What Banks Need To Know About Vendor M&As

The recent Fiserv/Open Solutions and FIS/mFoundry deals suggest that the banking industry is going through another wave of vendor consolidation. What’s driving the fintech vendor M&A trend this time around? How is this consolidation surge in the solution provider space different from previous industry restructuring? What are the potential impacts on banks, and what do the financial institution customers of these companies banks need to watch for going forward?

What’s the Best Way to Grow?

Marc DeCastro (pictured to the right), Research Director, IDC Financial Insights

We noticed starting in 2012 that M&A activity was changing course. In 2009, within IDC Financial Insights’ FinTech 100, we lost only two vendors through acquisition. In 2010, that number doubled to four. Last year, the number doubled again to eight. This is clearly a trend and not just a one-time blip. The main reason continues to be that companies must increase scale in order to make money in such a competitive environment. Vendors have realized that they need to figure out how to grow organically, acquire competing or complimentary solutions, or become an acquisition target themselves.

Obviously, during and following the 2008 financial crisis, acquisition activity slowed to a halt. There were few acquisitions because companies were worried about their own business models and keeping their financial affairs in order. Now that these companies have survived, they are now looking to grow their business. When you’re operating in a consolidating industry, where the number of institutions continues to shrink, you need to look to expand your product offerings and increase your client base.

The mobile banking space was the most recent technology to really drive a wealth of one-off vendor solutions. Companies that used to have these stand-alone offerings have all of a sudden become part of larger core providers or larger networks. Perhaps social will be the next wave, where we see some stand-alone social solutions come out -- and then we might see another wave of vendor consolidation follow. However social solutions are being woven into existing platforms and the market for a stand-alone solution may in fact be past.

The Need to Simplify

Christine Barry (pictured to the right), Research Director, Aite Group

There definitely has been another surge in vendor mergers in recent months, a trend I expect to continue. This most recent wave of activity is being driven largely by bank desires to limit their number of vendor relationships and the need for vendors to fill gaps and/or further strengthen their competitive positioning. Banks are looking to consolidate vendor relationships in an effort to enjoy better pricing (as a result of bundled offerings). Many are also telling us that regulators are making it almost impossible for them to have multiple vendor relationships. This desire by banks is resulting in the second driver of M&A described above.

Those vendors best positioned to succeed will be the ones capable of meeting most, if not all, of a bank's technology needs. Vendors are reexamining the depth of their product portfolios and their ability to offer those products most demanded by financial institutions. For example, while FIS already had a mobile offering and partial ownership of mFoundry, its acquisition of the vendor better positioned it to be a leader in this key area of bank focus and investment. Further, Fiserv's acquisition of Open Solutions better positions the vendor to see significantly more success among credit unions.

These trends are making it increasingly difficult for smaller technology providers with narrow product portfolios to succeed, even though their niche focus and more nimble organizational structures often lead to greater innovation. The implications of this industry consolidation for banks will likely be more one-stop shopping, tighter integration across products, and more bundled pricing opportunities. Of course there will also be fewer options in the market and less vendor competition, which is never a good thing.

Less Demand for Specialists?

Jost Hoppermann (pictured to the right), VP, Banking Applications & Architecture, Forrester Research

Forrester’s most recent global banking platform survey revealed that banking platform market growth has accelerated and top vendors were significantly more successful than average -- laying the groundwork for market fragmentation thus driving M&A. Some vendors also use acquisitions to strengthen their solution portfolio or to enhance their functional capabilities. Finally, more flexible global solutions reduce the need for specialized local vendors -- many of them becoming niche vendors from a global perspective.

Acquisitions have been a growth driver for Fiserv for the last years -- and Fiserv will likely continue to apply this growth strategy. Even the total deal size of close to $900 million is not unusual. This is about the same range of what Oracle has paid for former i-flex Solutions years ago. The question here is whether Oracle or Fiserv made the better deal.

[Open Solutions] DNA customers will be better off: They will have access to a broader solution portfolio, and many were concerned about Open Solutions’ high debt level. However, the big question is how long Fiserv is willing and able to support and maintain multiple heterogeneous core banking solutions -- and which solution would be the first candidate for rationalization.

Banks can never be 100% sure they will not end up with an end-of-life solution because some banking solution providers acquire others to eliminate competitors. However, banks can manage this risk by looking for strong market footprints, sound financial status, compelling product roadmaps and strategy -- and also visible competitive weaknesses.

[Fiserv Launches New Mobile App for Consumer Loyalty Rewards]

Peggy Bresnick Kendler has been a writer for 30 years. She has worked as an editor, publicist and school district technology coordinator. During the past decade, Bresnick Kendler has worked for UBM TechWeb on special financialservices technology-centered ... View Full Bio