GLG News by Art Gillis

Implications: In 2001 there were 165 companies selling 223 solutions to banks, thrifts and credit unions.Today there are 71 companies selling 306 solutions. That’s 57% fewer companies; 37% more solutions.During the past seven years there were a total of 162 mergers and acquisitions in the account processing sector of banking technology.

Analysis:  Today there are 26 companies that offer core solutions.15 of them do it both ways, outsource and in-house.9 of them do outsourcing only.2 offer software only.The list of the Top 8 core companies hasn’t changed in the past two years.  That’s a record.  Previously, the lineup (players & rank) changed every year because of acquisitions.The Top 8 have been around for decades except for Fidelity National Information Services, which in name only, is just over five years old.  Counting FNIS’s first acquisition in 2003, the company is 40 years old.In 1999 the number of independent companies offering Internet Banking solutions peaked at 24.Today there are 2 independent Internet Banking companies.Whereas the consolidation of core vendors was based on good acquisitions, the consolidation of Internet companies was mostly due to quick startups that failed quickly.The paradigm du jour is likely to occur with companies building Remote Deposit and Mobile Banking solutions  -  Find an investor, Build a product, Establish a company, Gain some customers, Sell it to a large company.4 offshore companies (India & China) are included in the report this year.There are 132 pieces of any FI’s technology pie, where “piece” is a technology-based resource (software and/or service) that supports what FIs do.  One company cannot provide all 132, but the right three or four can.I’m sure you could get by without the above trivia, but when I have ‘em, I like to share ‘em.

Implications: My bookcase contains 22 past editions of Automation in Banking.  The 23rd is still in the oven.  The 22 are dog-eared because I have had to refer to them many times to answer questions from very intelligent readers who had a need to know.  Last week I read the 1985 Edition, and here are some highlights that got my attention:

Analysis:  •  The content increased enormously in the current edition, and today’s tech companies deserve all the credit.  I don’t believe there is a technology that even the wisest visionary can dream up that isn’t provided by some of the 88 companies in the current edition.  I couldn’t make that statement in 1985.  The best “consultants” in this space are the customers who feed their providers with new and better ways to get the job done.  And that feeding process continues today.•  The 1985 Edition had some interesting metrics for that era, beginning with the graph on the cover.  Initially, most community banks relied on their correspondent banks to service their technology needs.  So outsourcing was hugely popular in 1970.  67% of all banks relied on their correspondent bank or a fledgling private service bureau to process their data.  In 1985 outsourcing dropped to 51%.  Today outsourcing is only 44%, but before you chip that in granite, you may like to know it’s rising again in popularity.•  The core vendor lineup was different in 1985.  Systematics (now Fidelity National Information Services) was the giant at $180 million in revenue.  FFMC was second, NCR was third, Mellon Datacenter was fourth and Citicorp Information Resources was sixth.  Oh, and Fiserv was #5 but very impatient.  So in subsequent years it acquired #2, #3, #4 and #6 giving it a mass of $620 million if it had all occurred in 1985.  M&I Data Services (now Metavante) was at $90 million and Jack Henry was cranking out $13 million.•  There were 113 companies offering core systems in either service bureau mode or in-house in 1985.  In 2008 there are 13.•  Of the top 22 bank tech vendors in 1985, four are identifiable today as going concerns, and all are public companies (FISV, MV, JKHY, CSVI).•  Very large computer services companies couldn’t seem to grasp the banking business.  EDS mismanaged both the in-house and service bureau segments into no-growth businesses.  It spun off the in-house piece to the employees which then was acquired by Jack Henry.  It sold the service bureau to a private equity firm that called it Aurum Technology, which then was acquired by Fidelity National.  ADP spun off its thrift processing business and named it BISYS which was then acquired by Open Solutions Inc.  Large correspondent banks destroyed the business, and eventually got out.  One exception was M&I Bank and their exit last year was more elegant.  There are still eight banks that offer computer services to banks but those processors are small banks or cooperatives.•  In 1985, the average monthly market price to computer process a retail or business customer account was 63 cents (all types of accounts).  Today, there is no equivalent average customer account because of new types of accounts such as online banking and EBPP.  Even so, the average monthly price is now 83 cents, a 32% increase in 23 years.  During the same period, the CPI grew 64%.  All things considered, I believe vendors are doing a darn good job of delivering the benefits of IT, both in cost and performance.
•  The security of electronic data has taken a huge leap forward.  In 1985, there wasn’t even a category to display data security vendors.  Now there are 16 solutions in the report.  If it hadn’t been for dual authentication and the initiatives of technology, banks would still be asking for “mother’s maiden name.”  Sorry folks, that’s a joke.
•  In 1985 there were ten top software companies that supported in-house systems for community banks.  Today only five of them exist, two of which would probably never get your attention.  Jack Henry acquired (rescued) four of them.  Fiserv paid handsomely for two, and Metavante waited a long time but picked the orange just in time.
•  1984 and 1985 were considered the years of robust core conversions.  By that time, in-house systems had proven themselves as proficient, economical, and “dummy” safe.  My stats show that approximately 1,000 community banks were converting each year.  We’ll never see that again.Bankers, Aren’t you glad it’s 2008?Vendors, Have you found the next silver bullets?

Implications: It’s numbers crunching season again for me, and my outlook has been confirmed as if a combined team of Big Four auditors ripped through my databases looking for errors, omissions and even fraudulent opinions.The financial institutions landscape:The number of banks, thrifts and credit unions continues to contract at the consistent average annual rate of 3.44% (2.4% to 7.7% for the past 18 years).  I didn’t round it; it’s the real math, and the real numbers as reported by Highline Financial. So if you want to use a pretty good figure to project the next ten years, may I suggest 3%?  Don’t ask me why it’s 3%.  Ask Alan and Ben.  That part of the consolidation scene is as predictable as reading ads about bank CD offerings in your local newspaper.  No matter where the dart lands, the answer will be the same.  In 2008, 3% of all FIs will accept the fact that they are going to throw in the towel.  On December 31, 2008 we’ll know the 506 by name.

