Deluxe Isn't Checking Out Yet

The check processor finally is focusing on electronic services

For nearly a decade, Deluxe Corp. has been trying to cope with the inexorable atrophy of its core product: the check.

The St. Paul (Minn.) company has been printing and processing checks for its entire 81 years and dominates the industry with more than a 50% share. Drawing on the rich cash stream of its check business, it has spent a staggering $650 million diversifying into everything from electronic-payment technology to greeting cards. And what does Deluxe have to show for its effort? A collection of new businesses that contributes nearly half of the company's revenue but less than 10% of its profits.

In 1995, earnings fell for the third straight year, dragging the company's share price down. Margins are under severe pressure as the bank merger wave produces bigger institutions that are forcing down check prices. Deluxe is also facing stiff challenges from 30-odd competitors in marketing checks directly to consumers. And it is losing ground to the regional electronic funds transfer (EFT) networks and to First Data, Electronic Data Systems, and MCI Communications, which are staking out positions in new electronic-banking businesses.

Faced with these difficulties, Deluxe is now being turned upside-down by a new CEO, John A. "Gus" Blanchard III, the first Deluxe chief not steeped in company tradition. His challenge is to protect what's still Deluxe's largest business, while investing more astutely than his predecessors in new electronic ventures. In recent weeks, Blanchard has launched a furious cost-cutting and restructuring program designed to better focus the company's efforts on developing and selling a variety of promising transaction services--check verification, home banking, ATM switching, and EFT settlement--for banks and EFT networks, its core customers. Deluxe, Blanchard says, "has a set of tools that can be of enormous use to financial institutions" as they shift from checks to electronic payments.

In late December, Blanchard began unveiling moves he hopes will cut $150 million in costs by the end of 1997. He has announced plans to close 26 of 41 check-printing plants, cut capital spending by 30%, and shed Deluxe's ink-manufacturing and financial-forms businesses. He has reorganized operating units, for the first time bringing electronic businesses under the same management as checks. He's studying whether Deluxe should keep selling greeting cards and stay in the low-margin business of electronically processing welfare and food-stamp benefits. And he says he's likely to lay off 30% to 50% of the company's officers. "Everything seemed disconnected," says Blanchard. "There's a great opportunity for focus."

PROMISING A REBOUND. Prompted by Deluxe's dismal performance, the Deluxe board recruited the 53-year-old Blanchard last May to replace Harold V. Haverty, who was approaching retirement age. Analysts and rivals think he has what it takes to turn the $1.8 billion company around. He's promising investors an earnings rebound this year. "He's got the organization on track," says Rudolf A. Hokanson of Deutsche Morgan Grenfell, a London investment bank.

A longtime AT&T sales and marketing executive, Blanchard appears to understand how to manage companies buffeted by technological changes. Most recently, he earned accolades as executive vice-president at General Instruments Corp., where he helped the maker of cable and interactive technologies maneuver into new foreign markets. Indeed, Blanchard will need to tap every bit of ingenuity he can muster to position Deluxe in the highly competitive financial transaction services market.

Rivals and customers suggest that Deluxe's questionable diversification strategy took its attention away from important trends in technology and pricing. One example: A key Deluxe business, selling processing services and software to regional networks of ATM operators, is now being squeezed because some of the biggest networks are processing transactions in-house. "They were simply not aggressive in product development and pricing," says Richard P. Yanak, president of NYCE Corp., the No.2 network, which now does its own processing.

Blanchard also discovered that Deluxe's check and electronic units were sometimes competing with each other for the same customers. "You have a feeling that the left hand sometimes doesn't know what the right hand is doing," says a senior bank executive whose institution is a Deluxe customer.

Blanchard realizes that Deluxe must work with banks, not compete with them. In moving into home banking, he plans to position Deluxe as an intermediary between banks and big software providers like Microsoft Corp. and Intuit Inc. by providing processing and customer database information. He's now prospecting for investment opportunities to bolster a fledgling home banking software company Deluxe bought in 1994.

Aiding this push is the reservoir of goodwill Deluxe enjoys among many bankers. Keith K. Theisen, a vice-president at Norwest Corp., also sees a new responsiveness to customers: He recently received his first call from Deluxe's chief technology officer. "This shows they must have awakened to the need to deal with their clients' issues," says Theisen.

Blanchard even seems to be getting his own managers from different units to work together. One result: On Feb. 12, the company announced a new product that enables banks to screen out bad customers by linking Deluxe's check-ordering database with its check- approval software. Now, if he can only infuse the whole company with that sense of focus, Deluxe could avoid going the way of the check.

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