Fidelity Information Service: Buying BingeBy Baselinemag | Posted 2004-11-01 Print
Fidelity Information Services, an agglomeration of 10 banking-related technology companies, has in two short years become one of the top providers of IT services to the financial services industry.
Chances are that Fidelity Information Services handles some very intimate details of your personal finances.
The Jacksonville, Fla., company provides software and hosted information-technology services to the banking, mortgage and insurance industries, dealing with everything from personal checking-account data to homeowner loans, and from teller-access software to international bank transactions. It claims it does business with 46 of the top 50 U.S. financial services companies-including Bank of America, Citibank and JP Morgan Chase-and says it manages 114 million deposit accounts and 24 million mortgage loans representing more than $3 trillion.
Yet Fidelity Information Services (FIS) technically didn't exist two years ago. It was born in 2003 as a division of Fidelity National Financial, the largest title insurance and real-estate services provider in the U.S. (not to be confused with Fidelity Investments, the Boston-based mutual fund company).
Fidelity National did offer some information-technology services, such as hosted contact-management applications for realtors and loan processing for mortgage companies. But flush with cash from the home-buying boom of recent years, Fidelity National embarked on a strategy to diversify its information-technology offerings. Its first step was buying Alltel Information Services, a leading provider of banking software and services, for $1.1 billion from telecommunications company Alltel in January 2003; this became FIS. Since then, Fidelity National has spent more than $1 billion to add another 10 software and services firms to its portfolio.
"We see FIS becoming a lingua franca in the industry," says Frank Sanchez, president of strategy and product development. He was previously CEO of Sanchez Associates, a provider of specialized banking services to multinational and non-U.S. financial firms that FIS acquired earlier this year.
Normally, when a company snaps up nearly a dozen smaller players and glues them together, clients grow concerned about whether they'll continue to receive the full attention of the new parent. But customers say Fidelity has managed the process well, while combining complementary providers and technologies.
Webster Financial, the holding company for the 140-branch Webster Bank in Waterbury, Conn., had been negotiating with FIS to use a hosted version of its core banking system-which processes all withdrawals, deposits and statement transactions for bank accounts-to replace the outdated one it was using from Aurum Technology; the Aurum package was targeted at smaller banks and credit unions. In the middle of those discussions, FIS bought Aurum. Zeynep Frederick, Webster's chief information officer, says FIS was quick to reassure customers that it plans to fully support the Aurum suite of applications, which runs on Unisys' mainframe system.
Now the bank plans not only to migrate to the hosted core processing system, called the Integrated Monetary Processing and Control System (IMPACS), by the third quarter of 2005, but also to deploy the TouchPoint front-end application (from FIS' acquisition of WebTone), which gives bank tellers access to account information.
"They've been very, very good about communicating their purchases and what they're doing with them," Frederick says. "Nothing I have seen so far makes me nervous about their acquisition strategy." Frederick has added one item to her wish list: "I'd like them to hurry up and integrate their purchases into their current environment." FIS says integrating the technologies of its acquisitions is a top priority.
In fact, to some customers, Alltel Information Systems had fallen asleep at the wheel under the stewardship of the phone company-and the acquisition by Fidelity has put it back in the fast lane.
"With Alltel, we didn't feel that we got what we were paying for," says Robert J. Smiley, executive vice president of loan servicing administration at U.S. Bank Home Mortgage. "They were not really enhancing the system." Smiley's group, based in Owensboro, Ky., processes 700,000 loans worth $74 billion through FIS. Smiley declined to discuss any pricing details; at this point, he says, "They're still one of the most expensive providers, but we feel that the way they're headed is worth what we're paying for it."
In other cases, FIS has been pricing its services more aggressively to win new business. In early 2003, First Tennessee Bank decided to put its data-center contract up for bid. Micky Redwine, senior vice president of enterprise technology operations, says the five-year deal First Tennessee struck with FIS will cost $3 million to $5 million less per year than the $20 million annual service fees IBM was charging the bank.
For many banks, outsourcing information-processing services is attractive because it's often far more cost-effective than developing and maintaining proprietary systems. Webster's Frederick calculates that the expenses of an outsourced service are about half the capital and operational costs of an in-house system.
Besides, in the financial sector, there's no competitive advantage to owning and operating the underlying computing infrastructure, says Paul Nussbaum, executive vice president of information technology at Ford Motor Credit. "To some extent, the systems are a commodity," he says.
Ford Motor Credit contracts the processing of about 8 million retail loan and lease contracts per year to FIS, whose per-loan pricing makes the deal even sweeter for Nussbaum. "It's almost entirely variable costs," he says. "If our volume goes up, I have the option of purchasing more capacity. I don't have to eat the fixed cost [of owning the hardware]."
But with its services-heavy model, FIS has been hurt by the vicissitudes of the mortgage industry. Wells Fargo, its largest single customer, has dramatically cut back the amount of business it does with the company. For the first six months of 2004, Wells Fargo paid $89 million to FIS, according to documents Fidelity National prepared for an initial public offering of FIS stock. That's well off the pace of 2003, when Wells Fargo spent $317 million with the company, accounting for about 17% of FIS' total annual revenue. (Fidelity National tabled the IPO in September, citing "weak and unpredictable current equity market conditions.")
Representatives for Wells Fargo and FIS declined to comment on Wells Fargo's drop-off in business. However, in the IPO filing, FIS indicated that Wells Fargo's business was unusually high last year primarily because of "its use of our automated process for performing title agency services in a period of particularly high refinancing activity."
FIS wants to diversify further to avoid such fluctuations, mulling plans to expand into payments processing and to enhance its ability to integrate multiple disparate systems. In any case, it will not discontinue any of the products of the companies it has acquired, according to Sanchez. "Banks are, for very good reasons, conservative about migrating systems," he says.
That position breeds goodwill among customers, no matter how they've ended up with FIS. "We're loyal to Fidelity," says Allan Lubitz, CIO of Option One Mortgage, a subsidiary of H&R Block in Irvine, Calif., that was formerly an Alltel customer. "There's nothing really motivating us to move."
Fidelity has bought 11 companies in the past two years. Its major acquisitions:
- Alltel Information Services, January 2003, $1.1 billion; information-processing services for banks and mortgage lenders
- InterCept, September 2004, $408.2 million; check imaging and other services
- Aurum Technology, March 2004, $306.4 million; community-bank and credit-union software and services
- Sanchez Computer Associates, April 2004, $175 million; international banking services
- WebTone Technologies, September 2003, $88.7 million; customer relationship management software for banks
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