2021 has been a year of recovery and a gradual return to normalized market conditions. We had already seen the banks returning to spending in the latter half of 2020, and this continued in 2021 with our business returning to growth from the first quarter and incrementally improving from there. The pressure on banks increased through the pandemic, with an acceleration in the move to digital channels and an increasingly diverse and innovative competitive environment adding to their existing challenges. Banks are forced to respond to these competitive pressures through IT investment, and the growth in non-incumbent spend is creating a new market and demand for Temenos software.
Our vision is to be Everyone’s Banking Platform and we are achieving this through consistently evolving our platform with the highest R&D investment in our industry. Over 20% of our revenues go into R&D and we have made more than USD 2.5 billion of cumulative investment to date, with another billion dollars expected to be invested over the next few years. Temenos has always been at the forefront of our market, as the first to launch real time core processing in 2004 and the first to move to the cloud in 2011. Today our platform is cloud native and multi-cloud, with Explainable AI embedded across it. We continue to make significant investments in our SaaS capabilities having launched our next-generation SaaS platform, the Temenos Banking Cloud, in 2021. We solve mission-critical needs for our clients through the power of our platform and this is ultimately why we are the leader in our market.
Disruptive technologies are having a profound effect on the banking industry, with the cloud, APIs and DevOps already widely adopted.
These technologies, along with others such as AI and big data, mutually reinforce each other, and at the same time, blockchain and distributed ledgers are leading to the rise of decentralized finance. Together, these technologies are driving rapid scalability, innovation and cost efficiency, and they are creating opportunities for open and collaborative business models such as Embedded Finance and Banking as-a-Service. New technologies and changing customer demands have led to an unbundling of the banking value chain, with banking now taking place everywhere, not just within the context of a traditional bank business model. This is creating opportunities for thousands of new entrants with innovative business models and Temenos is capitalizing on this, working with fintechs, neobanks, platform and BaaS players as well as our traditional banking clients.
These changes in the banking industry are driving growth in our addressable market, which reached USD 64 billion in 2021. However only 28% of this spend is with third party software vendors, significantly less than most other industries which are in the range of 60 to 80% of spend with third parties, providing a massive runway for future growth. The spend on third party software in the banking sector is expected to grow at around 10% per annum, up from 8% pre-pandemic. With the significant growth in non-incumbent business models like fintechs and neobanks, the spend in this client segment is expected to grow 29% annually. Most of the non-incumbents use SaaS to benefit from rapid time to market and the ability to scale their IT costs as their business grows, which is driving growth in SaaS spend of 28% per annum. This large and growing market, with a diverse client base and delivery models, underpins Temenos’ medium-term growth.
Temenos has successfully penetrated the non-incumbent market, leveraging our market leading technology that enables massive scalability, as well as our cloud native and multi-cloud capabilities. Our clients also benefit from the breadth of our packaged services, supported by extensive out-of-the box localization, which is something our competitors cannot match.
Through our Open Platform for Composable Banking, we are combining our rich functionality with state of the art technology. We are exposing increasingly granular services and now have the richest set of decoupled banking capabilities by domain. Our clients can consume these capabilities to suit their business needs; as individual capabilities, pre-composed Temenos Banking services or as a full front-toback Temenos Enterprise service. We have a single platform, and one code base, which gives our clients flexibility in choosing which capabilities they take and how they run them, whether onpremise or in the cloud.
Through 2021, we maintained our market leading position with strong rankings and awards from third party analysts reflecting the strength of our platform. IBS Intelligence Sales League Table has ranked us the #1 core banking vendor for the 16th time, as well as the #1 best-selling solution for digital banking and channels, retail payments, and risk management. Similarly, Forrester recognized us as the top global power seller for new-name clients for the 15th consecutive year. We were the only global power seller in the ranking, with a 20% increase in deals. Forrester also recognized us as a top global player for new and existing clients for the 9th consecutive year and a top global crossseller which was a new category they introduced this year. ESG also continues to be a significant focus for us and where our strength has been recognized.
We remain among the 25 Swiss stocks from the SMI® Expanded Index with the best sustainability scores. And in 2021, we again ranked in the top 1% of the Software and Services category in the DJSI World and Europe, as one of the only two companies listed in the Europe Index. We also received a Silver award by S&P for ranking 2nd globally in the Software category. Other indices and investor ratings that have recognized our efforts include FTSE4Good, CDP, ISS, MSCI , EcoVadis, Sustainalytics, Bloomberg Gender Equality Index, just to name a few.
