When banking and financial-service firms invest in technology, IT firms usually laugh all the way to the bank.
That trend seems to be fading a bit now.
Here is a case in point. In the quarter that ended in June 2020, the top five global banks — JP Morgan, Citi Bank, Bank of America, Morgan Stanley and US Bancorp — increased their investments in technology, especially in the wake of COVID-19.
Though IT firms did benefit from the move, the pie was much smaller.
Should IT firms worry?
Well, when they look at where the other part of the investments went, they have reasons to worry.
IT firms now face competition from cloud-service providers and banks’ in-house teams or captives (in-house technology teams in countries other than their headquarters).
According to a report by brokerage firm Motilal Oswal, JP Morgan, Citi Bank, Bank of America, Morgan Stanley and US Bancorp invested close to 7 percent in digital operations in April-June 2020 compared to 5 percent in Jan-March 2020.
IT firms should have ideally seen a proportional increase in their BFSI revenue. However, for a majority of the top players, except for Infosys and HCL Tech, it turned out to be the reverse.
On a year-on-year and constant currency basis, for the quarter ended June 30, 2020, while Infosys’ BFSI revenue saw a 2.1 percent increase, HCL Tech’s saw an 11.7 percent increase.
Other IT firms like TCS, Wipro and Cognizant saw a BFSI revenue decline of 4.9 percent, 6.9 percent and 4.3 percent, respectively.
Banking and financial services account for over 30 percent revenue for IT firms. For HCL Tech, it accounts for about 22.4 percent.
Why is this shift happening?
There are broadly two reasons. Pareekh Jain, founder, Pareekh Consulting, a technology consulting firm, explained that investment is going to cloud and software-as-a-service providers for products and platform services.
Aaditya Jain, Practice Director, Everest Group, an IT consulting firm, cited the recent long-term and strategic partnerships between banks and cloud-service providers such as Amazon Web Services (AWS), Microsoft's Azure and Google Cloud.
HSBC's partnership with AWS or Deutsche Bank partnering with Google Cloud are other instances.
"Also, BFSI enterprises have witnessed an accelerated adoption of third-party products/platforms such as Finastra, Temenos, Murex and Guidewire that has shifted the spend with such product firms over IT service providers," Jain added.
In addition, banks are investing in in-house IT teams and captives.
The Motilal Oswal report attributes this shift to the delay in giving compliance approvals and migration to the remote-work model by banks. Jain pointed out that while approvals were indeed delayed, these banks, over the last couple of years, have increased their strength in captives.
A senior employee in a top IT firm in India, who have worked with one of the top five banking clients for five years, said that outsourcing from banks had come down from what it was a few years back.
Glimmer of hope for IT firms
Top IT firms at least would not lose the game, for they have all gained from vendor consolidation. Case in point is the Vanguard deal Infosys won last month.
Infosys and US wealth management firm Vanguard announced a strategic partnership on July 14 for modernising and supporting Vanguard's record-keeping business. The deal is pegged at $1.5 billion, according to a Times of India report.
An analyst pointed out that some of the top service providers have cut their pricing in exchange for increased volumes from existing banking customers. “This is a market share gain from smaller IT service providers,” the analyst added.
Going forward, products and platforms would be a key differentiator if outsourcing firms want to increase their pie in banks’ digital initiatives.
This is what C Vijayakumar, CEO, HCL Tech, pointed out in a recent interaction with Moneycontrol.
“The whole digital foundation aspect and the need to strengthen and need to invest, be it security, cloud… are very important for these long- term clients. I do think investments in those areas will continue,” he had said.
HCL Tech saw a 77 percent jump in products and platform segment on year-on-year basis for the quarter ended June 2020.
During a recent interaction with Moneycontrol, V Ramakrishnan, CFO, TCS, had said that traction for its banking product BANCs is gaining momentum.
Infosys has its digital banking suite Finacle. CFO Nilanjan Roy had said during a press briefing last year that it was seeing wide adoption.
Jain of Pareekh Consulting has some more good news for IT firms. “Banks are unlikely to invest heavily and scale up in niche areas in-house. They would rather outsource them. This includes areas such as cybersecurity and analytics, which are huge focus areas for all IT firms, which have been stepping up their capabilities there,” he said.