A Conversation with Nick Davidge
On April 13, Atlanta-based S1 Corporation—a leading provider of Internet banking solutions to the financial services industry—completed the acquisition of Davidge Data Networks, a privately held software company that specializes in middleware for trade ordering, execution and back-office connectivity for Wall Street firms in a transaction valued at $20 million. S1, a holding company, has been on an acquisition binge since the fourth quarter of 1999, buying up three Internet banking solutions companies—including Edify, FICS, Q-UP plus Vertical One—a leader in account aggregation. In July, Nick Davidge, chairman, founder and CEO of Davidge Data Systems, who is now vice president of S1's investments applications, spoke with Editor in Chief Ivy Schmerken to explain how Davidge's brokerage technology and domain expertise will be integrated into S1's strategy of delivering integrated banking and brokerage solutions to global financial services institutions.
WST: S1—originally known as Security First National Bank and later as Security First Technologies—has carried out a very aggressive acquisition strategy and rebranded itself over the last few quarters. Can you give us a sense of its size and scale of operations?
Nick Davidge: Through all of this S1 has ended up with the biggest scale in online financial services provisioning. We're spending $80 million on R&D, which is roughly the revenues of our four largest competitors. The point of S1is, we're orders of magnitude larger than our U.S. competition. We have roughly 1,800 employees, customers in 26 countries, and we have product relationships with 60 of the largest financial institutions in North America.
WST: How did Davidge get involved with S1?
Nick Davidge: We hired Steve Summa to lead our retail activities. That took place about a year and a half ago. He had been with DLJ Direct and he had been general manager of the DESoft start up. His research lead him to strongly believe that banks in the U.S. were going to control much of the retail brokerage—particularly the online segment. With the TD acquisition of Waterhouse, Fleet's acquisition of Quick and Reilly, E*Trade's acquisition of Telebanc and Schwab's acquisition of US Trust, we're seeing that it's coming to fruition. There are many reasons why banks will, over time, dominate the consumer investment space.One of them is the consumer's preference for financial relationships with FDIC-chartered institutions. And another is that banks typically have much lower customer acquisition costs because they already have the customers. So our strategy was to sell the Davidge brokerage order routing and back-office brokerage connectivity to vendors of online banking solutions who were moving into the integrated investment product space. You can't take a retail order and route it until you've interacted with the back-office system to validate it and to show it to an RR if necessary. So it's sort of a mid-office undertaking.
WST: What is your strategy for integrating back-office connectivity and order routing into S1?
Nick Davidge: Today, S1 via Davidge has a hosted network which is a value-added, secure financial transaction network which ties 90 broker/dealers together with approximately 40 execution and comparison destinations in North America through a network that Davidge has built over the years. Those 90 broker-dealers service hundreds of thousands of customers from all sorts of different connectivity points. It frequently combines the DavNet network with the server technology and we're in the process of using S1 resources to make several initiatives with this whole business area. We're going to rebrand it as Global ICE—which stands for Integrated Clearance and Execution. We're going to host it globally in the S1 data centers. That's going to move us up a notch as far as the quality and scope of the hosting services. On top of that, we've only hosted execution interfaces. We're now going to host back-office system and clearing-firm interfaces. We're not going to go into the back-office systems business but we're going to host the interfaces to the back offices. We're also as part of that initiative that's going to globally host interfaces into market data. There are two reasons for this. One is because we already do it. And with S1's resources we can do more of it and do it better.
WST: Why do you provide interfaces to market data?
Nick Davidge: When you bring up a retail brokerage site, and you stick front ends on top of it, you've got to provide the interfaces into those three subsystems. Because you've got to show the customer his quotes, and his P&L, and his portfolios and news all the rest of that. We've been providing that middleware for a number of years now.
WST: Which market data vendors do you provide access to?
Nick Davidge: We interface with Reuters, we interface with S&P ComStock and we interface with AT Financial and we interface with Hyperfeed.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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