Hello, everyone, and thanks for joining us today. My name is Ben Varga, and I am a senior associate on the U.S. Payments and FinTech team at Autonomous Research, filling in today for Ken Sohosky, who's out on paternity leave looking over his new baby boy. Today, we are excited to have Jack Henry here at our 39th Annual Strategic Decisions Conference, and we're thrilled to welcome David Foss for the third year in a row now. David is the CEO and Board Chair of Jack Henry, and he has more than 30 years of industry experience, having been at Jack Henry for almost 25 years now, so just a wealth of experience, and we look forward to hearing from him today, so David, welcome. Thanks for joining us.
Yeah, thank you, Ben.
I'd like to thank you all for attending. Just a few housekeeping items before we get started. We are going to do a fireside chat today, so I will start off with some questions, but attendees are able to submit and vote on questions through Pigeonhole, either by scanning the QR code shown on the screen and in the conference agenda book, or by visiting pigeonhole.at with passcode SDC2023. We will try to weave these questions in as we go through our discussion. With that, let's get started. David, it's great to have you here. You and the team have done a fantastic job just getting the Jack Henry story out there. The company hosted its Investor Day last month, so we are looking forward to digging into that too.
But at first, for those in the room that are less familiar, could you give us a quick high-level overview of Jack Henry and the customers that you mainly serve?
Sure. Yeah, happy to. So the phrase that I always use to describe our company is, "We are a well-rounded financial technology company." And the reason that I use that phrase is because there have been some major shifts in our industry in the past few years where a couple of our major competitors have really moved to becoming payments companies, and they describe themselves as payments companies. At Jack Henry, we do a lot in payments, but we are not a payments company. We do a lot in core. We are not a core company. We are a well-rounded financial technology company. The idea being, if you run a bank or credit union in the United States, chances are almost all the technology that you need to run that bank or credit union, you can get from Jack Henry if you choose to do that with us.
So again, we're a well-rounded financial technology company. We specialize in serving banks and credit unions in the United States. We have a few international customers, but our strategy is to focus on the US market because we see a tremendous amount of opportunity for us to continue to grow in the US, and we've established this really terrific business in the US. We serve banks and credit unions primarily. And the way I always describe it is that we are not serving the very top end of the market, so the super regionals. That has not been our target base. And we are not targeting the really low end of the market, the really small banks and credit unions. We really play best in kind of that middle space.
So if you think in terms of $250 or $500 million up to about $50 billion in assets, that's the space where Jack Henry plays most significantly. On the banking side of the business, we serve about almost 1,000 customers with our core platform. And on the credit union side, we serve about 700 customers with our core platforms. We are the most widely installed core provider in the credit union industry, and particularly among large credit unions. So we own about 48% of the market of large credit unions, over a billion in assets. So large credit unions, about 48% of them, their core business is with Jack Henry. On the banking side, customers over a billion in assets, we own about 26% of the market when it comes to customers over a billion dollars in assets. So we are, as I said, well-rounded.
So we have this core business, core being that primary accounting system for a bank or credit union. The process is loans, deposits, and GL. We have a payments segment where we are a card provider, debit and credit. We have an ACH origination or remote deposit capture business in that segment. And we also have a bill pay business in that segment that supports about 4,000 financial institutions. And then the third segment at Jack Henry is what we call complementary solutions. So it's a wide variety of other things for banks and credit unions that are not core and not payments. It's all those other things that fit into the complementary bucket.
The thing that I think we're most widely known for in that segment is our Banno digital banking suite, widely installed, very popular digital banking platform, but we have a number of other solutions in that segment, and so like I say, when you put all those segments together, we have a wide variety of solutions, around 300 different technology solutions that we can sell to banks and credit unions around the United States.
Fantastic. So it's been a few months, but we would be remiss not to ask about the recent banking turmoil.
Yeah.
How did that impact your customers and then decision-making among executives more broadly?
Yeah, I was actually so the real excitement happened over the weekend of March 12th and 13th, or I guess 10th, 11th, 12th, with Silicon Valley Bank. I was actually in New York at one of these conferences the following Monday. And of course, that was the question that every single person wanted to talk about, is what just happened with Silicon Valley and what are the impacts going to be? And then of course, that was followed by Signature Bank and First Republic Bank. So at the time, of course, nobody knew what the impacts were going to be. It was a real surprise and frustrating because there was so much conflation of capitalization versus liquidity. The uneducated person in the industry or just investor was not understanding the difference between liquidity and capitalization.
So there was this assumption that all kinds of banks were not well capitalized and not in a position financially to run their shop. And that just wasn't true. There was an old-fashioned run on the bank that happened at Silicon Valley, and that's what triggered a lot of this. A lot of people, I think, forget that prior to Silicon Valley, Silvergate had happened. So when FTX, the crypto provider, melted down about a month or two months prior, Silvergate was affected at that time. And so the thing that I've stressed to everybody is these really have been specialty banks, banks that were specializing in different areas that have had these challenges. So with Silvergate, it was their focus on FTX and crypto, and same thing with Signature, focus on crypto.
