Consolidation - Predictable for banks, Anything goes for tech vendors

Implications: It’s numbers crunching season again for me, and my outlook has been confirmed as if a combined team of Big Four auditors ripped through my databases looking for errors, omissions and even fraudulent opinions.The financial institutions landscape:The number of banks, thrifts and credit unions continues to contract at the consistent average annual rate of 3.44% (2.4% to 7.7% for the past 18 years).  I didn’t round it; it’s the real math, and the real numbers as reported by Highline Financial. So if you want to use a pretty good figure to project the next ten years, may I suggest 3%?  Don’t ask me why it’s 3%.  Ask Alan and Ben.  That part of the consolidation scene is as predictable as reading ads about bank CD offerings in your local newspaper.  No matter where the dart lands, the answer will be the same.  In 2008, 3% of all FIs will accept the fact that they are going to throw in the towel.  On December 31, 2008 we’ll know the 506 by name.

Analysis:  The bank tech vendor landscape:Let’s have some fun and go to the other sports arena where nothing is predictable.  What will the consolidation factor among tech companies show in 2008 and beyond?  First, here’s a macro look at the players as they appear in Automation in Banking - 2008:Total number of companies in the report   83  (I’ll explain 83 later)  Total number of core providers with their own peripheral apps  23  (these are the dogs)Independent peripheral apps companies  44  (these are the tails)Total number of systems integration companies in banking 6 (these are the generics)Total number of research companies  10  (aka fortune tellers)The DogsThe main players in this category are:Fiserv, Fidelity National Information Services, Metavante, Jack Henry & Associates, Open Solutions Inc., and Harland Financial Solutions.  These companies are the primary tech solutions providers for 71% of all FIs.The TailsThe reason tails need a good dog can be explained in one word  -  integration.  Banks want to use integrated systems and buying systems from seven or eight different vendors can’t possibly add up to integration. Sometimes, even acquiring a tail, doesn’t necessarily mean it will be properly integrated to the dog.  But the intent is to make it work - seamlessly, to use vendor parlance.  The 44 tails are too numerous to mention here, but the criteria for acquisition include being successful at their specialty, having a specialty that is in demand, demonstrating active marketplace success, and possessing traditional business capabilities so that the dogs don’t have to waste a lot of time teaching the tails new tricks.  Over time, these tails and dogs will find each other.  In my opinion, the last major acquisition (FISV/CKFR) represented a close to perfect example of a dog and tail marriage. The GenericsThere are 11 systems integration companies that perform all manner of tech services in most of the vertical industries.  Banking is the sweet spot, however these companies are like “all hat and no cattle.”  They do not own banking solutions.  Five of them should be rounding up the cattle right now.  They are IBM, Accenture, EDS, CSC and H-P.  The fatted cattle that would appeal the most to the giant acquirers, as far as I’m concerned, are grazing comfortably in Brookfield and Jacksonville.The near term M&A sceneI subscribe to the adage of, “Ask me no questions and I’ll tell you no lies,” so I never tread in anything that might look like “confidential” information.  All my predictions come from the gut.  I doubt if the generics will make any moves soon.  IBM said it will acquire a data security company soon.  It didn’t.  Mr. Palmisano said he is not planning any major acquisitions.  He will.  The ripe situations for M&A lie within the top six core companies, and I believe the 2009 Edition of my report will show there will be four.Why 83 companies?I published the first edition of Automation in Banking twenty-three years ago.  At that time, I hand-picked the companies to be included in the report using a single criterion  -  those companies were in the spotlight of what bankers needed in their pursuit of a better data processing system.  Today, only 20% of the 83 are “originals.”  The remaining 66 came later as new technologies evolved, as global markets developed, as entrepreneurs saw a need to spread their wings, and as wannabes developed into been-there-done-thats.  My process has not been entirely successful, however.  For example, I invite a few good companies each year to show what they’ve got, but I get the cold shoulder from some of them.  Go figure. Disclaimer:     The only bank tech companies that Art Gillis owns stock in are two that gave him the cold shoulder.