Demand for core banking upgrades is on the up, according to Misys, and vendors are increasingly able to meet the high expectations of banks due to a tried-and-tested modular approach. This means lower risk and a higher return on investment, for small and large banks alike. Anna Milne writes

The market has been getting tougher and tougher for financial technology vendors, given the understandable fear and trepidation on behalf of banks in committing to full-blown core banking upgrades.

Vendors have had to adapt to this environment and respond with a more viable solution that is less ‘all or nothing’ and more piecemeal: proven processes that can be integrated easily to decrease running costs and increase revenue.

Cormac Flanagan, product director of core banking at Misys, says: “More banks are looking for core replacements. Some of this is regional. Africa is very buoyant at the moment but there is definitely more happening in Europe, Asia Pacific and the Middle East than there was. And there is less demand for a full-blown core banking upgrade – it’s a more modular approach now and it’s all about processes and channels.”

And demand in Europe is coming not only from the small banks and credit unions but also the large banks. Aside from this, there is an emerging trend towards models. Banks no longer want to start from a blank sheet; they now demand to know the product or process has been tested by the vendor.

“Invariably, banks now want mobile and digital channels and they want something quick in this space. This means they want from a vendor a pre-determined set of models for processes and products ‘off the shelf’ and ‘best of breed’,” says Flanagan.

“In the past, when you ‘blue sky’, as it’s called, the projects just go on and on and die on the vine, especially with the larger banks, so most of them now ask for model banks,” Flanagan adds.

Alex Kwiatkowski senior marketing strategist for banking at Misys, says the vendor industry has struggled to meet the ROI expected from core replacements and that the focus on channels has been increasingly important to get right. The pressure is on to make new releases far easier to install and upgrade so that banks can take on functionality in a much easier fashion. Historically, an upgrade was an enormous task.

“Software would be slowed down in the past by having to adapt to banks’ legacy systems. We now have mapped out processes for increased revenue, giving lower running costs and greater customer satisfaction. These are better than trying to marry software with systems from the 70s and 80s, which can massively curtail the value of investment,” Kwiatkowski says.

Demand is down to technical obsolescence and cost of ownership and this is driven by the digital channel piece. The expectation now is for a seamless experience.

“The mobile banking channel is driving more change in the core banking system. Banks realise they need far more utility in the back end.

“For larger banks with in-house systems, the running cost is huge, so more of those banks are looking at full replacement. The vendor market has matured in banks’ eyes in terms of being able to handle volumes and resistance,” says Flanagan.

Ultimately, banks only do a core transformation if they really have to. And Flanagan is generous enough to extend sympathy to those faced with this decision: “At the end of the day it’s the riskiest thing you can do. It really is the last thing you want to do. It’s like changing the engines in a plane when it’s flying.

“In fairness, the so-called proponentisation approach, also known as a graceful change, is understandable, especially for the larger banks. Start with the channels then pick off the silos, etc.”

Adopting a different strategy to core upgrades, some banks are going for a brand new digital offering instead of a new brand and are taking on new customers, Flanagan explains.

“In two years’ time when they’ve proved to their internal staff that it is resilient and does offer flexibility and functionality, then they’ll migrate over – this is another strategy for some of the medium-to-large banks.”

Going forward: rigorous regulation, rapid mobile banking growth and wearables
Due to the failures experienced in the UK and Ireland over the last few years, Flanagan expects to see greater regulatory oversight around technology.

“We’ll be subject to more and more questioning along the lines of how resilient your software is. That drive will change as well. Regulators know nothing about technology but they know it’s a risk to our financial system,” Flanagan says.

In the emerging markets for the unbanked, mobile will be the way to offer financial services. “This has been talked about for the last fifteen years but there is going to be rapid growth in that market,” Flanagan continues.

Wearables will be the most important development, according to Balazs Vinnai, general manager of digital channels.

“I believe voice command and AI similar to touch screen, will flourish. Wearables can be a device to enable voice and touch commands in a much better way.”

Kwiatkowski says analysts are forecasting huge growth in spending in core banking and digital channels investment. “We’re not chasing a market that doesn’t exist. At a CapGemini event this time last year over 50% of the room of corporate bankers said they were committed to spending at least €30m ($32.6m) on digital channels. Banks are spending.”

A pertinent point to remember, however, as Flanagan highlights, is that the replacement cycle of digital channels is three to five years; the core banking one is ten to fifteen.

Keynote Debate – You don’t have to be a start-up to be a disruptor

There was disagreement on the panel as to what constituted disruption, whether the big banks are seriously under threat or whether they themselves are disrupting as much as their nimble, digital counterparts. Are they the dinosaurs they are made out to be and do they face obsoletion?

Liz Lumley, managing director, Startupbootcamp Fintech
Nicolas Cary, co-founder, Blockchain
Dan Roberts, managing director, Trade and Working Capital, Barclays
Moderator: Alex Kwiatkowski, senior marketing strategist, banking, Misys

To kick off, Nic Carey explained his company was not the designer of the original blockchain, rather develops ways into making it work. Carey admitted the namesake did benefit massively, however, in terms of SEO.

