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February 23, 2009updated 04 Apr 2017 4:18pm

Fundtech shrugs off tough times

Research firm Celent paints a gloomy picture of spending on technology by financial institutions worldwide in 2009, predicting a fall of 1.3 percent to $353.3 billion Leading the way will be Europe with a 3.4 percent decline to $130.3 billion followed by North America with a 2.7 percent decline to $116.7 billion The financial crisis and economic uncertainty have financial institutions tightening their belts, said Jacob Jegher, senior analyst in Celents banking group

By EPI editorial

Research firm Celent paints a gloomy picture of spending on technology by financial institutions worldwide in 2009, predicting a fall of 1.3 percent to $353.3 billion. Leading the way will be Europe with a 3.4 percent decline to $130.3 billion followed by North America with a 2.7 percent decline to $116.7 billion.

“The financial crisis and economic uncertainty have financial institutions tightening their belts,” said Jacob Jegher, senior analyst in Celent’s banking group. George Ravich, Fundtech

“Banks in all regions of the world are experiencing difficult conditions,” he stressed.

Undoubtedly true, but even in the toughest of economic times opportunities present themselves, as US banking software and services company Fundtech is discovering.

“This is a tough year and one would imagine that any company selling software to banks would be experiencing considerable difficulty,” George Ravich, Fundtech’s chief marketing officer, told EPI.

But quite the opposite holds true.

“Fundtech is enjoying tremendous interest in its products,” said Ravich.

The reason is simple: big banks are not the only game in town.

In the US, explained Ravich, most big banks are in trouble but this does not apply to a myriad of small and medium-size banks which, by and large, are run conservatively and were not exposed to what proved to be a disaster for their large counterparts, subprime residential mortgage securities.

“Many smaller banks have extremely strong balance sheets,” stressed Ravich.

This has put smaller banks at an advantage to the big banks which are battling with under-capitalised balance sheets and, in many instances, reducing credit lines available to corporate customers. Many small- and mid-sized corporates seeking additional capital or just wanting to reduce the risk of being exposed to the whims of one big bank are thus turning to the smaller banks, explained Ravich.

“Small and medium-sized banks are seeing substantial new deposits and credit lines,” continued Ravich.

To a lesser extent this is also happening in Europe where many small and mid-sized banks are also seeing lots of opportunity, he added.

A key part of Fundtech’s strategy is to assist these banks consolidate their new-found corporate customer base into a full service relationship, said Ravich. Fundtech is discussing with smaller banks how upgrades of their key business areas such as cash management and payments systems can assist them in achieving this.

Huge opportunity

Smaller banks represent a huge potential market in the US where, according to the Federal Deposit Insurance Corporation, only 84 out of a total of 7,146 commercial banks at the end of September 2008 were in the big league, boasting total assets of over $10 billion.

In the US, Fundtech is introducing new products to address the needs of smaller banks, said Ravich. Particular focus is on expanding the reach of Fundtech’s PAYplus USA, a hosted funds transfer solution designed for larger banks and in use by more US financial institutions than any other similar product.

Fundtech’s intends making PAYplus USA available to smaller banks at a significantly lower cost, though with fewer options that can be customised. Differing slightly from the normal concept of software as a service (SaaS) because of some minor upfront set-up fees, it will be very much in line with the SaaS concept in that banks will be charged in accordance with the number of wire transfers sent, said Ravich.

In Europe, Fundtech is also pursuing opportunities to enable small to medium-size banks to compete on an even footing with their larger counterparts, particularly in the Single Euro Payments Area (SEPA) environment.

“We are very involved in SEPA,” said Ravich.

A key initiative in the SEPA market is the launch by Fundtech of its PAYplus ServiceBureau which offers solutions combining its PAYplus funds transfer service and its SWIFT (messaging) ServiceBureau.

The new service, which provides banks with a complete global payments solution priced on a pay per transaction SaaS basis, is housed in Fundtech’s Biveroni Batschelet Partners (BBP) unit located in Baden, Switzerland. Specialising in the integration of inter-bank applications since its founding in 1986, BBP was acquired by Fundtech in 1999. BBP is the world’s largest SWIFT service bureau.

With its new service, Fundtech’s intention is to offer banks of all sizes a low-cost and easy-to-implement alternative to in-house payments processing that will enable them to offer SEPA direct debits and compete effectively in the global payments market. The cost of an in-house developed SEPA direct debit solution can run into millions of dollars, noted Ravich.

Ravich is also optimistic about SEPA despite it being plagued by problems.

“It [SEPA] has got to work. You can’t have a unified Europe without a unified cross-border payments system,” said Ravich.

He added that SEPA will be “great for consumers and businesses” but conceded that banks face a costly transition period.

Notably, a survey of 23 major European banks undertaken by Fundtech in 2008 revealed that 44 percent of respondents believe that it will take longer than five years to replace revenue lost because of SEPA pricing mandates, while 13 percent believe they will never recover lost revenue.

Opening new revenue sources

The survey’s findings in many respects reflect pressure of increasing regulatory costs, margin compression and competition from alternate payments service suppliers that banks worldwide find themselves facing. The solution, stressed Ravich, is that banks must actively seek to introduce new fee-generating customer services.

Ravich believes banks have significant opportunities to enhance the level of service offered to their corporate customers to the benefit of those customers and themselves. In essence, this involves extracting greater efficiency out of what he terms the financial supply chain.

The financial supply chain is analogous to the physical supply chain in, for example, the retail and manufacturing sectors where the objective is to hold the minimum inventory required to function efficiently, thus reducing demands on working capital. This is generally referred to as a just-in-time inventory strategy which in the financial supply chain equates to a just-in-time cash strategy, said Ravich.

A key element of the financial supply chain requires that a bank be positioned between its corporate client and their trading partners and suppliers in the electronic invoicing space, the source of vital data required for effective cash management.

“The bank in this position can see invoices coming in to their corporate client and invoices being sent out by that client, therefore knowing precisely what cash the client has going out and coming in,” said Ravich.

Given this vital cash-flow data a bank can sell a multitude of fee-based cash management services and trade credit to its corporate clients, he added.

Adding significantly to Fundtech’s product offerings in the cash management space is Accountis, a UK-based electronic invoice presentment and payment (EIPP) systems specialist acquired in February 2008.

The first significant new customer win for Fundtech subsequent to acquiring Accountis was the Royal Bank of Scotland (RBS) which in June 2008 announced it would offer Accountis’ EIPP solution to its corporate clients as an RBS-branded service.

Again highlighting a growing trend towards employing white labeled solutions, Accountis’ EIPP solution is available to banks on a SaaS basis. High-speed internet communications have made it possible for banks to go the outsourcing route rather than build often costly in-house solutions, noted Ravich.

He added that banks are increasingly sourcing services from outside technology suppliers, a trend ideally matched to Fundtech’s strategy.

 

US COMMERCIAL BANKS

Ranked by total assets, 30 September 2008

Assets

Number of banks

Under $100m

2,882

$100m to $1bn

3,755

$1bn to $10bn

425

Over $10bn

84

Total

7,146

Source: Federal Deposit Insurance Corporation

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