We had Silicon Valley with the focus on fintechs and essentially the run on the bank that happened there. And then with First Republic, their focus on the high-end mortgage market. But they were really specialty banks. Our banks don't fit that profile. And credit unions really have been pretty much unaffected and haven't been in the news at all. So I won't talk about credit unions at the moment. But when you look at the banks that we serve, they are not that type of bank. They are community and regional banks that are serving their customers in their communities with a broad variety of services generally. And so these specialty banks that have had these challenges because of these niches that they tried to carve out, that hasn't been in play in our space.
So then the next question that comes up is, oh, there's been this big run of deposits. Everybody moving their money out of community and regional banks, moving them to the Big Four . Again, we have not seen that in our customer base. I believe in some of the super regionals, they've reported that type of activity. So super regional being over $100 billion in assets. We have not seen that on our customer base. I talked to a lot of CEOs. I've talked to a lot of them since Silicon Valley. And they've seen movement, but nothing of any significance. In fact, some of them have seen an influx of deposits because people, particularly business customers, had the majority of their deposits at one FI, and they decided to diversify a little bit.
And so we've seen some of our customers see an influx of deposits because of new accounts being opened as they spread deposits around. But no major movement of money, either in or out, that have impacted our customer base overall, and certainly not any of the CEOs that I've been talking to. And on the credit union side of the industry, as I said before, really no impact at all with any of this. And I just hosted a CEO roundtable last week of about 20 different credit union CEOs, and they've seen nothing, no change of any kind related to any of this that's happened with the recent bank failures. And so the challenge right now is trying to predict, is there going to be another shoe that drops? What's that shoe going to look like?
Is it going to have an impact that we haven't seen so far? There may be another one that happens like this, but really don't see any impacts of any significance in our space at all.
Got it. That makes sense. So maybe this is a good time to shift over just general IT budgets among FIs. So at your Investor Day, you released a very detailed and interesting survey about the spending plans of FIs across the different asset sizes. So let's dig into that. So the survey suggested that larger FIs plan to increase spending a bit more relative to smaller players. And if I recall correctly, about 29% of them expected a 1%-5% increase, while 37% of them expected 6%-10%. So what are the main areas you expect these investment dollars to flow, and how can Jack Henry help FIs with their initiatives?
Yeah, the really good news in the survey that you're citing this year was that earlier in the year, I'd been citing anecdotally things that I was hearing as I was talking to CEOs, banks, and credit unions of what their expectations were for 2023. And the number that I had kind of settled on was around 7% was the expected increase for the year. And that was all anecdotal. It was all conversations that I was having. Well, then this study came out in March, and the vast majority were in the 6%-10% range. I think overall, 35% or so said they were expecting 6%-10%. And so you had some a little less, some a little more. The good news was 78% or almost 79% of the respondents said they absolutely were planning to increase their spend in 2023.
So the overall numbers were good. As you just mentioned, the larger institutions had an even higher or a larger focus on spend for the coming year. There's been an interesting shift, and this was happening before Silicon Valley. This had nothing to do with Silicon Valley. An interesting shift this year in that they're focused on using technology to gather deposits. Why is that happening? Because what we were seeing really starting in December of last year and certainly through the first calendar quarter this year, people, consumers who had put away money that they received as stimulus checks last year, they were now dipping into that stimulus money. As the economy continued to be challenged, people were spending some of that money that they had.
And so deposits had been flowing out of banks and credit unions just in general because people were using. There had been a real big buildup in deposits over the past year and a half or so. And now some of that was starting to wane because people were actually spending the money that they had put away. And so there had been a shift this year among the respondents to the survey in a focus on how do we gather deposits? What technology can we use to be present online to gather deposits and help attract new customers to the institution? So again, that had nothing to do with Silicon Valley. That was all about what was going on in the economy and changes there. But then beyond that, there was real interest in technology to originate new loans. So still loan demand.
It's been interesting in the past year or two in that if you think about the way a bank operates, the bank makes money based off loans and generally commercial loans. That's where the real money is made in banking. And so in the commercial loan origination space, the commercial lender in a bank, they're the big dogs in the bank because they're the ones that are bringing the money. And commercial lenders historically have been very hesitant to adopt technology. They have the way they write loans. They have the way that they interact with customers. They don't necessarily want to be told to use technology. There's been a real shift in that in the last couple of years. A lot more commercial lenders now, younger probably, ready to use technology to do commercial loan origination and to interact with their commercial borrowers using an online channel.
And so last year, the number one rated requirement in the survey was loan origination and finding technology to do loan origination. This year, that dropped to number two because deposit gathering superseded that. But still a lot of demand for online loan origination tools, particularly in the area of commercial lending. The good news for Jack Henry, we have solutions that serve all of those needs. I have a very robust solution in the online commercial lending area where we can originate the loan, receive all the information from the borrower, including tax returns and all that kind of stuff, provide feedback to the borrower through that technology. We can even do automated underwriting for the financial institution using that technology. So a very robust stack to help satisfy that need.
