The banking technology service provider landscape seemingly changed over night after the announcement on April 1 that Fidelity National Information Services (FIS; Jacksonville, Fla.) would be acquiring Milwaukee's Metavante in a deal worth nearly $3 billion. The combined entity, which will keep the Fidelity name, would become a force to be reckoned with in the core systems and payments space.
To say the announcement caught many people off guard would be an understatement. Anyone who had been following Metavante may never have detected a hint that the company would become an acquisition target. An article published last November in the Milwaukee Journal Sentinel paints a picture of a company celebrating its first anniversary of going public and boasting of multi-year contracts with customers and was confident in its future as an industry mainstay. The writer even noted that Metavante was "keeping its eyes open for ways to expand."
TowerGroup's Bob Hunt, senior research director, says he didn't see it coming. "I did not foresee a deal between these two companies because they're both so big in the market. You always think of [FIS and Metavante] as the two survivors. This is probably the most significant acquisition we've seen over the last 10 years," he remarks.
According to Hunt, buying Metavante will mean that FIS becomes the primary deposit systems provider to nearly 50 of the top 100 banks, where most of the technology spending occurs. It will even jump past Jack Henry in the community bank space in terms of the number of institutions it will be serving there. "I think this is about as big as you can get," he notes.
"This is fascinating news," says Celent's Bob Meara, a senior analyst, "and a bold move by FIS in acquiring such a large player. This will bring FIS up to roughly the same scale as Fiserv, leaving OSI [Open Solutions] and Jack Henry trailing by quite a distance."
Bart Narter, SVP of Celent's banking group, also uses the word "bold" to describe what FIS is doing. "The more obvious deal would have been to buy Jack Henry or Open Solutions," he comments. "Metavante is a bigger deal because they have a lot of customers and a huge payments business, as does Fidelity."
That said, there is still going to be a good deal of overlap between the merged companies. With regard to core systems, each has its own initiatives. Metavante's much trumpeted partnership with Zurich-based core systems provider Temenos was designed so that both companies could jointly develop an advanced core banking solution based on Temenos technology to be marketed to U.S. banks—something a non-U.S.-based core systems provider could not have as easily done on its own given banks' risk aversion to anything surrounding their cores. FIS has its own next generation core system—Profile.
Celent's Narter imagines Profile will win out as FIS' go-forward core systems offering. He adds, "I don't know what they're going to do with Kirchman Bankway," referring to the core banking solution Metavante acquired in 2004 when it bought Kirchman Corp.
TowerGroup's Hunt isn't sure what the ultimate outcome will be once the new FIS makes its decision on which core platform to keep. One thing is for sure and that is this will have to be resolved quickly, he says. "No decisions has been made, but the strategy will be to concentrate their investments on a single next generation system. FIS will probably do as Fiserv did and maintain the current systems for a while. But the real issue is what the logical outcome will be for Metavante/Temenos and FIS Profile." Either way, Hunt says FIS will be dominant in the core market.
As of now, the Metavante/Temenos deal remains intact even with the acquisition by FIS. "The contract between Temenos and Metavante concerning the joint development and marketing of Temenos Corebanking in the U.S. is binding upon both parties and assigns to successors in the case of either party being acquired," Temenos said in a statement.
There is also no doubt that the payments landscape will be changed. Both companies have a significant presence in this area. Plus, bringing Metavante into the fold will give FIS access to new markets in the cards and transaction processing space. Richard Crone, CEO & Founder of Crone Consulting (San Carlos, Calif.), the payments aspect of the marriage is of greatest interest. "The crown jewel of this acquisition is the transaction processing business, especially [Metavante's] NYCE Payment Network that can be further leveraged with a larger combined entity," he says.
"I think it is part of the trend of a continuing consolidation of the traditional payment processors," notes Dan Schutzer, executive director of the Financial Services Technology Consortium (FSTC; New York). "It is interesting to note that at this moment in time we are seeing simultaneously a consolidation of traditional processors and service providers to the industry and the emergence of new non-traditional payment service providers."
Crone agrees, saying the move by FIS is just the beginning of a new round of merger and acquisition activity by bank servicers.
"I think this will put additional pressure on Fiserv to acquire someone," remarks Hunt. "This deal is a major market changer and there will be repercussions."
Looking at the acquisition from a broader perspective, Hunt also thinks this could be a response to a market that was already in the midst of changing. New competitors are entering the space where companies like FIS and Metavante traditionally dominated. He says when an SAP begins to encroach on this territory, it alters the dynamic greatly for the entrenched players. "I think this deal puts FIS in a better position to compete."
Other practical reasons for the joining of the two companies could have to do with the economic situation and the bank crisis. Hunt notes that on their own, FIS and Metavante have done "very well over the years." However, he's sure they both took the crisis into account in their projections. "Going forward, they have to be impacted by the crisis. Not just in terms of banks cutting back on their budgets, but the fact that some of these banks may no longer exist. By combining operations, they can eliminate costs and become even stronger," Hunt says.
Crone draws a further parallel between the crisis and the acquisition. "As banks rationalize, so do their backend processing suppliers, mirroring what is happening in their customer base of financial institutions," he remarks.
Ravi Manchi, a principal with Westwater (New York), a management consulting firm, also anticipates more consolidation in the bank tech vendor space as firms seek to compete on scale and offer newer solutions. "Firms with newer technology will win the game," he notes.
Then, there is the question of clients. Metavante, which has been known for its customer service, is bringing 8,000 banking and business customers to FIS, adding to Fidelity's 14,000. Will there be changes? Of course, but the new company will be careful to take it slow, says Celent's Meara. "I wouldn't expect any hasty changes at the client level. Instead, FIS may begin a long process of rationalizing their many products with the objective of moving forward with the best that both had to offer in each area," he explains. "Then, the longer (and oftentimes painful) process of gently moving clients begins. It will take years to accomplish."
TowerGroup's Hunt notes there will at least be continuity in some of the leadership at the new FIS. The company will be headquartered in Jacksonville. However, Metavante's chairman & CEO Frank Martire is slated to move to the Sunshine State and serve as president of the combined company. Metavante CFO Michael Hayford will join Martire in Jacksonville as well.
"The Metavante client base is a very valuable client base," Hunt explains. "Core banking relationships are usually very old. But as long as they send out the right message that they will support the products and will invest in new ones, the client loyalty will remain."