Analysis:  The bank tech vendor landscape:Let’s have some fun and go to the other sports arena where nothing is predictable.  What will the consolidation factor among tech companies show in 2008 and beyond?  First, here’s a macro look at the players as they appear in Automation in Banking - 2008:Total number of companies in the report   83  (I’ll explain 83 later)  Total number of core providers with their own peripheral apps  23  (these are the dogs)Independent peripheral apps companies  44  (these are the tails)Total number of systems integration companies in banking 6 (these are the generics)Total number of research companies  10  (aka fortune tellers)The DogsThe main players in this category are:Fiserv, Fidelity National Information Services, Metavante, Jack Henry & Associates, Open Solutions Inc., and Harland Financial Solutions.  These companies are the primary tech solutions providers for 71% of all FIs.The TailsThe reason tails need a good dog can be explained in one word  -  integration.  Banks want to use integrated systems and buying systems from seven or eight different vendors can’t possibly add up to integration. Sometimes, even acquiring a tail, doesn’t necessarily mean it will be properly integrated to the dog.  But the intent is to make it work - seamlessly, to use vendor parlance.  The 44 tails are too numerous to mention here, but the criteria for acquisition include being successful at their specialty, having a specialty that is in demand, demonstrating active marketplace success, and possessing traditional business capabilities so that the dogs don’t have to waste a lot of time teaching the tails new tricks.  Over time, these tails and dogs will find each other.  In my opinion, the last major acquisition (FISV/CKFR) represented a close to perfect example of a dog and tail marriage. The GenericsThere are 11 systems integration companies that perform all manner of tech services in most of the vertical industries.  Banking is the sweet spot, however these companies are like “all hat and no cattle.”  They do not own banking solutions.  Five of them should be rounding up the cattle right now.  They are IBM, Accenture, EDS, CSC and H-P.  The fatted cattle that would appeal the most to the giant acquirers, as far as I’m concerned, are grazing comfortably in Brookfield and Jacksonville.The near term M&A sceneI subscribe to the adage of, “Ask me no questions and I’ll tell you no lies,” so I never tread in anything that might look like “confidential” information.  All my predictions come from the gut.  I doubt if the generics will make any moves soon.  IBM said it will acquire a data security company soon.  It didn’t.  Mr. Palmisano said he is not planning any major acquisitions.  He will.  The ripe situations for M&A lie within the top six core companies, and I believe the 2009 Edition of my report will show there will be four.Why 83 companies?I published the first edition of Automation in Banking twenty-three years ago.  At that time, I hand-picked the companies to be included in the report using a single criterion  -  those companies were in the spotlight of what bankers needed in their pursuit of a better data processing system.  Today, only 20% of the 83 are “originals.”  The remaining 66 came later as new technologies evolved, as global markets developed, as entrepreneurs saw a need to spread their wings, and as wannabes developed into been-there-done-thats.  My process has not been entirely successful, however.  For example, I invite a few good companies each year to show what they’ve got, but I get the cold shoulder from some of them.  Go figure. Disclaimer:     The only bank tech companies that Art Gillis owns stock in are two that gave him the cold shoulder.

Implications: You can fill in the rest of that title statement as you see fit.  The reason I am writing this analysis is because clear-thinking investment analysts believe that when banks are in trouble, they will cut back on tech spending, among other expenses.  That’s a logical position to take, at least on the surface, but there’s more to this issue than a surface look, and I’d like to explain the details.This is how I would complete the title statement.  .........do the following three things.

Analysis:  1.     Identify the REAL problems first•  Is it the earnings and credit problems banks are facing that will curtail the revenue of any bank tech company?•  Is it tech maturity that will slow down new sales?•  Is it the absence of new first-time technologies that will slow down new sales?•  Has all technology run its course as a high-growth industry?2.     Develop answers that represent the real world•  No, to recurring processing revenue; maybe to new projects scheduled for 2008 and 2009.•  Yes.  Most banks have been building their IT capabilities for the past 35 years, some would say 50 years, and now they have pretty much completed the building process.•  Yes.  There are eight hot apps that banks are buying, but they are not entirely new and there’s nothing brand new coming in the future.  The 8 are hot only because the stragglers have finally entered the market to buy.  The nothing-new problem is a first-time phenomenon since I’ve been tracking the industry during the past four decades.•  Maybe.  The major generic software companies plus the top eleven systems integration companies might be putting on an optimistic face in public, but they are sweating bullets in the confines of their shrinks’ offices as they wonder what happened to the good ol’ days.  None of these companies that cover all vertical industries are experiencing strong growth.3.     Arrive at a conclusion  Any responsible CFO had better adjust the operating costs of his company to coincide with the model of a Wonder Bread as opposed to that of an Apple Computer.  The triple whammy of maturity, nothing new, and banker FUD is definitely going to have a reduced impact on bank tech company revenues.In order to understand the impact of today’s banking problems on IT, I’d like to address just a few examples of what one can expect.  And none of this even comes close to insider information because I am the model of “outsider.”  These are my own thoughts as evidenced by the style of my writing.•  Countrywide may be a countrymile from recovery, even with Bank of America’s rescue, but will Countrywide’s technology suffer?  NO.  Even bad loans never disappear from the processing of a bank’s work.  So in-place technology will continue to run, maintenance will continue and reporting may even increase.  Some day if BofA chooses to convert Countrywide’s work to BofA’s systems, that event will just result in more spending for BofA.•  Would the CFOs of troubled banks approach their Tech Provider to negotiate reduced charges?  Only if those CFOs are under the age of twenty-one.•  If a bank using in-house systems fails, would the Tech Provider feel their loss?  YES, to the extent that software maintenance fees would disappear.  All other provider-related costs for the bank were sunk costs, paid for and unrecoverable, so providers got their due. •  If a bank using outsource services fails, would the Tech Provider feel their loss?  Emotionally YES.  But unlike the thirties, banks don’t disappear completely anymore.  The bank would still operate under the control of a regulatory agency or a new owner, and the Tech Provider would continue to earn its revenue.  Follow the customers of the bank, not the bank.•  When a bank loses money is it likely to delay new projects?  YES.  Regardless of how much intelligent analyses can be presented to the management of many banks, the FUD factor freezes intelligence and embraces emotions.  “It’s the psychology, stupid.”•  Are any of the eight popular “new” technologies frivolous enough so as to be put in the back burner and not noticed?  NO.  In my opinion the eight are sound, practical and in some cases, solutions that mitigate present-day earnings deficiencies.  For example, one is the application of IT to restore credit quality monitoring and enhance loan administration.  Another of the 8 (Remote Capture) is so practical, economical and efficient, that bank customers would revolt if their bank couldn’t offer it.  If you pinned me to the wall and forced me to drop one or delay it, it would be Wealth Management.  I doubt if Northern Trust or Bank of New York would agree with me on that one.•  Is it likely that any bank IT operation will be “punished” as a result of losses from subprimes, credit crunch, or investment banking operations?  NO.  If some banks take a cleaver to IT, it will be because there was too much fat there to begin with.  Bankers are smart enough to know the fuel that runs their factory, and they’ll keep paying the price of IT.  Just like we’ll pay any price for gas.•  If a bank CEO forced his CFO to cut 10% from IT, without any discussion, where would the cuts be made?  In a well-run bank, there are no good options.  Cutting IT costs would be like doing 90% of the work.  Whose accounts would the bank not process?  In a poorly run bank, the cuts would have to come from HR.So what will the revenue picture be for bank tech providers in 2008?  Organic growth of from 3% to 7%.  But the 7% is theoretical.  If these companies changed their sales strategies to those of the Accenturites, they could see the 7%.  If the sales guys wait for bankers to call them then they will most assuredly achieve the 3% growth.  But then, if I were the CEO, I’d fire them.  There’s a new paradigm for success out there, and it begins with, “Get out there unearth the genuine need for IT to start earning money for banks.  Running the factory was conquered three years ago, and we’re not going to ride that wave anymore.

