Go ahead and get started. I know everyone's kind of transitioning, but we'll jump in. So I am delighted to be joined for our 11:00 A.M. session. I have to keep track of what time it is, with Mimi Carsley, the new CFO of Jack Henry. Mimi, thanks for being here.
Happy to be.
All right, great. So we have had the pleasure of hosting Jack Henry in the past a number of times, but our first time with Mimi, and that's because you just joined Jack Henry as CFO about nine months ago. So talk to us about what drew you to the opportunity at Jack Henry.
Yeah, so happy to. And we were just talking about. I've spent the last couple of roles in companies that are more B2B. And so the name, you know, it's not name recognition companies until you're in the industry. And so I was amazed as I started to learn about Jack Henry. And it's really rare to have a company that's 40-plus years old with this executional history, and yet innovation mindset, really thinking about striving for additional growth. And so as I learned more and more, just the outstanding culture, the people-first mentality. And it's a great leadership team, really low ego, unified, acting as one type of organization. So thrilled to be a part of it.
Good. So I like to start off these sessions with a big picture strategic question to sort of frame the discussion. So looking across the industry and Jack Henry's portfolio of businesses, where do you see the biggest growth opportunities over the next, say, three to five years?
Yeah, I think for the most part, we're in a stage where we have visibility, and I think they're going to be fairly consistent with what we're seeing today. I think once you get outside of the five-year, kind of that later tail end of that range you talked about is where we'll start to see even more about the innovation we're doing today in the hands of our financial institution customers. So we operate in three segments: our core segment, our payment segment, and our complementary segment. And so the diversity that Jack Henry has over 300 solutions, it's hard to say there's one thing that's going to be spearheading it. But a lot of the innovation we're doing around tech modernization, I think, will really come to the forefront in that time frame.
All right. I guess we should address right off the top one of the hot topics affecting Jack Henry recently, is the turmoil in the small and medium-sized bank environment. So before we get further along in our detailed discussion of your strategy and business, let's just address some of that. Your core customer base is, of course, small and mid-sized financial institutions here in the U.S. So how have your customers and then your business been affected by the recent turmoil?
Yeah, I think the first thing is I think there's a misnomer out there. You read a lot of press, particularly after SVB, about small banks in America, and they talk about these $100 billion-plus institutions. Well, that's not really small banks in our minds. Jack Henry supports over 1,700 FIs, about 900 banks, and about 700 credit unions. And while we don't play intentionally at that tier one space, we can run the gamut. Our largest client is around $30 billion of a bank, all the way down to, let's say, a $50 million institution. So most of those, you know, we like to say we support Main Street America financial institutions. They are outside of the coastal experience that most of the people are thinking about when they're thinking about SVB or Signature Bank or some of the others in the press.
They're differentiated in terms of their deep knowledge of their customer base, the customization of the support they offer of their products, and even if you think about some of the things they do around lending, the profiles of that lending is quite different than, I would say, the bigger, larger institutions, so by and by, you know, they've spent some time. They obviously had to do a lot of outreach after SVB to say what healthy conditions they're in, and they weren't affected, but by and by, they haven't been, you know, they've been insulated to the impact, and part of our revenue model is not based on number of FIs, but it's based on number of accounts or number of transactions or number of members.
If you actually think about diversification of your banking, instead of having a concentrated experience with one bank partner, if you start to see trends of diversification, Jack Henry will actually benefit from that.
All right. And then how about some of the potential longer-term implications? We've heard from others over the course of the last few days an expectation of increased regulatory scrutiny, potential additional consolidation in the banking environment, and perhaps some other effects. So how are you thinking about looking down, you know, watching where the puck is going, what those effects might be? And then what are you doing at Jack Henry to make sure you benefit, I guess, from that?
I think the first thing in the conversation that's going on right now is how to refund the FDIC liquidity programs, and at least from what we're hearing of the early expectations around that program and special assessments, most of our customers will be exempt from it. You know, they're really looking at, say, the top six institutions to take the lion's share of that program and special assessments. So I don't think we'll see them, you know, impacted from a financial health perspective. Obviously, cost of capital has gone up for everyone, but I also see, well, the potential for regulation and more regulatory environment is there. It's hard to see in Washington right now anything getting passed in terms of legislation, but again, we help our customers when things get more challenging and difficult.
