Proposed federal regulations designed to give bank subsidiaries greater leeway have raised some interesting questions about whether financial institutions will get a second life in the technology outsourcing business.
Last month, the Office of the Comptroller of the Currency announced that it is proposing revisions to rules governing how bank subsidiaries operate. The revisions would streamline regulatory oversight and give banks the freedom to go into businesses they currently are restricted from entering.
Under the new rules, bank holding companies, through a subsidiary, could sell real estate, insurance, or data processing services, as long as they are "incidental" to banking, the agency said.
Furthermore, the OCC would require banks to own only 51% of the voting stock of a subsidiary rather than the 80% required under the current rule. That could be a boon for banks with profitable fee-income-producing data processing units, as investors typically place higher valuations on these types of businesses than interest rate-sensitive banks.
The pending rule changes, which are open for public comment until Jan. 30. have already piqued the interest of some Wall Street technology analysts and nonbank outsourcing companies, many of whom are speculating as to whether banks will reenter a market they dominated 20 years ago.
Financial institutions began to exit the data processing services business in droves in the late 1980s, to the point where only a handful remain. These include M&I Data Services Inc., a subsidiary of Milwaukee-based Marshall & Ilsley Corp.: Total System Services Inc., the credit card processing unit of Synovus Financial Corp., Columbus, Ga.; and Cincinnati-based Fifth Third Bancorp's Midwest Payment Systems Inc. While many banks sold off technology subsidiaries to raise capital after incurring big loan losses in the early pan of this decade, others bailed out because of regulatory red tape, observers said.
"Had [the proposed OCC revisions] been there five or six years ago, I don't think you would have seen as many banks selling off their credit card operations," said Bobby Jones, a senior vice president at technology outsourcing firm Bisys Group Inc. Mr. Jones also is president of the Association for Financial Technology, an industry group made up of bank outsourcing firms and systems vendors.
Mr. Jones said he applauds the OCC moves. "Our industry needs a little breath of fresh air," he said. "I don't think it's necessarily been good that big banks have been getting out of the operations and systems sides of their business."
But nonbank outsourcers like Bisys, Electronic Data Systems Corp., Fiserv Inc., and Systematics Information Services Inc. -- shouldn't be worried about the possible increased competition coming from newly unfettered banks, he said. "Basically, most of us are pretty strong competitors, and we don't need banks playing with their minds tied behind their backs."
Henry W Hobson 3d, senior vice president at Midwest Payment Systems, said that while any type of regulatory relief is welcome, competitive pressures and market dominance will still drive his company's moves toward new lines of business.
"When we look at offering new services or enter new markets, the foremost consideration is how many companies are already offering it; then we look at the legal and regulatory issues," Mr Hobson said.
Wall Street mavens are most interested in the OCC changing its majority ownership rule, noting that by allowing banks to sell up to 49% of a processing subsidiary, it will be much easier for them to raise capital and make acquisitions.
Richard Weingarten, an analysts with Montgomery Securities in San Francisco, said the rule change could be an especially positive development for Total System Services, as 20% of its common stock is already publicly held, with a stratospheric price/earnings multiple of about 50.
"If Total System had a larger float [of common stock], they could grow earnings faster by making pooling-of-interest, acquisitions, using their stock as a currency," Mr. Weingarten said. "Being able to sell more stock would be a material advantage to them."