And then some of the other things that emerged. Still a lot of demand for upgrading the digital presentation layer to consumers and business customers. So again, Jack Henry, well positioned there because of our Banno suite of solutions. But lots, as I say all the time, most banks and credit unions in the United States, regardless of who they're using as their primary technology provider, most of them need to upgrade their digital presentation layer. And so we see a lot of opportunity there. There's a lot of interest always in fraud technology. Fraud is not going away, and it's not slowing down. And so most banks and credit unions are looking at fraud technology. And then it's interesting, almost any time we start to see an economic challenge in the United States, bankers will start talking about efficiency tools. What's technology that can help them become more efficient?
And then when the economy is more robust, efficiency isn't fun to talk about anymore, and it goes in the back seat again. But right now, efficiency is kind of back on the top of the list again. They're looking for tools that can help them become more efficient. Again, Jack Henry, well positioned there because of things like workflow that we offer that can help the back office run more efficiently.
Got it. That makes a lot of sense. And as a friendly reminder, if you'd like to ask David a question, you can submit one using Pigeonhole. But maybe let's move on to this secular tailwind driven by this continued need for FIs to drive efficiencies and upgrade their tech stack has been around for a while now, which makes sense given all the competitive pressures from neobanks, big tech, and now even big banks tied with other community FIs. So as we think about the next five to 10 years, how long can this IT spend tailwind persist?
Yeah, it's a good question. And it's hard to predict. But the thing that I stress all the time is most banks and credit unions, as I said earlier, most banks and credit unions need to modernize their tech stack. One example that I use in almost any setting like this, I will say to people, I don't know any of you. I don't know who you bank with. I don't care who you bank with. But I will bet you $1 that the experience you have on your phone when you're interacting with whoever you bank with is totally different from the experience when you're sitting at your PC. You can do things at your PC that you can't do on your phone, probably. You can do things maybe on your iPad, your tablet that you can't do on your phone.
Maybe you can do them on your PC. I mean, it's very common among banks and credit unions to have a different experience depending on the form factor. Those days are gone. When you look at our Banno solution, you have exactly the same experience regardless of form factor. That's what consumers want. That's what businesses want. That's what they're demanding. Most banks and credit unions need to make that move to a platform like Banno to modernize that experience for their customers. And so when it comes to the overall digital banking experience, people will ask me, well, where are you at? I normally say we're in the first or second inning of this huge opportunity. And that's not just for Jack Henry. I'm talking about in general, huge opportunity for modernization. That's just one aspect of all the things that we do.
There's also this move to public cloud versus either on-prem or private cloud. So most financial institutions today either run their solutions primarily on-prem or in a private cloud environment. But there's a real big move now, and we're leading the way on that to public cloud deployment. We have many of our solutions now public cloud native, and we're continuing to work on that move. And so that works into this modernization initiative that most banks and credit unions are facing. So the tailwind, just intuitively, there's many years of tailwind in that in our industry, not just for Jack Henry, just overall in the industry because of this need to modernize. And the modernization need doesn't slow down just because the economy is challenged. Every bank and credit union is trying to figure out how do I continue to remain attractive, particularly as demographics are shifting.
So think about who has all the money today. It's the boomers. But who's starting businesses today? It's not boomers. It's millennials that are starting businesses. What do millennials expect? They expect to be able to use technology to do everything that they do. And that money is moving from boomers to through the generations. The millennials are inheriting money. They're starting businesses. They're interacting with financial institutions. They expect to be able to open accounts, manage their accounts, do all of their money management using technology. They're not going to drive to the branch. They're not going to talk to the friendly teller behind the teller line. They're going to use technology to do that. And that's inspiring all banks and credit unions right now to figure out how do we modernize because we need to because of the demographic shift that's happening in this country.
Yeah. So it sounds like a lot of wood to chop. And maybe this is a good point in our conversation to pivot to the tech modernization strategy, which you first unveiled a bit over a year ago. So we've gotten a lot of inbound on it from our clients. But to help those in the audience who may not be as familiar with the details, can you just walk us through this initiative at a high level, how it came about, and what were you seeing across your client base that encouraged you?
Yeah. So what Ben's referring to is what we have phrased tech modernization at Jack Henry. And what we determined, and this is now about six years ago, what we saw coming was a move toward the public cloud. So everybody in our space has been providing solutions in a private cloud environment, essentially a data center environment for many years. But we saw this move coming toward public cloud. And we already were working with several of our non-core solutions to move them into the public cloud environment. But we believe that long term, the core, the primary functionality also needs to be public cloud native. And so we settled on a strategy a few years ago.
We actually started writing code, developers writing code about three years ago, trying to figure out how to get the core systems that we offer at Jack Henry to be public cloud native, meaning written in and for the public cloud, not a lift and shift where you take something that's operating today in a private cloud environment and make it work in the public cloud. We're talking about public cloud native. We started writing new technology ground up about three years ago. In February of last year is when I went public with the strategy. What I announced at the time was this is a strategy. It is not a product announcement. It's a strategy.