So at worst, I think you might see us having to shift some of the dollars we spend in R&D away from innovation to regulatory changes. But at best, I think we'll start to be even more of a strategic partner to our FIs, helping to navigate this uncertainty.
Yeah. I know we've looked at the data. I'm sure you've looked at the data extremely closely. How about you just remind us how Jack Henry's business performed back through the financial crisis?
Yeah, so you know, that was a financial institution-led crisis. I don't think anything we're likely to face either from the SVB fallout or just the recession that might be looming is specific to driven or causation of financial institutions. Also, back then, Jack Henry was much more of a license and implementation model. Today, we're a much more SaaS-driven model. Over 69% of our clients are in our private cloud environment.
So it's not a large CapEx spend that you might think, okay, people are going to hit more pause on in a recessionary environment. It's a smaller OpEx. And the long contract duration of our clients' relationships with us, on average, over seven years, I think adds to the resiliency of our model. But even then, Jack Henry was a grower. I mean, we had revenue growth, so not concerned over what might happen.
And on the point of consolidation, just to follow up on that point, because I know that comes up a lot, look, the U.S., while it happens slowly, you know, the U.S. banking environment has consolidated somewhat, but yet Jack Henry, as you've highlighted, has grown throughout that. So how does consolidation end up affecting Jack Henry?
Yeah. We talk a lot about deconversion as the revenue we don't want, which happens when one of our clients gets acquired. It's essentially akin to a termination fee. Depending on the length of the contract remaining with us, they kind of buy out that contract. The other side of merger and consolidation in our industry is when one of our clients acquires someone. We tend to be more the beneficiary of that trend than our clients getting acquired. Oftentimes, you know, when our clients get acquired, we don't have a lot of visibility into that, which is why we strip it out on a non-GAAP basis because it's non-recurring in nature, but not a lot of visibility.
On the other side, when one of our clients acquires someone, they call us right away because they want to schedule in that conversion. They want us to come in and do some consulting around helping them put systems in place with one of their acquired properties. That's actually pretty attractive revenue for us, and so I agree, while you've seen this long-term trend of consolidation in the industry, at the same time, those institutions have been growing in size, both organically and inorganically, and the way we charge, again, through transactions, number of members, number of accounts, we're actually not as tied to the number of FI institutions in the U.S.
So switching gears over to some of the broader industry trends you're seeing in financial technology services and in your strategy around them. So in your strategy documents, you refer to a couple of major industry trends that affect your customers. One, the digitization of financial services, and then also the fragmentation of financial services. Can you provide a little bit more color or examples illustrating what you mean by these trends and how they're affecting your base?
Sure. Let's first talk about the fragmentation. On average, you know, through a mobile phone, you know, most people have, call it like 30 financial-related apps on their phone. Most millennial families have at least 30 to 40 relationships with some sort of financial provider. So that versus the bank or credit union being at the epicenter of that relationship, and so what we're trying to help through an open approach is to make sure that our credit unions and banks stay relevant and they stay at the center of that experience. So through openness, through being able to embed fintechs into their systems, for example, with products like Banno, they still own the relationship long term.
So they're not disintermediated, and then on digitalization, and we saw a big surge of this during the pandemic, credit unions were used to a very dispersed model. They don't have branches. So they weren't reliant on customers walking in and out, you know, of the front door every day. But banks, on the other hand, relied on that for cross-selling, for deeper experiences, for revenue. And so when their branches closed, they realized the shortfall in their strategy, and there was a big push to digital. And we're still seeing that today. So we call digital essentially anything that a bank or credit union wants to do without a face-to-face interaction with their customers. And we'll see that continue.
Another thing you've highlighted or a unique aspect of your strategy is your commitment at Jack Henry to open banking. Can you talk a little bit about what that entails at Jack Henry and how do you see it creating a competitive advantage?
Yeah, this is one of the things that surprised me most when I first joined Jack Henry. So about a month into my experience as an associate, we had our big Connect Conference, which is our largest annual conference of the year. And this year, it was hosted at the San Diego Convention Center. And I walked into the pavilion, and if you can imagine this huge booth at the center with Jack Henry, and we had just relaunched our new brands. It was just saying Jack Henry all over the place. But all around it, there was about 300 fintechs, including, you know, competitors. And I was shocked. And while we don't invite other core providers, we invite pretty much anyone else.