Implications: Two years ago, I saw a list of opinions regarding his/her/their “own grandiose challenge to the industry.”  In my opinion, it was more like an in-your-dreams list, so I saved it to see if a couple of years would produce any kind of change close to the dream.  The short answer is, it would take decades or fuggetaboutit.  Here’s the score card:

Analysis:    Consolidation of U.S. bank and financial services regulatory agencies.     I believe there will be more specialist regulatory agencies thanks to SocGen and subprime, so give up any idea of fewer than the eight bank/federal agencies we now have.•  Creation of an independent financial-services consumer advocate.      Is Ralph Nader doing anything these days?•  Centralized U.S. government financial crime statistics, including those for identity theft.      A good goal, but only  after the War in Iraq ends, we get universal health coverage, we solve the immigration problem, we educate every child to the level of excellence, we regain the respect we had back in 1777 (that’s right when we were only a year old), and our economy competes on the basis of quality and performance rather than lowest price.•  Public online disclosure of both financial crimes and consumer complaints.      This isn’t even a dream.  It’s a nightmare.  In a world where any screwball can gain worldwide exposure, who is going to screen the legitimate complaints from the weirdo complaints? •  Consolidation of consumer protection laws.      You mean so that it would take 18 lawyers to figure out just which type of account is involved?  I’d      rather see an effort to dumb it down  -  the consumer protection laws, that is.•  Greater consumer protections on deposit accounts and credit cards for businesses, which lack nearly all protections available to consumers.      That’ll have to wait until 2009 when the new lobbying firm of Cheney & Bush is established.  You noticed Cheney got first billing just to preserve what’s been going on for seven years.•  An industry move away from risk-based pricing on loans and the rewarding of high-balance customers on deposits.     Only after the Democrats win.  If this has anything to do with equality like the one in our Constitution, then I’d expect Ross Perot and Jose Himenez would get the exact same terms and treatment in their application for a home equity loan.  How real is that?•  Regulation for all. All financial institutions -- including finance companies, mortgage companies and industrial loan companies -- should be accountable to the same strong federal consumer protection and disclosure rules.     How does this reconcile with #1  -  Consolidate regulatory agencies?  It sounds like more government, more overlap and more confusion.•  Financial institutions should strive to offer special, fairly-priced accounts for those who never have had a checking account or credit card.      Only after the immigration problem is solved, and new citizens view the land of opportunity as theland that asks not what your country can do for you but what you can do for your country.•  Speed. Faster crediting of interest on deposits, which is only fair now that banks are debiting checking accounts faster.     Good idea, and after that, would you like to come to my house and see my baseball card collection?•  Choice of venue for complaints. Consumers opening bank accounts should not be required to submit to arbitration if they have a dispute with their bank.     Is there even one consumer in the U.S. who would do that now?  This sounds like a change looking for a problem.•  More uniform disclosure of credit-card fees, interest rates and other pricing nuances. If a solicitation or ad offers an attractive rate, the institution should be required to display any catch to it in equal-size type.     I have a better idea.  Caveat emptor, or read the fine print.  Saying it differently, I have never been screwed by a bank since I opened my first bank account in 1945.  Banking is a business, not a welfare agency.•  Give notice. If terms of a bank account or credit card have changed, institutions should be required to provide in notices both what they are, and what they will be. Easy-to-read disclosure of specific account terms should be required with account approval notices.     I get those now and throw them away because I can’t afford to take off time from life to read everything that comes in the mail.  Is this another attempt to ask government to govern our lives?•  Universal default clauses should be prohibited on credit cards and loans. Rates and fees on a bank loans should not increase based upon a misstep with another unrelated customer account.     Another regulatory nightmare.  But don’t worry, banks can’t even put together a customer portfolio, related or unrelated.•  More speed. Improved bank customer service response times.     I have a better idea.  Bring the call centers back to Iowa, Montana, the Dakotas, etc. where speed      will be improved by simply speaking English without the accent.•  Soldier solidarity. More financial education and assistance to our military, whose families are getting particularly clobbered by steep bank fees and unfair practices.     Haven’t you heard?  Hillary’s going to end it on January 21, 2009 (day one).  Besides, banking is not the main issue for our warriors.  Start with rewards, bonuses, benefits and superb medical and adjustment care.  That’s what they want, not seminars.•  More attention to bank online security. And along with that stronger guarantees of reimbursement to consumers who bank online. Elimination of phishing, viruses and hacking incidents that lead to both consumer and bank losses.     Now I’m not sure I did the right thing to save this list.  I coulda gone to Disney World if I wanted to experience a series of fairy tales.

Implications: Three conditions affecting the banking business seem quite real and have already become visible in the form of poor earnings reports from the giants  -  losses in investment banking, the credit crunch and subprime mortgages.  So it’s natural to look to the left and right for other industries that might be affected.  Of course, IT is a likely candidate for losses because as bank profitability goes, so goes IT investment.  Maybe.

Analysis:  Here’s my take on what the subprime problem means to IT companies  -  very little.  Take a ride with me and see if you buy my typical consultant-type extrapolations.1.  There are approximately 67 million mortgages in the U.S. at the present time.  54 million are good.  They are yours, mine and others that were acquired through traditional methods and paid for like coins on the tollway.  Large mortgage companies like Countrywide would have loved to unwrap and display these mortgages to the bank examiners.  Most of us would pay the mortgage before any other budget item.  For example, I coulda gotten tickets to the Red Sox sweep, but instead I paid the monthly on my three mortgages.  2.  Taking my usual conservative approach, and after watching last Sunday’s 60 Minutes, I have assumed that 14 million mortgages are subprime.  That may sound high to some of you, but I have learned that bad things usually get worse once we’ve uncovered the first signs.3.  Since mortgages have traditionally been a business for thrifts and large financial institutions, I’m arbitrarily putting half of them in the 145 large institutions, leaving 7 million subprimes in the 17,000 remaining banks, thrifts and credit unions that typically rely on outside help for IT.4.  The protection gets even better because only 44% of the 7 million subprimes are under the care of a third party processor.  Those FIs that went in-house sorta remind me of the sign in antique shops  -  “You break it, you pay for it.”  We’re now down to 3.1 million bummers.5.  Outsourced banks will pay a processor $6.00 per mortgage account per year just to do the computer processing.  That means theoretically $18.6 million is subject to vanish from the revenue hoppers of outsource companies.  I say theoretically because we all know even workout loans never really disappear.  And we all know that IT vendor invoices are anything but crystal, so trying to get a credit for a hundred fewer mortgages is like asking American Airlines for a credit because I lost 10 pounds and they’ll save on fuel.6.  If you look at the combined projected 2008 revenue for the top eight outsource companies, the $18.6 million doesn’t even represent a half of 1% of the aggregate.  Most of the top eight won’t even be touched by subprime, but if a company is big in the mortgage processing business, it just stands to reason that exposure might touch that company  for maybe half of the $18.6 million.  In fact, one company advertises that it processes 50% of all mortgages, so what goes around comes around.All in all, subprime is a problem, but not for the companies that process transactions.  I don’t know who said it, but I would alter the statement for the current period by saying, “It’s NOT the economy, stupid.  It’s more like (1) banks have reached a technology comfort zone (after 50 years of building) so buying has leveled off, and (2) vendors having nothing dramatically new to sell.  These two things are going to hurt bank tech companies for the next several years .

