S1, Fundtech Agree to Merge in Deal That Hinges on ‘Transaction Banking’

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S1 Corp. and Fundtech Ltd. on Monday announced a merger valued at $700 million at Friday’s closing share prices. The deal, expected to close in the fourth quarter, positions the combined company to take advantage of what company officials see as a rapidly growing trend at banks to emphasize transaction revenues over lending. It also brings Jersey City, New Jersey-based Fundtech, whose software is used by banks exclusively for wholesale payments processing, into the consumer-payments arena for the first time.

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In the merger, Fundtech shareholders will receive 2.72 shares of S1 common stock for each Fundtech share, leaving S1 shareholders with a 55% stake in the combined entity. The new company will be rechristened Fundtech Corp. and will be based at S1’s headquarters in Atlanta. Reuven BenMenachem, chief executive of Fundtech, will become executive chairman, while Johann Dreyer, chief executive of S1, will serve as chief executive.

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A provider of software for electronic funds transfer network switches, merchant acquiring, card management, online and mobile banking, and in-house payments processing for merchants, S1 provides a consumer-payments platform Fundtech has lacked. The 18-year-old Fundtech’s product line is used by major banks to process remittances for businesses around the world. The consumer capability was seen as crucial at Fundtech, which was increasingly hearing from clients that they wanted a single source, or “strategic supplier,” for all payments software, says George Ravich, executive vice president and chief marketing officer at Fundtech. “Banks have been asking, ‘Can we put consumer products on top of that [Fundtech] platform as well,’” he says. “Up to now, the answer has been, ‘No.’”

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At the same time, banks have, since the financial crisis of 2008, placed increasing emphasis on sources of transaction revenue, Ravich says, making a commercial-consumer payments combination even more important. The trend has come to be known as “transaction banking.” “This is a very large part of the banking business that nobody has paid attention to until recently,” Ravich says. “It’s based on transaction fees rather than interest [income], so it’s predictable, and banks are investing in this.”

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In this context, the merger appears to make sense, observers agree. “It’s a market-share play based on transaction banking,” says Robert Meara, a senior analyst at Celent LLC. He notes the combined company will also produce “expense synergies.” The two companies expect to save $12 million in costs by 2012, according to their announcement. The transaction seems to benefit both parties in roughly equal measure, with Fundtech “getting retail-banking capabilities it didn’t have,” says Nancy Atkinson, a senior analyst at Aite Group LLC.

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Of the two companies, S1 is the larger, with $181.5 million in revenue last year, compared with $141.9 million for Fundtech, which operates the largest service bureau in the world for the SWIFT global payments system. Had the two been a single entity in 2010, some 61% of its revenue would have come from U.S.-based business. The two companies expect to generate a total of more than $370 million this year.

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The deal culiminates weeks of speculation that had been swirling around Fundtech, which felt compelled on June 14 to release a statement confirming it was in talks with unnamed parties “regarding potential transactions.”