February 8, 2011 – Though many banks have reported financial improvements, their technology spending is still at a trickle.
That's the message coming from major banking tech vendors, and it's likely to remain the case for the foreseeable future as banks grapple with credit problems and regulatory changes.
While some financial institutions are more willing to spend on specific projects, few are expressing the confidence to embark on the deep overhauls that many in the industry have been waiting for, according to technology executives.
"Banks are going to really look to that as one of the latter things they do when there's uncertainty around their capital structure, credit quality or regulatory environment," said Darrin Peller, a vice president who covers technology vendors for Barclays Capital.
Fiserv Inc. President and Chief Executive Jeff Yabuki cited an "undefined regulatory landscape" as well as economic challenges as reasons its bank and credit union customers are hesitant to commit to major projects.
"The outlook for predicted IT spending has become slightly more positive over the last quarter," Yabuki said on the Brookfield, Wis., vendor's earnings conference call Thursday.
Fiserv, considered a bellwether for financial technology spending, reported fourth-quarter revenue rose 1.5 percent to $1.08 billion from a year earlier. The results were just shy of analysts' estimates, which pegged the figure at $1.09 billion.
Yabuki said banks' and credit unions' spending appetite will be "incrementally better" this year than in 2010 "but still not at the average rate of growth we expect to see over the next three years."
It's not that banks aren't spending; rather, they're doing it in very specific pockets of technology such as mobile banking, bill payment services and Internet systems.
Although talk is picking up about massive projects, like a complete overhaul of a bank's core account processing system, such projects are still rare, experts said. And those that are moving ahead on such projects, which can take years to complete and cost billions of dollars, are doing it piecemeal.
"The way you're going to see the investments is, it will be in subsegments of business," said Fiaz Sindhu, an executive in Accenture PLC's North American banking practice. "It will be replacing a line of business," not a rip-and-replace project done at once companywide.
Yabuki said there are some "magnificently large projects" taking place in the industry, but they tend not be in the U.S. and tend not to be "core centric."
"Most of the energy we're hearing tends to focus around channels," Yabuki said, adding that clients are interested in revamping their online banking systems.
Fiserv has invested heavily in upgrading its online banking platforms as well as investing in new products, such as its ZashPay person-to-person payments system, which competes with services such as eBay Inc.'s PayPal and CashEdge Inc.'s Popmoney software. All three allow users to send money using the recipient's e-mail address or mobile phone number.
More than 600 financial institutions have agreed to offer their customers the ZashPay service as of Dec. 31, Yabuki said, adding that ZashPay is an example of a product banks and credit unions can use to generate "much-needed fee income."
Bank information technology spending in North America is expected to increase 3.9 percent this year to $53.4 billion, according to a report that research firm Celent released in January.
"While we expect good [fiscal year 2011] demand for small/midsize projects, we see banks' continued reluctance to commit to larger projects as the most significant gating factor on industry growth," John Williams, an analyst with Goldman Sachs Group Inc., said in a research note Thursday.
The modest outlook among industry executives is not surprising given the numerous issues that banks are dealing with.
Many are still trying to get a handle on problem loans and many more are reluctant to make big investments until pending rules for carrying out requirements under the Dodd-Frank Act are in place.
Fiserv and rivals Jack Henry & Associates Inc. and Fidelity National Information Services Inc. also must contend with bank failures and as well as mergers, which can be a positive or negative for them depending on what an acquirer decides to do.
In 2010, 157 banks failed, up from 140 in 2009, according to the FDIC. Additionally, there were 860 banks on the FDIC's "problem bank" list as of Sept. 30, the most recent figure available.
Fiserv's net client losses have been less than half a percent of its total account processing client base since 2008, Yabuki said on the call, adding that it expects regulatory actions against banks to be in the range of 130 to 170 this year.
Yabuki and other vendors have specifically cited the Federal Reserve's proposed caps on debit card swipe fees as a reason many banks are frozen. "If they were final, things would be a lot better no matter what they are," Yabuki said.
Jack Prim, the chief executive of Jack Henry, said Wednesday during the company's fiscal second quarter earnings conference call that small banks are waiting for the Fed's final rules before making any major decisions. He also singled out unemployment as "the biggest issue" affecting the company's customers.
Regulatory issues, not just those related to debit card fees, will remain a major hurdle for spending this year, Peller said.
That's not to say banks don't need to make investments, Peller added.
"The problem is … the core account processing systems on average at midsize regional banks are generally 10-years plus outdated so it's not like they don't need to be upgraded," Peller said. "They're managing to get by with current status quo. My guess is they will continue to keep managing for at least another year."
This story originally appeared on American Banker.
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