Core banking providers FIS and Fiserv face pressure from banks’ growing in-house tech investments as well as fintech competition, Morgan Stanley reported in a research note this week.

The study argued that FIS and Fiserv continue to be good businesses, with FIS historically serving clients with more than $1 billion in assets and Fiserv catering to smaller institutions, but the tech giants face longer-term pressure from incumbent banks and startups.

“This wave of technology spend by fintechs and the competitors of FIS’s and Fiserv’s clients puts pressure on FIS and Fiserv to innovate,” wrote Morgan Stanley.

Fiserv’s acquisition of First Data, and FIS’s acquisition of Worldpay were characterized by Morgan Stanley as responses to competitive pressures; however, continued tech investments over time will be necessary for the legacy core providers to maintain their positions in the marketplace, the study noted.

See also: FIS to help stand up digital-only banks within 90 days

The report identified three key risks to legacy core providers’ business models, including:

Tier 1 banks’ tech investments
Morgan Stanley highlighted that the tech spend among large and mid-sized banks (with more than $10 billion in assets) is on average 12.5% of revenues. Meanwhile, JPMorgan Chase is spending $11.5 billion on tech in 2019, while Bank of America is spending less than $10 billion for the same time frame.

Growing tech investments from tier 2-4 banks
Citing data from IDC, the report noted that tier 2,3, and 4 banks (those with less than $100 million to $10 billion in assets) collectively spent approximately $18 billion on technology in 2018, and are quickly accelerating their IT investments.

Private fintech investment
From 2013 to 2018, private investment in U.S. fintech, according to the report, grew from $14.1 billion to $53.5 billion. Fintechs are seen as threats to core providers because of  their speed to market, adaptability, and capabilities to offer their services at rates 50% cheaper than incumbent providers due to their lack of legacy tech debt.

 “As tech spend by other technology providers and by their clients’ competitors continues to climb, FIS and Fiserv will need to continue investing in [their]  offerings to satisfy the needs of their client base,” the report explained.

“Persistent research and development is paramount, and could mean that FIS and Fiserv opt to reinvest some of their longer term synergies upside, rather than let them fall to the bottom line.”

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