Battles and Bids Over Pay by Touch

Talk that troubled VeriFone may acquire the doubly troubled Pay By Touch, a leader in point-of-sale fingerprint payments, has turned to murmurs

by Arik Hesseldahl

VeriFone (PAY) has quietly expressed interest in buying the assets of Pay By Touch, a biometrics company currently in Chapter 11, according to court filings obtained by BusinessWeek.com.

It's not clear what stage, if any, talks between the two companies have reached. Both VeriFone and Pay By Touch declined to comment.

The documents, included in filings by Pay By Touch with the U.S. Bankruptcy Court for the Central District of California, provide a glimpse into the swift decline of a company that has raised more than $300 million and is one of the foremost purveyors of products based on biometrics—the technology of identifying people by their unique physical traits. The papers also shed light on what analysts say is a last-ditch effort by another troubled company, VeriFone, to capitalize on those woes. In addition to bankruptcy proceedings, Pay By Touch is the subject of a dispute in the Delaware Chancery Court, pitting its lenders against founder and Chairman John Rogers for control of the company.

VeriFone's Stock Hit

VeriFone, a $581 million maker of credit-card readers and point-of-sale systems, is facing troubles of its own. On Dec. 3, the company disclosed that it would restate financial results for the first three fiscal quarters of the year ended Oct. 31. The San Jose (Calif.)-based company said accounting errors caused it to overstate its pre-tax profits by nearly $30 million. The company also delayed reporting its fourth-quarter earnings. The news sent VeriFone stock reeling as it fell $22, or more than 45%, erasing nearly $2 billion in shareholder value. The stock closed at $23.05 on Dec. 5. Analyst Robert Dodd of Morgan Keegan says any interest that VeriFone may have had in Pay By Touch has probably ended for now. "They're not in any position to be making acquisitions," he says.

VeriFone's overture was detailed in a Nov. 5 letter from one of Pay By Touch's lenders that was included in the bankruptcy filing. According to the letter, VeriFone's senior executives and corporate counsel contacted executives of Plainfield Asset Management, Pay By Touch's lead creditor, seeking information about buying Pay By Touch's assets. In the letter, Plainfield Managing Director Thomas Walper reminds Pay By Touch General Counsel Steve Zelinger that the company is required "to consider all options to insure maximum recovery to creditors."

VeriFone's interest in Pay By Touch, a San Francisco company founded in 2002 as Solidus Networks, stems from the company's early success in bringing biometric technology to the retail payments business. Pay By Touch raised more than $300 million from hedge funds, and venture capitalists Rembrandt Venture Partners, Mobius Venture Capital, and the J. Paul Getty Trust. Its gear, which allows consumers to pay retailers with their fingerprints, is installed in checkout lines at grocers Piggly Wiggly and Jewel-Osco, a unit of Supervalu (SVU).

Fingerprints: Not Sticky

Despite those early customers, processing fingerprint payments has not taken off as expected. Pay By Touch claims that it has fingerprint scanners in 3,000 stores, but the privately held company has never disclosed how many transactions it processes. For millions of consumers accustomed to using credit and debit cards, the proposition of using a fingerprint hasn't been all that appealing. "It's hard to fight the credit-card companies," says Gartner (IT) analyst Avivah Litan. "Consumers are so used to racking up frequent-flier miles and other rewards that it's like a David vs. Goliath situation. There's just not much of a value proposition for the consumer to use a fingerprint."