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Banking deal may threaten MS

In a move that could isolate Microsoft, Integrion Financial Network and CheckFree announce a wide-ranging online banking agreement.

    In a move that could isolate Microsoft (MSFT), Integrion Financial Network and CheckFree (CKFR) today announced a wide-ranging online banking agreement.

    Under the ten-year partnership, CheckFree will provide its electronic billing and payment service to Integrion banks, some of which are already CheckFree customers. When the deal closes, Integrion can buy 3 million shares of Checkfree for $63 million, a 27 percent discount from today's stock price, and a chance to buy up to 15 percent of CheckFree if the partnership adds 8.5 million new customers to CheckFree's service.

    Integrion is a joint venture of IBM (IBM), Visa, and 17 North American banks that handle 70 percent of the accounts in North America.

    Integrion is building a back-end software infrastructure for its member banks and other financial institutions to offer online transactions. Today's multifaceted deal links CheckFree, which currently offers online bill-paying to 283 banks that have 2 million online customers, directly to Integrion's operations.

    The agreement also represents a strong reaction by IBM and the banking industry against a Microsoft initiative called MSFDC, a joint venture with giant payment processor First Data (FDC) MSFDC aims to offer both bill-paying services and bill "presentment," a term for online billing, both for banks and directly to consumers. MSFDC is piloting its service with several banks, while Integrion's service remains in development.

    Banks worry that Microsoft will insert itself between financial institutions and their customers as the software behemoth branches out into new markets.

    In response, MSFDC has changed its revenue model and is touting itself as a "bank-friendly" service, said Microsoft's Lewis Levin, vice president, desktop finance division.

    "Integrion has been struggling to get bill presentment for member banks, and this deal recognizes that Integrion can't do that itself. So it decided to partner with CheckFree," said Cliff Condon, online banking analyst with Forrester Research.

    "Integrion likely to compete with MSFDC because one of the advantages Integrion has over MSFDC is relationships with the banks, and banks are who consumers trust," said Erica Rugullies, an e-commerce analyst with Giga Information Service.

    Microsoft's Levin suggested that the announcement may mean that some banks are impatient with Integrion's slow movement in getting operations started. "There might be a slight change in how Integrion perceives its own mission," he said.

    Reading between the lines, he thinks Integrion may move to locate sources for banks rather than building them itself. Today's CheckFree announcement, however, increases the chances that two online banking specifications will converge, analysts say.

    CheckFree, Microsoft, and Intuit (INTU) early this year released a common protocol for consumer online banking called Open Financial Exchange, or OFX.

    Integrion, meanwhile, is creating an Interactive Financial Services (IFS) platform for online banking based on its Gold Standard. Although Integrion and the OFX partners said several months ago that they would merge their specs next year, visible progress has been virtually nil until this month.

    "This [CheckFree] deal doesn't hurt OFX substantially," Condon said. "The information that travels from a merchant [biller] CheckFree will still be in OFX. Gold comes into play in linking CheckFree with Integrion and Integrion with the financial institution."

    On October 8, Intuit and Integrion announced that Intuit's Quicken personal finance software can plug into Integrion's platform, boosting the chances that OFX and the Gold Standard will converge. Today CheckFree's news offers new evidence.

    The CheckFree deal also gives Integrion warrants to buy 3 million shares of CheckFree for about $63 million when the deal closes. In addition, Integrion can get up to 7 million more warrants if the deal funnels at least 8.5 million new bill-paying customers to CheckFree by the end of 2001.

    The warrants, which represent about 15 percent of CheckFree's shares outstanding today, are priced at 20-15/16. CheckFree shares traded this afternoon at 29-1/4, up 3-11/32 on the day.

    In addition, CheckFree will take over the customers of Visa Interactive, a bill-paying operation Integrion acquired from Visa two months ago.