And that, you know, just aligns to the tenets of Jack Henry himself. There was a man named Jack Henry, for those who don't know. And he started by just being a core provider. And he knew that banks and credit unions would need more than he would provide. And so he really started with this tenet of like, I want to be the easiest person that a bank or credit union can work with. And we still hold that true today. And so we really believe in open APIs, reduction of toll gates, free flow of data, and helping the FIs integrate into the credit unions and banks. So that holds true today as much as at the founding.
What are some examples maybe of how your bank, how that creates, I guess, a competitive advantage for you in certain instances with, you know, with some of your banks? Like, are there particular types of other services that they'd like to connect to that you enable that others don't?
If we think about the mobile experience and certainly the younger generations not walking into the branch or even calling a branch, you know, so if they pull up their mobile and say they're using Banno, for example, they're not going to leave the bank experience to then go to Chime or SoFi or Mint or anything else. We work with all four data aggregators, so we're able to empower the bank or credit union at their choice, you know, of what they want to put into that Banno experience, so it's all there for them without leaving, you know, the walls, if you will, of the financial institution, which adds loyalty to the financial institution from their customer base and relevancy.
All right. You highlighted up front that at Jack Henry, you have three major segments. Let's talk a little bit about each of these. Let's start with the core. That's your core banking services, of course. I think it's about 32% of revenues, if I have the number right. And then around that, you have wrapped the complementary segment. So what exactly is in the complementary segment? That's another 29% of your revenue, so another third. What's in the complementary segment?
Yeah. So the complementary segment is things that are core agnostic, if you will, or can work with our core customers. So, and over the years, that's grown. That tends to be also where we put a lot of acquisitions. So if you think of it as an add-on strategy, it's a diverse portfolio of over 300 solutions. That's also where the Banno and the digital efforts are within that segment, but also our new, some of our new flagship products like LoanVantage, OpenAnywhere, our Financial Crimes Defender. So it's a really diverse, you know, it's hard to say what is the anchor tenet that's driving growth. Obviously, Banno is a big one. Banno Business, which we're launching this upcoming quarter. But it's a diverse mix.
So you've highlighted Banno several times.
Yes.
I think on your most recent earnings call, you highlighted you have 9.3 million consumers using the Banno services. These are like white label mobile app and web banking services. Can you just give us maybe a richer description of what exactly Banno is and what that sort of size and growth rate is for you?
Yeah, so it's the number one app in the App Store, as you mentioned, over nine million users. Today, that has been predominantly on the retail banking front. If you think about how you would open an account or bill pay or see all of your balances and then lending itself to other services you would need from the bank, again, it's white labeled. Depending on what the bank or credit union wants to display in that presentation layer, they can embed other financial institutions or other balances through the data aggregation services that we offer.
That's continuing to grow. Banno Business that I mentioned is about to launch. We have about 350 clients signed up. We have about 50 right now in beta that are using that service as well. The Banno Business adds on some kind of cash management, treasury-like functionality that commercial small and medium businesses need.
Got it. Okay. And so these are we should think of Banno as, is it primarily sold into your core base, or do you also find you sell it outside of the core?
So today, it's predominantly core in our inside of our core base of the 1,700 customers we have using one of our core solutions. We do plan to go outside of the base. Frankly, we anticipate going outside of the base sooner than we are. We're technologically ready to go outside the base, but what we heard from competitors is they were eager to have Banno come to them because it's the most modern, most robust digital application that they wanted. So from a digital banking app, they were hoping that we'd come to them. But so we're going to be really thoughtful, really intentional as to what other cores we're going to go to and what sequence, but it will eventually be available to outside the core.
Got it. Okay. And how does Banno you just mentioned, you know, some of the modern technology underpinning Banno, but how does the Banno what are you normally competing against with that offering and how does Banno win?
So we're competing against a couple of things. One, there are certainly banks and credit unions out there that don't have a solution today or don't have a ubiquitous solution. So the solution on your tablet may be different than the solution on your mobile versus on your laptop, and it's certainly not seamless. So today, helping them have a single unified digital presentation layer. Some of it is migrating people from our NetTeller solution to now the Banno solution. And then publicly, there are companies like Q2, for example, that have offerings in the space.
Okay. And how, like, you highlighted Banno Business Solutions? How does that expand the TAM, the addressable market? How should we, maybe, and maybe a broader question is just how should we think about the impact of Banno on your financials?