Implications:  have completed 154 consultations for 67 investment firms in the past two years.  The analysts asked a lot of good questions, and none that I didn’t expect, about the performance of bank tech companies.  However, no one ever asked me about the competence of the sales force.  Not one  -  nada, nyet, rien, niente, keine, tipote.  So I feel the need to speak out about the condition of the bank tech vendor community.  Most of it is good.

Analysis:  •  All the required products have been developed and most of them are good, some not so good.•  The right support teams are in place waiting for nagging calls from customers.•  The operating departments are doing a good job making sure trillions of transactions are processed correctly every day.•  Data security is pretty good.  From day one, transaction processors were conscious of their obligation to properly manage other peoples’ data.  Governance by regulatory agencies also helped.  Now if only they could figure out how to protect courier deliveries.•  R&D appears to be current because fewer customers are asking for new stuff anymore.•  Acquisitions are occurring at a consistent clip of about 30 per year, even though there’s a shift to acquire companies unlike the acquirer.•  The CFOs are counting their beans accurately and reporting honestly.•  CEOs are still checking management reports after the fact as opposed to looking for what’s going to go wrong three quarters down the road.  So what’s new?  Bank CEOs are no better, and that makes it OK in a club-based business environment.  •  A few hands-on CEOs are doing the Lee Iacocca exercise  -  walking the assembly line, talking to the workers, and getting their hands dirty.•  The strategists are absent, unless you call the Monday morning management meetings a place where new strategies are discussed.This sounds like a pretty tight ship, right?  In my opinion, WRONG.  The biggest void is in the sales department, and it is hugely apparent these days because “consultative selling” is what works. The problem is that most vendor sales organizations are still selling “left over” products, and that game ended about three years ago.  The game now is to sell capabilities that will improve the performance of their customers  -  commercial banks, credit unions, thrifts and mortgage companies.  If you don’t know what I mean, let me use one example to explain  -  Accenture.  Accenture doesn’t own products.  It “owns” 140,000 employees.  What a lost opportunity for major bank tech vendors if large banks brought in Accenture with this work order:  “We bought all the best products from Vendor X.  Now help us to achieve the performance we need for a desired ROI.” 

Implications: In my view, 2007 was not a Boston-Sports-Teams year for the banktech business.  There were some losers in our arena, as well as lots of worries;  a large number of lower stock prices for banks and techs;  a ninth inning attitude among bankers who achieved a good-enough system to get the job done, and then took a rest;  certainly nothing new and exciting showed up to compete with the likes of Apple Computer.  But one has to recognize the good things.  For example,  U.S. banking transactions got posted accurately and on time during 4,308,198 posting runs in 2007.  Presumably 112 million households were pleased with the processing of their accounts.  And I believe business customers got the same accuracy and timeliness.  The press had far more compelling events to write about than to look for banking glitches.  I was interviewed for only two failures in 2007 and both were ATM related, and both were corrected within 24 hours.

