Deluxe Corporation History

Company Perspectives:

Deluxe's vision is to partner for prosperity by pioneering information and payment solutions. Deluxe's envisioned future is that we will transform our company from a confederation of businesses to an organization that acts as a single company and is the recognized leader in providing information and payment solutions to customers throughout the world. Deluxe's mission is to provide integrated information, payment, and related services that create value for our customers throughout the world.

Company History:

A shining example of a company built upon the right idea at the right time, Deluxe Corporation is the largest supplier of checks, deposit slips, and other financial documents in the United States, holding a market share of over 50 percent. The company's long and enviable track record has in large part mirrored the evolution of American banking and financial services technology, from the relatively simple boom-and-bust 1920s through the complex decades of the 1950s and 1960s, when electronic automation revolutionized the industry, to the rise of the electronic funds transfer (EFT) in the latter decades of the 20th century. As recently as 1985, check printing accounted for 96 percent of Deluxe's sales. By 1996, however, this figure was lowered to 79 percent through an expanded focus on such products and services as processing software, account verification, ATM cards, sales development, business and health care forms, and direct marketing. For many analysts, the diversification was long overdue, particularly given repeated predictions that checks would soon be obsolete. And although the personal check continues to be viable and Deluxe has posted 58 consecutive years of sales increases, the company's profitability fell in the mid-1990s as a result of increased competition in the check printing business and less-than-stellar results from the company's non-check-printing operations.

Early History

The foundation for Deluxe was laid in 1905 when William Roy Hotchkiss purchased a small Wisconsin newspaper named The Barron County Shield Well. Acquainted with the printing business since boyhood, Hotchkiss thought he had found his niche, particularly after he became publisher and co-owner of the more prestigious Dunn County News of Menomonie in 1908. For the next five years Hotchkiss oversaw the development of this paper into the largest and most respected weekly in the state. A protracted illness, however, forced his early retirement from the newspaper business and his relocation to the more congenial climate of southern California. His entrepreneurial drive still intact, Hotchkiss decided to raise chickens but failed, despite conceiving the idea of selling precut chickens to grocery stores.

In 1915 Hotchkiss returned to the Midwest and settled in St. Paul, vowing, according to company annals, "to do one thing and one thing only, but do it better, faster and more economically than anyone else." Recalling his printing days and a special assignment of printing bank checks for a friend, Hotchkiss decided to claim the creation and marketing of personalized checks as his business. The distinctive feature of his checks would be quality imprinting of information unique to each customer. Hotchkiss borrowed $300 to secure the necessary equipment and a small office in the People's Bank Building in downtown St. Paul. In the two months of operations for 1915 the eager salesman attracted $23 in orders against $293 in expenses. Despite such unpromising numbers, the company would soon find success. As Terry Blake wrote in A History of the Deluxe Corporation, 1915-1990, several factors favored Hotchkiss's enterprise, particularly the printer's choice of location. The Minneapolis/St. Paul area, already densely populated with financial institutions, was destined to become a major national banking center--and therefore a major check clearinghouse--through Minneapolis's selection as the site of the Federal Reserve Bank of the Ninth District. Equally important was Hotchkiss's timing. In 1915 approximately five billion checks were issued by American businesses each year. This immense market was being served by various printing houses, none of which was more than regionally dominant, particularly noteworthy for its service, or even remotely prepared to foster new business in a virtually untapped domain: individual consumers.

Hotchkiss's early marketing of his company's services consisted of mail-order brochures sent to all regions of Minnesota. His first customers were healthy outstate banks, with less deposits than the Twin Cities banks but also far fewer check-printing competitors. In 1916 Hotchkiss succeeded in tapping the metropolitan market with contracts from both the People's Bank and the Western State Bank of St. Paul. Sales for his first full year of business reached $4,173. This same year Hotchkiss welcomed printer Einer Swanson as a business partner. Swanson replaced Hotchkiss as chief salesman and may also have been responsible for determining the company's name. The new arrangement allowed Hotchkiss, an instinctive inventor, the freedom to design and develop new machinery to enhance printing quality, speed delivery time, and save money. By 1918 the company's sales had soared to $18,961 and Hotchkiss issued his first catalog. The following year, as sales more than doubled, the company relocated to its first, full-sized plant. In 1920 Swanson and Hotchkiss incorporated as DeLuxe Check Printers, Inc. and became equal partners.

