By acquiring Metavante Technologies Inc. and its extensive roster of small and midsize bank clients, Fidelity National Information Services Inc. has attained what is arguably the best view of the entire banking industry's purchasing power.
The view is not very pretty. After weathering a year of poor sales, the Jacksonville, Fla., vendor sees no improvement in information technology spending before the middle of next year. Hammered by bad loans, rising default rates on consumer credit cards, slumping revenue from transaction fees and many other problems, few banks have made tech spending a priority.
"It is what it is; it is going to remain that way for another few quarters, and then hopefully we will move upward from there," Lee Kennedy, the company's vice chairman, told analysts on a conference call in October to discuss Fidelity's third-quarter results, its first since closing the Metavante acquisition. "It is still our thinking as we move through 2010 and get into the second half, potentially, of 2010, we will see some type of an improvement," he said.
The spending slowdown, a result of the protracted economic slump, has even reached community banks, which until recently had largely continued their technology spending as larger rivals retrenched.
In its 2009 IT spending forecast, the research firm Celent had projected both 2009 and 2010 to be flat years for spending, due to both capital constraints and the rising maintenance costs that already comprise three-fourths of the estimated $50.2 billion in tech spending by North American banks this year. Spending on new projects was expected to take the biggest hit, falling from $10.2 billion in 2008 to $8.7 billion this year.
Celent will not have its final 2009 results or a revised 2010 outlook completed until it finishes fourth-quarter polling of bank senior IT executives, but senior analyst Jacob Jegher says he thinks banks will still be reluctant to take on new spending, despite glaring needs for upgrades to cash management, mobile banking and new Web 2.0 online tools like personal financial management. "The likelihood of projects going forward today are much slimmer they have were in the past," he says.
David J. Koning, an analyst at the brokerage firm Robert W. Baird & Co., says that the combined heft of Metavante, which catered mainly to small and midsize banks, and Fidelity, which targets similar customers but also has several major banking companies as clients, gives the post-merger company a unique window on financial companies' budgeting.
He says that Fidelity's revenue was weaker than the market had expected, especially for licensed software.
"Anywhere banks can cut discretionary spending, they're doing it," Koning says.
Fiserv Inc. in Brookfield, Wis., Fidelity's chief rival, sounded a similarly cautious tone at its analyst day conference in September, Koning says. "Everybody's a little cautious. They don't want to promise more than they can deliver."
Fidelity says it expects savings of $60 million to $65 million this year from the Metavante purchase and has already achieved $32 million in combined cost savings year-to-date, including $21 million in the third quarter, according to Mike Hayford, a corporate executive vice president and the chief financial officer.
Both companies had been cutting costs in anticipation of the sale, which was announced in April. For the third quarter, Fidelity reported higher earnings on lower sales, with a 3.8 percent decline in revenues to $850.7 million. The company attributed the decline in part to lower license and professional services revenue.
Steve Bills is deputy editor for technology, cards and payments at American Banker.