Analysis:  I don’t know how your world looked, but here’s how banktech looked from my perch.1.  What the banktech business needs now is a “clear thinker with no baggage.”  After 50 years of addressing fragmented requirements from dutiful bankers dedicated to serving their customers, CIOs and their suppliers have now reached a level that can be described as the bicycle tire tubes on my fifties-styled newspaper delivery vehicle. “Get a new bike” is what Ray, the distributor, commanded.  And the metaphor continues.  I had the largest paper route in Somerville, MA  -  202 families, many of them W.W.II vets who wanted their paper on time when they returned from the factory every night. Excuses and apologies didn’t work for my customers.  I invested in a new bike using borrowed funds from Ray.  I tried my bank first, but I was considered nonprime.  Ray got his three bucks a week (sans interest) every Saturday after collections.  Today, bankers (especially the giants) are still using patched systems while giving away their hard-earned profits to some mortgage holders.  Where’s the justice in that?2.  When I say a “clear thinker” I’m open to all manner of previously unacceptable members of the banking “Green Book”  -  tweenies, boomers, geeks, geezers, artists, scientists, einsteins, the ordinary, the nouveau wealthy, the multifaceted nationalities, the unbanked, the overbanked, the urbanites, suburbanites and ruralites, the gripers, and even the activists.  I present that all-inclusive picture because banking is not just a business, it’s a community service.  The only ones excluded are the scammers, phishers, hackers, launderers, data snatchers, fraudsters and robbers. 3.  A year ago, I had identified 23 core companies as potential candidates for acquisition, only because they were independent and they were core.  I zeroed in on five of them as “could happen” candidates;  the others as “after all the glaciers melt.”  None of the 23 was acquired.  “Wait till next year” as we in Red Sox Nation used to say.4.  One giant acquisition took the spotlight from the other 22 rather uneventful ones.  The Fiserv/CheckFree deal just had to happen for the good of all parties concerned.  CheckFree was a very good “tail” that needed a very good “dog” to wag it.  I expected it to happen two years before it did, and it should have happened then because there will be a natural gear-up phase of a couple of years before the benefits of fresh revenue start to roll.  This is not an overnight sensation even when trying to sell CheckFree’s EBPP to a strong Fiserv customer.  Since Fiserv was not ignoring the electronic payments business, it had its own solutions to sell.  I therefore believe existing EBPP Fiserv customers won’t be too excited about doing another conversion just to get a “better” EBPP offering.  In my opinion, if Fiserv is serious about generating $125 million in synergy revenue, it will have to get it from new sources such as the fewer than 500 small banks and credit unions that will be shopping for a new core system in 2008.  5.  Bankers have always been slow to react to new things.  It took 12 years for ATMs to hit a confident stride.  Internet banking is still viewed as a risky way to do business so it’s taking longer than 12 years to come up to speed.  Consider the following time factors:•  The Internet reached the early adopters as a usable comfort tool in 1992.•  Tech companies introduced their first Internet Banking solutions in 1995 and 1997.  You won’t know them by their original names today because they were smart enough to sell out at their peak.•  Today, only about 41% of U.S. households use Internet Banking, and I suspect a lot of them just to check their balances.•  If the greenhouse problem moves at the same rate as banktech innovation, we won’t be swimming in glacier waters in January for some time to come.  That’s a good thing, Al.6.  Bankers love “toaster technology.”  Where do I plug it in?  Remote capture was such a technology and it took off without the usual vendor arm-twisting.  As Bob Hope used to say, “If the audience had to stop and think about the punch line, it was a bad joke.” My father liked Bob Hope, but I never forgot his advice on reactions.  Bankers are not thinkers.  They are mechanics.  Here’s the sales pitch:  At $3.00 plus for a gallon of gas plus labor, you don’t need a courier or your employee to drive to the branch.  Do it yourself from the source, truncate the paper, reconcile, and get instant credit.  Remote capture was the hottest new technology in 2007.  There were seven others:•  Anything having to do with protection  -  compliance, security, fraud prevention, privacy•  Any transaction handled electronically  -  EBPP, EFT•  Business Intelligence, Data Warehouse, Intuitive Retrieval (the third one is my term)•  Electronic Check Clearing (aka Check 21)•  Credit Quality Surveillance (who will be the bad guys)•  Wealth Management (Joe 6 Pax and Couch Potatoes need not apply)•  Treasury Services & Cash Management reborn7.  While the prestigious business press love to promote the tech wisdom of large banks, we in the trenches know that the unsung little banks have the best technology in the world.  145 large banks are still using 40-year-old technology with no relief in sight other than the promises of pundits that there will be mass conversions occurring soon.  But there hasn’t been a core conversion in the Big 145 for years.  Is this something to worry about?  Only if you are a CIO at a big bank and you’re 50 years old or younger.  Anyone older will leave legacy systems conversions to their successors as they drift off towards the sunset.8.  Almost overnight the U.S. banktech market has been invaded by threats of companies like i-flex solutions, Infosys, TEMENOS, Misys and Tata Consultancy.  And their sights are on the giant banks.  i-flex has help from its majority owner, Oracle, while TEMENOS partnered with Metavante.  None of the five has made even the slightest inroads as yet.  These companies have the right system architecture, but they failed to realize that bankers are still buying functionality, and the U.S. legacy systems have tons of functionality.  “Legacy” may be a dirty word in the tech world, but bankers see it as a synonym for experience.9.  What was once a vibrant revenue generator has now become an “also ran.”  Core systems sales are at a churn rate of only 3% a year and dropping.  If one looks behind that rate, the stat gets worse.  34% are de novo banks, 22% are credit unions, and 44% are banks.  Some day those three groups will have crossed the finish line, and then what.10.  The best thing about the banktech business today is that all 131 pieces of a typical banking system are available to any bank now, and at a reasonable cost.  Even the dreamers can’t come up with a wish list that would require drawing board activity.  There are solutions, there are choices, and there are responsible vendors who can implement and support them.  What more can any industry ask for?What can you expect in 2008?  Here’s a clue.  I’m saving this article so next January I can just make a few updates and save me hours of work in preparing my annual status of the industry.  And that ain’t all bad.  We are not in the entertainment business, and I’m not a PR guy.  If you see any dreamers in your travels, let me know.  I’m tired of dealing with bean counters.

Implications: Domestic core system vendors vs. International core system vendors.  Every week I read about a new sale made by either i-flex solutions, TEMENOS, Infosys, Misys, or Tata Consultancy, and they are mostly significant sales.  But their marketplace is not the U.S.  There’s a more active market out there called “the rest of the world.”   While this robust new business activity is taking place, U.S. vendors are still looking for the passport office.

Analysis:  I believe the top core vendors in the U.S. (FISV, FIS, MV and JKHY) missed the boat by not seeing early signs of new opportunities about ten years ago.  But who can blame them?  Ten years ago, core business in the U.S. was still churning at about 8% of the population.  Now that the rate is only 3%, it seems the opportunity to jump into the international arena has diminished as a result of stronger foreign competition.Maybe there’s a solution.  Oracle found it as an 86% owner of i-flex.  Metavante partially found it by “dating” TEMENOS.  Do I hear a bid for Misys, Infosys or Tata?  There’s one great synergy that I believe is possible if domestic and international tech vendors got together.  The domestic guys know the banking business better than anyone, even though their system architecture is far too old.  The international guys have modern day system architecture, but still have a lot to learn about how to make a bank really work efficiently.

Implications: As if there isn’t enough bad news about the economy, here I am adding to the heap before it even happens. As much as I don’t like bad news, what’s worse is bad news that comes as a surprise. So be prepared. Just follow the facts, and then draw your own conclusions. We may see the bank tech sector face similar job cuts.

Analysis:  1. Fiserv has never had a layoff. Nor has Metavante, Jack Henry, Open Solutions, Harland Financial Solutions, Computer Services, Inc. or COCC. It’s hard to tell if Fidelity National Information Services has had any layoffs because they selectively discharged redundant employees as they acquired like companies, and I’m not sure that counts as a layoff. Suffice it to say, bank tech companies have been constantly adding employees to satisfy a growth record that never dipped in over 40 years.
2. Other companies in the tech business layoff employees routinely. Accenture, EDS, CSC, BearingPoint, Perot Systems, IBM, CGI and others are accustomed to layoffs because of the nature of their business - projects that have a beginning and an end. When a project ends, and another one isn’t in the pipeline, employees are laid off.
3. Transaction processing companies are in it for the long haul, but when parts of their business meets with a decline, then ready-willing-and-able employees are no longer needed.
4. Right now, for the first time in fifty years, I see a leveling off in the bank tech arena which can simply be called “all the pieces of the bank tech pie are in place and working reasonably well.” In fact, my stats showed signs that it was about to happen two or three years ago. The core apps churn rate dropped from a consistent 8% per year to about 3%.
5. When bank tech vendors aren’t selling core apps systems, it’s like Thanksgiving without a turkey. The trimmings are fine, but they all depend on what’s at the center of the table.
6. Core apps work is the largest user of a vendor’s human resource pool, thanks to that nightmare of a word, “conversions.” If vendors are not installing as many core systems, what will they do with the people who did those jobs?
7. Organic growth among bank tech vendors is dropping to single digits. If the top line levels off, and the CFO wants to preserve the bottom line, it’s the middle lines that need to be adjusted. 40% of the middle lines is one line - salaries and related fringe benefits. Since that line is the major and almost only variable expense, which one do you think is the best line item to cut?

