The Connection Between Recessions and Bank Tech Spending: Unhinged

I must have been asked hundreds of times by investment analysts how the current banking crisis and weak economy are affecting bank tech vendors, in particular the top four-FISV, FIS, MV and JKHY. Without disclosing the individual feelings of my 105 clients, I'm at liberty to say they believe the current situation is a bummer.I understand why they would ask, since the stocks of the four companies are trading at their lows, even though everything else relating to global economic conditions are low and lower. And revenue gains aren't much to celebrate about for bank tech vendors, at something like 4 percent currently compared to 18 percent during the high-growth years.

But I don't believe the economy is the only culprit. A far greater threat is facing tech vendors-the fact that most banks are sitting pretty with regard to fulfillment and breadth of their systems. Banks are no longer eager to buy better technology because 1) what they are using works well thanks to their primary tech vendor that supplies updates consistently making 30-year-old systems look like Napa Valley's finest vintage, 2) some banks have opted not to have every technology (for example, CRM, Electronic Check Clearing, Business Intelligence, Devil's Advocate Lending Reviews), and 3) vendors (or even two guys in a garage) have not come up with any brand new technologies in the past 10 years to whet the appetites of bankers who have always favored the tech resource over the human one.

Check this out. Even in a city where food, drink, good-times and hurricanes prevail, a study by The Louisiana Technology Council posted on Dec. 29, 2008 showed that there's "an encouraging amount of IT jobs in New Orleans." Another study showed that even though banks are shedding large numbers of banking positions, they are looking for more IT recruits. In terms of annual spending, remember, every bank is "forced" to increase its IT budget by 7 percent each year just to stay even, whether there's a recession or prosperity. My confirmation of the 7 percent figure did not include the hiring of more IT people. Is this a wake-up call for vendors?

The December 15 issue of Time magazine had a nice 71-year graphic depicting 13 recessions. I paid attention to the last eight starting in April 1960 because prior to that date, automation was a punched card non-event for banks. 1960 was the year, I believe, IT in banking began on a roll when large banks got serious about using semiconductor-based mainframe computers to automate branches and the backrooms. Small banks joined in by piggybacking onto the systems of their correspondent banks, for a "free" ride (aka compensating balances).

Here is Time's list and my description of what was happening in banking IT:

1. 1960 recession: Large banks moved aggressively to build tech capabilities. Creating applications software was de rigueur by any bank that owned a computer.

2. 1970 recession: ATMs, Credit Cards, EFT Networks, Mini Computers, Jack Henry, Don Dillon and Ken Kirchman-these influences created the largest spending spree in the history of banking technology.

3. 1974 recession: Same as above.

4. 1980 recession: Introduction of the PC added huge strength to do-it-yourself computing and breaking the logjam of getting onto the mainframe. Service bureau method gained credibility as the word "outsourcing" was made legitimate by the Kodak/IBM deal. But in-house systems surge as well. Telecommunications became a must-have capability. With goodies like these available, every banker was like the proverbial kid in a candy store.

5. 1982 recession: Same as above-a very robust era for technology.

6. 1990 recession: Y2K, Internet Banking, Branch Automation, PC gains intelligence and processing capabilities.

7. 2001 recession: Check and document imaging become ubiquitous. The nightmare of paper handling became the sweet dream for every banker. Data security threats became real thanks to the Internet. "Geek Interlopers" were cracking security hurdles 18 hours after bankers were setting up walls. Dual authentication was like Willy Sutton giving the teller two notes instead of one-he still cleaned out the vault. Electronic payments activity begins, but slow to take off.

8. 2008 recession: The economy and credit crunch contribute to the first tech slowdown in history. Ten not-so-new but solid technologies account for add-on work at healthy banks and add about 3 percent to 5 percent more to a bank's 7 percent IT budget increase to maintain the status quo.

Conclusions:

Weak economies have not had an effect on bank IT spending in the past because they occurred during building-type IT periods (1960 to 2000). Banks were increasing their IT budgets consistently at the rate of 15.6 percent per year. No one complained because bankers were very eager to use system facilities that made their jobs easier.

The current recession has impacted IT spending because an underlying mood amongst all banks is to hunker down in times of grave uncertainty. However, IT managers are not faced with must-have-right-now tech implementations, so they will defer their purchases until better times return.

Depending on the culture, attitude, market characteristics, strategies and overall management competence of many banks, IT spending will increase by 7 percent to 12 percent in 2009, and who knows for how many future years. In some cases, bankers are vehemently claiming not to increase IT budgets at all, but that's a sweet dream only.

Opinion:

I believe most bank tech vendors are still wrestling with their old paradigm of selling "the best bank tech products" vs. how to help their customers achieve the maximum benefit from technology. I call the current need almost as bad as switching from being a used car salesman to a McKinsey-type consultant. What do you call it? I believe every bank can use some IT tweaking, but I have yet to see "tweaking" on any vendor's list of services. As long as bankers are spending 7 percent to 12 percent more on IT in 2009, vendors should be earning a large share of that increase. They're not.