But we wanted to make sure that our customers and our prospective customers understood where Jack Henry was going and how we were going to get there as far as moving everything to the public cloud to take advantage of all the wonderful things that you get when you're public cloud native. So at the time, what I disclosed was we've rethought the idea of what a core system is. Historically, all of us who sell core, you sell it as a thing in a box. It does all of these things, deposits, loans, general ledger. It is a thing. We have been in the process of unbundling the core so that customers can pick and choose which modules they want to buy. And each of those will be standalone on this public cloud platform that we've created.
It's essentially a total modernization of the banking infrastructure in the United States as offered by Jack Henry. So we're moving our complementary products to the public cloud. We have some of our payments products already in the public cloud and then core sitting on this public cloud platform, all as public cloud native. And I keep stressing that, by the way, native because other people will talk about moving things to the public cloud. But if you haven't written it on the public cloud as a cloud native stack, you can't take advantage of all the real efficiencies that are there if it's truly a public cloud native solution. So when I first made this announcement last year in February, lots of questions, lots of confusion. Nobody's ever done this before. What is it you're talking about?
But what's happened in the intervening period here since, so it's a little over a year, we've had a number of CIOs and CTOs at banks and some credit unions, but a lot of banks that have done a real deep dive on what Jack Henry is doing, trying to understand what we're doing, and then comparing it to other players in the industry. And they've come back to us and said, "Okay, you guys are way ahead as far as strategy and vision as compared to anybody else in the industry." We know we still have a lot of work to do. We still have several years of development work and rollout. But we're getting a lot of attention now, particularly among larger financial institutions that are really excited and impressed by what Jack Henry is doing.
We announced a key strategic partnership with Google back in October around this initiative, although we are very active in the AWS environment today, so the Amazon Web Services environment, we're very active in Microsoft Azure today, but we have this new partnership with Google, and we're starting to do a lot of work in the Google Cloud with this new initiative, so it's exciting. I think it sets our company up, so the way I always phrase it is we're a 46-year-old fintech, but this sets us up for the next 46 years. With what we're doing today, this sets our company up to grow for many years to come with a really, really innovative and brand new technology stack to offer to our customers and prospective customers.
Absolutely. And one of the questions that we often get from clients is just around pricing. So how would you expect pricing and contract lengths in general to kind of evolve in this unbundled environment?
Yeah, it's an interesting question. So today, depending on the product, contract lengths for core, for example, the average contract is about seven years. For payment solutions, usually it's around three years. And then for the other complementary products, usually around five years, although a lot of people will tie their complementary solutions to the core, so they can be seven years. So they're long-term contracts. I don't expect that to change. And the reason I don't expect that to change is the core functionality is really the heart and soul of your financial institution. It is what's running the plumbing of your financial institution. And so I still expect that people will consume those solutions much the way they have in the past, and they'll sign long-term agreements because that major plumbing that's really holding your institution together, you don't want to have to change that out very often.
You want to know that you have a price commitment and a timing commitment to those pieces of the solution, so I don't think that you'll see any major change in the approach or kind of the logic behind how people contract for those solutions going forward.
Got it. And the customers that you serve are notoriously risk-averse, which makes sense that people entrust them with their hard-earned dollars. But this could often mean, however, that the decision makers, the CIOs at these organizations are a bit more cautious when it comes to change. So how are you planning to incentivize these customers to adopt your public cloud offering?
Well, so I don't think we'll change as far as incenting them. I don't think it'll be any change as compared to what we've done in the past. So the incentive for most people to move to Jack Henry is, A, they know they're getting great technology from Jack Henry. B, they know they're getting outstanding customer service. And so you know we're known in our space as the best provider of customer service as compared to anybody. So they're going to get great service. They get a great partner relationship. And all that comes through reputation. Every banker talks to other bankers. Every credit union executive talks to other credit union executives. They all talk to each other and compare notes.
And they'll come back to me and say, "Jack Henry has the best reputation in the industry as far as being a good solid partner." So it's not that we're going to go in and incent them to make a move because it's something they don't want to do, and we're going to try and buy their business, if you will. It's more we are the preferred provider out there when it comes to those three different things that I just highlighted. And if you are looking for kind of that next step, the next evolution of technology, Jack Henry is leading the way there as well. So if you're looking for that, Jack Henry is your provider. We are not putting our customers on a forced march. We're not saying you have to move by whatever date.
We have many happy customers, and we're going to make sure they remain happy. But those really forward-thinking customers, the people who want to get to public cloud now, and those forward-thinking prospects who want to get to public cloud now, that's where Jack Henry can really have a win because we have the technology that they're looking for.
Got it. And maybe this is a good time to weave in a question from the audience. So when Jack Henry runs an RFP, what are the main strengths that clients choose the platform for?
Yeah. So on the technology, so we serve two different markets, and I assume we're talking core here probably. We'll focus on core. We have a wide variety of other solutions we sell, but usually that question is related to core. So on the banking side, our flagship core is SilverLake. On the credit union side, our flagship core is called Symitar, and so we have a very focused strategy when it comes to the core solutions that we offer. That is different from anybody else in our space. We're very focused when it comes to the core, so they know if they move to Symitar, for example, as their credit union core solution, they know that Jack Henry is focused on that. We're investing in it. We are the best customer service in the industry when it comes to that solution.