Growth during the 1920s was phenomenal because of both timing and the special imprint of Hotchkiss's vision. From the beginning he had decided that his business would emphasize quality and service. Service, for him, became synonymous with speed; he instituted the still standing company goal of 48-hour turnaround on any order, or "in one day, out the next." As the Federal Reserve established new banking districts, Deluxe, as soon as it was able, moved in to claim its share of the check business. First came Chicago, then Kansas City, then Cleveland, then New York. By the end of the decade, sales and net income had risen to $579,000 and $42,000, respectively.

Perhaps more indicative of the company's long-term prospects were Hotchkiss's unique advancements in check products and printing technology during the 1920s. In 1922 he developed one of the first small pocket checks--nicknamed the LH, or "Little Handy"&mdashø complement the larger, end-register-style business check. The initial market for this new check was to be the wise and discerning consumer. As catalog copy from this era declared, "The Individualized Check today is considered almost as necessary in leading social and business circles as the calling or business card. It marks the user as a man of distinction and discrimination." Yet, as Blake pointed out, "Hotchkiss had no definite strategy for marketing the personalized Handy checks. Bankers, too, were skeptical of the horizontal register and deemed Hotchkiss's invention a fad. As a result, the LH, destined to become the most successful product in Deluxe's history, remained an obscure novelty for a number of years." Hotchkiss realized more immediate profits from a series of important, speed-enhancing inventions, which included the Hotchkiss Imprinting Press (HIP), patented in 1925; a two-way perforator, perfected the same year; and the Hotchkiss Lithograph Press (HLP), patented in 1928.

Revolutionary Sales Program Grew Revenues During the Great Depression

With the stock market crash in 1929 came an end to a free-spending era. From 1920 to 1929, Deluxe saw sales increase by an average of 32.3 percent annually. By comparison, from 1930 to 1939, sales increased only 55 percent for the entire 10-year span. After suffering its only full-year loss in 1932, the company began to rebound as newly elected President Franklin D. Roosevelt's sweeping reforms for the banking industry took hold. A potentially devastating period was transformed and, like F.D.R., Deluxe hastened the transformation with a revolutionary new sales program. The program was guided not by Hotchkiss but by George McSweeney, a former Deluxe paper supplier hired by the company in 1932 expressly for the task of building a sales force and boosting revenue. McSweeney emphasized personalized attention over catalog promotions and worked closely with bankers in developing personalized check programs. Viewing Deluxe as a service- (rather than product-) oriented business, he sought ways to aid financial institutions in boosting their own incomes. Promoting small checking accounts for individual customers, all of whom represented potential loan clients, became a mutual goal, and the LH, the mutually agreed upon tool to attract these customers. McSweeney also directed his sales force to refocus attention on serving rural banks; by 1939, this segment had grown to represent 58 percent of Deluxe's annual revenue. Finally, McSweeney instilled in his sales force a "guidance and counsel" approach. With the passing of the Social Security Act in 1935 came an opportunity for McSweeney and his representatives to thoroughly research the law and then educate their banking customers. "To McSweeney," writes Blake, "it was important for Deluxe to establish itself as a leader, and Deluxe's impressive anticipation of an industry-altering event like Social Security set a precedent the company has always followed."

In 1940 Deluxe saw sales surpass $1 million. A year later, McSweeney became company president at his own request. LH orders had multiplied from 1,000 in 1938 to 100,000 and would continue to grow exponentially. With World War II and the ration banking program which necessitated new ration checks, sales also jumped dramatically. A new service-monitoring system was instituted by production superintendent Joe Rose in 1948. Within a year, two-day delivery fulfillment advanced from 75 percent to nearly 90 percent. The advent of the teletypesetter and new plant construction in Chicago, Kansas City, and St. Paul capped the decade.

Steady Growth Continued from the 1950s Through the 1980s

During the 1950s, overall sales rose by 275 percent. Much of the company's growth could be attributed to the widespread popularity of the LH. Equally important was Deluxe's national coverage of the commercial banking industry. By 1960 it had contracted for a portion of sales with 99 percent of the country's commercial banks. Meanwhile, Deluxe's largest competitor, New York-based Todd Company, was struggling to hold market share after a corporate takeover. With 10 plants strategically spread across the United States to better serve its customers, Deluxe could boast sales of $24 million and anticipate a bright future, with steadily rising numbers for total domestic checks written, which now numbered nearly 13 billion. Furthermore, many bankers now accorded Deluxe special status as an industry leader. This was particularly true after Deluxe's fundamental involvement with the development of magnetic ink character recognition (MICR), which after years of back-and-forth negotiations between the American Bankers Association, leading high-tech companies, and check printers, was now becoming the industry norm.

