The desire to source technology solutions from one vendor rather than several is on the rise among banks and this is helping to feed an M&A trend, believes Jim Wilson, president of the international division at Fidelity Information Services. Interview by Michael Imeson.
It is not so much an acquisition trail as a voyage of conquest. Fidelity National Financial (FNF), number 326 in the Fortune 500, has picked up five US banking technology companies in the past 12 months and is on the look out for more.
Based in Florida, FNF is one of the world’s largest providers of technology products and services to the financial services sector, through its subsidiary Fidelity Information Services (FIS). Last month, FNF announced that it was acquiring Aurum Technology, a provider of processing services to US community banks and credit unions, for $305m. In January, it announced its acquisition of Sanchez Computer Associates, a provider of software and services to about 400 financial institutions in 22 countries.
Last year, it bought three companies, starting in April with Alltel Information Services (renowned for its Corebank product), which it renamed Fidelity Information Services. This was followed in May by the acquisition of Hamilton and Sullivan, a provider of online banking, wire transfer, cash management and account analysis software products. In September, it purchased WebTone Technologies, the developer of TouchPoint customer management software.
Seeking dominance
Who is on the takeover list this month? FIS’s Jim Wilson cannot say. What he will say is: “Our stated core intent is to be the dominant provider worldwide of financial systems software and servicing.”
That is a huge ambition. William Foley, FNF’s chairman and CEO, will not be happy until half the company’s revenues are from banking technology. As the group’s revenues last year were $7.7bn (yielding profits of $860m), and the combined revenues of the companies it has picked up since last April are about $1.5bn, there is a lot more empire building to be done.
Mr Wilson, who has been at FIS and its predecessors since the 1970s, says that FNF’s strategy is to diversify. FNF is the largest property title insurer in the US but it is a cyclical business: when interest rates rise and mortgage volumes fall, demand for title insurance falls, too. “It becomes a little bit more difficult to maintain the same growth patterns that shareholders expect,” he says euphemistically.
The solution has been to look beyond “the rate-sensitive business model” of title insurance and its related products and services, “towards a recurring revenue model”, says Mr Wilson. Banking technology fits the bill nicely – hence the acquisition of Alltel Information Services and the other companies.
Other technology vendors have adopted similar strategies. “To be a dominant player, you cannot get there through organic growth,” says Mr Wilson. “You have to acquire. So there are some companies in the industry that have taken the acquisition route.”
Core banking
FIS’s range of products includes:
- core banking applications (Corebank), which is by far its main business internationally;
- consumer lending applications (Advanced Lending Solutions);
- and a commercial banking system (Advanced Commercial Banking System).
It also provides technology implementation and training services.
Many banks, even among the top 100 global banks, are still operating outmoded core banking infrastructures (often based on mainframe applications using Cobol and even older programming languages) that are ill-suited to today’s banking environment. They are difficult to integrate with newer applications, such as online banking, real-time processing and cheque imaging. Programmes are hard to manage, with numerous lines of code and outdated programming languages. Upgrades can be confusing and time-consuming.
New systems offer welcome benefits. They can integrate with newer, third party applications. They are more flexible and more cost effective. They are scalable, faster and operate in real-time. And they have the ability to run customer relationship management programmes.
There are two important questions for banks, says Mr Wilson. Do they replace their legacy core banking systems in one fell swoop or piecemeal? And when they replace, do they build in-house, commission a bespoke product or buy an off-the-shelf packaged solution?
“In the past two years, we have had some significant deals in our Asia Pacific markets that have been full core system swap outs,” he says. “But in Europe you do not see that happen in institutions of any size. They want to replace their core banking component by component, rather than tear everything out and put in something that’s all new.
“And packaged solutions are becoming more popular. Banks realise it makes a lot more sense than continuing with bespoke or in-house developed solutions.”
One-stop shop
Banks desire to source their solutions from one vendor rather than several is on the increase. “For example, we are putting together a proposal right now for a prospect that includes our core banking product, the TouchPoint front-end solution, and the Sanchez wealth management offering,” says Mr Wilson. “That’s a story we think very few companies in the market place will be able to tell.
“Banking is a relationship-oriented business. Many chief information officers would rather have a relationship with someone who can provide multiple product sets, rather than go to the trouble and expense of having a number of individual relationships.”
Large vendors, with their economies of scale, have a distinct advantage in supplying low cost solutions, such as cheque imaging and ATM processing.
Tried and tested
Providers of technology-based products often fall into the trap of believing that just because they have developed something new, that is what the customer wants. In reality the customer often wants something that is tried and tested. “They will make business-driven decisions,” says Mr Wilson. “They are not necessarily looking for the latest technology but for something that is functionally rich and predictable in the way it runs.
“Vendors have to keep up with the latest technology, such as the ability to port with Java platforms and have WebSphere discussions around front ends. But they must also have discussions with heads of retail lending who do not care what technology their lending products run on, as long as they can create the right products.”
WebSphere is IBM’s next-generation transaction processing middleware, which FIS will use for its future core banking product.
Regional differences
Around the world there are significant differences in some of the base requirements. “In Germany, France and the UK, for example, I would say IBM’s DB2 database technologies are pretty much the base set of requirements, whereas in the US, surprisingly, even among the largest banks, DB2 is not really part of their core system processing,” says Mr Wilson.
European and US technology dominates the global scene but most large developing countries have some home-grown applications. In northern Asia, institutions in China and South Korea, for example, will buy from the big names because they are keen “to pick up some of the best practices that have been put into this software and are in use around the world”, he says. But they will also deal with local vendors.
In eastern and central Europe, banks find it more cost effective to operate Unix rather than big IBM platforms. And they still need to invest more in modernising branch processing and taking some of it out of the branch environment, says Mr Wilson. “There is real opportunity for branch modernisation to help take costs out of equation and deliver a better service for customers.”
Therein lies the nub of the story. Reducing costs and improving service is what banking technology is all about. In the past four or five years, banks have done everything they can to take cost out of the equation. It would be difficult and foolish to predict what they want next, says Mr Wilson.
“You would be in a dangerous position if you tried to build your software in anticipation of what you thought a customer would need in the future,” he says. “Only the banks will know what they want. Technology suppliers need to keep close to the banks to see where the market is heading and then readily adapt to what their requirements are.
“We have staff working with the biggest financial institutions in the world, talking to them every day about the future direction of banking products and services. It’s those conversations that drive our development agenda, not having some smart people in our company sitting around figuring out where we ought to go next. That would be the road to doom.”