Our competitors have a variety of cores as opposed to a single focused core. So that's one reason that comes up and oftentimes in conversation is the focus that we have on the core offering and the level of investment that we do in those core offerings. Second thing, I highlighted a few of these a minute ago, but the customer service reputation that we have. There are analysts in our space, Wall Street analysts, who publish their own surveys every year on customer sat ratings. So we also publish our results. But we commonly hear, "What are they doing at Jack Henry that's so different from everybody else? Why are their customer sat ratings so much higher?" So that is a real thing, and it helps in the decision process. It helps us win deals.
The fact that we have really outstanding technology and we can point to all these innovative things that we've been doing lately, that helps us. And just the overall reputation for being a great business partner also really helps in securing those deals. I hear it all the time from CEOs. When we're working with a larger bank or a larger credit union, it's common for the sales rep to ask me to come and meet with the CEO. And I hear it all the time from these CEOs running a competitive core. They'll say, "Our relationship is broken. We don't get the service we used to get. We're not getting attention when it comes to new R&D development.
And we don't feel like we have a partnership with whoever it is they're working with." And they hear from other friends in the industry that Jack Henry provides that level of partnership that they're looking for.
That makes sense. And maybe let's shift here to some of the targets, the normalized revenue growth targets that you provided the investor today. So I think Jack Henry now sees its normalized revenue growth in that 7%-8% range, which was slightly down when compared to that 8.5% revenue growth rate provided at last year's investor day. So what drove that delta between the two projections?
Yeah. So I think the thing that I think this has been overblown. Of course, that's my opinion, but I think this has been overblown. If you look at the historical performance of Jack Henry, it was only three years ago or so that we were talking 6%-7% top line. Everybody was happy with 6%-7%. Then two years ago, we were talking 6.5%-7.5%. Everybody was excited. We got to 7%-8%, again, on a rising revenue number. Our percentage growth is going up on a rising revenue number. I think what happened last year was, well, let me back up one second. The business as it is today supports 7%-8% top line. It very comfortably supports 7%-8%. I think that's a good number.
I think last year we probably got a little bit over our skis, a little bit enthusiastic about what we were seeing in the industry. But the business, it wasn't a logical assumption to go that far with 8.5%. So I think the 7%-8% is terrific. I think particularly if you compare that to the other major players in our space, carve out the financial technology line items in the major competitor space. You have one that's growing 0%-2%, one that's growing 3%-4%. You got Jack Henry at 7%-8% in essentially a like-for-like business. I think that's a pretty darn good performance for our company. And again, very supportable as far as the revenue model that we have. We're a highly SaaS revenue business today. And so it's highly predictable for us today. And I think that's a good number for us.
The other question that I've had, you all probably know, we have a new CFO. So our CFO just started a few months ago. And if you're the new CFO and you're trying to make sure that you put a stake in the ground, the last thing you want to do is go out and set a target that's on the high end. You want to set a target that's truly achievable. And I think the 7%-8% is definitely achievable for us.
Absolutely. And going back to maybe some of your larger competitors, so another question we often get is just around Jack Henry's relatively lower margins compared to those players. So I know you haven't provided guidance for next year, but as we think about the longer-term free cash flow growth algorithm of the company, what gives you the confidence that Jack Henry can expand margins from here moving forward?
Yeah. So a couple of things in that question. Number one, I would encourage you, if you're doing a margin analysis, to really do a GAAP margin analysis, right? So there are puts and takes in there that make some of our competitors' margins look a lot better than they really are if you're comparing on an apples-to-apples or GAAP basis with Jack Henry. The second thing that I would say is it's been a little bit lumpy here the past couple of years because of what's happened as far as comps are concerned. So this year, of course, travel was back as compared to the previous year where travel wasn't. We had to overcome, this past year, the Great Resignation. It impacted Jack Henry, which was a shocker for us. We have historically, our voluntary attrition rate has been well below half of the industry average.
And so when the Great Resignation happened a year and a half or so ago, it impacted us and just like it impacted everybody. And so this year, the comps for that are an easier comp for us. And so I think what we're hoping for this year is to kind of have a normal year again. And I know "normal" needs to go in quotes there, but hoping for kind of a normal year when it comes to the comparisons that have been kind of up and down in the past couple of years.
And so when you look at the overall growth of our business, the fact that we're a SaaS-based business primarily, and so logically, as you're layering on revenue, you're not having to layer on an equal amount of expense or anywhere near the amount of expense, there should be room in the business for us to continue to expand margins. Haven't done budgeting yet. Actually, two weeks from today or yesterday or something is when we get into budgeting for our fiscal year 2024. And just to make sure everybody's on the same page here, we're a June 30 fiscal year-end, right? So we are just about to the end of our fiscal year now. So we'll be doing budgeting in a couple of weeks, finalize budget by the end of June, prepare to set guidance in August for our fiscal year 2024.
But I think without having benefit of budget information yet, I think it's logical that we should be able to see margin expansion in 2024 and going forward, but I can't tell you what level yet.
