Banking Yields Growing Pains for the BankTech Community

A little over two years ago (January 10, 2008, Analysis & Opinion Brief 2008-01), my analysis of the coming crisis was accurate in some areas and understated in other areas.What has unfolded over the past two-plus years has left the BankTech community with three types of customers: survivors, the walking wounded, and dying institutions. Two years ago, the question this analysis addressed was simple: Is banking broken or wounded? Clearly by the end of 2008 and into the first quarter of 2009, the "broken" argument was getting a lot of votes. My analysis suggested banking was wounded but would recover. Here is the first section of that analysis:

"1. The banking industry is not broken. The ability of major banks to raise $ billions of capital very quickly proves that the industry is not broken. However, there is clear evidence that the management teams at many of these large banks made glaring mistakes. The resulting actions will have a corrective effect on how banks proceed to recover from this mess. Each bank's story will have unique attributes based on common themes:

"a) Back to basics on credit risk and underwriting standards will mean credit flows will be tighter and risk-based pricing spreads will widen. Riskier borrowers will have a tougher time getting credit at all. This phase is already slamming leveraged buy outs and speculative grade credits.

"b) Expect a period of layoffs and contraction at wounded institutions that could stretch into 2009. There will be ongoing pressure every quarter to cut or control costs to help maintain profit margins as lower risk credits yield less income, compressing net interest margins. 2007 began the layoff process and hard hit institutions are moving into a second or third round of layoffs. Industry employment may actually drop for the first time since the 1980s. 'O & D' businesses (i.e., opportunistic, diversification) will retrench or fade out.

"c) New initiatives will be put on hold or cancelled altogether as both capital and budget constraints have no wiggle room and future break-even scenarios are not compelling in 2008. Capital budget items like technology-based initiatives and new branch expansion or refurbishing will be affected."

Now, two years later, the recovery is unfolding at an uneven pace across the banking industry. FDIC failures will increase over 2009 levels and over 25 percent of banks will remain unprofitable in 2010 as either walking wounded or dying institutions. Survivors, which are clearly better off, are beginning to take actions to improve their capabilities, in some cases expanding their footprint by taking on FDIC failures in deals that would be impossible to do in normal market conditions.

BankTech vendors see the storm clouds starting to clear - but a return to the balmy, sunny days of 2004-2006 or the late 1990s are, unfortunately, not in my forecast. For starters, the industry continues to shrink. In the 10 years since Y2K (12/1999-12/2009), the banking industry has slimmed by about 1,500 consolidated entities (think bank holding companies) while the credit union industry has compressed by 3,000 institutions. The total reduction amounts to 24 percent fewer BankTech buyers! Surviving BankTech vendors made adjustments, in part by purchasing other vendors, managing their solution portfolios to improve their capabilities, and addressing new IT solution requirements. The past decade clarified the fact that BankTech is not a "growth" industry anymore. Critical to the success of banks to be sure, but experiencing different types of growing pains (the slow-growing ones). Startups will still pop up on the BankTech landscape, but I expect the mature vendors to match (or buy) their value proposition(s) to generate modest growth.

Bill Bradway, founder and managing director of Bradway Research LLC, analyzes the business strategies and IT investments of US banks and credit unions.