I wish there was something new and exciting to replace dwindling core sales. In my opinion, current “trimmings” (security apps, EBPP, electronic check clearing, remote capture, credit management, and business intelligence) aren’t enough to pick up the slack. Even the guys who need a new core system more than any other bank (the 128 large U.S. banks) are digging in their heels hoping their legacy systems will keep on posting. And for the first time in at least 40 years, I don’t see a new silver bullet solution even in the distant future.

Which way is it to “Chindia?”

Implications: Once again, I first must confess to a bias before making this case. “Big” by itself has never impressed me. “Big and capable” is another matter. So when I tell you that small banks have better technology than the giants, I’m ready to defend my statement with facts. I believe that there is better technology within smaller banks.

Analysis:  Also because the trade press loves to report on the giants, I find it necessary to speak as a lonely advocate for the little guys. Case in point: When the Wall Street Journal writes about technology in banking, they always interview the largest banks. Several years ago, the CEO of Bank One (please note it wasn’t the CIO) became the poster boy for spearheading a new core apps development project that was going to leave every other bank in the dust, except Norwest. For reasons that I cannot understand even now, Norwest went along as a partner. I don’t understand it because Dick Kovacevich was CEO of Norwest at the time and this man was one very level-headed guy in every aspect of bank management. He respected technology, but he never hyped it. The 12-year project failed. The two banks and the developer just thru in the towel and walked away. The best thing about that disaster was that none of the players showed up in a court room. I could have sized it up with two words - too big.

Small Banks
The most important reason that small banks have better technology can be stated in one word - integration. In 1976 when the developers - Jack Henry (JHA) and Don Dillon (ITI) - embarked on what today are the two most popular core systems in the U.S. (31% marketshare of all core systems installed), the design strategy was based on a simple command. “Let’s build a core apps system that small banks can run themselves.” In contrast, the wrong command would have been, “Let’s build a new DDA system, or a new Installment Loan system, or a better CIF.” The second best attribute defining these new systems was the adoption of development tools that heretofore didn’t exist. In my opinion, these were programming languages that were clean cut and easy to use by normal people. A programmer no longer had to do all the housekeeping to get a computer “in the mood” to do some work. Programmers were able to focus on doing the work. The third best thing was database file structures instead of flat files. This capability represented the first example of computers being able to answer questions as opposed to just sucking up data and dispatching transactions. Today, these systems continue to grow by adding functionality, access to “outsiders” through Service Oriented Architecture (SOA), reaching to the “Big Bank Club” by proving they can do it. Today, small bank software vendors are sitting pretty. And it’s not because they are “tweenies.” Thirty-something systems are not young, but they are capable. The label that looks like the final nail on the coffin is “legacy,” and that’s where the 132 big banks are.

Big Banks
These banks spend tons of money because they have it, not because they have to. Look at this ridiculous hypothesis which conveys some good food for thought. If the top three bank tech vendors abandoned all their customers (that’s the ridiculous part) and devoted themselves to serving the three largest U.S. banks, those three banks would cut their IT budgets by $8 billion. Large banks are throwing money out the windows of money center cities because the overhead to keep their 40+ year old systems running is enormous. Now here’s the really bad news. Any large bank that decides to convert to a new core system could bring that bank to its knees. The reason is the risk of conversion. These banks are now looking at systems, whereas they should be playing what-if games, like what if the posting/updating run doesn’t get to end-of-job on Monday night.

And you thought, along with every Wall Street analyst, that sub-prime mortgages, the credit crunch and investment banking woes were the killers facing Citi and most of the big banks.

Implications: With excess cash from the seperation, what are the possible acquisition opportunities for Metavante.

Analysis:  “Insider information” to me means what tech vendors say in their press releases. It came from inside the company. So as I understand it, the justification for spinning off Metavante from M&I Bank was that both companies needed cash for acquisitions. I understand the bank’s need because there are lots of good banks just waiting to be swooped up by a better bank at three times book value. But I don’t understand where Metavante is going to do its shopping. A year ago, I took inventory of what was available and here’s the tally:
Theoretically there were 23 potential acquisitions for Metavante if it stayed within the boundaries of equivalent bank technology companies.
5 were candidates as long as they didn’t get too greedy.
7 were locked out because their owners were not impressed with BIG, culture differences, and just simply a fierce desire for independence.
8 just didn’t have any appeal for a company like Metavante that needs size and innovation as opposed to mom and pop shops with me-too products.
3 were buyers so they weren’t ready to give up the fight to be a major contender.

The churn rate was very low during this past year. CheckFree, Carreker, Corillian, Digital Insight and eFunds were on my list of 23 that got acquired. The remaining 18 are not my idea of major league companies that need big money to bring them on board. Metavante could cut their advertising budget and use the money to go shopping for any of the 7 real possibilities remaining on my list. They didn’t need OPM. So what does this tell us? My answer is, don’t expect any big announcements from cash-rich MV unless it shops for the bottom four of the now Big 8 (Open Solutions Inc., Harland Financial Solutions, Computer Services, Inc. or COCC), or goes far afield into new vertical industries. Do I hear a bid for TEMENOS?

There were only 12 acquisitions by the Big 8 in 2006. That’s the smallest number in the past ten years and the third smallest number in the past 22 years. Is the acquisitions game over? Is it the bottom of the 9th? Is Yogi yelling it ain’t over till it’s over? Beats me, I just compile the numbers.

Implications: With many big banks such as BoA, Wachovia and Citigroup reporting record breaking losses in the 3Q, there shouldn't be any less spending for new bank technology in the future. We may see consolidation of banking & trading divisions, but technology will come to the forefront in spending from banks.

Analysis:  When it comes to IT, bankers know you don’t mess with sacred turf. Sell off unprofitable business units in a heartbeat, cut salaries in the executive suite with one e-mail, reduce benefits as an alternative to pink slips, increase ATM fees for real-time P&L remedy, but leave IT alone. The proof is in the stats. In the past 13 years, IT spending has increased on average at the rate of 15.6% per year, with not one down year. Ironically, the largest and the smallest financial institutions were the most gluttonous. Large commercial banks’ IT spending increased 252% in 13 years. Credit unions increased their IT spending 260%.
These findings make perfectly good sense. Sub prime mortgages are not the fault of IT. Ben Bernanke’s fed rate changes have nothing to do with IT. Citi’s and BofA’s poor earning reports are not the result of bad IT decisions.
IT is a long term commitment. You can’t tweak it every quarter to compensate for a low earnings report. And after all the nail-biting occurs, it is IT that can solve some of a bank’s earnings deficiency with added technologies.
Now that doesn’t mean Fiserv, Fidelity, Metavante, Jack Henry, Open Solutions and Harland Financial Solutions can sit back and take a breather. Their biggest nemesis is that in 40 years of playing catch-up with technology, banks have caught up and there are no brand new technologies to whet their appetite. If nothing new shows up in the horizon a couple of years from now, even the stragglers will have adopted good-enough technology, and that’s like Bill Gates saying I don’t have a new version of Windows to sell.