Sales – a gradual return to normal through the year
The sales environment improved throughout the year as banks returned to normalized levels of spending, however the recovery was not uniform across regions. Our US operations performed particularly well in 2021 as we capitalized on our strong position with non-incumbents in particular, and built a good pipeline for 2022 across both non-incumbents and incumbents in the US market. The recovery in Europe lagged the rest of the world, with large banks in particular only gradually returning to spend. We saw good sequential improvement in Europe in the fourth quarter and a healthy pipeline build for 2022.
Tier 1 and 2 banks contributed 36% of our total software licensing in 2021, with the contribution in the fourth quarter in particular reaching 41%.
“We had a great end to 2021, with strong growth as the sales environment continued to improve and we are now at pre-Covid levels in closure rates and predictability.”
Overall we had a total of 63 new client wins for the year, with our market leadership position driving our success in new business where we have consistently gained market share across incumbents and non-incumbents.
Total bookings is a metric we use to assess the new business growth as it takes into account signings across license and SaaS. In 2021, total bookings grew 36%, reaching nearly USD 740 million. This was also up on total bookings in 2019, our strongest year ever prior to the pandemic. We saw broad based demand across both license and SaaS, and there was an increase in average tenure compared to 2020.
Our SaaS business continued its very strong performance in 2021, with SaaS ACV up 66% in the year and SaaS revenue up 29%. Our US and European business drove the majority of SaaS signings in the year, and we built a strong pipeline for 2022. Most of the demand is still incremental to our business, driven by fintechs, neo-banks and other non-incumbents moving into financial services. There is also a small but growing number of Tier 4 and 5 banks that are considering the use of SaaS for their IT renovations.
“Our vision is to be Everyone’s Banking Platform and we are achieving this through consistently evolving our platform with the highest R&D investment in the industry.”
Key strategic initiatives to drive growth across SaaS and licenses
At our Capital Markets Day in February 2022, we outlined our strategic initiatives to achieve our medium-term targets. These focus on four key areas.
Continued SaaS acceleration
We have delivered strong sustained growth in our SaaS business over the last few years, on the back of our continuous investment in our SaaS and cloud capabilities. The latest evolution of our SaaS and cloud offering is the Temenos Banking Cloud, which enables clients to easily access, test and deploy our composable banking capabilities. We expect our SaaS revenue to grow at a CAGR of more than 30% to 2025, whilst also improving the gross margin in our SaaS business by deepening our relationships with hyperscalers such as AWS and Azure, investing in greater automation and scaling revenue on an optimized cost base.
North America focus
North America is the largest market globally, and we have made significant investments in the last five years, both organically and inorganically. This is reflected in the growth of our business in this region, with the contribution from North America to total software licensing tripling since 2014. Going forward, we expect North America to contribute 40-45% of total software licensing by 2025. We intend to achieve this by maintaining our leadership with non-incumbents in the US, building on our strong referenceable client base. At the same time we will focus more on large banks in the US, leveraging our open platform, our US model bank and our strategic partner relationships, for example with DXC and Salesforce, to drive incremental growth.
Increasing penetration in larger banks
We already have 36% of the global Tier 1 and 2 banks as clients of Temenos, and we expect to increase our penetration of this important segment going forward. We have a very significant opportunity in this space, to both capture more wallet share within existing clients, and to win new names. Large banks continue to increase their spending on third party software, driven by the need to fend off competition from non-incumbents, who enjoy lower cost operating models, by leveraging the latest technologies. We have invested heavily in our open platform to support the priorities of large banks. Our platform allows targeted, incremental modernizations, and helps banks benefit from international expansions quickly, with a standardized operating model. Going forward, we expect Tier 1 and 2 banks to contribute between 40-50% of total software licensing.
Partner centric approach
The last strategic initiative is our partner centric approach. We have a thriving ecosystem of partners doing everything from implementation to providing complementary solutions. We are co-innovating with fintechs to create new offerings for our clients and we will drive more value by working with them, leveraging our open platform. Fundamentally, our partnerships will help us scale revenues and drive growth, in particular key strategic partnerships like DXC and Salesforce, and exciting new BaaS partnerships with Vodeno and Mbanq.
I am pleased with the growth we delivered in 2021 as we continued to deal with the fall out from the pandemic. We returned to growth in the year, and signed a greater amount of new business than we did in 2019. Our SaaS business in particular is doing exceptionally well, and we are well positioned for growth in 2022. Of course none of this would be possible without the efforts of every single person within Temenos. All our Temenosians continue to perform to incredibly high standards whilst remaining true to our values of tenacity, velocity, responsibility, authenticity and a constant focus on community. And it is these values and the strength of our Temenos community that will enable us to continue to grow and to achieve our targets in the medium term as the leader in our market.