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%
11. Jack Henry experienced the largest rate of growth in 23 years among the top six core vendors. JHA started early. It started small. And it built well, including good acquisitions and native growth. Even Fiserv couldn't match Jack Henry in rate of growth. But rate is the operative word. FIS gets the prize rapid growth (eight years) and vast wealth, #1 in eight years, not #3 in 23 years.
12. As the entire world knows by now, IBM was once the leading hardware company of the computer business. Now it is a giant in the services business. Its market share of computers used by outsource companies dropped over the years as did that of Unisys. NCR is practically off the radar. The newcomers are Sun and HP.
13. Twenty-four years ago, outsourcing was so popular among banks that there were 24 large companies that served the needs. Most of them were up-line correspondent banks. Now there are only 6 in that group, not an up-line correspondent among them, but they own 92% of the market. There are 11 small outsource companies that process for 281 banks.
14. Prior to the availability of reliable telecommunications, it was important for outsource companies to be located close to their bank customers. Now an outsource company can exist anywhere, which is why you'll find them in only 14 states, at least that's where they are headquartered.
15. In 1976, two men were responsible for creating a new business in banking, called turnkey in-house systems. They created the software and packaged it with everything else a bank would need to be completely independent and run their own IT system. That's why today Fiserv and Jack Henry are the #1 and #2 companies with the largest base of in-house systems. This is a good place to emphasize the dilemma of current day weak core sales. Core software companies build their systems right, from day one, but unlike other tech companies who look more like paper cup manufacturers, bank core companies maintain their software so that even after 35 years, they are better than what they were on day one. Any good banker will understand that. System functionality gets better with time. The irony of that do-gooder trait of core vendors is that they don't have an after-market sale even every ten years. Just think what Microsoft would look like if they stopped developing new versions of MS-DOS.
16. In the early years of technology a tech company was either a software company serving in-house users or an outsource company. Now all the major companies provide both methods.
17. Revenue per employee is an interesting ratio only if you look at what's behind it. In 2010 the mean, mode and median hovered around $192k. Most companies fall within a pretty tight range. But FIS sticks out with the lowest number. The reason the company gives to anyone who is rude enough to ask is their business mix. A lot of it is BPO and international where revenue isn't as high as pure tech work and U.S.-based work.
18. The largest employer is FIS with 32,000 employees. First Data is second with 24,500 and Fiserv is third with 19,000. Do the math and you'll see what I mean about the revenue per employee ratio. Fiserv has 59% of the number of employees that FIS has but it generates 79% of the revenue that FIS generates.
19. Six companies gained the largest increase in employees, but five really earned the growth - Q2ebanking, Wolters Kluwer, TEMENOS, Euronet Worldwide and Bottomline Technologies. Two companies cut their employment number - Oracle Financial Services Software and BancTec.
20. It wasn't an active year for M&A transactions in 2010. None of the crunch years were. In the past 19 years, the average number of acquisitions was 21. Last year it was 12. These numbers apply only to companies covered in this report.
21. What a difference a day makes on Wall Street. The fictitious Automation in Banking Stock Fund had some impressive gains from April 2010 to April 2011.Big winners included ACI Worldwide, Bottomline Technologies, Computer Services, Inc., Intuit, Jack Henry, FIS, Oracle, TEMENOS, Fiserv, and TSYS. Today the only green one is Computer Services, Inc. Looking at the past 15 years, Jack Henry and Fiserv would have been great college fund holdings.
22. Tenure isn't a characteristic one would apply to the original top management team of bank tech companies. Only three companies hold the distinction - ADS Financial Services, Automated Financial Systems, and Computer Services, Inc. In this context, "original" means more than 30 years.
23. In 1987 there were 113 suppliers of turnkey systems and outsource services. Today there are 39. But that number has been constant since 2004.
24. Once there was only one size for any computer. Now there are at least a half dozen sizes. The mainframe is used by large organizations. Some of the core systems in this report can move across boundaries from small to large; others cannot. There are 13 core brands or parts of core that run on mainframes. Those brands process for 2,138 financial institutions. It's important to note that FIS, Fiserv and Jack Henry built core software on day one with small banks in mind. But today, that software has developed into "big intelligence" which is what mid-tier and large banks want. Thus by loading the software on industrial strength computers, even larger banks can enjoy the benefits of big intelligence.
25. There are 5 small outsource companies that are owned by banks. They process for 464 financial institutions.
26. Oracle FSS, Inc. earns the highest rate of profit among all core companies - 37%. The rest of the group is between 12% and 17%. One other fact in this report relates to this one. Oracle decreased its employment by 16%. A not so obvious fact is that most of the Oracle workers are in Mumbai, not Edison, New Jersey which is Oracle's U.S. headquarters. I never asked but my guess is that Jack Henry is the most American-bound employer when it comes to the location of their workers.
28. Core sales are the sweetest sale any bank tech vendor can make. And core vendors vary in their reliance on core systems because some of them do not carry their own brand of ancillary applications. For example, TEMENOS generates a very high percent of its total revenue from sales of its T24 core system. Because Fiserv owns the broadest line of ancillaries, as well as brands, its core revenue is about 50% of total revenue.
29. The pundits' debate — legacy vs. modern architecture. It's been going on for 20 years or more. But only 12% of the U.S. population has migrated to one of six systems that are based on modern architecture. Did I say there's a strong stickiness factor between a bank and its core system? Did I say most bankers look at core conversions as a death wish? Approximately 5% of the new core sales in 2010 were of the modern architecture variety.
30. Large banks in the U.S. have not in the past used branded core systems supplied by companies in this report. Large banks created their own applications software. At times, they purchased one application such as a loan system or deposit system from specialized vendors. For this reason, only two of the top six core vendors have a significant stake in the list of 135 large U.S. banks. FIS has 36% of that market and Fiserv has 11%.
31. The international arena has also had sparse representation from the top six. FIS derives 16% of its revenue from international sources. Fiserv 5%, Harland Financial Solutions 3% and Jack Henry less than 1%.
32. A typical core system sale these days also includes several ancillary applications. FIS, Fiserv, Jack Henry and Harland Financial Solutions provide an appropriate suite of ancillary offerings, thus delivering to their clients two good values — integration and single-vendor support.
33. There were 125 new core sales in countries other than the U.S. TEMENOS accounted for 46 of those. Fiserv had 11, FIS 7, Harland FS 3, and Jack Henry 1. Oracle does not report their number.
34. The IT business in the financial services industry is an appealing one for IT vendors. Eliminate government spending and all manufacturing businesses and financial services is the largest vertical industry. The IT spending in the U.S. makes the case. In 2010, FIs spent $91.36 billion to keep their IT systems running. Of course, the giant institutions spent 81% of that. Think of one activity that hit the large banks since the crunch and you will begin to appreciate why IT is so expensive. The foreclosure fiasco must have turned into a heroic rescue attempt for the IT division. People couldn't do it.
35. Six very large and typically multi-vertical systems integration companies have stuck their big toe into the water of core systems. They are, Accenture, CSC, SAP, SunGard, Tata, and Wipro. They claim to have a core system, but a customer list is harder to come by. I'm watching them closely because I believe they will alter their strategy and either acquire a proven core company of they will fade away quietly.
36. Consumers and businesses should be pleased with the way in which banks have evolved in their offerings. How many of you are old enough to have said this, "Hurry up, I've got to get to the bank before it closes." In 1970 there were only six ways in which a customer could engage its bank and they were all physical. Today there are 14 ways and eight of them could work from anywhere, except maybe at 30,000 feet from a commercial airplane.