The finalization of new debit card regulations will likely provide a tailwind to bank technology spending later this year, according to the top executive of vendor Fiserv Inc. The company expects its clients will funnel more money toward software purchases as a result of rules, known collectively as the Durbin amendment, which the Federal Reserve Board shored up last month.
"Although sales cycles continued to be longer than they have been historically, we believe that finalization of the Durbin rules will allow financial institutions to make decisions that could positively impact IT spending this year," Jeffery Yabuki, the president and chief executive of Fiserv, told analysts on Tuesday after the company reported a 4.2% increase in second-quarter revenue.
Fiserv, in particular, could benefit from a provision in the rules that requires banks to equip their debit cards for processing over multiple debit networks. Specifically, debit cards must include at least two networks that are not owned or operated by the same entity to give merchants that accept the cards more routing choice.
The rule effectively bans so-called exclusive routing deals that some banks have with payment networks, under which they process all of their signature- and PIN-based debit transactions. For example, some banks have agreements with Visa Inc. under which the payment network processes its signature transactions and uses its Interlink network for PIN transactions.
Fiserv owns the ACCEL/Exchange PIN debit network, which could be an option debit card issuers choose if their cards are not already in compliance. The network non-exclusivity provision takes effect for most card issuers in April 2012.
"As it relates to the PIN debit network exclusivity provision … there's really not a choice," Yabuki said. "People have to make those decisions in the near term."
Some banks held off on technology purchases before the finalization of the rules, which lower the amount of interchange fees they can earn from a current average of 44 cents per transaction to 21 cents plus an allotment for fraud costs. The cap takes effect in October.
"There is a feeling of relief in certain tiers of the market and a feeling of let's get going now that we know the rules in other tiers of the market," Yabuki said.
Yabuki's comments echo those of executives at competitor Fidelity National Information Services Inc. last week. The Jacksonville, Fla., vendor, also operates a PIN debit network called NYCE.
"We've had conversations with a large number of the institutions who have had exclusive relationships in the past," Neil Marcous, the senior vice president of network solutions at FIS, said in an interview last week.
FIS is also testing its "telecommunications bandwidth" and expanding its "processing capacity" to make sure it can handle increased traffic the NYCE network sees as a result of possible new relationships, Marcous said.
Marcous estimated that there are 800 to 900 million debit card transactions today that are under exclusive network relationships today that could be redistributed because of the rules.
In general, the IT spending environment is improving, Yabuki said. There is strong interest in online and mobile banking platforms.
During the quarter, Fiserv said it signed 107 new electronic bill payment clients and 41 debit processing clients. It also received commitments form 135 clients that plan to offer its ZashPay online payments system to their customers. Fiserv last month said it is buying software vendor CashEdge Inc. for $465 million to bulk up its online payments business.
"The environment … is getting marginally better," Yabuki said. "And certainly the regulatory environment helps deliver some certainty."
Fiserv Inc.'s second-quarter revenue rose 4.2%, to $1.07 billion, from a year earlier.
The company said it posted a smaller profit after recording a $61 million pre-tax charge for extinguishing some of its debt early. As a result, Fiserv's net income fell 29%, to $90 million, or 62 cents per diluted share.
On an adjusted basis, Fiserv's earnings of $1.13 per share from continuing operations beat analysts' average estimates.
Analysts had predicted Fiserv to earn $1.08 per share, according to Thomson Reuters.