Yeah. So Banno Retail, if you think about each one of us could be a Banno user, but Banno Business is a little different. First of all, it's probably going to be less number of FIs that need them. Some of the credit unions who do less with small and medium-sized businesses than some of our banking customers. But at the same time, a Banno user, let's say I'm a landscaping company owner, I don't need to just access Banno myself. I might need five people in my institution, in my company to need access to be able to handle cash management, to handle some of their bill payments. So each person that uses Banno is an active user, and we charge on an active user basis.
So while there might be less number of customers on Banno Business, there's going to be more users and at a more attractive price point because there's more rich functionality for a small business.
I think you said Banno is out of the 1,700 clients, is the 500, is that what you were saying?
It's about 700 customers.
700 that are using Banno.
Banno Retail, and we've got 350 plus customers waiting that have signed contracts for Banno Business.
For Banno Business. Okay. And so how should we think about then that the uplift you see from a revenue perspective from Banno?
You know, the nice thing is it's not just penetration within the FI base. You know, we have over 1,700 customers on our cores, but once we go outside the base, there's hundreds of FIs that are not Banno customers today. But also as these customers grow, you know, and have more users and have more accounts, you'll see that as an uplift from a revenue perspective.
Another strategic major initiative at Jack Henry is the unbundling strategy, which is that as part of your big technology modernization, you've been unbundling some of your core processing services so that they can be sold individually or as individual modules, which is quite different from how cores have historically been sold. So what led you to make this decision at Jack Henry?
Yeah. So if we think about a core today, there's maybe about 30-35 key elements or functional elements. So account opening, there's authorizations, there's wires, there's loan tracking. So if we think about decoupling some of these and with our partnership with Google, as we reach digital cloud native and the public cloud, people aren't ready today for a public cloud native. You know, there is some, but the regulators are a little hesitant about having all that PII in the cloud.
So over time, we think there'll be more and more adoption, but it allows, for example, a larger institution to not do that big bang conversion. Today, conversions are done on one weekend, and you're changing everything in your bank or credit union, every process, every training, every operation. If it allows you to say, "Oh, well, let's start with deposits," or, "Let's start with our wires," or, "Let's start with our lending," then you're allowed to de-risk that conversion and space it over time.
Okay. All right. Are there particular parameters around this, like what situations you unbundle versus bundle the cores?
Today, we have two modules that are out in production in the public cloud. We have wires that we just launched, domestic wires, international wires will be coming soon. And then we have what's called authorizations. And authorizations is really interesting because if you think about how many specific instances within a core system and then within the adjacent products, you have to say, "Hey, Lisa is allowed to do X, Y, and Z." Today, you would have to change that over in every system.
One of the things we're doing as part of our tech modernization is what I call like write once, use often type approach to development, which is in our Financial Crimes Defender product or in our treasury product, we're going to be using that same authorizations module so that we can eventually you kind of go to like this concept of almost one core, if you will, where most of the tenets will be ubiquitous across, and then there'll be some layer of customization.
Okay. All right. And how do you think about the impact of the unbundling strategy on your financials?
It's good that you called it a strategy because today, it's not a go-to-market. It really just is a strategy, and at Jack Henry, you know, we tend to be very modest and build it first, then talk about it, but we thought it was important, and Dave started talking about it last February. We thought it was important for our customers, first and foremost, even more so than our investors, but to know where we were headed technologically, and so that's really, you know, garnered a ton of enthusiasm and excitement over the strategy. It's a little early to see that from a P&L perspective. As I said, we only kind of have two modules in market right now.
Okay.
But you could imagine whether it's an à la carte, but our hypothesis is at some point, people will buy enough of those modules in a bundle, you know, to fairly resemble what a core looks like today, and it'll be a premium product. So we don't really see it as a cannibalization so much as an uplift to a premium experience at a premium price.
Got it. Okay. All right. Another component of your growth strategy at Jack Henry has been starting to move up market a bit. I know you've highlighted that you have been in discussions with banks at the level of $50 billion or more, certainly in the mid-$20 billion, which is at the upper end, as you highlighted, of where you typically focus. So what drove you or led you to decide to move up market like this, and what's sort of different about selling in that space?
Yeah. So today, oddly enough, our average size, both on the credit union and bank size, is $1.2 billion. It's just odd how the numbers work out to be the same. But today, I would say the majority of our customers, we have about 25% market share in the bank from $500 million-$10 billion and about 40%-48%, I believe. Vance will correct me if I'm wrong, but 48% of that same size on the credit union space. So we've been growing as our customers have grown. Our largest customer today is about a $30 billion bank. I wouldn't be surprised, Lisa, if I'm sitting with you in two years, and they're at like a $75 billion bank.