With McSweeney's death in 1962 and the continuing maturation of MICR technology came numerous changes for the company. McSweeney's successor, Joe Rose, was faced with dire predictions that a checkless society would be a reality by 1970. Deluxe's recourse was to embrace MICR for all types of document processing and to launch a New Products Research Division. By 1967, sales for the three-year-old division from loan coupon books, process control documents, and deposit/withdrawal slips topped $1 million. Deluxe underwent another difficult, though ultimately beneficial, change in 1965 when it went public after pressure from various estates who complained of the artificially low trading prices for their stock. This same year, Rose satisfactorily settled another potential setback when the U.S. Post Office announced new coding and presorting regulations. A major user of the public mails, Deluxe could ill afford increased expenses or undue delays caused by the new regulations. Consequently, Rose met directly with the deputy postmaster general and obtained permission to establish his own in-plant post offices where mail could be easily sorted and sent to save the company and the local post offices both time and money. Rose closed the 1960s with more than $85 million in sales.

Despite serious inflation during the 1970s which caused production costs to rise, Deluxe performed well. By 1979 sales had risen to $366 million and net income to $39 million. This was especially impressive after considering the large capital expenditures involved in new plant openings, which arose at the pace of three per year. A considerable amount of new equipment, including minicomputers and the Deluxe Encoder Printer (DEP), also made their debut during this decade. Under Gene Olson, who became president in 1976 and CEO in 1978 (and stayed in these positions until 1986), Deluxe acceded to critics on Wall Street--long wary of the company's dependency on essentially one product--and cautiously diversified into pre-inked endorsement stamps.

Growth continued unabated during the 1980s; by 1988 sales had surpassed $1 billion. Among the new products that kept Deluxe firmly in place as a financial products market leader were three-on-a-page, computer-form business checks, pegboard checks, and money market related documents. Although the financial industry suffered repeatedly by failures of large-sized banks, such developments actually increased Deluxe's competitiveness, for as the institutions failed, numerous small check printers ceased business as well. By 1989, less than 10 full-service printers remained. In one sense, however, such events were singularly frightening, for few could anticipate the future of banking. Harold Haverty, elected president in 1983 and CEO in 1986, wrestled anew with the problem of diversification (analysts for Forbes had twice predicted the company's downfall, due to its traditionally cautious acquisition policy). In part to satisfy the analysts, but also to increase its presence as a provider of wide business services, Deluxe purchased ChexSystems in April 1984, John A. Pratt and Associates in June 1985, and Colwell Systems in October 1985, consequently entering such new fields as account verification, marketing services, and direct-mail supply to the dental and medical industry. In December 1986 Deluxe purchased A. O. Smith Data Systems and instantly became a leader in the burgeoning EFT industry. In 1987 the company purchased Current, which soon became touted as "the nation's largest direct mail marketer of greeting cards and consumer specialty products." Meanwhile, Harold Haverty, a 32-year company veteran, became Deluxe's fifth CEO in 1986. And two years later, in a move symbolic of the company's diversification, Deluxe Check Printers, Inc. became simply Deluxe Corporation.

1990s Brought First Serious Difficulties

Under Haverty's direction, Deluxe stayed on the same course through the early 1990s, continuing to cautiously diversify. In 1990 ACH Systems was acquired to bolster the company's electronic funds transfer operation. Deluxe, the following year, acquired the Seattle-based Electronic Transaction Corp., which provided electronic check authorization services for retailers. The acquired firm managed the Shared Check Authorization Network (or SCAN), an association of retailers nationwide who exchange information on bad checks and closed customer accounts. In 1993 Deluxe bought PaperDirect, a mail-order supplier of specialty papers and other products, while 1994 brought National Revenue Corporation, a leading U.S. collections agency, into the company fold.

By 1993 it was becoming evident that not all was well at Deluxe. Although revenues continued their yearly rise, return on equity dropped below 25 percent for the first time in years to 17.4 percent. Net income fell substantially as well, from $202.8 million in 1992 to $141.9 million in 1993, due in part to a restructuring charge incurred as a result of the closure of about one-fourth of the company's check-printing plants, which were made redundant by other, higher tech plants. For the first time in company history, workers were laid off.

The company would continue to struggle for the next several years, buffeted by a variety of factors. The bank merger mania of the mid-1990s resulted in larger institutions which could demand lower check prices. Its check-printing business was also being pressured by new competition from more than two dozen marketers using direct mail to sell checks to consumers. At the same time, its efforts at diversification were not paying off; although the new businesses were generating more than 35 percent of overall company revenues, they were contributing less than 10 percent of the profits.

