Despite their exemption from the Federal Reserve's proposed cap on debit card fees, small banks and credit unions are hesitant to spend heavily on payments technology until more details are available, according to Jack Henry & Associates Inc.
Financial institutions with assets of less than $10 billion, which analysts say tend to rely on the fees more than smaller banks, seemed to have won a reprieve when an exemption for them was added to the Dodd-Frank Act that instructed the Fed to cap debit fees. The central bank in December proposed capping the fees that merchants pay banks for processing debit card transactions at 12 cents per transaction.
There are still many questions about the ability of smaller banks and credit unions to compete in the reshaped debit card market. For those institutions to benefit, the major card networks, which set interchange rates, would have to support one fee structure for banks with assets of less than $10 billion and another structure for those with more than $10 billion.
"It's very much an unanswered question," Jack Henry Chief Executive Jack Prim said on the vendor's earnings conference call Wednesday. "There's more talk … about trying to go back to Washington and get that provision changed in some manner. But again, how fast can you get anything done in Washington?"
Visa Inc. last month told American Banker that it planned to support a two-tiered structure. MasterCard Inc. said it has not made a decision.
The Fed is accepting comments on its proposal until Feb. 22 and is required to implement the caps by July 21.
"It's very much on their minds," Prim said. "I think you've got a lot of institutions who are having to rethink pricing of their services. You know, 'Do we start charging for our checking accounts, and is there any opportunity to pick up business from the large banks' " that have already starting adding new customer fees.
In general, banks are more comfortable investing in technology as the economy improves and more institutions get a handle on their credit problems, Prim said.
Jack Henry's fiscal second-quarter results reflected the improvements.
The Monett, Mo., company's revenue for the quarter that ended Dec. 31 was $242.6 million, 15% more than a year earlier. That increase was mostly because of a boost in payments processing and banks deciding to outsource the management of their systems. Jack Henry's backlog of future sales rose 8%, to $342.7 million. Its net income rose 20%, to $36 million.
The results, which were released Tuesday, sent Jack Henry's shares up more than 5%, to a new 52-week high of $31.33 on Wednesday before closing at $30.88.
John Kraft, an analyst who follows bank technology vendors for D.A. Davidson & Co., said he expects results of Jack Henry competitors Fiserv Inc. and Fidelity National Information Services Inc. will show gradual rebounds in bank investments as well.
"I don't think this is a dam that's breaking, I think this is a dam that's finally got a leak," Kraft said.
Jack Henry said remote deposit capture transactions were up 12.7%, online bill-pay transactions were up 13% and ATM and debit transactions were up 18.1%. Payments transaction volumes have been helped by three acquisitions in fiscal 2010: of iPay Technologies Holding Co. LLC, the card processor PEMCO Technology Services Inc. and the deposit technology company Goldleaf Financial Solutions Inc. The acquisitions caused its operating expenses to increase 15%, to $47.8 million.
