of Digital Insight of Calabasas could be a good deal for both companies.
If not, well
The deal, which has tax software publisher Intuit paying $39 for each common share of Digital Insight stock, looks pricey on the surface. The stock closed at $33 the day before the merger plan was announced Nov. 30. It is L.A.’s biggest tech deal of the year.
But executives at Mountain View-based Intuit are betting that the deal will pay off in the short and long term because the firm will be able to hawk its flagship tax products, such as QuickBooks, Quicken and TurboTax, to Digital Insight’s customers.
Digital Insight sells software that lets banks and credit unions offer online banking to their customers. It serves 1,760 financial institutions, 7 million customers and 116,000 business end users.
One challenge facing both Digital Insight and Intuit will be convincing the public that online banking is legit.
A decade ago, online banking was a trendy consumer inducement that banks used to drum up customers. As late as 2003, analysts were predicting that online banking would grow at a 14 percent annual growth rate over the next five years.
However, online research firm eMarketer reports that online banking rose only 3 percent in 2005.
Consumer confidence has waned in the wake of inadvertent identity and account info breaches at several
high-profile online financial companies. Another negative has been the proliferation of “phishing,” or online scams in which the perpetrator masquerades as a bank or Internet service provider.
“Security is not a luxury to online banking users, and it cannot be for online banks,” said Lisa Phillips, an eMarketer analyst and author of the report.
Intuit nonetheless sounds confident about the prospects for online banking.
“We estimate that about 43 million households do some kind of online banking,” said Intuit Chief Financial Officer Kiran Patel. “Increasingly, we see small businesses as using online banking solutions to do their financial management. As that trend is appearing, we want to participate in that trend.”
Jeff Stiefler, Digital Insight’s chairman and president, saw the same bright future.
“The market for online banking and bill paying is still at an early development stage,” said Stiefler. “We believe that if we do nothing more than drive higher adoption of those services within our base of existing financial institution clients, we will have an exciting growth business.”
Stiefler is expected to be named head of a new financial institution business division established by Intuit.
Analyst Chris Penny, of Friedman, Billings & Ramsay, said Intuit was looking to take advantage of Digital Insight’s relationship with banks across the country.
“As a consumer, if I want to use TurboTax every year, then I have to buy it,” Penny said. “If I can do it through my banking institution, then 1,700 banks will make it available.”
Intuit’s Patel confirms as much.
“Through those banks, they reach 38 million potential online banking customers,” he said. “They bring distribution and a channel and we bring the content to offer through that distribution.”
Digital Insight was started in 1995 to provide software for banks and credit unions that their retail and business customers could use. Its major focus quickly became Internet banking, including online cash management, multi-channel lending and electronic bill payment.
Digital Insight has 750 employees in its Calabasas offices with revenues pegged at $214 million for fiscal year 2005. Intuit executives said there were no plans to cut staff or make any significant changes in Digital Insight’s operations.
The company will continue to operate from its facilities in California as well as Georgia.
The transaction will be subject to regulatory review, but it expected to close in first quarter 2007.
Intuit’s Chief Executive Steve Bennett said that he saw the deal “bringing a new generation of online banking solutions to market.”
