Free of E-Wallets, ECHO Goes to the Altar with Intuit Once Again

Intuit Inc.'s agreement to buy Electronic Check Clearing House Inc. (ECHO) for $131 million in cash, announced on Wednesday, came about largely because of ECHO's move to shed its gambling-related electronic-wallet business earlier this year, an Intuit executive tells Digital Transactions News. It was that business, in which ECHO processed e-check payments related to bets placed on the Internet, that brought on scrutiny from the federal government following the Oct. 2006 passage of the Unlawful Internet Gambling Enforcement Act (UIGEA). Complications arising from a federal investigation of the business, along with a settlement ECHO made with investigators, also scuttled in March a deal the two companies made a year ago by which Intuit would have bought the Camarillo, Calif.-based processor for $142 million (Digital Transactions News, Dec. 18, 2006 and March 27). In February, ECHO closed its e-wallet business. While admitting no wrongdoing, it also entered into a non-prosecution agreement with the U.S. Attorney for the Southern District of New York in which it agreed to pay $2.3 million to the federal government. The sum represented the total of ECHO's e-wallet profits between 2001 and the time it terminated its e-wallet activities. ECHO also agreed to serve as a cooperating witness in a federal investigation into the activities of e-wallet customers that provided services to Internet gambling sites. Under the UIGEA, U.S. processors are prohibited from handling payments for online gambling operations. Exiting the business cost ECHO about $4 million in annual revenue, but it cleared the way for the company, which processes card and automated clearing house transactions, to re-start talks with Intuit late this summer, says Dan Wernikoff, vice president of product management for Innovative Merchant Solutions, an independent sales organization Intuit acquired in 2003. Mountain View, Calif.-based Intuit, which will merge ECHO into IMS, values ECHO primarily for its ACH capabilities. “They exited e-wallets, which made their portfolio less risky,” says Wernikoff. “For us, once they cleaned those things up, it was worthwhile to talk to them again because all the other things we were looking for were still there.” ACH and other electronic check services account for about 19% of ECHO's $77 million in annual revenue, with card processing for about 60,000 merchants accounting for the balance. While the check-services division, which housed the e-wallet business, saw its revenue fall from $18.3 million to $14.3 million in the year ended Sept. 30, growth in the much larger card processing business more than offset that drop. Intuit wants to use ECHO's e-check and risk-management operation to complement its current payment offerings. “Some people have a preference for accepting checks, and we don't have a solution for them,” says Wernikoff. The company's popular QuickBooks accounting software allows small businesses to process card payments through a function integrated into the product. Roughly half of the 225,000 merchants IMS serves are using this solution, Wernikoff estimates. ECHO will also fit into a new so-called payments portal Intuit released this fall that allows merchants to process payments, get reports, service accounts, and get customer-service help in one place. Wernikoff sees potential not only in back-office conversion, the new ACH e-check product that allows merchants to convert checks in batches, but also in several other e-check codes, including WEB, TEL, and RCK. These allow merchants to accept e-checks online and over the phone and to re-present bounced checks electronically. He figures QuickBooks customers will provide a ready market for such services, since they are largely small businesses that most banks have bypassed. “Our QuickBooks customers fall under the radar of banks,” he notes. The deal is set to close in the first quarter and has been approved by the boards of both companies. Wernikoff refuses to say how soon he expects ECHO's operations will be integrated into Intuit. “It's going to be as quick as we can possibly get it done,” he says. ECHO shares, which trade on the Nasdaq, closed on Thursday at $16.59, up $8.69 for the day. Intuit shares, also on the Nasdaq, closed virtually unchanged at $30.43.