Bank Tech Companies are in Good Shape, Considering the Economy and the Banking Crunch

Select any criteria you want (except for those good ol' days of double digit rates of organic revenue growth) and these companies will take home a darn good report card. Grade Point Average: 3.3, aka B+.

Following are the criteria I chose.M&A Activity: The Big 8 (prior to 10/1/09) core vendors made 205 acquisitions during the past 17 years. Were all of them perfect? No. Were 94 percent of them darn good for the acquirers? Yes. The strategy was pretty much the same. Like companies (culture included) were a sure thing because they added profitable mass, and turned into kissin' cousins from competitive thorns. Other reasons fit into the idea that good leading dogs need a good tail-in this case, lots of tails to wag because a complete banking system needs one superb core system and 132 tails, aka ancillary applications. Fiserv won the prize with 152 acquisitions during its life of 25 years. But others were careful not to acquire redundancies, so they made fewer acquisitions while delivering total system capabilities.

In my opinion, Metavante and Jack Henry created a rule in the bank tech M&A business: "You need 30 acquisitions to achieve full service capabilities in the bank tech space." During all those years, three acquisitions, in my opinion, were noteworthy: Information Technology, Inc., CheckFree and Metavante. ITI was a 10-year pursuit that was finally clinched at a football game. CheckFree I understood and was looking for it to happen three years before Fiserv finally came out of the batter's box to hit the proverbial home run. Metavante was a complete surprise to me, and I'll give it five years before I post the final score. I'm funny that way.

Stock Performance: In the past six months, the average appreciation rate for five public companies of the Big 8 was 33 percent. Who else can claim good performance in a Wall Street market that can't report good news in any five consecutive days? The answer is Google with a 34 percent gain in the same period.

Product Enhancements: If Microsoft followed the practices of bank tech companies, it would be bankrupt today. Every PC user would still be on MS-DOS, albeit with updates. A lot of banks are still using the bank core system they acquired as many as 33 years ago. Thanks to product enhancements that kept systems current, without the need for conversions to, for example, Fiserv Premier .15 or Jack Henry SilverLake .15, banks can still run on a modern system that contains thousands of enhancements as a result of three software releases each year. Core vendors did a superb job of supporting their systems, even though they deprived themselves of after-market opportunities to sell new versions. If nothing else, Windows 7 gives Microsoft a new "core" system to sell. If there has been a new bank core system among the Big 8 in the past three decades, I missed that press release.

Employee Performance: As a group, the Big 8 employed 56,397 people. It will be a few thousand less than that when one does a head count for the Big 7. Admittedly, I haven't met enough of them to claim they are all perfect. I can only speak about their performance as a group through the direct contact that my clients have with them. It's interesting that my own yardstick for assessment of employees in the bank tech arena is based on a negative transaction that is about to occur. FIS has identified $260 million in savings from the Metavante acquisition. I know where some of those savings will come from, and they don't affect my emotions-broken leases, equipment eliminations, software consolidations, data center consolidations, consolidation of support services, administrative consolidations, fewer corporate filing fees, bulk purchase benefits, and the like. But I view the elimination of thousands of employees as an industry loss. These people are highly skilled and properly placed within a very efficient work structure. They didn't screw up all these years to deserve an adios. I'm not against cuts, profits and revenue gains, and I understand the business model. If it wasn't about cuts, I would have said this merger is like 1 + 1 = 2 ones. It's just that a significant number of what service companies call their "most valuable resource" is about to hit the unemployment ranks during the worst economic times since the Great Depression. Add to that the fact that the other six of the Big 7 are not hiring, and you can see the problem. If I were one of the layoffs, I'd be at the doorsteps of 142 large banks. My resume would include one sentence. "Formerly employed at Metavante." That name is an automatic welcome mat that will turn into a W-2 come December 31, 2009. Customer Satisfaction: After 50 years in the IT business, I discovered that technology is not perfect yet. I gripe about my technology all the time. In 2008 only 263 (1.6 percent) financial institutions switched to different core system. Does that sound like core tech companies are not satisfying their customers?

What's next? New revenues from cross selling is a weak expectation for any bank tech vendor. Every vendor has been cross selling for decades. Once bankers acquire most of their 132 ancillary apps, they stop cross buying. The fact that two like vendors merge doesn't create more cross selling opportunities. It just tells a banker to convert from an old ancillary to a new one so one vendor can have it all. How do you think bankers will respond to that pitch?

The bank tech industry now needs something dramatically new like, for example, Cloud Computing. But the Big 7 are still grounded, and that's where their customers ought to be. Stability and modest growth seem like very nice goals, especially as the regulators are sending mixed messages. The Fed says the recession is over. The FDIC closed 98 banks so far this year and has an order with the GSA for 400 padlocks and chains. And unemployment just went up a tick. Are you sleeping better yet?

Goodnight Ben. Goodnight Sheila. Goodnight Hilda.