Makes sense. And since we are talking about expenses, I think it would be remiss not to bring up the topic of the hour, which is artificial intelligence. So I know you have called out productivity improvements driven by automation in the past, but can you just talk about the impact of AI on Jack Henry and just how much benefit you might see from these emerging technologies?
Yeah. So it's a big topic. And there's opportunity and risk, all in the same sentence when you're talking about AI. We've used AI historically to help in quality assurance testing, for example. Almost everything that we do in QA today is done using AI tools and has been for quite some time, machine learning and robotic process automation. And so that's an area that has really been fruitful for us in the past, and we see opportunity to continue that. But we also use AI when it comes to call center interactions, for example, not only for ourselves, but for our customers, technology we deliver to our customers to help kind of predict the right answer for questions that are coming in to speed up the response when it comes to call center interactions. And there will be areas in development.
We're having lots of discussion right now about the development opportunities and where's the line that you don't cross when it comes to development. And so we're working on a lot of those things, just like I know a lot of companies are, to figure out the best use of AI and machine learning. But again, there's that, I could say opportunity and risk come up in the same sentence when you're having those conversations. So we just have to be very careful as we continue to explore those opportunities.
Very interesting, and you have a lot on your plate between the tech modernization strategy, standing up the credit union processing platform, which we'll touch on in a bit, and moving up market. Yeah, your headcount has only grown very modestly during the pandemic. So do you expect headcount growth to re-accelerate as you focus on these initiatives, or do you feel like automation could help you maintain a relatively modest headcount growth over the next three to five years?
Yeah, it's a good question. Again, I haven't gotten the budgeting yet, so I haven't seen any headcount projections for the coming year. So I'll respond absent of that. The good news, as we have managed headcount, we have not done any layoffs here as a result of everything that's gone on in the economy. I think we've managed headcount well and managed headcount appropriately. But we have taken advantage of a lot of tools to make sure that we don't have to address every issue just by adding bodies, adding people. And so as we continue to grow, as we continue to roll out these new technologies, that'll be an evaluation that we'll continue to do. I've stressed in certain situations, we do manage headcount closely. I was at three companies before I ended up at Jack Henry.
At one of those companies, the common response whenever there was a challenging quarter was layoffs. I wasn't CEO, by the way. I was a middle manager, but I would get the call on Thursday saying, "Okay, we're sending you your employee list, and by Monday you have to have identified X number of people, and we're doing a layoff next Friday." I have told our team, "I will never operate in that environment again." I mean, that is a management failure as far as I'm concerned. That's not the employees doing something wrong. That's the leadership doing something wrong when you get yourself to that position. Today, every position is zero-based, every position, whether it's a replacement or a new hire, and every position comes to me for approval.
People say, "How could you possibly do that?" Because I'm very serious about ensuring that we don't overextend when it comes to headcount. We want to manage that appropriately. It's my responsibility to make sure we're managing that appropriately. So I'm really serious on this topic. We may end up growing headcount next year. I can't tell you as I sit here right now. But if we do grow headcount, you can be guaranteed it will be because we had to grow headcount, not just because it sounded like something fun to do.
Got it. And maybe let's shift over to payments and some of these growth initiatives that you have ahead of you, such as the credit issuer processing platform. So can you talk about the genesis of that idea and the opportunity that you see in this offering? I mean, in the context of your 8%-9% growth expectation for payments, how big of a part could credit issuer processing become over time?
Yeah, I've talked about this a lot. So we're a major provider of debit. So we have, I think, 900 or so financial institutions running our debit platform. We're well known as a really good quality provider of debit. We started down the path of credit a few years ago because we had several financial institutions who said, "We love you guys for debit. We wish we could do debit and credit with the same company." We didn't have a credit offering at all back then. We wish we could do both with the same company. And so we took a really careful approach to that because everybody assumes that debit card and credit card, they look the same. And so it's probably the same process to issue and manage that, and they are not. They're totally different processes.
So when you get into credit, you have to have a different skill set. You have to have different sales expertise, different risk management on the back end. I mean, it's an entirely different process. And so we made that decision very carefully. And what I said at the time when we first started offering credit was, "This is not, I don't think you should expect this is going to be a real fast grower for Jack Henry. This is going to be one of those things that's a good add-on to debit, but I don't think people are going to just come rushing to the doors to sign with credit for Jack Henry. And you need to give us a little time to grow and learn how to manage this business effectively." And so we're into that space now.
We have a good business going today, but it's not. We have 900 and some debit customers. We have, I forget what the number is, probably 75 or 80 credit customers today. We're signing credit customers regularly, but we're not signing them at a pace of 100 a quarter. There's maybe three to six per quarter, and that's fine. That's what we expected. That's in line with kind of the demands of our customer base. The other thing to keep in mind is when somebody is going to change their credit provider, they wait till their existing contract expires. Normally those contracts are long-term contracts because if they try to change ahead of time, they got to do a buyout, right? They got to pay liquidated damages.
And so as those contracts are coming up for renewal, we have a sales team now in place that is mining those opportunities. And you'll see that continue to grow, but I don't think you're going to see it be anywhere near the contributor that the debit business has been historically at Jack Henry.
