There can be little doubt that this year has been one of the most challenging on record for the financial services industry. Read original article.
With a growing number of banks failing and many more struggling, investing in technology may not be a top priority — or even feasible in some cases. That means that the companies that are ranked in the fifth annual FinTech 100 Special Report are also facing challenges.
Some financial companies, of course, will see this turbulent period as a good time to upgrade. Others have been forced to pare back their spending. And some are looking for cost-effective ways to install the systems necessary to comply with industry regulations. These changes will force FinTech vendors to become more creative in how they approach potential customers. (See related story.)
One major wild card in the FinTech sector will be the efforts to overhaul banking regulation. In March, Treasury Secretary Henry Paulson called for drastic changes at the agencies that oversee the financial sector. By October, with banks increasingly burdened by subprime mortgage debt they could not get off their books, he proposed a massive bailout aimed at freeing up the flow of credit and stemming the industry's cascading losses.
As this report goes to press, it is still unclear exactly what these plans will require. But certainly there will be far-reaching changes affecting all sectors of the financial services industry — banking, capital markets, and insurance. Prudent institutions and vendors will try to predict and plan for these changes.
Regulatory change typically spurs investment in areas such as analytics, reporting, document management, and core systems. Vendors in these fields are likely to benefit once new regulations take effect. (See related story.)
Given that much of the current crisis has been linked to poor underwriting decisions, it's not surprising that one group of vendors making gains in the FinTech rankings provides tools designed to improve analytics, decision-making, and risk management. (See related story.)
The largest of these firms are SAS (which jumped from 19th to 13th on this year's FinTech 100 list), Experian Group Ltd. (which jumped from 27th to 14th), Equifax (from 24th to 16th), ChoicePoint (from 25th to 17th), and Fair Isaac (from 23rd to 19th). Each of these firms provides technology designed to improve decision-making by combining data elements with strong analytics. This trend was visible last year, remains strong this year, and is expected to continue next year. The technologies offered by these firms have matured, and the need for them has become even more critical.
With hard times facing the banking industry, many FinTech vendors have started diversifying into other industries. CGI, Unisys, and Infosys have reduced the percentage of their revenue generated from the financial services sector, to the point where that percentage now is less than a third. Since that is the cutoff point for companies to earn a spot on the FinTech 100, all three made the jump to the Top 25 Enterprise Companies list. Smaller firms such as Stratus Technologies and Comsys also left the FinTech 100 for that reason.
Since the current rankings are based on 2007 data and vendors are continuing to look at other markets, it seems prudent to expect that trend to continue in next year's rankings.
Acquisitions removed some other companies from the FinTech roster, including Reuters, Bisys, CheckFree, Corillian, eFunds, i-flex, Kanbay International, and Digital Insight.
Fiserv returned to the top of the FinTech 100 list. After topping the list for the first three years, it was nudged to second place last year by Fidelity National Information Services. With Corillian (89th last year) and CheckFree (20th last year) now part of Fiserv, its FinTech revenue exceeded $4.3 billion, reflecting the acquisitions and organic growth from its Fiserv 2.0 initiative.
Fidelity National is close on Fiserv's heels, with $4.2 billion. However, the July spinoff of Lender Processing Services made it a smaller company more focused on payments, processing, and core systems. We expect Lender Processing Services to join the FinTech 100 next year.
Acquisitions are also driving some strategic shifts, notably at Hewlett-Packard, which purchased Electronic Data Systems in August and is hoping to become more of a rival to IBM in bank information technology outsourcing.(See related story.)
HP and the others at the top of the Enterprise Companies list — IBM, Dell, Fujitsu Ltd., Cisco Systems, and Microsoft — all reported more FinTech revenue than Fiserv. These firms are fueled by financial institution investments in areas such as service-oriented architecture, data center transformation, virtualization, hardened networks, and outsourcing. In many institutions, chief information officers are leading huge technology initiatives, and they are partnering with these firms to meet their goals, including the ones related to cost containment.
It has been five years since the FinTech rankings were created, making this is an appropriate time to review some trends.
Of this year's FinTech 100 companies, only 47 made the inaugural list. Many of the companies that did make that list have since been acquired.
The U.S. FinTech market is the largest for packaged software providers, but some significant foreign players well known to banks here made the rankings — and not just the Indian firms. Companies such as Politec, Temenos Group, and Murex are rapidly moving up the list, proving that FinTech vendors are a truly global lot.
It is also true that revenue continues to increase for the FinTech 100 members, and the bar has risen each year. Making this year's list required a minimum of $36 million of FinTech revenue; the initial list in 2004 required a minimum of $16 million.
By contrast, the Enterprise Companies list has remained quite stable. The top spots have been dominated by IBM and HP, which offer an extensive range of products and services to banks and employ legions of financial services experts to guide their strategies.
In the future, cost containment will be front and center. To continue to increase their revenue, FinTech vendors will need to find new areas where banks are willing to spend. Vendor management and contract negotiations are a key competency for all large institutions, and ever-increasing expenses are unlikely to be approved for products that only maintain the status quo.
In mature markets, institutions are investing in risk management, automation, some customer-facing applications, and compliance. Newer markets are still experiencing double-digit growth, but macroeconomic conditions will play a role.
Buyers in financial services are very savvy, and they will be even more demanding next year. This promises to shake up the FinTech rankings again.
Ms. Capachin is research vice president for banking at Financial Insights, an IDC company. Mr. Wade is the technology editor at American Banker.
