How Deluxe transformed from paper checks to providing an SMB cloud, payments stack

Deluxe is best known for its paper checks, but the company has transformed to offer cloud and payment tools to power SMBs.

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Deluxe, best known as a company that makes paper checks, launched its digital human resources platform for small and medium sized businesses so they could integrate payroll, hiring, onboarding and time tracking.

HR Solutions on the Deluxe People Platform was soft launched in the first quarter and is now widely available. Deluxe also said it would bring its HR and payroll tools for small businesses to Microsoft Dynamics 365 Business Central. On the surface, Deluxe's launch highlights how the COVID-19 pandemic accelerated the digitization of SMBs. If you zoom out, however, there's a digital transformation story and more than 2 years of work.

I've been tracking Deluxe for a few months since it highlights how a company that epitomizes paper-based processes (checks and check clearing) can go digital and expand into new markets. HR Solutions on the Deluxe People Platform is the product of a focus on payments, collaboration with GoCo.io Inc. and digital transformation.

Coupled with the $960 million purchase of First American Payment systems, a deal that closed June 1, and Deluxe has revamped its business in a hurry. Deluxe Payments will now represent 29% of the company's revenue.  Barry McCarthy, CEO of Deluxe, said the First American acquisition is a big step toward becoming a "trusted payments and business technology company."

McCarthy added that Deluxe will take First American and expand into government, non-profit and retail verticals to complement its core SMB customer base.

The First American deal is the largest acquisition in Deluxe's 106-year history.

When announcing the First American deal, Deluxe noted that its digital transformation in advance set the stage for the purchase. Deluxe has built a technology platform that can integrate purchases, a sales organization to cross-sell the portfolio and the ability to build products.

The digital transformation plan

While the HR product launch and First American deal are two big moves, they're only possible due to a digital transformation plan laid out previously.

Deluxe CEO McCarthy's plan was called One Deluxe. In a nutshell, One Deluxe aimed to turn the company away from being a rollup of acquisitions to an enterprise focused on building products, organic growth and more strategic acquisitions.

Over the last two years, Deluxe set out to break down silos in its business as well as become a customer and product driven company.

In the first quarter, Deluxe was able to close 1,600 deals and sell its software as a service and cloud platforms as well as land business for payments, promotions and its core checks business. The financial results are still a work in progress. Deluxe reported first quarter sales of $441.3 million, down 9.3% from a year ago, with net income of $24.3 million, or 57 cents a share. The company is projecting 2021 sales to be flat to up 2%.

Deluxe is targeting a small and medium sized business market as well as core financial institutions.

Here are a few lessons from Deluxe's transformation:

  • Deluxe had to get its own IT house in order to be nimble enough to acquire and transform to launch new product extensions. As outlined in a 2020 investor day, Deluxe moved to a modern technology stack as it implemented Workday, Salesforce, MuleSoft and a bevy of other tools.
dlx-internal-stack.png

  • View transformation through the customer and business lifecycle. Those IT operations were designed to enable a business lifecycle that walked SMBs from the startup to branding to growth and optimization phases.
dlx-business-lifecycle.png

  • Once phases of the lifecycle are clear, develop customer-centric products for pain points. Deluxe is now focused on payments, cloud products including everything from web hosting to marketing to digital engagement as well as promotional tools and checks.
dlx-segments-q1.png

McCarthy said on Deluxe's first quarter earnings conference call May 6:

Our transformation into a sales-driven payments and trusted business technology company is yielding results and will accelerate with the addition of First American. Our One Deluxe strategy is clearly working, and our execution is strong. This really is a new Deluxe, a payments and trusted business technology company.

Going forward, McCarthy said that the economy's reopening should accelerate Deluxe's sales as SMBs recover. He said:

We do see small businesses continuing or accelerating reorder of core products. We mentioned that in our promotional products business. The business we have there, which is business essentials is a pretty good leading indicator of what's happening in the marketplace because those are forms that people and businesses use in the normal operation of their business. And we've seen a very healthy rebound there. We've also seen good growth in our incorporation services that new businesses use, our web-based and our cloud-based corporation services help businesses incorporate.

We think small business formation continues and that we're especially pleased to see small business to start recovering as well.

Wall Street is modeling Deluxe to report 2021 sales of $1.86 billion with $1.96 billion in 2022. Shares of Deluxe have recovered from $18.90 a share to $44.33 in the last year but are down from nearly $80 in 2018.

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