Fundtech & S1 - A Match Made in Heaven?

Earlier today, S1 announced that it had joined forces with Fundtech. This merger of two well known payments and electronic banking solution providers has a lot going for it. For the most part, these two firms have complementary product sets. As a single firm, they now have the capacity to be a global player, serve clients of different sizes, and provide complete front-back end solutions. It sounds rosy on paper, but it's not going to be that simple to pull off. Don't get me wrong, I think this transaction has a lot of potential, but let's explore some of the finer points. What Works:

• Complementary product sets. Here are a few examples, there are several more. Fundtech has a vast array of payments solutions that it sells to large banks across the globe. S1 has payments solutions as well, but they have been focused on a different slice of the market - small banks in the US. S1 has a suite of online banking products for retail banking, Fundtech does not.
• Common goals. Both firms want to own as much of they can of the electronic banking and payments (front to back) landscape. Both companies have been actively investing in their solutions. They now have a library of solutions that can serve banks of all sizes around the globe and they can provide solutions for retail banking through corporate banking.

What's Going to Hurt

• Product Overlap. Not surprisingly, there is some overlap. The key area of overlap is online banking for businesses/large corporates. S1 has two solutions - one for large financial services firms (LFIN) , the other for small banks (CFG). Fundtech has two solutions - CashPlus and Global CashPlus. Both firms also have mobile banking solutions that serve business customers. For the moment, all of these solutions will continue to run. I have no doubt however that over time there will be some product consolidation. I can't see how the firm could justify the expense of keeping these all alive. This will of course take time, particularly since S1 clients will not want to switch to a Fundtech solution and vice versa.
• M&A doldrums. As with any firm that goes through a merger, there is going to be a lot of energy placed on nitty gritty M&A activities. This redirection of energy could stifle innovation and creativity in a space that is innovating at a very rapid clip. This could allow competitors to leapfrog ahead.

I think it's interesting and smart that the investor presentation focuses on transaction banking. The title of the investor presentation is, "Transforming The Transaction Banking Landscape." Transaction banking has been a really active and popular space over the last few years. Whether it's payments or online banking, solutions geared at corporate customers is where the revenue is at.