Compliance Costs Kill Banks’ Budget For Innovation

It’s getting hard out there for a tech vendor — particularly those that sell to banks. Banks are cutting costs these days — hit by high compliance costs and an interest rate that the Fed keeps delaying raising — and those costs are hitting vendors like DH Corp., Fiserv Inc. and Fidelity National Information Services Inc, who have all seen their bank clients backing off on technological upgrades.

Interest rates — and their long-delayed rise — is one factor cited often, as revenue gains are not keeping pace with projects, thus pushing banks to back-burner the technology budget until 2017. Also a commonly cited issue: compliance problems and the need to jump into line on those before getting involved in revenue generating core system upgrades.

The fact of banks slipping into neutral from a tech advance point of view has hit banking tech firms fairly hard over the last year — to the extent that, though banks are showing increased signs of strength, the vendors that service them are continuing to lag.  The KBW Nasdaq Bank index —  comprising financial institutions — is up 2.8 percent in the last 30 days. The KBW Nasdaq Financial Technology index — made up of bank tech firms — is down by over 4 percent. That switches the September picture — when banks were down by nearly 4 percent and the tech index was up 3.6 percent.

Banking tech vendors tend to specialize in software and services like payments processing and account tracking. In recent years, purchasing software as a service has become more common than in-house building projects — but at an increasing pace, banks are either cutting back on their tech vision or simply idling with what they have until the budgeting situation is better for technological upgrades.

Investors will get an update from another large player in the sector when Jack Henry & Associates Inc. is scheduled to release earnings Monday afternoon. The quarter so far has not been kind. DH’s CEO Gerrard Schmid noted that global conditions have “Resulted in a slowdown in the pace of technology spend. As banks struggle with their balance sheets and are mired in cost-cutting initiatives, they have to find new ways to generate revenues and also find ways to save money.”

DH missed analysts’ quarterly revenue forecast by 3 percent and lowered its 2016 growth projections. Shares of DH have plunged nearly 41 percent.

DH is not alone; Fidelity National, known as FIS, has its Chief Executive Gary Norcross noting that banks don’t have the discretionary funding to do these upgrades.

“[Banks] free up those dollars to invest in something that’s non-discretionary,” namely risk and compliance.

The big technology vendors also said digital banking would be a new spending focus —but banks are also at times tapping new fintech upstarts as tech partners. Will those start-up partners be able to cover the gap left by the world’s biggest banks?

We’ll keep you posted.



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