So many of our customers are really acquisitive, and we've created what we call the RBO or the Regional Banking Office, which is how do we support not just from a sales go-to-market, but from a support from an operational perspective, from a regulatory perspective, how do we support these institutions as they grow. And so we've done math, we've done modeling. Our systems today can handle the transactional volume of a $100 billion size institution. But as part of our tech modernization, we've been surprised by the inbound calls we've received from institutions that, frankly, would never have called Jack Henry like 10 years ago, getting inbounds from like a $20 billion-$50 billion size institution. And they just love what we're doing with that tech modernization.
As I mentioned earlier, the debundling impact that lowers the risk of a conversion. A lot of large banks and credit unions love that concept. We often say that we hear from CEOs and CTOs, they would rather die or retire, like which is pretty strong language, rather die or retire than do a conversion. But they feel that through this, it de-risks them and allows them to get those newer modern functionality that they need to support their institution.
So you've mentioned a number of times the tech modernization. Can you maybe just walk us through what's involved in that or what's really changed?
Yeah. So we work with all three cloud providers, but we did announce a strong partnership with Google. So a lot of our what we call internally our Origin product, which is our tech modernization strategy, will be built within GCP. And that allows us to capture a lot of benefits, enhance security. We think our security is pretty good, but Google's is pretty good too. We also have more capabilities for dev tools. There's more around just spin-offs and the cost of compute power, but another is bursting. So a lot while credit unions are real-time, banks do batch processing still.
And so the surge of compute power needed at month-end or day-end is really big. So our data centers can handle that, but certainly going with the public cloud providers offers kind of unlimited capacity in that sense. So some of it is around how to take advantage of these elements that you get when you're operating in the public cloud. The other part of tech modernization is how to, through APIs, be even more open than we are today. So at jackhenry.dev, we have published roadmaps on our tech modernization strategy, but we have over 900 people signed up to use our API programs. And so that's how to connect through the APIs, which really does break down, and we think it's going to increase the velocity of product development.
All right. So the only segment we haven't talked a bit about is the payment segment. It's the other third or so of Jack Henry's revenues. There's a number of elements within payments. So can you just remind us what's underneath the covers of payments and what the growth profiles are of the different pieces?
Sure. About 60% of that segment is in our card business. We're predominantly debit versus credit. We're just re-entering into the credit space. You'll see us be more heavily weighted to debit for some time, mostly because either people have credit today, so you're waiting for a renewal, or if they are new, they want their debit at the same place they want their credit for efficiency. So every time we're getting a new credit, we're also getting the debit. So it's kind of hard to move that ratio, but we're mostly a debit card provider and processing. That's about 60%, growing at low- to mid-single digits.
We then have our enterprise payments, so ACH, remittance, thinking about processing checks. And while you and I probably don't write a lot of checks anymore, small businesses still do. And so that's a lot of automation around check processing. That's about, call it 22% of that payments segment, and the remaining 18% is around our bill pay solutions, and so that's a little bit of a slower grower, a little more mature and saturated product. That's also where you find our Payrailz. Our latest acquisition is in that payment space, so it's much more around our payment hub. That's where you'll see some of the work we're doing for FedNow and real-time payments.
I was just going to ask you about Payrailz, recent acquisition of yours. Talk about what Payrailz adds to the portfolio.
Yeah. So I think people always think it's synonymous with a bill pay, and it is bill pay, but it's much more. So Payrailz was a company we've been talking to for over six years, a great partner. We're starting to get pretty competitive in their offering. One of the important tenets of Payrailz is they're digital cloud native. So it was an accelerant to the work we were going to do on our PayC enter to modernize it. So through the acquisition, we got a modern digital cloud native platform. It has not only P2P bill pay, but it has account to account. It has a P2P offering, and it has a lot of different rails that allow us to evolve that platform.
All right. Let's talk a little bit about now the go-to investments and growth initiatives at Jack Henry. So you highlighted credit processing as one of the areas that you have recently re-entered. Talk about what, you know, this strategy, what made you decide to get into credit processing and what unique capabilities are you bringing in that space?
