Kristin Moyer

Kristin Moyer and David Furlonger here.  Business models in the banking industry are set to change dramatically:

• Rahm Emanuel, Chief of Staff in the Obama administration, recently spoke to business executives and said:  “You never want a serious crisis to go to waste,” Emanuel said. “What I mean by that is that it’s an opportunity to do things you could not do before.” This is now being dubbed as “Rahm’s Doctrine.”
• The FSA published a consultation paper on December 8, 2008 that would over-haul liquidity requirements for banks, building societies and investment firms.  This would essentially result in breaking up banking organizations as we know them today.

Prior to the sub-prime crisis we started looking at industry restructuring from another angle:  globalization, cost to income ratios and the democratization of financial services.  We said that the banking and investment services industry would begin to separate manufacturing from supply, and that more and more, banks would look to partnerships to deliver value added services.  This trend began most clearly in payments, with banks partnering with non-bank payment providers like PayPal and Google Checkout.  The financial crisis led to massive consolidation and restructuring.  Now, Rahm’s Doctrine and FSA liquidity requirements can take this to a whole new accelerated level of restructuring and divestiture.

The world as we know it is over.

What does this mean for technology vendors like IBM, Oracle and others that earn millions of dollars a year from signature banking accounts?  What happens as divestiture takes place?  In the past, mergers and acquisitions have resulted in fewer customers for vendors and often more pricing power for the consolidated bank.  As the bank rationalizes its applications during post-merger integration, some vendors end up with more seats than they had before the merger, others end up with no seats.

But this is the case for consolidation.  What about divestiture?  If a vendor generates $30 million from Citi, and now Citi is divested into many other financial institutions – are the parts more than the sum of the whole?  They could be.  Let’s say Financial Institution A has 500 commercial lending seats across its domestic and international operations.  It is divested and becomes Financial Institution A (with 250 seats), Financial Institution B (with 150 seats) and Financial Institution C (with 100 seats).  Tiered pricing models would likely increase the seat revenue generated (with each institution having fewer seats, and therefore higher pricing, than it did before the divestiture).  Increased licensing revenue means increased maintenance revenue. This is certainly the more bullish scenario. Another, darker one for vendors to consider is one of potential losses as line of business divestiture and whole business models are no longer profitable and areas of the industry just fade into the sunset. This would be catastrophic for niche application vendors and painful for even the “mega vendors.”

There is a potential silver lining for some agile vendors with a utility play. From the example above, Financial Institution A may have divested due to an overhaul of liquidity requirements, but it may also be hungry for capital.  Therein lies an opportunity, for vendors that have the cash, to buy out some of the operations within the bank (for example, payment processing) for potentially bargain prices and increase market share in important markets.  We spoke with the CEO of a technology vendor not that long ago that has this very strategy.

However, divestiture could also lead to a shift in delivery model preference.  Many large banks have a tendency to have in-house, licensed solutions.  Small banks tend to leverage ASP or SaaS solutions, where a third party manages the technology.  The ability to support a range of delivery models will prove important.

The implications for vendors:

• Divestiture will result in considerable confusion.  Banks will lose IP in the shuffle and will need substantial support in managing the transition.
• Vendors will need the ability to quickly scale their services capabilities and change their account management models to be able to cover a higher number of small institutions.
• Vendors will need methodologies that support divestiture and reduce the inevitable confusion in terms of people, processes and technology.
• Vendors will need business model flexibility as previously “guaranteed” revenue streams suddenly get turned off.
• Mega/well capitalized vendors should watch the markets carefully for cheap technology acquisition opportunities as niche players fall by the way side.
• Delivery model flexibility may determine the ability to retain customers in the case of divestiture.
• Vendors with cash have the opportunity to buy-out various operations in the bank and expand both their market share and their relationship with the financial institution.

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Category: Customer Uncategorized operations     Tags: banking and investment services, fsa, IT vendors, liquidity, rahm's doctrine

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