Only the Strong Shall Survive

Higher interest rates, a resurgence in the equity markets, and heightened M&A activity portend difficult times ahead for banks in the U.S., according to John O'Malley, president of Harland Financial Solutions, a subsidiary of John H. Harland Company (Atlanta). "We'll see institutions that just aren't prepared to go through these changes in the industry," he said, speaking at Harland's annual user conference in Kissimmee, Fla.

Concurrently, banks will have a smaller stable of bank technology providers to choose from, predicted O'Malley, pointing out that many "'B' and 'C' players" have already been bought by "'A' players" in core banking. The further winnowing out of second-tier software providers might lead to "fewer choices, less innovation, more monolithic, closed-end solutions, and higher price levels" within 12 to 18 months, O'Malley warned. "There will be price stabilization, if not increases."

Although it's possible that non-U.S. bank technology vendors could enter the U.S. market in response to such industry consolidation, the domestic providers enjoy a significant home-field advantage versus non-U.S. firms. "There are regulatory reporting requirements that are significant barriers right now, and they're not widely understood by all the foreign players," said O'Malley. As a result, even if non-U.S. providers have "good products, good architectures and good technologies," they may not be ready for the U.S. retail and commercial banking market, contends O'Malley.

Conversely, the quality of the non-U.S. competition and other barriers to entry have made it difficult for U.S.-based providers to expand overseas to a significant degree. Accordingly, Harland has focused its appetite on domestic financial institutions. "We have no plans at this point in time to go international with our software," said O'Malley. Also, Harland has not internationalized its technology development processes through the use of software development outsourcing.

Going forward, Harland plans to approach larger U.S. banks with a more comprehensive suite of banking applications, building on its current strengths in compliance, business intelligence, systems integration/interfaces and transaction processing. Anticipated areas of growth for the company include e-payments, imaging, wealth management and cash management.