How to Build a $4.4 Billion Fintech Company: The Story of Pete Kight
Pete Kight, founder of CheckFree and MX board member, spoke at MX headquarters about his journey from startup to successful exit. If you're invested in banking and fintech, his story is full of lessons about how to be scrappy and persistent as you build the future of banking.
This writeup comes from his speech at MX.
Starting in Health Clubs
Pete Kight knew from a young age that he didn’t want to work for someone else. “I wasn’t a very good student,” he says, “and I didn’t like to be told what to do.” So when he pulled his hamstring one too many times as a decathlon athlete and could no longer compete at a high level, he quit college to launch his career as an entrepreneur.
Soon enough, he was running a small chain of health clubs in Texas where he tackled the difficult problem of billing. The clubs sold annual memberships, which meant they kicked out their own customers every year and told them they had to fork over another $200 to sign back up — a process that hurt sales.
“Everyone told me that I couldn’t send a bill in the health club business because the bill would never get paid,” he says. “I understood that, but I knew there had to be a way to make it work.”
One day Kight mentioned his dilemma to a couple of health club members who happened to work in the insurance industry. They told Kight that they’d faced the same problem with insurance payments until the government told them that they could use ACH technology to collect monthly premiums.
“A light bulb went on,” Kight says. "I went to my local bank and told the banker there that health clubs were kind of like life insurance, so we should be able to use ACH too. But the banker didn't buy it. Instead, he handed me a book from the Federal Reserve and pointed to the regulation on electronic funds transfer.”
"I went to my local bank and told the banker there that health clubs were kind of like life insurance, so we should be able to use ACH too. But the banker didn't buy it."
Kight read the regulation front to back and found that it never said only a bank could use ACH. So he returned to the banker and made his case. “To this day, I think back on how lucky I was that this individual was the one I was talking to because 99.9% of bankers likely would have just told me that the conversation was over,“ Kight says. “But for some reason this guy told me to call him tomorrow.”
The next day, Kight didn’t call — he showed up in person. The banker told him that his boss didn’t know whether Kight was right or not, but he admitted the regulation didn’t explicitly say a non-bank couldn’t use ACH, so the bank had decided to allow it until someone stopped them.
Kight was initially elated, but the process wasn’t as simple as he’d hoped. “It turned out to be very complicated,” Kight says, “The ACH system didn't work very well.” Kight had to hire a programmer who eventually helped him sort things out.
Once ACH was set up, however, everything changed. Kight switched from charging a $250 down payment and $200 for subsequent years to charging a $49 down payment and $12 a month. At the end of six months, they were signing up four times more people than they were before initiating ACH. In addition, because the sales process was taking care of itself, Kight was able to switch from expanding his sales team to hiring gym trainers who helped people meet their fitness goals — which in turn drove up the value of the business. “We went from a sales business to a service business,” Kight says.
Expanding the Business
After seeing the success at his health clubs, Pete Kight believed he could create a business that helped gyms around the nation reap the same benefits. “I bet everything, packed my stuff into a U-Haul, and drove back to Ohio where I had negotiated with my grandmother to live in her basement and use my late grandfather's workbench as a starting point,” he says.
Kight hired a new programmer and sat up with him at night to make sure he programmed the right things. “He was a chain smoker, which drove me crazy,” Kight says, “but he could program as fast as he could type, so I did what I had to do.”
During the day, Kight would meet with a variety of bankers who consistently rejected his idea. “I couldn't believe how wrong the banking industry was,” Kight says. “You would think they would have known more about their customers, but they just didn't.”
“I couldn't believe how wrong the banking industry was.”
Finally, he met a bank CEO who told him, “I don't know whether this is even legal, let alone whether you can really pull it off, but to tell you the truth, I just want to watch you try. This is going to be interesting."
So Pete launched the process in Ohio. “I had sold electronic payments to members in health clubs face to face and told them that if they ever had a problem or needed anything fixed or wanted to stop the payments, all they had to do was call me, call the bank, or send in a letter. I told them they were in complete control of the process. The truth is, it wasn't that hard to do. People loved it.”
The business grew to $10 million in revenue and became a household name across the health club industry.
Even still, Kight was unsatisfied. He kept thinking about how wrong the banks had been about ACH and how much customers liked the digital payment process. Now he was hearing bankers say that people likely wouldn’t sign up for online banking. So he decided to once again bet everything he had and launch an online banking startup.
He started by trying to raise money from venture capital firms and was turned down by every one he visited. Then he realized he would have the best chance with the insurance industry, since they already understood electronic funds transfer. He went that route and raised $2.5 million to build an online checkbook.
The next step was to shop the idea at banks. “I told the banks that I had everything ready to go and that their customers wanted it and liked it,” he says. But the results were abysmal. “I’ve never done another marketing campaign where I had a perfect 100% consistent result, but I visited 250 banks and all 250 told me no.” Kight says. Then he adds, “Well, that's not actually true. About 50 of them told me hell no."
So Kight’s team instead integrated their software with technology companies, including Intuit and Microsoft Money. “All of a sudden, we had a distribution system completely outside the banking industry,” he says, “and it turns out, of course, that it really worked and that consumers liked paying their bills this way.”
But the system came with a new set of problems. Because CheckFree wasn’t yet integrated directly with the back end of billers, Kight had to make many of the payments manually. “I was literally using a computer system to print checks, and then I’d mail them out,” Kight says, “I had tech people asking us how we could call it electronic banking, and my argument was that it was electronic to the user. “
At that point, the main hurdle was figuring out how to streamline the backend process since the checks were considered exception items and would often be posted late (to the irritation of end users).