Yeah. I think as we think about banks and credit unions looking for diverse streams of revenue, you know, they've been operating at pretty thin net interest margins for some time. And prior to the rates being raised, they were operating at like zero interest rates and net interest margins. And even though rates are much higher, you know, first they saw a more rapid increase on the loan side, but deposit rates are now creeping up too. So again, they're going to operate at pretty thin net interest margins, but they've been doing that for a number of years now and have learned how to get diverse sources of revenue.
Well, credit is one of those. A lot of banks and credit unions stepped away from credit because fraud was so expensive for them. Unlike the big banks who can kind of take it a little bit more, if you're a smaller institution, the impact of fraud can be quite substantial. So I would say the democratization of fraud prevention tools have enabled these institutions to kind of step back into credit. We also offer through our partnership with TIB a full-service kind of end-to-end credit program for those who don't want to manage it themselves. And so that's been a keen interest as people have been kind of stepping back into it, but don't want to go full scale.
Yeah. And interest. So what, out of curiosity, really like in your customer base, what types of credit programs are you seeing them launch? Are these consumer or a lot of it small business? What types of programs are they?
A little bit of both, I mean, frankly, but a lot and also just in the retail side.
In retail, yeah.
Yeah.
Let's see. You've commented and talked a bit about the technology modernization you highlighted. Looking forward, what are some of the on the horizon, what are some of the new capabilities that will be coming down the path as you continue with your modernization initiatives?
Yeah. Well, I think there's several that we've launched just in the last two years and about to launch that we're pretty excited with that will keep us at the forefront for the next several years. So I talked a little bit about our Financial Crimes Defender product. Also, our treasury management was completely rewritten, and you have LoanVantage and some of our OpenAnywhere. So a lot of those products will continue to kind of be the larger performers as well as Banno Business, which is growing off of zero base from this year as we launch it for next year. So I think those will continue.
You'll continue to see us putting some of the modules of Origin out into production over the next couple of years, but it'll still probably be about four or five years till you see the full suite of Origin modules out there.
All right. You mentioned FedNow a little bit earlier. You've been quite involved as Jack Henry with FedNow and some of the other faster payments programs. Can you talk a little bit about Jack Henry's involvement and what your strategy is around faster payments?
Yeah. Our team spent a lot of time in D.C. over the last couple of years. We've been working with the Fed since day one. We have customers in beta with the Fed. As of now, we will be one of the first transactions in July on the new rails. We're seeing quite a bit of interest from our customers. Today, there's been some reluctance to join things like Zelle. It is quite expensive for smaller financial institutions, and now with the question of like who will be responsible for the fraud on Zelle, so they're really excited about an alternative channel, so that's where FedNow fits. I think some of the use cases, not everything has to be instantaneous, but there's a lot of use cases both for the business side, but also retail side.
One of the things that the Fed has been thinking about and the Treasury Department has been thinking about is what are payments they can control. If you think about VA benefits, for example, or Medicare or Social Security stuff or paying your taxes, like there are things they can mandate usage of to really accelerate the adoption of those rails. The nice thing about the Jack Henry payments platform, and I say it's just that, it is a hub platform, is you can say, "Hey, I need to pay, you know, Mimi or I need to pay, you know, my utility bill," then you can choose what method. Does it need to be there real-time or is it something that you're happy to wait a couple of days?
So we really make that up to the FI and up to the end user of how what channel and what rails do they want, but they're all turned on for the use of the hub. So once you get the hub in as a platform, as an FI, then you can just, you know, turn on and off rails as you see fit.
Yeah. And maybe that was going to be my follow-up question. With FedNow and maybe also comment with Zelle or with RTP, the existing real-time payment system, if they're all integrated through your payments hub, correct?
Yep.
And then from a small bank, one of your customers' perspective, do they, how do they make choices? Are they just all available to them or is there, you know, do they pay differently depending on what they choose or what drives their decision process about what gets activated or not?
I think it's probably going to be a blend, right? It's the expectation of their end users and customers and members. I think as things grow in popularity, there's the expectation that their FI would support that. I think there's been some reluctant use of Zelle. Frankly, it's quite expensive for a financial institution and they don't make much money off of it. It's really a closed loop system. The beauty of something like a Payrailz and some of the payment solutions they offer is it's open loop. So right now, if we want to send money to each other on Zelle, your bank has to be on Zelle, my bank has to be on Zelle or it doesn't work.
