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Capital Scarcity, Operating Leverage & BPaaS Drive Emerging Partnership Strategies in Financial Services BPS

There has been a recent spate of acquisitions and partnerships among Financial Services BPS vendors which reveals interesting trends. These include the following deals from 2015:

  • HCL and CSC: Two JVs were formed, whereby HCL will operate and expand the existing Core Banking business of CSC. The first JV will focus on account management and delivery governance while the second will focus on service delivery and product development
  • FIS and Sungard: FIS acquired Sungard for its wealth and asset management solutions. The combined entity will focus on selling platform-based BPS services to the wealth and asset management industry, and leverage FIS’ existing retail banking clients for upsell (FIS has seven other public solution partnerships in capital markets)
  • Broadridge and QED Solutions: Broadridge acquired QED to obtain software-based investment accounting solutions which will now be delivered in a BPaaS mode
  • Wipro and Viteos: Wipro acquired Viteos to provide STP and post-trade BPaaS services for alternative investment managers
  • Broadridge and Direxxis: Broadridge acquired Direxxis to acquire cloud-based marketing solutions for wealth advisors.

These deals are being driven by several key business factors in Financial Services:

  • Capital scarcity for both financial institutions and BPS vendors
  • Requirement for IP to support process reengineering which delivers cost reduction that increases with scale (operating leverage)
  • Lack of client engagement staff to support business growth and C-SAT improvements
  • Willingness of clients to accept standardized services for a much broader array of processes, which will drive BPaaS adoption.

Businesses at all levels (financial institutions, ISVs, and BPSs) have limited resources to pursue revenue gains and therefore have to adopt ‘sharing’ policies to succeed. Currently, qualified labor (i.e. domain expertise and the experience to effectively use that expertise) is scarce and expensive. To solve the twin challenges of cost reduction that increases with growing volumes, and client/customer engagement, all participants need access to large amounts of labor. This can only be accomplished by sharing the scarce resource. We will continue to see partnerships and acquisitions of the types listed above for the next three years. The result of these partnerships will be the restructuring of the BPS industry servicing the Financial Services industry. BPS will become highly automated and delivered in a BPaaS fashion.

Ultimately, industry consolidation (both financial and BPS industries) will be required to realize the gains from these new IP-based BPS services. The net outcome, to be achieved over the next ten years, will be:

  • Financial Services will consolidate, with ~40% fewer firms. The survivors will be buying operations on a BPaaS basis, which will deliver 40% to 50% lower cost, but more importantly greater flexibility, allowing financial institutions to enter and leave lines of business much faster than is currently the case
  • BPS vendors will consolidate, with 60% to 70% fewer tier one BPS vendors delivering industry-specific processes. Lack of proprietary solutions will make pure manual delivery cost-ineffective (~40% to 50% more expensive)
  • ISVs for industry-specific solutions will struggle to survive independent of the BPSs who utilize their software. Most ISVs will either partner with operations vendors in multiple geographies or will merge with one of those vendors. 

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