The most successful companies in vertical markets pair product innovation with go-to-market disruption. In this series we explore that marriage, how companies many have never heard of came to dominate their markets, and how they scaled with distinct tactics. These history lessons inform what we look for when investing in vertical markets at Scale Venture Partners, and hopefully provide blueprints for the next generation of vertical market winners.
Company name: Checkfree (now part of Fiserv)
Founder: Pete Kight
Year founded: 1981
Company vertical: Banking – electronic payments
Market dominance: Consumer bill payments via banks in the US
What do they actually do: Checkfree powers online bank bill payment for 4000 financial institutions in the US. When a consumer goes to a Checkfree customer such as Bank of America, the bill payment experience as well as the money movement to the vendor is all managed by Checkfree.
Product innovation: Checkfree initially launched an online payment service for apartments and health clubs, and then pivoted to offering bill payment directly to consumers via Compuserv. They later offered private-labeled online bill payment to banks as online banking became more prevalent and Checkfree became the de facto standard.
Checkfree’s simple innovation was the recognition that very few billers were ready to accept electronic ACH payments, but that consumers liked the convenience of paying online. They bridged this gap by accepting consumer payment requests online, and then mailing checks to billers. As their batch of checks to a biller grew over time, they would convince the biller to switch to ACH acceptance instead. As their network of billers grew, their costs declined because they converted batches of mailed checks to ACH payments, and they were able to lower the price of their consumer bill payment service. Their founder Pete Kight described improving the bill payment platform as a slow incremental process to manage how addresses and accounts were verified, how checks were batched, how billers were converted to electronic payment receipt, etc. Years of working on this process gave them an edge over potential competition.
Scaling magic moment: In May of 2002, their client Bank of America made the bold decision to offer bill payment services free to consumers. They were able to do this because Checkfree’s costs had come down over time, so in some sense, the “magic” was enabled by years of slow, grinding hard work. But when BofA offered this to consumers, the uptake was much more than expected, and it forced other banks to match the offering. This led to broad adoption of consumer online bill payment services, growing Checkfree transactions from 300 million in 2002 to 1.3 billion in 2007. Along the way they acquired the market leader in portfolio management software for brokers (Security APL, 1996) and a leader in bank payments support software (Servantis 1996) but their core bill pay service drove the vast majority of their revenues and profits. This company was built on a channel distribution model that was supercharged because they were able to offer their product at a very low cost, and that low cost was driven in part by network effects.
Where are they now: Checkfree went public in 1995, and Fiserv acquired CheckFree for $4.4 billion in December, 2007.