American Banker  |  Thursday, November 13, 2008

By Jeanne Capachin

Print Email Reprints Feedback

Information technology investments by financial institutions keep the FinTech community afloat, and at a time when spending will certainly be under increased scrutiny, vendors must become more creative in their approach to this market.

Even though Financial Insights is still projecting spending increases in the banking, capital markets, and insurance sectors, the increases will be at a slower rate than they have been of late. Over the next five years worldwide external IT spending will increase at a rate of 5.5% for banks, 5.2% for capital markets firms, and 4.8% for insurers.

As North American and European institutions use global sourcing to manage staffing and minimize costs, much of the increase in external spending will be offset by reductions in IT and operations staffing.

Many would perceive the FinTech industry now as likely to see slow spending, but there are ways to find revenue growth within an anemic overall market. For vendors to grow at double-digit rates and convert a dull market into a dynamic one, there are a few strategies they can employ.

First of all, they must know where they are in their growth curve — are they emerging, growing, maturing, or aging?

Emerging firms have identified an opportunity and found that causal factors exist to spur investment — they are experiencing strong growth.

Causal factors may be new regulations, newly mature technology offerings that are spurring technological updates, or business opportunities that institutions can exploit with a new offering.

These firms find the most rapid adoption within the capital markets industry, and most are too small for a spot within the FinTech 100.

Many are still using venture capital funding. They may not be cash flow positive, and they generally have a very specialized offering.

Growing firms are those that are moving quickly up the FinTech 100 rankings. They are serving acknowledged opportunities. Demand for their offerings is accelerating, and they are competing against a broad field of competitors that may or may not have staying power.

FinTech 100 firms in this category include Infosys, Vasco Data Security, and Wall Street Systems. These are companies that are growing faster than the industry as a whole and are well aligned with current industry issues, allowing them to exploit high-spending areas that still exist within the industry, despite the economic downturn.

For Infosys, the issue is the need for global sourcing with expertise in the financial services sector. For Vasco, it is the increasing security and online authentication requirements as online channel use rises and regulation evolves to keep up with new threats. For Wall Street Systems, it is complex accounting and risk management needs that require sophisticated treasury and trading services to maximize investments and ensure compliance.

Maturing firms have experience in the market, usually a suite of offerings, and strong market position with their core products. Revenue growth for these firms is slowing as penetration expands and their offerings are viewed as standard requirements. Overall, their growth comes from acquisition, penetrating new markets, and stealing competitors' clients.

Most of the core banking providers find themselves in this category, and for most, investment in ancillary technologies is driving growth.

The core banking clients remain a steady stream of recurring revenue, but for these firms to increase revenue, they must be ahead of the technology adoption curve with offerings in mobile banking, analytics, and security that can reach into high-growth areas of spending.

Once firms hit the aging stage, their revenue is flat or declining. These firms may have a solid offering, but in a market where the number of institutions is shrinking, new offerings are required to sustain growth.

Stratus is an example of a company that once was the beneficiary of strong bank spending when its fault-tolerant hardware was necessary to support many banking functions. Now that additional options are available, it is diversifying by offering a lower-cost, software-based approach and focusing more on other industries, such as public services, where its hardware-based approach is mission-critical.

Depending on their stage in the life cycle, companies have options to stimulate growth beyond the 5% range that Financial Insights is projecting for this segment. For emerging and growing firms, the focus should be to continue exploiting opportunities. Regulatory compliance, risk management, document management, and efficiency will be hot investment areas through the rest of this decade.

Also, firms targeting emerging markets are benefiting from accelerating investments in channels and consumer credit as the middle class grows and cultures shift to embrace credit through financial institutions.

For firms that are maturing or aging, growing faster than 5% will require reaching new markets.

The FinTech 25 list contains great examples of firms that see growth potential in financial services and are acquiring capabilities to tap into that potential. Oracle's acquisitions in software companies are expanding its reach. EMC is acquiring more services aimed at content management and work flow.

Also, SAP has acquired Business Objects and is partnering with several FinTech 100 firms (including SunGard and Callatay & Wouters) to expand its reach and capabilities.

Looking ahead to next year, each segment of the financial services industry has specific business initiatives that will drive their IT spending and revenue for FinTech vendors. Respondents to IDC's Annual Vertical IT Solutions Survey this summer provide the following insights into the priorities of U.S. banks.

In banking, buyers reported the following top five drivers: improving profit margin, increasing sales volume, meeting compliance requirements, retaining customers, and introducing new and/or improved products and services at a faster rate.

These were the top five drivers in insurance: increasing sales volume, retaining customers, improving profit margins, introducing new and/or improved products and services at a faster rate, and ongoing competitive pressures.

And these were the top five drivers in capital markets: improving profit margins, meeting compliance requirements, reducing operating costs for non-IT functions, increasing sales volume, and introducing new and/or improved products and services at a faster rate.

As this research indicates, beyond just doing business better, compliance remains and will always be an investment driver.

Investments that are simply nice to have will not make the cut, and many institutions reported that even budgeted projects have been put on hold or terminated until they can get their financial houses in order.

CIOs face a difficult balancing act. Business owners are continually looking for market advantage, but they also expect lower costs. Just maintaining infrastructure is an ever-increasing expense — executives report that even without any business growth, storage requirements are increasing 20% a year. To maintain balance, CIOs look to cost takeouts so they can continue to invest in business opportunities.

The growth in global sourcing is an outgrowth of this balance, as are the virtualization and document management offerings that can reduce costs.

Successful FinTech vendors will succeed in the face of fewer business opportunities. They must manage their research and development efforts and balance their cost structures against more unpredictable revenue.

On the bright side, financial institutions cannot shut off their reliance on new technologies. As a business of digital content rather than physical products, IT is at the heart of what they do.

Jeanne Capachin is research vice president for global banking at Financial Insights, an IDC company.

More articles in Technology