But in the Payrailz system, I can just send you a text or a message and you can say, "Yep, I want it in that," or, you know, we can send money whether your bank is on the system or not. So your bank doesn't have to be a Payrailz bank to support receiving. And I think the Fed is going to encourage that as well. We're encouraging our institutions to at least turn on receiving so that they can get those inbound and then up to them on the adoption of the outbound use of that rails.
So, Payrailz, does it currently will it work? Will it be riding on FedNow, the Payrailz service?
Yeah. Yeah. So we'll be live and up on using the FedNow service.
Yeah. Yeah. Okay. All right. Do you, well, you mentioned things like VA benefits, certain tax payments, et cetera. Do you anticipate there being like a Fed mandate as you highlighted around it? How do you, I guess maybe the broader question is, how do you see the adoption or evolution of FedNow kind of rolling out?
Yeah. I mean, I think they have certainly more leverage than, you know, the average system to encourage adoption. I think what they're trying to do is build use cases that add value to the FI and to the end consumer. But certainly relative to other closed loop systems like a PayPal or a Venmo, I think it's going to grow quite well and be more ubiquitous.
All right. Okay. Let's turn to the Jack Henry investment profile. How would you, for maybe some investors less familiar with the Jack Henry story, when you've come in now, new to Jack Henry over the last nine months, how would you characterize the investment profile, meaning sort of the formula of revenue and growth, operating leverage, you know, cash return, et cetera?
Yeah. So we had our annual investment day earlier this week and I'd encourage anyone to go out to the Jack Henry site and the materials will be there and the webcast will be up quickly. But I outlined kind of my six tenets, putting on my portfolio manager hat, my six tenets around the Jack Henry model. I think the first is just the predictability, the durability of the business model. Being a SaaS model with over 90% recurring revenue and customer retention of over 99%, you know, it's pretty predictable in its nature. It's very limited in the macro sensitivity, probably only about 20% of the model of revenue touches consumer spending related, and that's mostly around payments and digital, for example, sorry, not digital, but debit transactions.
So just the resiliency of the model I think is something to keep in mind. The second is there's a lot of tailwinds that are really helping us not only from revenue growth, but from margin expansion. So if we think about the migration from on-premise where people have their servers in the basement to our private cloud, we're about 69% today, private cloud usage that continues to grow at a nice healthy stream. We don't think we'll ever get to 100%. Some people just like those machines in the basement, but we think you'll probably get to the high 90s. So there's probably about a seven to ten year runway left at attractive up revenue and up margins for that.
And just the growth of our underlying customers, both organically, inorganically helps for the model. There's a lot of diverse revenue streams. We talked about paying Jack Henry both on number of members, number of customers, number of transactions in Banno's case, number of active users. So just a diversity within the revenue model itself. And then I think the other is a strong cash flow generation and a return of capital to investors. We're 34 years of increasing our fiscal years, I should say, of increasing our dividend policy and a history of returning excess capital to shareholders. So I think the high recurring, I like to say the software, the magic of software. When you have high recurring revenue with nice attractive margins, it's just a beneficial virtuous cycle there.
Good, so what have you outlined as the sort of medium-term financial objectives for Jack Henry?
Yeah. So we've talked about the growth algorithm of those three segments between our core, our payments, and complementary together totaling about 7-8% growth on a, you know, kind of normal average year if we think about the next three years or so. So it doesn't mean to say like we can't in any given year produce higher and we certainly aim to do so, but that gives me sleep at night comfort that the model itself, you know, barring any extreme recession, you know, is going to produce very healthy single-digit returns.
All right. Good. And then similarly, what is your capital allocation philosophy? How do you think about, yeah, M&A, for example, or other CapEx versus returning shares?
So while I've been in the role about nine, ten months now, I think more will stay the same than change. We continue to be a very conservatively led company. You know, coming in just the clean, high-quality earnings growth strategy. You know, we are truly a GAAP EPS. There's not a lot of adjustments. I'm used to working for companies with, you know, or EBITDA because there was a lot of adjustments. We're a GAAP kind of reporter. So just a conservative balance sheet.
We have no permanent capital in our structure. We have a history of quickly paying down any strategic debt, a history of returning capital to shareholders, and I think that'll continue. So as I see priorities, it's obviously maintaining operational liquidity. It's paying dividends. It's innovating for the future through our 14% R&D growth. It's looking at acquisitions that may be opportunistic and returning capital to shareholders.
Are there any particular areas on the M&A side, especially as we've seen, you know, private company valuations come down now over the last, you know, 12-18 months that are of a particular focus for you?