Implications: Bank Technology has seen an expansion in new technology that has been built on old technology. It is not just the bigger organizations but the smaller entrepreneurs that are in the running.

Analysis: Fifteen to twenty years ago, it would have been quite ordinary to observe the large number of start-up companies based on a single-product offering under the broad heading of bank tech systems. Major events fed that creativity, including the availability of PCs, document imaging, Internet banking, check clearing legislation, telecom speeds and powerful database management systems. In recent years, however, the scene switched to a different kind of world - that of consolidation. Big companies got bigger, while small privately owned companies disappeared, at least in name. Now, in my view, there appears to be a resurgence of new companies entering the marketplace, so new that some of them are hitting “my shores prior to taking the beach.” Sorry for that weak analogy, but I’ve been glued to the TV watching “The War” these days. There’s an interesting characteristic describing the new start-ups these days that sort of satisfies a general observation that describes technology as, “We’re done.” Today’s entrepreneurs are responding to better ways of doing the old stuff rather than creating products to address first-time situations. Stay tuned. Automation in Banking - 2008 (now in the planning stage) will have more than 92 companies in it. The giant will still have 26,000 or more employees, but there will be a few companies with 6 employees.

Implications: I don’t think so. And here are the reasons

Analysis:  • Before 2007 even had a chance to show its strength I wrote an article titled, “This is a Pretty Dull Time for Bank Technology.” I was hoping to generate some objections, disagreements, differences of opinion or even insults. I didn’t get a whimper. Instead, I received a note from the Editor of Computerworld saying a reporter’s story and my blog must have crossed in Cyberspace because the idea was the same. She called the industry “dull and boring.”
• I’m not a visionary, but I’ve been looking on the horizon for new technologies and can’t find any. Bank tech vendors, like retailers, automakers, and McDonald’s just to name a few, thrive on new stuff to sell. The only things bank tech vendors are selling today are technologies that the stragglers are now waking up to. For example, is there still a bank that doesn’t offer its commercial customers remote capture? Or check imaging and electronic clearing? Or Internet banking including bill payment?
• Recent new technologies have indeed improved processing methods for banks. In turn, the new technologies provided economies for the banks. What nobody seemed to notice is that these new efficiencies forced vendors to reduce their charges to a bank because the work that vendors performed the old way has declined. It’s not something likely to appear in any vendor’s press release, but corporate revenue gains occur when every invoice generated by a vendor is larger than last month’s. Invoices to existing customers are shrinking, or at least, they should be.
• There’s some heavy duty spending going on in large banks, as expected. But I haven’t seen a single press release announcing a new core system sale to a large bank. The press releases are about de novos and the mom-and-pop-shop banks located in the boonies. For vendors who are now playing at the five to six billion dollar “tables”, selling anything to a tiny bank is like playing the 25¢ slots. Why am I thinking of this famous movie quote, “Show me the money, Jerry?”

I hope I’m wrong about this. I like good news as much as the next guy. I just haven’t seen much from the vendors who normally love to tell about their successes. We'll find out a couple of months after the books are closed on December 31st.

Implications: With ACI and IBM in collaboration, what will happen to the sub sector competitors.

Analysis: First, how about if I define the players:
David is ACI Worldwide at $348 million per year in revenue. Goliath is IBM at $91 billion per year. The sub-Goliaths are CheckFree at $973 million and Metavante at $1.5 billion. When I read today’s press release that ACI and IBM are collaborating to bring electronic payments to a current-day platform from what everyone knows is a legacy system world, I couldn’t help but ask where were the giants of Electronic Payments Systems? Was Fiserv too focused on acquiring CKFR? Was Metavante too focused on going public? With all due respect to all the players who managed to make their mark on their own, one unwritten law in the books of technology is that IBM governs. For what it’s worth, if IBM got in bed with Fiserv, CheckFree or Metavante, I would have yawned. Doing it with ACI tells me there’s something else going on that I missed. But I’m in good company because Fiserv, CheckFree and Metavante were taking a nap also. Whatever happens next, one thing is for sure. Fiserv, CheckFree and Metavante lost something. ACI won big time. It just proves that big is not a guarantee. Stay tuned.

Implications: The current consolidation of bank tech companies is not a new occurrence and will certainly remain a necessary business move if bank tech vendors want to compete in the future market.

Analysis: • If Fiserv had not made 149 acquisitions in 22 years, its annual revenue today would not be $4.4 billion (approaching $6 billion). It would be about $1 billion.
• If Fidelity National Information Services had not made 12 acquisitions in the past five years, its revenue would not be $4.2 billion (approaching $5 billion). It would be zero.
• If Metavante had not made 28 acquisitions in the past 15 years, its annual revenue would not be $1.5 billion. It would be about $740 million.
• If Jack Henry & Associates had not made 29 acquisitions in the past 15 years, its annual revenue would not be $668 million today. More likely it would be about $120 million.
• If Open Solutions Inc. had not made 16 acquisitions in the past 7 years (and hired Louis Hernandez, Jr. to turn this company around), its revenue would not be $480 million today. It would be defunct. The defunct part is only my opinion, of course.
• If Harland Financial Solutions had not made seven acquisitions in the past 7 years, its revenue would not be $325 million today. It would be about $100 million representing Marketing Profiles, Inc. and ForMation Technologies, Inc. which John H. Harland, the check printing company, acquired as sort of a stick-your-toe-in test before getting serious about the bank tech business and forming Harland Financial Solutions.

If you need a reality test to see the impact that acquisitions have had on bank tech vendors, use Computer Services, Inc. as the model of the “unaquirer.” This company has been in the space for over 40 years. It has made a handful of small acquisitions. Its annual revenue today is $125 million.

There’s a rule for survival in the consulting business - Publish or Perish.
Here’s my rule for bank tech companies - Acquire or Be Acquired.

