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Bank Tech Vendors Must Adapt to New Market

Bank tech vendors must prove value to survive.

Financial services technology is proving to be a tough market for vendors. Consolidation has been ongoing for the past decade and shows no sign of abating, according to experts. As a result, tech vendors need to take a look at new ways of operating in order to survive.

According to <a href="" target="_blank">Christine Barry, research director with Aite Group (Boston), there's a trend among vendors to more clearly define who they are in order to serve bank clients better. This movement, she says, is being driven by the banks themselves to a degree. "There's a shift in overall bank strategies -- cutting costs is still important, but they also want to increase revenue and acquire new customers," Barry explains. "So vendors are changing their strategies to match those of the banks. They need to clearly define their role in the market and extend their capabilities."

It's all a matter of differentiation, agrees Stessa Cohen, research director with Stamford, Conn.-based Gartner. "There's a lot of M&A activity going on," she says. "You're also seeing the commoditization of certain functionalities, so vendors are looking to differentiate themselves. They are trying to pull together different pieces to create more of a multichannel solution. Companies have to be smart enough to change their business model to adapt with their markets." If a company is a one-trick pony, chances are it will be acquired, Cohen contends.

Norcross, Ga.-based S1 is among the vendors that are getting the message. It underwent a major restructuring beginning in 2004 in which it was split into three distinct business units serving different financial services markets: Postilion (for self-service and payments), FSB (for full-service banking and lending) and Enterprise (for multichannel, front-office solutions). The new model "creates smaller companies within S1 that can focus on key markets and build relationships within those markets to better serve customers," says Neil Underwood, G.M. of the Enterprise group.

Survival of the Fittest

According to Gartner's Cohen, the strategy may have helped the company, which was the subject of sales rumors just last year, to stay on top of the game. "[The new structure] gives them some flexibility in the marketplace," she says.

Other vendors, however, inevitably will remain takeover targets. But unlike in the past, this does not mean the demise of the acquired, according to Cohen and Barry. "Acquiring companies aren't assimilating the companies they buy but are working out long-term strategies for rebranding and leveraging their solutions in a way to help them differentiate in a commoditized market," says Cohen.

"A lot of these mergers are two companies that complement one another rather than have overlap in product offerings," Aite's Barry adds.

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