ntuit Inc. is onto something that could be cause for concern for folks in other business lines, such as payments. The Mountain View, Calif., firm - perhaps best known for its Quicken and QuickBooks accounting software - just plunked down $116 million in cash for Innovative Merchant Solutions (IMS), an up-and-coming merchant services firm that operates from headquarters in Calabasas, Calif.

Joe Kaplan, IMS founder and CEO, is pretty astute when it comes to the merchant community, having built and sold Superior Bankcard Service during the 1990s and then eventually starting IMS in 1999.

The deal with Intuit has Kaplan and associates leveraging their combined acumen to help Intuit boost its presence in the small-business market for financial services. Kaplan and his staff of 110 have been asked to remain on board.

I can almost see the prompts popping up on my QuickBooks screens: "Enhance sales with credit card and debit card acceptance. Let Intuit help you set up a merchant card account. Click here for details."

Intuit has dabbled in card payments but lacked the capability to support PIN-based debit and swipe terminals, a spokesperson explained. While limited, the merchant account services available through QuickBooks, Intuit's small-business accounting software, have attracted 40,000 customers and created a $9 million business for Intuit over the last three years, according to a company statement. But, the company's spokesperson noted, "There's a huge need beyond this limited offering for QuickBooks users and other small-business owners."

IMS processed an estimated 1.7 billion Visa and MasterCard transactions in 2002, according to GSQ's 2002 Billion Dollar Acquirers Report. It ranked 30th among billion-dollar acquirers. That's a respectable showing for a four-year-old company.

Kaplan and a group of co-investors also own Innovative Bank, an Oakland, Calif.-based bank that specializes in small-business lending (it holds "Preferred Lender" status with the Small Business Administration and ranks as the third-largest SBA lender in the U.S.). While the bank and the processing company have similar names, they operate as separate corporate entities.

The bank isn't part of the Intuit deal, but it might play a role in Intuit's merchant services strategy; however, Kaplan expects the business will soon outgrow Innovative Bank and will probably be shared by two or more acquiring banks. (Remember, the size of an acquiring bank's book of business is constricted by regulatory requirements on capital. A privately held bank with two branches and an Internet presence, Innovative has about $70 million in assets, according to Kaplan.)

Intuit doesn't rule out owning a bank, but the legal odds are against it these days. What it's most interested in is expanding its relationships with small businesses, and company executives see merchant services as an area rich with untapped potential.

"Small business is a huge business for us. Our goal is to solve as many pain points as possible for the small-business person," the Intuit spokesperson said. "We're always looking at opportunities."

Competing with the Big Guys

Those who know Kaplan and IMS say there''s real potential for Intuit, through IMS, to become a formidable competitor in the merchant services arena. "If they follow the plan laid out by Joe Kaplan, they will have every chance for success," predicted Paul Martaus of Martaus & Associates, Mountain Home, Ark.

But Intuit is a big company (it claims nearly 7,000 employees), and the bureaucracies common to big companies can be stifling for entrepreneurs like Kaplan, Martaus observed. If Kaplan doesn't remain with Intuit, the odds for success go down. "I don't think they can make it work without him," Martaus said.

Kaplan, though, had nothing but praise for Intuit's corporate culture. "There are so many synergies, and our corporate cultures are aligned," he said. "We're like two peas in a pod."

Intuit isn't the first software house to dabble in financial services. Several years ago, Microsoft teamed up with First Data Corp. and Citicorp in an electronic bill-pay venture but has since sold its interests in the venture (as have Citi and First Data) to an outsourcing company that specializes in bank operations.

Electronic billing and payment always have been a difficult sell, primarily because the service requires the buy-in of consumers and billers, constituencies that are serviced by two distinct areas of banking (retail and wholesale) that are loathe to working in tandem.

Merchant services, on the other hand, is strictly a business service, one that is critically important to all types of businesses - from the biggies all the way down-market to the "mom and pops."

What bodes well for Intuit is that banks, for the most part, have ignored "mom and pop" businesses, especially the legions of home-based businesses. These are the types of businesses that drive Intuit's revenues.

"The acquisition of IMS enables Intuit to strengthen our offering for a critical 'beyond-accounting' service," Steve Bennett, Intuit President and CEO, said in the company's statement announcing the deal.

Intuit reports that its fiscal year 2003 revenues exceeded $1.6 billion. To put this into perspective: First Data Corp. reported $7.6 billion in revenues in 2002; $2.8 billion came in through merchant services. NPC, which isn't quite as diversified as First Data and focuses more acutely on merchant services, saw a little more than $118 million in revenues in 2002.

Kaplan is excited about the deal and believes that under the Intuit corporate banner - with the funding and access to new technologies and business processes that come with it - his operation can mine new profit sources in merchant services. He claims, for example, that nearly 85% of all small businesses that use accounting software use QuickBooks. And many of these businesses are not accepting card payments.

"ISOs and agents need leads to survive," Kaplan said. As part of Intuit, he added, "We can back our agents and reps with leads that will allow them to offer full-service financial products."

If the Intuit deal isn't already turning heads in banking and payments, I think it should be. Intuit has set its sights on becoming a major provider of financial services in a market segment that long has been ignored by traditional providers (read: banks), sole proprietorships and other small businesses. It may not own a bank, but it doesn't really need one to grow and prosper in this market. A merchant services company should suit its needs for entree to the payments system just fine.

Patti Murphy is Contributing Editor of The Green Sheet and President of Takoma Group. She can be reached at patti@greensheet.com