Nasdaq-listed Virtusa Corporation built its global business mainly by helping banks deploy technology to save costs. Now, bad enough tightening regulations are upending the traditional banking business model: for example, banks can no longer make profits by increasing spread across maturity mismatches under the new Basel III rules, and digital technology (and the online financial services businesses it spawned) is taking the wrecking ball to the very brick-and-mortar foundations they stand on. Virtusa is now finding success helping legacy banks embrace the digital threat, says Kris Canekeratne, founder chairman and chief executive of Virtusa Corporation. The firm began in the garage of Canekeratne’s home in Colombo in 1996. Nearly three decades later, it’s on the threshold of crossing the $1 billion revenue mark.
Headquartered in Westborough, Massachusetts, USA, the company expects sales to cross $1 billion in the 12 months ending March 2018, growth of 18% from a year earlier. “This is significant compared to an industry growth rate of 4-8%,” Canekeratne says. More than half of Virtusa’s revenue is from banking clients. It helps banks cut costs by reducing IT clutter and integrating its platforms to meet complex regulatory requirements to reduce compliance costs. Today, Virtusa specialises in developing digital banking platforms. Around a fourth of digital banking in the US rely on code written by Virtusa engineers across the world.
Excerpts from the interview are as follows:
What are key trends driving your business?
Canekeratne: Large banks are making digital investments to ward off threats from online startups eating into their market share. But, it’s only the start. The Fourth Industrial Revolution will bring new threats and opportunities, as a new breed of consumers and employees make never-before-seen demands from businesses. At Virtusa, we’re building capacity and scale ahead of this demand. The Fourth Industrial Revolution has four enablers, which is why there is a strong, pressing requirement for enterprises to prepare themselves.
First, the last decade experienced significant technological maturation. There’s been significant progress in AI, robotics, micro services architecture and big data. The cloud enables so much computer power to store and access big data whenever needed. Second, all this technology is being applied to serve the needs of the emerging digital consumer whose expectations on how they are serviced are very different to that of prior generations.
Third, there is an abundance of assets in the supply chain. Companies like Uber and Airbnb have sprung up to leverage this over-abundance. Uber doesn’t own a single car or employ a single driver, but they’ve built a $50 billion company. Fourth, a significant amount of capital is being thrown behind these online companies, disrupting the status quo. Investors have infused over $50 billion in capital to online financial services companies, or fintechs like SoFi, which underwrites over $15 billion of US student loans, and Venmor, which is used by people to transfer money to friends and businesses.
Maturing technology, new-age consumers, an over-abundance of assets and enough capital funding are the enablers of the Fourth Industrial Revolution. Millennials will only work with someone who will work on the mobile device. This is doing two things. First, it’s blurring the lines between industries. A bank with a good payment system will still be competing with a company like Alipay, which is not even a bank. You can now buy insurance from Amazon. Second, online companies are simply extending the time consumers spend on their platforms. So, what can legacy enterprises do? Sit back and lose business, or embrace the revolution.
Losing customers and businesses to the digital disruption is not the only challenge. Finding and retaining talent will depend on how companies embrace the Fourth Industrial Revolution.
The workforce of the future is changing dramatically. Far more people are involved in the geek economy, working on multiple projects for multiple companies at the same time. How do we get their interest? One way is to create a strong ‘gamified’ environment that ensures people are continuously setting and resetting the bar on excellence. We need to think about millennials, who grow up playing games. High school kinds probably play around 10,000 hours before they graduate. If companies can build similar environments, they will naturally gravitate to those companies.
Growth is a huge conductor of talent acquisition, so it’s one of Virtusa’s advantages because we are growing faster than the industry. We have a tremendously attractive value proposition for the best engineering talent in the world. Once they join Virtusa, they get to work on some of the most transformational programmes in the world, be it digital or engineering arbitrage.
We have a ‘gamified’ performance engineering platform that gives everybody real-time visibility of their performance. You can see what the top performer is doing, so anyone can mimic that and build their skills. Performance evaluation is real-time and transparent. It fosters meritocracy. This ‘gamified’ software engineering platform engages millennials and offers faster career progression.
There’s a phenomenal opportunity for Sri Lanka to be a part of the global digital transformation. Sri Lanka’s IT industry may not have the size and scale of India’s, but it has people and companies with capabilities around design thinking, creating platforms and domain building. This is very appealing to businesses looking to build a presence in the digital economy because they want people who will put all the pieces together and perfect designs.