“Essentially a spreadsheet in the sky, that’s been replicated by thousands and thousands of people and they maintain it. In order for you to write to this ledger, you have to send a bitcoin transaction and when you do that, you can store some data with it. The first practical application of this is a payments system for the internet. This is why companies such as Microsoft, Dell, Wikipedia, WordPress and many others are starting to accept bitcoin as a payments platform because it allows them to open up their doors to consumers and customers all over the world to receive a payment digitally and get 100% of the value of the transaction. Earlier I described it as a P2P transaction – essentially digital cash. Ecommerce is another application,” Carey explained.

Land title registry is another use case – a ledger that keeps track of everybody’s property, that can’t be changed – an immutable database that is replicated globally. Carey also mentioned the tracking of stocks, bonds, certificates; the provenance of diamonds, “these are all real world applications and are now proofs of concept that are now developed in a live and working-on-the-bitcoin blockchain right now. There is a lot to disrupt – it doesn’t have to just win in a few places – it could be 15% of online commerce; it could be 30% of world remittances, it could be a way to do online payments and P2P and all these registry services. If it does any of those things, the bitcoin blockchain will be worth hundreds of billions of dollars.”

Alex Kwiatkowski was quick to point out that regulation-wise, however, blockchain is the Wild West.

“The protocol level of bitcoin is not regulated in the sense that it is not owned by a company so just like TCP-IP allows people to send messages all over the world using the internet, the bitcoin protocol does the same thing for value transfer. So companies that choose to implement that technology will be regulated just like banks or just like financial service providers,” Carey explained.

Anyone holding custody of user funds will be audited and insured, Carey pointed out, and emphasised that blockchain technology can build a trustless service.

“For the first time in history we have computer science innovation that allows us to send value anywhere in the world without a middle man: no merchant processor, no merchant clearing house, no bank, no forex exchange, just peer to peer.”

Liz Lumley made an impelling argument to dispel the myth that financial services will fall by the wayside, yielding to digital competitors.

“To compare banking to other industries that have been disrupted, like Kodak or Blockbuster, is to fundamentally misunderstand what banking is and what banking means to society. Financial services and banking underpins every single industry in the civilised world. A secure, regulated bank account is the cornerstone of civilisation. Can banking and financial services be made better? Yes. Can that be disruptive? Yes. But this whole idea that we’re going to wipe out the dinosaurs is nonsense. It’s about working together and collaboration and bringing in new thought. New fintech companies are going to disrupt market thought, not market share,” Lumley said.

“Ultimately, our goals are the same, which are to provide decent services for our users. We are trying to completely re-imagine the way the world transacts, not just in finance, or in a payments platform but using the blockchain to do all kinds of other interesting things,” Lumley continued.

At Startupbootcamp, fintech start-ups work very closely with partners such as Lloyds, Rabobank, MasterCard, Intesa Sanpaolo and PwC. Around ten start-ups a year are chosen to work with the banks.

“I have issues with the term disruption. Every single start-up that comes in wants to sell to a bank or asset manager or a large corporate. The people who disrupt this industry are inside the banks.”

Barclays’ Dan Roberts added: “I do like the term disruption and I do see the industry as ripe for disruption. However, people confuse the notions of inevitable and imminent. I would agree with the debate thread which is you don’t need to be a start-up to be a disruptor- both the start-ups and the incumbents have disadvantages.

“I work for the seventh oldest bank in the world, which celebrated its 325th birthday in 2015. I would definitely consider companies that are 325 days old as being a competitor today, that’s not something I would have said even two or four years ago,” Roberts said.

Lumley: “When this fintech revolution came about a few years ago, there were people who got on stage and called banks dinosaurs and said the new fintechs were going to come and a financial utopia will emerge. Your customer service app is not going to take down a bank, it isn’t. And to compare banking to the demise of other industries is ridiculous.”

Lumley pointed out that while banks are fostering start-ups and innovation, they are not changing the system so as to make it actually viable for start-ups to set up here, meaning that many then disappear off to New York and other places where it’s easier to set up an account. Simple measures like this are holding back innovation.

Countering this, Roberts came in: “Yes, there is a trust requirement, the fiduciary nature is for sure one of the dynamics of the industry and it is a highly regulated industry but I’m not sure either of those in their own right really means that the barrier to entry for start-ups is too high.

“Any new start-up can develop ideas and if they’re relevant they will get adopted and frankly it may be the Wild West but it will catch up. Blockchain became a buzzword without a great deal of thought or understanding – there are some incredibly powerful ideas that sit behind the technology in terms of distributed ledger and tackling the huge and fundamental problem of reconciliation that sits at the heart of banking. If we can suddenly wipe out in an instant reconciliation between banks this is powerful.”

Carey came in again: “I haven’t seen a lot of actual success from banking incubator schemes, where the bank brings in entrepreneurs and learn from them. Entrepreneurs put themselves in a position and take the view the closer they are to danger, the further they are from harm. I’m not really sure if that’s true but I do strongly believe there is an opportunity where software will severely eat into profit margins.”