Implications: - The price of an acquisition is only part of the algorithm. Value is more important.
- The bargains have all but disappeared, and it is now a seller’s market. One pays the going price to keep the growth momentum going
- Fiserv is a long term player with a value-add factor applied to every acquisition we make. This investment will look like a bargain some day

Analysis:  My wife and I took a little breather from the bay breezes of Cape Cod to experience the value of NYC’s high-culture. For her, it meant haute couture as well. The Fiserv/CheckFree announcement reached me from the telephone messages left at my Dallas office, and from what I read in the WSJ. I had a few opinions about the deal. For example, three years ago, I had told a reporter at the American Banker that CKFR was a ripe acquisition. This time, I probably reacted more strongly to the price paid for CKFR. You see, I had just paid five bucks for a 8-ounce bottle of Coke, so all of a sudden, FISV’s $4.4 billion purchase seemed more reasonable. For what it’s worth, I’m offering Jeff Yabuki my justifications for the $5 Coke, along with some equivalent rationalizations he might want to use to address critics who use their own models for fair pricing.

Me At 96 degree temperatures in Manhattan, I might have suffered dehydration if I hadn’t had something to drink.
Jeff This deal should keep the heat of Wall Street off our backs for a while.

Me If they had to rush me to Mt. Sinai Hospital, I might have paid $180 for a glass of tap water.
Jeff The bargains have all but disappeared, and it is now a seller’s market. One pays the going price to keep the growth momentum going.

Me If I had not slept in my bed at the Alex Hotel, they would have charged me anyway. Who knows what Mt. Sinai would have charged for one night?
Jeff If we didn’t buy CKFR, the other $5 billion competitor would have. This is not a time for tough negotiations.

Me Henry Clay Frick paid $4,000 for a self portrait by Rembrandt. I paid only $10 to see it at the Frick, as I was calculating the painting’s value in today’s market. If I keep the green Coke bottle for a hundred years, my heirs could sell it and get the five bucks back, maybe more.
Jeff We’re a long term player with a value-add factor applied to every acquisition we make. This investment will look like a bargain some day.

Me A trip to NYC would not be complete without dinner at Provence in Soho. Personally, I thought the waiter oversold “le cochon roti avec des abricots” to my wife. At dessert time the waiter was waiting for my wife’s reaction to his entrée recommendation, and she gently told him it was a disappointment. When the check arrived, I noticed the price of the roast pig was stricken. That was like a six-Coke return on my earlier investment.
Jeff We’re keeping Peter Kight on the payroll and adding him to the board. If things don’t work out (very unlikely in that only four out of 149 acquisitions hadn’t made the grade), Pete might buy back CKFR.

Full disclosure: My vacation is coming to a close, folks, and I’ll soon be back in Dallas acting just a tiny bit more serious. A bientot.

Implications: Large bank core conversions in the U.S. - Lottsa talk, little action • Even though large banks realize their legacy systems are old and tired, they don’t have options that are risk-free. • The bank tech vendors with advanced architecture are big internationally (i-flex solutions, Infosys and TEMENOS), but they don’t have a single large U.S. bank using their complete core system.

Analysis:  First, let me describe the arena this blog is about:
• “Large banks” includes 145 financial institutions (FIs) operating in the U.S. The good people at Highline Data came up with 145, but I reduced it to 122 because I look at corporate entities, not charters.
• The list includes asset sizes of $8 billion to $1.3 trillion.
• Most of the FIs are commercial banks, 13 are savings and loans, 7 are primarily credit card companies, 6 are brokerages that operate banks, and 3 are credit unions.
• Most of these FIs have been using mainframe computers for at least 50 years, which means they are using core software that they themselves built.
• Nineteen have hired an outsource company (Fidelity National Information Services, Inc. (FNIS), Fiserv, Metavante or BISYS/Open Solutions Inc.) to do their core processing.
• Some are using vendor-supplied software but mostly for a particular application rather than full core. The most popular example of this is Automated Financial Systems for loan processing. A less popular example is CSC’s Hogan System.
• There are some banks (less than 20) in this group that have implemented integrated core systems such as Jack Henry SilverLake, Information Technology, Inc. Premier, Fiserv CBS, Fidelity MISER, Fidelity Horizon, Metavante Bankway and Trisyn Infopoint.

Now that we understand the players involved, I’d like to express my opinions regarding the “noise” one hears from researchers and pundits who claim large banks are planning for conversions to new core systems. This situation has been a subject of press and research firm activity for at least the past ten years.
• My first offering in this imaginary debate is, it ain’t gonna happen.
• Even though large banks realize their legacy systems are old and tired, they don’t have options that are risk-free.
• The common characteristic, in one word, that all large banks share is - customization. If one bank found a new system that it liked, it would take 1,000 “Accenturites” or 5,000 “Offshorites” to implement it while preserving the functionality that the legacy system has. What is the cost of that?
• Why are they stuck with legacy systems? Because their present core systems are like roots of a 300-year-old-oak tree. No one knows where they end. The Monday after a core conversion, there could be a meltdown at the bank because testing and reality are never the same. Name a CIO who would like to give up his/her million dollar W-2 for that kind of craps-shoot.
• Interfaces in legacy systems are like flees on a hound - too many, irritating, and they’ll migrate to the new pup. If interfaces continue to reside in new systems, then their overhead will carry the negative baggage of legacy systems to the new platform. Where’s the improvement in that?
• The bank tech vendors with advanced architecture are big internationally (i-flex solutions, Infosys and TEMENOS), but they don’t have a single large U.S. bank using their complete core system. Is that going to give a CIO the warm fuzzy feeling he/she needs to take the bank to what we all agree is a better platform?

The last time a core conversion was attempted at a large bank(s) was more than ten years ago when Norwest (now Wells Fargo) and Bank One (now Chase) hired EDS to build and implement a new-age core system. The project failed after a few hundred million dollars were invested. Ask Wells Fargo and Chase what their plans are today to replace their legacy systems. I can hear their high-tech clichés now.

Implications: - Two and a half years ago an article in the American Banker quoted a bank tech research firm as predicting that major banks were going to convert to new core systems within the next two years. - Not one single large bank in the U.S. has converted their legacy core system to a platform based on new architecture since that article appeared.

Analysis:  Two and a half years ago an article in the American Banker quoted a bank tech research firm as predicting that major banks were going to convert to new core systems within the next two years. The case was based on pretty good evidence. Large banks are using 40-year-old legacy systems, and everyone knows that in a world of throw-away technology after three years, this event is way over due. What the research eggheads didn’t take into account was the practicality of how this monumental conversion would occur. Plug-in technology is doable in a matter of months or years. But core systems in large banks are like 300-year-old oak trees. They don’t move easily. Two and a half years have passed since the American Banker article appeared and not one single large bank in the U.S. has converted their legacy core system to a platform based on new architecture. If you track companies such as Fiserv, Fidelity National Information Services, Inc., Metavante, Jack Henry, Open Solutions and Harland Financial Solutions you will discover that research reports do not drive their revenues. Reality does. The average revenue increase from 2005 to 2006 for these companies was 9.77%. Not like the good old days of five years ago, and that’s because core system sales are not the main event anymore.