Got it. And maybe just another question on the payments segment. So Jack Henry will be the first processor live on FedNow. Can you talk about what you are hearing from bank customers and what's the revenue opportunity for the company coming from FedNow?
So I will clarify one thing there. So now I think the Fed is trying to take everybody live at the same time because they're trying to keep everybody happy. Originally, the plan was Jack Henry was going to be live. I think they're trying to make sure everybody is supportive and happy. So I think everybody's going to go live at the same time. But to that point, I was just in Washington, D.C., about three weeks ago or so, met with Fed presidents and the FedNow team. I was the only vendor there, only vendor invited to come and do this meeting with them, talking about the future of FedNow, use cases, the opportunity for FedNow. It's going to be interesting to see how the rollout goes. And I think a lot of people are kind of guarded in how is this really going to roll out?
What's the adoption going to be? There are a lot of bankers out there who were excited about Zelle, and then Zelle wasn't everything they were expecting. And so they fooled me once, kind of a situation. So they're waiting to see how FedNow really is adopted. But the interesting thing with FedNow is what the Fed presidents are talking about, assuming the rollout goes well, they're talking about essentially some mandates around FedNow payments. So for example, VA benefits. If the only way you can get your VA benefit is by accepting a FedNow payment, you're going to accept a FedNow payment. If the only way you can get your Medicare or Medicaid insurance payment is by getting a FedNow payment, you're going to accept FedNow, right? It's going to be a real immediate incentive to banks and credit unions to implement FedNow and start accepting those transactions.
That doesn't necessarily mean that they will send money using FedNow, but receive is the kind of easy button, and so the Fed is really trying to figure out if they're going to, how hard they're going to push that and where they're going to mandate usage of the FedNow platform, but first we got to get live and make sure that we have customers and transactions up and running. The opportunity for us is on every one of those transactions, and we get paid per transaction on every one of those transactions, and I think it will be somewhere between the wires rate and the ACH rate, is probably where it's going to end up, somewhere in that space, and so that's a nice opportunity for us and for anybody else in the space, but certainly for us as a key partner for the Fed.
So we'll just have to see how the rollout goes, but we are optimistic at this point.
Got it. And maybe let's move on to your complementary segment, which Jack Henry would expect to grow in that 8%-9% range in a normalized environment. So how much of that is gaining wallet share with existing clients via your offerings like Banno or Banno Business versus winning new clients?
Yeah, it's a hard question because there are more than 200 products in that segment. So we have a lot of different complementary solutions. Certainly, many of them are sold to existing core customers who were essentially getting more share of wallet by selling to the existing core base. But I think the thing that's often lost on people is if you look at Jack Henry today, we have about 1,700 core customers. We have about 6,100 non-core customers. So there are banks and credit unions that are not running a Jack Henry core, that are running an average of five and a half other solutions from Jack Henry. So they maybe have bill pay, remote deposit capture, asset liability management, budgeting, whatever, these other solutions from Jack Henry.
And so we have a large base of customers to cross-sell many of our solutions into that have nothing to do with core. There are these other complementary, best of breed complementary solutions that we can go around to non-core customers and sell. And so I don't know that I can quantify how much of that is going to come from inside the base versus how much is going to come from outside the base. All I can do is stress there is a large opportunity outside the base that I think people tend to forget about. They think about us as a core provider, and we sell stuff to our core customers, and that's the end of the story. And that is absolutely not the end of the story.
We have this really wonderful base of non-core customers and a sales team specifically focused only on selling to non-core customers. They're not allowed to sell into the core base. So their whole job is to go and continue to gain that penetration into the non-core customer base selling those complementary solutions.
Super interesting. And on that point, in terms of selling into that non-core base, I think you mentioned on the last earnings call that Jack Henry had to pivot his strategy of selling outside of the base as it relates to Banno. After one of your competitors had identified that as an opportunity to hang on to their core customers for longer, I mean, what were the biggest lessons from that experience, and how are you planning to reorient your go-to-market strategy?
Yeah, I've been doing this a long time. That was a lesson that I was not expecting. Just to get everybody up to speed here, we have all these different solutions we sell to non-Jack Henry core customers, as I just mentioned. My intent had been to take Banno outside the base, meaning start selling Banno digital banking to non-Jack Henry core customers as soon as possible. That's been the plan for a long time. The pandemic and the Great Resignation slowed some of that down a little bit because we lost a little bit of the talent in that area that we were working with. We were ready to go at the end of the calendar year, 2022. We were very public about it. We were talking about it a lot, saying we're going to start selling Banno to non-Jack Henry core customers.
One of our core competitors, their sales reps, we found out, were telling their customers, "You don't need to change your core now. Even though you don't like your core, you don't have to change it because you'll be able to buy Banno. And you can put Banno in place. Jack Henry's going to start selling it outside the base. You can buy Banno and then just leave your core in place." I had never anticipated that it would suddenly become a sales opportunity that would limit our ability to sell core into that base. So I asked the team to just stop everything you're doing. We got to back up here because this is something new that I've never experienced before. And so we had lots of meetings, lots of conversations to try and figure out how to address that. Do we move forward as planned?
