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By Michael Eggebrecht
With the financial crisis pushing banks to delay or suspend technology projects, large IT services vendors have been turning to midsize and smaller banks to bolster their bottom line. However, that expansion has put them on a "collision course" with core banking processors, according to a new report from research firm Aite Group.
Large IT services vendors such as Accenture, Infosys, TCS and Wipro have become a fixture in the banking industry over the past ten years, focusing primarily on big banks like Citigroup and HSBC. But with spending at those firms shriveling, the vendors have had to look elsewhere.
For smaller banks, that has opened up choices, according to Gwenn Bezard, research director at Aite and co-author of the report. Due to vendor consolidation, most of the thousands of U.S. banks have had access to only "a handful of major vendors that are very difficult to escape," said Bezard. As traditional IT services providers "go downmarket to more midsized banks, instead of just the super-large ones, you have an opportunity for banks to diversify their vendors."
The banking industry is contracting rapidly—Aite predicts that 750 firms will fail or be acquired this year—but that also presents an opportunity for IT services providers, at least in the short term. "When the bank is acquired, obviously you have some system conversion that needs to take place," said Bezard. "It's not a discretionary expense—you have to do it." The Federal Deposit Insurance Corp. has stressed that systems integration has to happen quickly, which presents an opening for IT services vendors to step in and help.
But as the large IT services providers focus on smaller institutions, they are entering a space dominated by core banking processors, who in turn are broadening their horizons to include IT services.
The major core banking processors—Fiserv and Fidelity National Investment Services, which is in the process of acquiring Metavante Corp.—are expanding their business beyond software applications and processing services, according to Bezard. "While IT services revenues are still a fraction of core banking processors' total revenues, the sheer size of their revenues in financial services and the dramatic size of their financial institution customer base highlights the potential for fierce competition," says the report.
But to build the scale needed to compete with companies that are generating a few billion dollars in revenues from IT services, Bezard believes that acquisitions will be necessary. "The beauty of the situation," he noted, "is that you have a number of midsize IT services vendors that potentially represent good acquisition opportunities." Exigen Group, Mastek, Neoris and Sapient are among the companies Aite lists as midsized providers.
Big IT services vendors may also look to purchase smaller core banking processors, which have not until now represented likely targets. "The IT services business is a pretty high-margin business," said Bezard. "Core banking processing is more a slower-growth, low-margin type of business. For many years it was not very attractive to make an acquisition because if you acquire one of those slower-growth, lower-margin businesses, it's not going to look good to your shareholders." But margins are going down across the board, he added.
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