They've come down and they're going in the right direction, but I wouldn't say they're very active, and we are a very disciplined buyer, so we did not chase a lot over the last three years. You did not see us doing a lot of purchasing, and the company has been quite acquisitive in the history of over 50 deals in the history of the company, so we consider ourselves a very experienced and skilled buyer, but we're not a chaser, and the reality is the model of growth isn't reliant on acquisitions. The moment a lot of people ask, you know, what type of sectors are you guys interested in? And at the moment we don't have a lot of gaps.
So, we're happy when that, you know, valuations are just out of our kind of price point or we don't see quality names. We're happy to turn that attention inward and do internal development, which not everyone can say they can do both. But if I would have to say in terms of the types of things that we look at, digital cloud native from a technology perspective, things like Payrailz that accelerate our modernization strategy, and things that are additive to an existing product that we have. So we like to take a lot of like little pieces maybe in a space that we're already in and then that gives a more robust modern solution. And Payrailz was a good example of that.
All right. So now that you've been in the seat for nine months, you just got through the Investor Day a couple of days ago. Look out now over these next couple of years. How will Jack Henry, you know, look different over the next two to three years?
Yeah. So looking forward to getting through budget, first of all. So before I can even think about the next three years, looking forward to just getting to 2024. And I think we feel really good about this year. It's been a bit of an unknown and a bit of a roller coaster with M&A in the segment that's led us to have different expectations for deconversion revenue in our conversion and merger business. But overall, we feel like our customers are in good financial shape. You know, we're not, we don't have our head in the sand. We know there's some things around upticks and delinquency and commercial real estate that we're all monitoring. But for the most part, we see our customer base as good, financially sound, and growing.
So I think as I look out over the next several years, we see the increased size of our customers through organic and inorganic. As I said earlier, I wouldn't be surprised if we're sitting here and we're serving a $75 or a $100 million dollar, a $100 billion dollar rather, asset size institution. I think in that three to five year continuing down our tech modernization and also just a return back to the importance of margin expansion. It's a big part of our investment thesis. The last couple of years have been ups and downs, the benefits from the pandemic and then inflationary headwinds that we've all seen through the cost of R&D talent and other elements. So getting back to a period of more normalized margin expansion as a CFO is something that I look forward to.
All right. And for you personally, what are the, in addition to the budget, what are the top couple of things that you're personally focused on within Jack Henry?
One of it is just spending more time with our customers. You know, I've always been at that intersection of finance and technology. And when I was working in wealth management, we had a lot of credit unions and banks who we offered wealth management services, but just spending more times with our customers. And with over 300 solutions, I've just been kind of learning more and more. So that's kind of, I would say, one of the focus areas for me.
All right. Good. And if you had to pick one thing in terms of the whole suite of growth opportunities ahead of Jack Henry that you're the most excited about, what is it?
There's a lot right now, and there's a lot, you know, that's the nice thing about having such a big portfolio is you never know, you know, who's going to be your next home run flyer. We have a small product, an acquisition that actually Vance led called Agiletics. And you know, it does, and this is going to sound really sexy to you, Lisa, but it does sub-escrow accounting for deposit. So if you're a law firm and you do a lot of escrow, it allows you to have a parent-child relationship. Akin in wealth management, I would call it segregated management portfolios, but right now, with deposit gathering being the number one thing on FI's mind, it helps them gather more deposits.
So like seven months ago, I would have said, "Oh, that's a product." But you know, all of a sudden in the last quarter, we have six new deals that we've closed on this small product. So you just never know what FIs are going to need. But the nice thing about Jack Henry is the breadth of us being a well-rounded financial technology firm, we're going to have a solution for them.
Yes. Well, I once had one of the CFOs of one of our big payments companies say to me, "Lisa, in our world, settlement is sexy." I was like, "Yep." So how about let's just close with the Jack Henry investor pitch. So how would you frame, you know, this sort of elevator pitch for an investment in Jack Henry?
Yeah. I would say, you know, overall, we're a durable grower, so the predictability of our model, the high recurring revenue, the SaaS model in and of itself, it's just layers and layers of growth and diversification.
All right. Excellent. Mimi, thank you so much for joining us.
Thank you so much.
Congratulations on the new role at Jack Henry and all the best of luck. We look forward to working with you.
Thank you guys all for joining.
Thanks.