We've all had a tough year, enough bad news. We could begin this article with a recap of the dismal global economy, the worst recession in modern times, the record number of bank failures, etc., etc. But instead some good news: In a year where there were huge structural changes and consolidation in financial services, the top 100 financial technology firms actually saw their revenue grow. The 100 companies on the 2009 FinTech 100 had combined revenue of $52.8 billion, an almost 10% increase from last year's $48.1 billion.
So in the sixth year of the FinTech 100 the bar continues to rise. Last year $36 million in revenue from the financial services industry was enough to land a company on the list. This year it took more than $50 million.
Fiserv maintains its position as the leader of the FinTech 100 roster. There are not many changes among the rest of the top 10, with a few notable exceptions. SunGard, Diebold, NCR, TCS, First Data, TSYS and Metavante Technologies all boast solid 2008 performance. So solid, in fact, that their performance caused CA to drop from the top 10, from No. 8 in 2007 to No. 12 in 2008, even while CA maintained healthy growth itself.
Typically, the growth of FinTech 100 companies has come from merger activity. However, in 2008 merger activity was anemic. In fact, the biggest movement within the top 10 was a spinoff as Fidelity National Information Services gave wings to Lender Processing Systems. This move caused Fidelity to drop from second to third place on our list - but not for long. Fidelity surprised most in the industry with its April Fool's Day announcement to acquire Metavante. We expect Fidelity to vie for the top spot again in 2009.
Fidelity's move for Metavante confirmed the trend toward larger, more diversified providers striving to offer a broader spectrum of products and services to their financial institution clients. In the coming years expect to see companies continue to grow through acquisition, especially the core vendors as they add to their competencies with adjacent and integrated offerings.
Four 2007 FinTech 100 companies were acquired during the year: ChoicePoint, by Reed Elsevier (No. 17), the parent company of LexisNexis; GL Trade (No. 32), by SunGard, OMX AB (No. 34), by Borse Dubai and, eventually, Nasdaq; and Fermat (No. 85), by Moody's.
As we see each year, there was some interesting movement between the FinTech 100 and Enterprise 25 lists. Last year we saw more companies move from the FinTech 100 to the Enterprise 25, including CGI, Unisys and Infosys as they diversified further and reduced the percentage of their revenue generated from the financial services sector. Infosys has returned to the FinTech 100 this year, as its revenue derived from financial services has exceeded one-third of its total; last year that revenue accounted for just under a third of its top-line total.
One reason it was harder for some familiar names to crack the FinTech 100 this year was the arrival of new names, which in turn can be explained by increased recognition of the list. We welcome 11 new providers to the roster. Congratulations to those from North America: 3i Infotech (No. 32), BancTec (No. 49), Collabera (No. 66), Diamond Management and Technology Consultants (No. 79), and Panini (No. 92) - as well as those from the EMEA and AP regions: HCL, India (No. 25 on the Enterprise list); Longtop, China (No. 62); Mastek, India (No. 69); TAS Group, Italy (No. 78); Nucleus Software, India (No. 85); AurionPro Solutions, India (No. 94); and FRS Global, Belgium (No. 96). While more than 50% of FinTech 100 newcomers are outside North America, 59% of the complete FinTech list hail from the North American region. No doubt the demographics of the FinTech list will continue to evolve with time.
Though revenue of the top 100 companies is higher, that's mostly big companies drawing business from smaller rivals. Overall, IT spending continues to decline. Since the 2007 FinTech 100 issue, IT spending has been downwardly revised across most spending categories, reflecting the impact the difficult economy has had in terms of financial institution consolidation and severe budget cuts. Overall IDC Financial Insights expects global banking IT spend to be a minus - 1.5% CAGR through 2012, with similar negative growth expected in the capital markets segment. Insurance appears to be the bright spot in financial services IT spend, albeit flat instead of declining, a paltry 0.02% five-year CAGR.
AREAS OF OPPORTUNITY
Still, there are a few IT spend areas projected to grow. We can thank the regulators for increasing IT spend on risk management and compliance, as well as the supporting business performance management and financial analytics. Collections and recovery spend is also projected to increase as financial firms labor to mitigate losses. Significant shifts are occurring in the payments space as we see a decline in item processing feeding gains in stored value cards. Continued investments in Internet banking and mobile banking and payments is beneficial to vendors in the sector. Core banking also remains in the black, but increased spending is attributed to keeping the lights on as opposed to the innovation and transformation the industry has been expecting for years. Analytics and business intelligence firms such as Equifax, Experian, FICO, Oracle, and SAS stand to benefit from risk and compliance initiatives. Core providers from across the globe have held relatively steady in positions close to last year's. In fact, three of the top 10 are prominent U.S. core banking providers: Fiserv, Fidelity and Metavante.
The glaring exception is the mobile banking space, where no pure-play mobile vendor has reached the critical size required to make the FinTech roster. Furthermore, with the exception of S1, there are no independent multichannel players any longer, as they have all been consumed by the core providers.
Where do we go from here? Optimists expect the economy to begin to recover in 2010. Pessimists say it will be longer. Both agree it will be a slow recovery. Financial institution customers of the FinTech 100 and Enterprise 25 are declining at record pace, mostly through failures but also through forced marriages and acquisitions. The regulatory waters look murky, and the industry still suffers from battered consumer confidence.
IDC Financial Insights looks at the financial services industry through 2010 with four key themes that will differentiate those companies that will thrive rather than just to survive.
Customer relationship management. FinTech companies will develop solutions which help financial services companies actively manage the relationships they have. The focus has shifted from building the depth of customer bases to broadening the breadth of customer relationships through penetration of additional products and services.
Customer service. The financial crisis has brought about a sea change in firm-specific and systemic risk, now it is time for financial institutions to focus on customer service and financial stability in order to win back the full confidence of both customers and the financial markets.
Back to basics. Many financial services firms will be redefining their business models moving forward. Maintaining stable and growing business models will require redefining customer interactions, product development as well as evaluating each line of business. Institutions will have to strike a delicate balance between finding new efficiencies and growing customer relationships.
Relationship growth, restoration of confidence and redefinition of business models will require new levels of innovation. Look for focus and increased innovation in the areas of core systems, business analysis, risk management and mobile payments. Which institutions will break the traditional barriers of customer service through the use of new technologies? Which FinTech firms are developing new solutions that will change the face of core banking, capital markets, risk management, treasury services and payments execution?
The past year has brought about many changes in the financial services industry, but also created an urgency around efficiency and innovation. The universe of FinTech companies providing solutions the financial services industry is growing and should continue to do so into 2010 and beyond. We did promise to maintain an upbeat view. So let's celebrate 2008, because it probably won't look too bad when we review 2009 a year from now.
Karen Massey is a senior research analyst in Financial Insight's banking practice.