Do we come up with a different strategy? Do we just abandon the idea of selling Banno outside the base? And what we determined was there are some core bases. And keep in mind, our largest competitors have many different core solutions, right? Many cores. And a lot of them are not very well supported. And so what we determined was there are certain cores, not core providers, but cores within those core providers that we can target and sell Banno to because we know they will still be a core opportunity. We know they're so unhappy with those core solutions that when the time comes for them to trade out, they will still be a core opportunity for us.
So we've taken a much more strategic pointed approach because if we had sold every time we sell a new core logo, a new customer to come to Jack Henry on the core side, they will normally buy 30-40 other products from Jack Henry, Banno plus a whole bunch of other things. So winning a Banno sale, but losing the opportunity to replace their core when we know they're going to buy normally 30-40 other products, that would be a very short-sighted strategy. So that's why we backed up. Said, "Okay, we're going to be very targeted. So now what will happen?" And we're getting very close to being able to roll this out. We will go to some core customers outside the base and say, "You want to buy Banno?
We're there for you." And other core customers inside the same competitor's core base will say, "Hey, we want to buy Banno too." And the answer is going to be, "Then you need to change out your core." And that's a strategy that we're really putting the finer points on right now, but it was a real learning for me. Again, I've been doing this a long time. That is something I had never experienced before. So good lesson.
So fascinating. So we have a couple of more minutes here, and maybe let's shift to capital allocation. So at last year's conference, you mentioned that valuation expectations were still quite high. Since then, we've seen the funding environment deteriorate even further. So what are you seeing out there as it relates to potential M&A opportunities?
Yeah, it's interesting. So last year in February's earnings call, so more than a year ago, I was very bold in saying I thought by the end of calendar 2022, there would be some real opportunities. I figured that funding was going to dry up for some of the private companies. I knew that some of the smaller public companies that had gone public in the last couple of years were under a lot of shareholder pressure. And so I thought there were going to be some really good opportunities for us. And virtually none of those opportunities came to pass other than Payrailz. It was crazy. Valuations were still high, and the private companies still seemed to be able to raise money, which I was not expecting late in calendar 2022. So we get into 2023, started to anticipating that things would change as I had previously thought.
Really no measurable change so far, but there are a lot of kind of rumblings now that we think that valuations are going to come back in line here, and that may create some opportunities for Jack Henry. As some of you may know, we used to be known as a serial acquirer. We did between 2004 and 2017, we did 34 deals at Jack Henry, 34 acquisitions. I, by the way, came to Jack Henry through an acquisition. That's how I got here. I was acquired. And so we're a good solid acquirer. We're a disciplined acquirer. I feel strongly about our ability to do deals and complete deals and successfully integrate them into our company. But we don't chase the shiny object. We don't go after deals that don't make sense, particularly around valuation.
And so we're hopeful now, based on the rumblings I'm hearing from investment bankers, we're hopeful that this year maybe things will start to loosen up a little bit, and valuations will come in line, and there will be deals that we can do and kind of that will make sense to our shareholders. But again, we don't have to do deals to maintain that 7%-8% top line. We know we can lead the industry as far as top line growth without requiring M&A to do that. But it's nice to do an M&A deal now and then just to kind of fold in a new solution and provide something new for the sales organization to sell.
Makes sense. I guess one last question here, speaking of your previous deals. How do you see Payrailz fitting into the portfolio?
Yeah. So Payrailz, there are a few reasons to do the Payrailz deal. We have a bill pay platform called iPay. We serve around 4,000 or 4,100 financial institutions with that platform, some core customers, a lot of non-core customers with that platform. We were back to the topic of modernizing everything we offer. We were faced with rewriting our bill pay platform to make it a public cloud-native platform. We were also running into Payrailz and competitive deals in the industry, and we'd been following them for quite some time. We liked the company. We liked what they were doing. They had created a 100% public cloud-native payments platform that not only had bill pay, but had person-to-person transfer, account-to-account, and business-to-business payments, all on the same platform, all public cloud-native.
As we looked further into their technology, what we really liked was not only could they modernize our bill pay offering, but we could get a person-to-person offering where both the sender and the receiver don't have to be in network. Meaning with every other P2P solution out there, if you want to send money to me or I want to send money to you, both of our banks have to be in network. With Payrailz, that isn't true. If my bank is a Payrailz customer and I want to send you money, all I have to know is your phone number or your email address, and I can get money to you without your bank having to be in network. So it was a really differentiated solution for us, and we saw that as an opportunity to grow. Another opportunity is in the B2B payment space.
They have no customers today running B2B, but the technology is there, and that's something we've been targeting for quite some time to figure out how to become a B2B provider. So all of those things fit into our strategy.
Makes sense. Well, I think we'll have to leave it there. But David, thank you so much for joining us, and that was a great conversation, and it's been an absolute pleasure talking to you as always. So thank you to all of you as well, and have a great day, and I hope you enjoy the rest of the conference.
Okay.