How is Virtusa helping banks go digital?
Canekeratne: Virtusa is well-positioned to help businesses embrace the new digital norm; create strong digital experiences; and re-imagine their digital store fronts whether in banking, insurance or media. We’re not turning smartphones into computers, but creating platforms that make sense for a mobile phone. That’s a big difference. Our digital business is seeing significant traction in the US and Europe.
Virtusa is one of the largest providers of digital banking and financial services. About 55% of the group’s $1 billion revenue in the 2017/18 financial year comes from our banking clients. Business from this segment is what’s driving Virtusa’s growth. We expect revenue growth to reach 18% in the current financial year, while our competitors grow at 4-8%. Large scale digital transformation in banking and financial services is driving our growth. Virtusa is responsible for building digital banking platforms that transact over 25% of all digital mobile banking accounts in the US. There are around 200 million digital banking accounts in the US, and over a fourth of these run on software and platforms created by Virtusa; that’s a significant share for a company that started out in a garage in Colombo.
There is a reason why large banks are going digital. There is a digital consumer today—primarily millennials—whose expectations on how they are serviced are very different to that of prior generations. They don’t want to visit bank branches just to open an account, but many banks gobally still have this requirement, only then can clients access their accounts online. Think Amazon, Uber, Airbnb or even Facebook: you don’t have to go anywhere to open an account or transact. That’s the new reality of a digital world; everything is online. Fintechs like SoFi, Alipay and Venmo have emerged to fulfill this need and are taking away business from traditional banks with minimum capital and certainly no branches. To survive and grow, banks have realised that they must create digital experiences from the ground-up.
For this, banks need to be able to provide a seamless interface like Amazon or Uber, and create a better experience for their clients: a personalised, frictionless experience. In this regard, banks are leveraging big data to gain as much insight as possible about clients, their preferences and communities, to deliver targeted services that best meet their needs. Across banking, we’re seeing more adoption of big data. Banks generate a lot of data. A single transaction can infer many insights about a customer, different demographic subsets or different consumer groups.
At Virtusa, we apply big data, artificial intelligence and machine learning to create better customer experiences for our banking clients. However, most banks are still far behind. Banks have too many systems and have to compete with online companies that don’t even have any legacy, so the requirement to move quickly is great.
Regulations are tightening. Isn’t this compounding challenges to banks in the digital front?
Canekeratne: Going digital can actually help banks navigate regulatory complexities in many ways.
For example, one of our clients is a large consumer bank in the US, which is permitted to do business in only 24 of the 50 states. We worked with them to build a ground-up, all-digital mobile bank, and enabled them to take deposits and provide banking service across the entire US. This is because digital commerce regulations don’t preclude them from transacting in those other 24 states—so digital has created bigger market opportunities. An important trend we’re seeing is large companies trying to reduce costs, which is not easy in regulated industries like banking. Virtusa has strong capabilities in engineering arbitrage. This is where we go in and help clients simplify, rationalise, consolidate and modernise their IT systems. We truly believe that it is also a requirement to create a better digital presence. We call this creating the connective tissue between the bank’s systems and consumers’ digital requirements. We have a leadership position in that digital transformation middle-ware space by applying our capabilities.
When we apply engineering arbitrage, our clients save anywhere between 20-30% of existing costs, and we do that primarily by effort reduction and work compression as opposed to applying costs to reduce costs, also known as cost arbitrage. That is a big differentiator for us.
Is Virtusa looking at other industries apart from banking?
Canekeratne: Banking is not the only industry going digital. Digital is gaining momentum in other industries as well, like insurance, healthcare and media.
Recently, a large cable company in the US selected Virtusa for a very advanced blockchain advertising platform. Essentially, we are helping large media firms share insights about their consumers, so they can provide better marketing, programmes and offerings. Most people relate blockchain with banks, and at Virtusa, we do a lot of work in blockchain for them, but we are also finding that it is becoming as applicable in other industries.
We expected revenue to reach the mid-$900 million range for the 2017/18 financial year, but what we didn’t realise was that working in digital, AI, blockchain and engineering arbitrage resonated well with our clients, leading to more and bigger contracts and new client acquisitions. This was why we crossed the $1 billion revenue mark ahead of schedule.