Kight and his team worked relentlessly to fix the problem on their end. “I can still remember the day I sat inside our conference room and heard our people talk about how excited they were that less than 10% of the late payments were our fault,” Kight says. “That’s when I realized we were talking about the problem all wrong. I told my team that we were the ones introducing online banking electronic bill pay in the United States and that if anything went wrong with the payment being posted on time, it was our problem.”
“It fundamentally changed the way everybody thought about the business,” Kight adds, “and it's ultimately the reason why we were able to defeat all the competitors who came after us with so much more money and more powerful technology.”
Fixing the problem required persistence and innovation. CheckFree built a database of essentially every meaningful biller in the country so they could establish an electronic connection and therefore avoid being considered an exception item. “We built more than 6000 unique, customized interfaces into billers across the country to automate that process,” Kight says.
They also worked on a case-by-case basis. For instance, they had a problem with a particular biller in Atlanta that wouldn’t let CheckFree build an electronic link to their company. They called the company repeatedly and were rejected each time until someone called at 7pm and got ahold of a worker named Ethel who ran the night shift.
"It was embedded deeply in our culture that if anything went wrong with the process, it was our problem."
“Ethel told us, ‘Oh yeah, I know who you guys are.’ Then she said that her team got our stack of checks and waited until the end of the week for two employees to type in the needed data,” Kight says.
When CheckFree explained that wouldn’t work because the payments were late by the time they got posted, Ethel told them to send the payments straight to her and she would post the checks every night. “From then on, any payment that went into that lockbox had the address in the bottom that said Attention: Ethel,” says Kight, “and we never had another problem with that company.”
This level of ingenuity and demand for quality was difficult for competitors to replicate. “We had an absolute mandate,” Kight says. “It was embedded deeply in our culture that if anything went wrong with the process, it was our problem. And we didn’t want to just fix it once. We wanted to fix it permanently.”
Partnering with Financial Institutions
At that point, CheckFree was wrestling with whether they needed to partner with banks at all. On the one hand, their research showed that people generally didn’t like their banks. On the other hand, their research also showed that people trusted banks with their money. In the end, the call for trust won out. If CheckFree was going to truly bring online banking to the masses, they needed financial institutions.
So Kight went back to financial institutions and showed them that people loved electronic bill pay. “The banks actually thought that we were just evil,” Kight says. “They thought we were messing with the banking system and that we shouldn't be allowed to.”
Ultimately, Kight had to figure out a way to get in front of the CEO. “I realized that diplomacy and being nice wasn’t working, so we had to wield power,” Kight says.
“I realized that diplomacy and being nice wasn’t working, so we had to wield power.”
To do this, Kight ran a query and printed out the routing transit number of every customer that was using CheckFree at a particular bank. Kight would then hand this stack of papers to the CEO and say, "Here are all the customers from your bank that I pulled this morning off our computer system — customers who are using our online banking and bill pay platform.” Then Kight would pointedly ask the CEO, “How many do you have using your online system?"
Inevitably, the CEO would have far fewer customers using their own internal electronic system. “His stack wasn’t half as big as mine,” Kight says. “I never lost one of those sales.”
Soon enough, CheckFree was white labelling their product and partnering directly with financial institutions.
However, the process wasn’t scalable since it required Kight to personally visit every institution one by one. So Kight set his sights on signing Bank of America, which had just become the first nationwide bank with their acquisition of Nations Bank. “It took us 18 months, but we found the right person to be our champion and focused on them,” Kight says.
The key part of the contract included giving Bank of America $20 million to advertise free online bill pay. “They signed that deal,” Kight says. “They started running the ads, and every bank in the country had to react to the threat that Bank of America was offering online bill pay for free. It changed everything.” It worked because banks are, as Kight says, “not very good offensive marketers, but they're very good reactive defensive protectors.”
Suddenly companies were taking notice. Competitors including MasterCard, Visa, American Express, Citicorp, and IBM started coming after CheckFree with products of their own. “The ultimate peak was when I got up one morning and saw on the top fold of The Wall Street Journal that Bill Gates had announced a joint venture to go into online banking bill pay to compete against CheckFree.”
But by that point it was too late. Banks would tell these competitors, including Microsoft, that they should just link into CheckFree to establish their connection for bill pay. Kight says, “Big companies such as Microsoft don't like really messy things like trying to convince Ethel she should sign a new electronic link and put it on her budget.” Eventually the competitors got tired of losing money and moved on.
CheckFree acquired roughly 75% of the market, which opened a new set of problems. Their clients didn’t have an effective competitor to compare them to, so they didn’t know whether or not CheckFree was overcharging for their services.
In light of this, Kight figured that the single best way forward was to “have a quality level that was beyond compare.” So he threw down a challenge to make all quality levels public. “The banks were worried about us as a consumer-facing service,” Kight says, “so we decided we would show that the quality of our consumer-facing service was higher than anything they did inside their bank. They couldn't match it. And the competitors to till this day have never published a quality level.”
Pete Kight had started a tradition of taking two weeks off at the end of each year — two weeks where he wasn’t allowed to go into the office or talk about business. “I would just do nothing but think, step back, and get perspective,” he says.
During this time at the end of 2006, Pete Kight could see that if he wanted to take CheckFree to the next level, he would have to bet everything again. He could also see that the banking industry would soon be headed for a fall. Given these two perceptions, Kight decided he didn’t want to take the risk. He sold the company.
“It was an emotional experience,” Kight says. “We ended up finding a good home for Checkfree, and we got a great price for the shareholders — but there probably isn't a 24-hour period that goes by that I wonder about what would have happened if we had hung on and I hadn’t sold it?”
“What I tell people today is that what I would have done next is build MX,” says Kight. “What MX is doing today was literally in my strategic plan of what I was planning on doing next.”
For more, hear why Pete Kight aligned with MX.