Providers must act; creaking IT and emergence of mid-tiers means competition for BFS deals ramps up

The banking and financial services (BFS) industry desperately needs change—HFS analysts recently discussed how banks’ creaking IT is coming under the spotlight. Incumbents are running out of time to address their problems. Established service providers have an opportunity to offer themselves as BFS’ much-needed knights in shining armor. The space is littered with banks playing catch-up with their digital transformation efforts, and the sheer number of deals in the space confirms it. Exhibit 1 shows HFS’ estimate of the number of publicly announced BFS deals in 2019 alongside their value. It’s clear that large quantities of small-to-medium deals are there to be won, alongside a small number of high-value transformational deals.

But the battlefield is competitive, especially due to the ongoing success of mid-tier providers, so those who don’t bulk out their offerings risk clients slipping through their fingers.

Exhibit 1: A large quantity of small-to-medium deals are there for service providers to win

Source: HFS Research, 2020 

BFS leaders finally recognize that digital transformation is no longer an option; it’s a necessity

The banking industry is undeniably slow-moving; harsh regulation, public perception, and a lack of available talent are just three of the several reasons banks struggle to kickstart their digital transformation initiatives. Adding to their struggles, the BFS sector has also failed to fully recover from the global financial crisis, which means executives have been hesitant to invest capital into projects that are not essentially cost-neutral (typically funded through operational efficiency gains) or don’t guarantee a return on investment in year one.

But a shift was clear in 2018 when Lloyds Banking Group announced its plans to spend approximately £3 billion over three years to enhance its digital offerings. The group chief executive, António Horta-Osório, explained;

“As we look to the future, we see the external environment evolving rapidly. Changing customer behaviors, the pace of technological evolution, and changes in regulation all present opportunities.”

BFS leaders shifting away from the post-2008 crisis mindset, alongside increasing pressure on incumbent banks from regulators and digital disruptors, is the perfect opportunity for service providers. The banks’ name of the game in digital transformation is to drive industries to new heights of efficiency while transforming the customer experience and creating new means of monetizing their data and other assets—but it’s hard to move the needle.

TSB’s deal with IBM puts further pressure on their incumbent competitors: even banks with a poor track record are going all-in on digital transformation!

The news recently announced a deal between IBM Services and TSB in which IBM will build and manage a private cloud environment and manage the services across all of the bank’s core banking platforms. This deal follows the bank’s controversial decision to partner with Sabis, another subsidiary of Sabadell, which resulted in continuous IT failures and cost the bank £330 million. The importance of this deal is clear in a statement from Suresh Viswanathan, TSB’s chief operating officer:

“It is a critical deal for us: the reputation of the company hinges squarely on whether we are available for our customers.”

The bank announced that it plans to spend £120 million on digital initiatives over the next three years, and its new partnership with IBM will play a significant role in this.

There’s a new breed of competitor coming for their slice of the BFS pie: mid-tier service providers

The news is typically crowded with stories of leading service providers scooping up the latest deals, particularly in BFS, and they all approach competition differently. Some choose to flex their deep pockets. Others are bulking out their digital offerings, such as Accenture acquiring Mudano to enhance its analytics and data transformation services to UK BFS firms. We can categorize the deals they compete for:

• Incumbent expansion: Often, BFS deals are built on existing relationships between the bank and provider. No one gets fired for going with the proven provider.
• Challenger innovation entry: Providers often win deals from competitors when coming to the market with an innovative and cost-effective new offering. Someone *may* get promoted for trying something new.
• Hail Mary: This is the least common of the three, and it is often a deal that involves a complete IT overhaul with a single service provider (or one acting as a prime contractor). While incumbents tend to lead here due to institutional knowledge, overall, it’s a mixed bag based on what level of digital atrophy the BFS firm is in. Sometimes a challenger can prevail.

Recently, mid-tier providers are coming to the market with an approach that often discards headline acquisition in favor of developing innovative offerings coupled with appealing pricing models, allowing them to challenge larger, often less nimble, providers. For the more established service providers, the increasing number of deals falling into the second bucket, innovative offerings, means they must enhance their offerings and adopt outside-the-box thinking, as competition for BFS deals accelerates.

Going back to publicly announced deals from 2019, Exhibit 2 outlines each of the five deals that fell in the $100 million bucket for total contract value (TCV) from 2019, proving the majority of large deals are won by the largest service providers.

Exhibit 2: IBM won three of the five 2019 BFS outsourcing deals exceeding $100 million TCV

Source: HFS Research, 2020

The Bottom Line: Service providers in the BFS space need to differentiate their offerings if they hope to compete in this increasingly cut-throat market.

The biggest “Hail Mary” deals are few and far between. The greatest opportunity is in fighting for a higher quantity of small-to-medium-sized deals—and that’s where the competition is really thriving. The deal between IBM and TSB is just one of many that will be announced as banks look to address their creaking IT.

Service providers must look to enhance their existing offerings if they hope to compete in the space, especially as the competition increases by mid-tier providers coming to the market. If they don’t, they risk being dethroned and losing a significant portion of potential revenues.