At the beginning of 2018, we forecasted a bump in discretionary IT services spending in Financial Services. And we predicted banks would spend heavily on technology. But we didn’t forecast as big a bump as is occurring, and the banks are spending more heavily than we anticipated. Why is it important to understand what’s happening here?
Who would be the beneficiaries of that spend? That’s why this spending trend is important.
At the beginning of the year, we said the beneficiaries would be primarily Fintech companies, in-house services, and non-incumbent service providers. However, given the amount of spending we see coming down through the pipeline, we don’t think the fintechs, in-house services and challenger service providers will be able to absorb the spend.
IT Services: Growth Trends in the Financial Services Vertical
Deep Dive Equity Research and Everest Group’s July 31 report, “IT Services: Growth Trends in the Financial Services Vertical,” reveals that the BFSI spend – particularly in banking – is poised to increase dramatically. In fact, we see a 15% increase planned for 2018 at just the top four US banks:
- JP Morgan indicates it will increase its IT spending by $1.4 billion in 2018.
- Citigroup plans to spend around $8.0 billion on IT in 2018, or about 20% of the bank’s expense budget, which is an increase over its 2017 spend.
- Wells Fargo plans a significant spending uptick in technology transformation and data management in 2018.
- Bank of America plans an incremental $500 million technology investment due to tax-reform benefits.
Initially, we believed that the incumbent technology service providers would not be the beneficiaries of the increased spend. But we now believe there will be a shortage in supply that the fintechs and new-age service providers will not be able to satisfy. We believe the only way to satisfy this shortage is if the incumbent legacy technology service providers of technology – which have been largely left on the sidelines to date – participate.
Yes, the underlying secular forces that we noted at the beginning of the year as growth obstacles for the legacy service providers (revenue compression, a strong DIY movement or insourcing and suboptimal sales model for digital projects) still hinder legacy providers’ growth. But we believe that the enormity of the spend that is coming through the pipeline will create a rising tide that the fintechs and new-age technology service providers will not be able to absorb.
Consequently, we’re upping our forecast for banking spend in 2018 and strongly believe the legacy service providers will be meaningful beneficiaries of this spend.