The other reason why the traditional BFSI revenue stream is drying up is that clients themselves are setting up captive operations or global in-house centres. They are taking the help of service providers to set up these centres, and are also sourcing resources from these partners to manage the core applications in-house.

This is one of the reasons why the country’s top two IT services companies — TCS and Infosys — delivered different growth figures in their BFSI businesses. While Infosys saw a 1.5 per cent decline in the June quarter, the contribution of the segment to the company's overall revenues also declined by 80 basis points to 31.8 per cent. On the other hand, TCS reported a healthy 3.7 per cent quarter-on-quarter growth in the BFSI segment, which accounted for around 40 per cent of the company’s overall revenues.

Infosys acknowledged that insourcing and reduced spending across some accounts affected the growth of the BFSI business, though the management saw good conversion in the Americas. “In financial services, we had a soft quarter primarily due to insourcing from a number of clients and reduced spending in a couple of accounts,” Infosys Chief Operating Officer U B Pravin Rao said. While the company's core banking services had not seen huge traction, banking-based digital offerings were getting interest, the company added.

Tata Consultancy Services, which reported good traction in its BFSI business after a few soft quarters, also noted a similar trend of banks spending on internal workforce, though the firm said its “Business 4.0 programmme (new technology services) was seeing huge acceptance by BFSI clients.

“Our investments in Business 4.0 is paying off and we are very well positioned to attract such investments,” according to Krithi Krithivasan, president and head of BFSI vertical at TCS.

Within the BFSI segment, TCS witnessed strong traction in areas, including wealth management and compliance services, in the past quarter, which were mostly digital-led and boosted the company's digital business growth 44 per cent year on year, compared to Infosys’ 25 per cent.

“Earlier, globally banks would outsource 70 to 80 per cent of their technology needs to IT companies. Today banks were looking at faster turnaround time of digital services, and as a result, developing the technology in-house in their captive centers while trying to bring down outsourcing to less than 50 per cent,” said Pareekh Jain, senior vice-president, HfS Research.

Banks were turning towards their captive centers to compete against fintech companies, Jain added.

In its recent report, SBI Capital noted that the growth momentum in the IT sector was affected due to weaker-than-anticipated discretionary spending over the last two years by BFSI clients. However, the anticipated pick-up in BFSI spending was expected to drive growth in 2018-19, the report added.

“It’s not that they are competing with external service providers by building in-house technology expertise, their approach to outsourcing is changing. They are building shorter duration projects with focus on outcomes, compared to doing large multi-year projects in the earlier phase,” according to Sachin Seth, partner and fintech leader, advisory services, EY India.