It was thus in this troubled environment that for the first time ever Deluxe looked outside for new leadership. In May 1995 John A. "Gus" Blanchard III was named the company's sixth CEO (and then became chairman as well the following year). Blanchard had gained plenty of experience helping companies deal with technology change through stints at AT&T and General Instruments Corp. Once on board at Deluxe, he moved quickly and decisively to restructure and streamline operations; to identify noncore, underperforming business that should be divested; and to reestablish growth through new products, alliances, and acquisitions.

In early 1996 Deluxe announced plans to trim operating costs by $150 million over a two-year period. Included herein was the planned closure of 26 of the company's 41 check-printing plants, a 30 percent reduction in capital spending, the implementation of a centralized purchasing function, and layoffs for 30 percent of the company's officers. Divested in 1996 were T/Maker Company (a maker of clipart and children's multimedia software, just acquired in 1994), Health Care Forms, Financial Alliance Processing Services, Inc. (a processor of credit and debit card transactions, just acquired in early 1995), Deluxe U.K. forms, and the internal bank forms business. Deluxe also placed PaperDirect and Current Social Expressions (i.e., the greeting cards, gift wrap, and related products--the Current Checks direct-mail operation was to remain with Deluxe) on the block, although it ran into initial trouble trying to find a buyer.

A restructuring of the remaining operations left Deluxe with four main business segments in 1997. Deluxe Paper Payment Systems consisted of the check printing services that remained the company's core, including Current Checks and Deluxe Canada Inc., which had been formed in 1994 to provide Canadian financial institutions with checks and financial forms. Deluxe Payment Protection Systems included account verification (ChexSystems), check authorization (SCAN), and collection agency (National Revenue) services, as well as the TheftNet employee screening service run by Deluxe Employment Screening Partners, Inc., a new subsidiary established in 1996. Deluxe Direct Response specialized in the development of targeted direct mail marketing campaigns for financial institutions, with four of its five units having been acquired or established in 1996 and 1997. Finally, Deluxe Electronic Payment Systems, Inc. grew out of the 1986-acquired A.O. Smith Data Systems and concentrated on electronic funds transfer services.

Blanchard's dramatic moves had quickly transformed Deluxe Corporation into a much more focused and strategically structured organization. These changes may have come just in the nick of time, as checks--though hardly dinosaurs--were beginning to show signs of decline. Checks had been growing at a rate of six percent a year in the early 1990s, but grew less than one percent in 1996--EFTs, telephone banking, and online banking were finally having a real impact. Still, Deluxe was likely to have several more years in which to establish enough non-check-printing business to offset the inevitable declining check revenues. To his credit, Blanchard seemed to already have Deluxe on the path toward doing just that.

Principal Subsidiaries: ChexSystems, Inc.; National Revenue Corporation; Deluxe Employment Screening Partners, Inc.; Current, Inc.; PaperDirect, Inc.; Nelco, Inc.; Fusion Marketing Group Inc.; Deluxe Canada Inc.

Principal Operating Units: Deluxe Paper Payment Systems; Deluxe Payment Protection Systems; Deluxe Direct Response; Deluxe Electronic Payment Systems, Inc.

Further Reading:

• Abelson, Reed, "The Check Is in the (Electronic) Mail," Forbes, January 6, 1992, p. 99.
• Barthel, Matt, "To Bolster Checks, Deluxe Buys Authorization Service," American Banker, January 4, 1991, p. 3.
• Blake, Terry, A History of Deluxe Corporation, 1915-1990, St. Paul: Deluxe Corporation, 1990, 48 p.
• Byrne, Harlan S., "Deluxe Corp.: Diversifying Against Check-Free Banking," Barron's, April 26, 1993, pp. 39--40.
• Chithelen, Ignatius, "Printing Money," Forbes, March 18, 1991, p. 116.
• Kutler, Jeffrey, "3 ACH Operators Band Together," American Banker, April 20, 1992, p. 3.
• Marjanovic, Steven, "Though Hedging, Deluxe Isn't Writing Off Checks," American Banker, March 26, 1997, p. 4.
• Melcher, Richard A., "Deluxe Isn't Checking Out Yet," Business Week, February 26, 1996, pp. 94, 96.
• Sawaya, Zina, "The Underpaid: Relative Pain (Harold Haverty)," Forbes, May 27, 1991, p. 222.
• Zemke, Ron, and Dick Schaaf, "Deluxe Corporation," The Service Edge: 101 Companies That Profit from Customer Care, New York: New American Library, 1989.

Source: International Directory of Company Histories, Vol. 22. St. James Press, 1998.