Big banks are starting to open the tech-spending spigot, but times are tight for their smaller peers.
This is a significant shift from a year ago, when the top financial companies were driving a global economic slump but many community banks (at least ones that had refrained from risky mortgage lending) continued to invest in their technology infrastructure.
Call it a "first in, first out" phenomenon, said John Kraft, an analyst at D.A. Davidson & Co. Big banks, hit first by the downturn, are now showing signs of life, so it makes sense that they are now ready to invest. Smaller banks, belatedly ensnared in the recession, are now watching their spending, he said.
Fiserv Inc.'s [FISV] strong fourth-quarter results, reported late Tuesday, are one sign of big-bank spending activity. Fiserv is one of the largest banking technology vendors.
"The tone in the larger banks was not quite as dire as it was a year ago," Jeffery Yabuki, the Brookfield, Wis., vendor's chief executive, said in an interview Wednesday. "Clearly people were more willing to spend in Q4 this year than they were last year because, I think, the questions of the very survival of the industry have been put to bed."
Fiserv was not shy about highlighting its successes with larger clients in the quarter, including a payments software deal with Wells Fargo & Co. [WFC] The company has long served mainly community banks but has tried to expand its big-bank client roster in recent years, notably with its 2007 purchase of CheckFree Corp., a move that Yabuki said paid off last year.
"CheckFree had relationships with 21 of the top 25 institutions on bill payment," he said. While those relationships "take time to work," many of these large financial clients are starting to show interest in new payments applications. "We find ourselves having a lot of conversations on a day-to-day basis," Yabuki said during a conference call with analysts.
Though "2009 was by any measure a challenge," Yabuki said, sales were up sharply toward yearend, and December sales results were "the highest in the company's history."
Fiserv's revenue was $1.06 billion in the fourth quarter, up 2% from a year earlier, and net income surged 90%, to $118 million. Full-year revenue fell 11%, to $4.08 billion, and net income dropped 16%, to $476 million.
Jack Henry & Associates Inc., which is focused much more on smaller financial companies, said its clients are now feeling the effects of the weak economy despite the fact their collective exposure to risky mortgage lending paled compared to that of their larger rivals.
"A year ago, the issues seemed like they were going to be confined to a dozen very large financial institutions on Wall Street," Jack Prim, the Monett, Mo., vendor's chief executive, said in a conference call Wednesday. Though many smaller banks were not dealing in exotic mortgages, they could not avoid the fallout from those risky investments. "The reality is that 10%-plus unemployment affects everybody, everywhere."
Jack Henry's revenue for its second fiscal quarter, which ended Dec. 31, rose 11%, to $210.9 million, from a year earlier. Its net income rose 7%, to $30 million.
Prim said that much of those gains came from cost-cutting and a pair of payments-related purchases it made last fall: the payments software vendor Goldleaf Financial Solutions Inc. on Oct. 1 and Pemco Technology Services Inc., the former card processing unit of Pemco Corp., on Nov. 1.
Payments technology is one area driving investment now, said Davidson's Kraft, because such applications are customer-facing and less discretionary.
"The overall discretionary spending market is still under pressure, there's no question," he said. "What's improving is the growth coming out of the payments and transaction businesses."
Yabuki said that customers have expressed interest in person-to-person transfers, mobile banking and analytics. "There is a lot of energy around what you can do as payment types begin to converge," he said. "Payments are big news."
However, he warned that overall sales will continue to be slow through the first half of this year. We expect financial institutions to continue to be pragmatic with their technology-spending decisions," he said. "Some institutions are spending a lot of money, and some institutions are not spending any money."
Rodney Nelsestuen, a senior research director at the TowerGroup Inc. research firm, said that large and small banks face similar challenges but if large banks seem to be a step ahead in terms of recovery, it is because they were quicker to recognize and write down losses.
Even so, they are not in the clear, he said, and "everybody's cautious about spending."
Nelsestuen said investments in payments are strong because they are a proven growth area. "It's been a bright spot and it's made more money."
Greg Smith, the managing director of the equity capital markets group at Duncan-Williams Inc., wrote in a research note published Tuesday that the market for banking technology will probably improve this year.
He wrote that he was "impressed with Fiserv's ability to grow" earnings "during these challenging times," a trend that should grow as the economy improves.
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