It seems strange to say that 2010 was another normal year for bank technology, but in the context of what is now known as the new normal, only three years old, I believe my characterization is appropriate. This year has brought consolidation, which means two things that produce the same results — less is more. There are fewer financial institutions, and there are fewer providers of tech solutions. I believe the regulators are not having second thoughts about the banks they closed, and I'm pretty sure investors are not eager to create new banks given the new rules from Washington. So 15,219 financial institutions is still too many and the consolidation process will continue even in good times.
In my Automation in Banking — 2011 report, my annual analysis of the bank tech vendor landscape and its products, I drew these conclusions, among others:
1. In 2010, 307 financial institutions in the U.S. signed new core deals. That's only 16 more than in 2009, but at least it's not dropping. I hope that means the line of business reached its natural level. In my opinion, there will always be a number of FIs that will face their situation and accept the fact that they made a bad choice thirty years ago, or that the bank's strategy has changed, or the CEO has been dead long enough, or the incumbent vendor finally threw in the towel. The leveling off number in 2010 was 307. The number in 2011 will tell us if we can count on this level as the norm.
2. Which types of financial institutions made the 307 core solution purchases in 2010?
Commercial banks for any number of reasons 64%
Credit unions trying to be banks 30%
De novos for obvious reasons 6%
3. Since 2006, CEOs have favored outsourcing because the new burdens of reform touched technology directly, thus causing small banks in particular to turn it all over to the professionals. In 2010, 80% of new core deals were of the outsource method. For years, outsource vendors loved the phrase, "You stick to what you do best, let us do what we do best." It took a government to make the claim work.
4. It'll be a few years before the base of FIs increases the ratio towards outsourcing. Right now in-house still commands 54% among small banks. In the large bank arena (135 FIs) 87% favor in-house. Find a good psychologist to explain that phenomenon, or use common sense. Is there anything a large bank THINKS it cannot do better than a smaller tech vendor can do? The IT budgets of the largest banks still exceed by far the revenue of FIS and Fiserv.
5. Credit unions love the in-house approach. They buy hermetically sealed turnkey systems, just like I buy a laptop and never try to change it. In no time at all, it's written off and the P&L gets a nice benefit. Maintenance expense, yes, but depreciation, gone.
6. Fiserv again scored what I called "king of kore (KOK)" as it logged 47% of the new core sales in 2010. Looking at outsource sales alone, Fiserv took home 52% of those. Every year, Fiserv sells more core than any other core vendor. I've got 25 previous editions of "Automation in Banking" to prove it. But don't discount FIS. If dollars interest you more than numbers, look at the revenue that FIS receives from core customers. And if you are looking for consistency in performance, Jack Henry steps up to the plate and hits doubles, especially when one of the bags is occupied.
7. There are six top core vendors in the U.S. where "top" is a matter of opinion. $5.2 billion in revenue to $164 million. But no other company comes close to #6 which is why I didn't stop at the usual Big Three. Five companies reported modest organic growth in revenue. One reported a decline. The net gain for the group was 2.9%. It won't be any better in 2011 because I don't see any reasons to expect gains. If the top 6 core vendors expect to be the darlings of Wall Street they better find new sources of revenue. Their tired, unconvincing defense of cross selling won't cut it. When you consider the hottest item in banking (mobile) added less that 1% of a core company's revenue, you can see what I mean. Core vendors need a big ticket item to take the place of core.
8. Take away the two large offshore core vendors, and the largest rate of revenue increase goes to Bottomline Technologies. They earned 14.5% and for good reason, electronic payments, and not just for banking but corporate customers of banks. Are the acquirers asleep at the switch on this one?
9. It wasn't organic growth that put Jack Henry on the list for a 12.2% increase in revenue, but it was value. iPay Technologies, a previous resident in Automation in Banking, was a good acquisition for Jack Henry. Fiserv has CheckFree; FIS has Metavante; now JHA has iPay.
10. Twenty-five core companies account for 87% of the U.S. core customers. The top six are,
Jack Henry 15.5%
Harland Financial Solutions 7.6%
Open Solutions 6.6%
Computer Services, Inc. 4.0%