Banks are spending a lot on tech but the money is not going to Indian IT biggies yet

• In the past two years, whenever banks spend more money on technology, the revenue for IT companies from banking, financial services, and insurance (BFSI) sees a similar jump.
• This quarter, even though the tech spends by the top 8 global banks was up 3%, IT companies saw BFSI revenue drop by 4%.
• The dip is likely a one-time thing due to uncertainty caused by restrictions around the coronavirus pandemic, according to Motilal Oswal Securities.
• The brokerage firm estimates that with banks joining the digital bandwagon, tech spend will only increase and may even be a key driver of revenue of Indian IT companies.

Banks in the US and Europe are shelling out more money to step up their technology game. Yet, for Indian IT companies, which garner the majority of their banking, financial services and insurance (BFSI) business from these markets, the revenue isn’t showing up on their balance sheets this time.

Over the last two years, the top 8 global banks around the world have been spending more on technology, and the aggregate BFSI revenue of the top IT companies saw a corresponding jump, until now.

This time around, even though the tech spends at the top banks grew by 3%, aggregate BFSI revenue for the top IT companies declined by 4%.

Aside from Infosys and Tech Mahindra, all other I-T companies reported a sharp decline in their BFSI revenue. According to a report from Motilal Oswal Securities, the ramp-up in an Asia-Pacific centric insurance deal boosted the BFSI vertical in Tech Mahindra.

Factors behind this one-time blip
The Indian IT industry is not losing its share of the BFSI business in the long-term. The divergence in BFSI revenue and banks’ IT spend was a one-time occurrence brought on by uncertain circumstances, as per the Motilal Oswal Securities report. It attributes the discrepancy to three temporary factors:

1. IT spending in areas where IT companies don’t participate.
2. Supply-side bottlenecks in April.
3. Exposure to niche sub-segments like cards or payments.

Banks’ tech spending will only continue to grow
When the coronavirus pandemic hit, banks had to adapt and embrace the digital play. If a customer could no longer come to the bank, banks had no option but to set up digital channels to reach them. And now that global banks are on the bandwagon, they have no plans of slowing down.

The commentary from these banks indicated that they expect digital adoption to be sticky. On the one hand, it means spending more on technology. On the other hand, it also means not having to have a branch at every corner and boost margins with redundant tasks getting automated.

“We postulated that this increase in digital engagement, led by a lack of choice, should eventually result in permanent change,” said Motilal Oswal Securities report.

And, now that banks are finally joining the digital parade, a majority of their demand will be centered around cloud migration, automation, and reshaping their physical presence.

In the recent earnings calls, companies like HCL Technologies and Infosys have already indicated that they are benefitting from the consolidation opportunities.Along with Tata Consultancy Services (TCS), Wipro and L&T Infotech, these are likely to be major beneficiaries, according to the report. BFSI revenue will be a key driver in the medium-term for Indian IT companies.