Leading executives from
four of the largest suppliers to the global retail banking market –
Oracle, Temenos, Microsoft and IBM – discuss with Douglas Blakey
the state of the market, the evolving role of IT and how banks can
ramp up their efforts to return to pre-crisis levels of
profitability.
Go deeper with GlobalData
While 2010 has witnessed
progress at many of the banks most adversely affected by the crisis
getting back towards pre-2008 levels of profitability, many
challenges remain unresolved.
Among hurdles to overcome
include, in no particular order: the need to shore up balance
sheets, reduce costs, restore client trust, reform the risk
management culture and optimise multichannel
opportunities.
RBI spoke with
leading representatives from four of the largest suppliers to the
retail banking sector to assess their views on the state of the
market and to sound them out as regards advice they would offer the
sector for 2011.
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By GlobalDataRetail Banker
International (RBI): How would you
summarise some of the more notable changes in the retail banking
sector? What is your take on the market?
Senthil Kumar,
Vice-President, Marketing, Oracle Financial Services Global
Business Unit (SK): Fewer and fewer retail banks have
applications for the core businesses that leverage the technology
and web for servicing customers.
As a result we expect many
more to evolve by removing the multiple instances of legacy
applications and moving to a global single instance for its
business within the country or region or worldwide.
Functionality has been
delivered for the past two decades for business. Given the state of
the core applications – much of the newer functionality has been
built around the existing core application that can be based on the
same legacy platform or newer Open Systems. Hence very inefficient
and expensive IT resources.
Over the past five years,
Oracle has brought the best-of-breed applications in the banking
industry to a common operating platform and has now evolved this
further towards the delivery of systems that is tested with our
Apps to Disk stack.
Andreas Andreades,
Temenos CEO (AA): In many ways, core banking
investment for retail banking was being neglected pre-crisis.
The big traditional banks cannot
rely for their profits on investment and wholesale banking going
forward. While we see some inertia, the brave banks who take the
plunge and carry out a strategic restructuring, will be
rewarded.
There will be winners in the next
10 years and we see retail banking as the criteria for major banks’
prospects.
Marcelo Marquez, Worldwide
Financial Services, Microsoft Corporation (MM): Cost
reduction continues to be a huge priority for banks. My take on the
market is that banks still have work to do to rebuild trust with
the customer. They need to provide the customer with a better
experience.
One of the biggest changes we see
is in customers themselves. They are more knowledgeable and have
really embraced technology in the past 10 years or so.
Likhit Wagle, Global
Industry Leader, Banking and Financial Markets, IBM (LW):
I think you have to make a clear distinction – from a market-state
perspective – between the mature markets and emerging markets.
For example, in the BRIC countries,
there is 7% to 8% GDP growth. In the mature markets, we are only
just coming out of recession.
In the mature sectors, a real loss
of trust with banking customers is a major issue. The banking
industry will have to spend time, money and real effort to rebuild
that trust.
You just do not see that topic on
the agenda in the BRIC countries.
In the emerging markets, while
achieving growth will not be a problem, there is a challenge of how
to contain increases in cost-income ratios.
I know one bank in India, for
example, confident of achieving 35% annual growth, but at the same
time it wants to reduce its cost-income ratio from 47% towards
40%.
RBI: As vendors
operating on a global basis, are you benefiting from banks’
increasingly demanding higher levels of support from a single
source supply?
SK: At Oracle we
participate in SOA deployments within banks and financial
institutions. To date application components have all come from the
same stack.
In January 2010, Oracle announced
the Flexcube Integration lab where customers can configure, test
and fine-tune the design for SOA deployments within their business
using Oracle FLEXCUBE 11.0.
They can also remotely configure
and test the services using our application components, along with
any other component that could be bank specific in the design.
AA: It is
certainly not only about product and functionality – banks are
looking at customer service. We are relevant in their
considerations
Multi-vendor relationships tend to
be more expensive; the less vendors banks have to work with, the
better for them.
RBI: Is there
evidence that international banks are demanding one solution for
all the markets in which they operate?
SK: Multi-country
banking has enjoyed great demand since the second banking directive
was passed by EU nearly a decade ago.
Initially, the banks in EU used the
multi-country deployments as a means to bring all country
operations under a single legal entity within Europe and remove
country based IT and applications infrastructure. Oracle has
participated in such implementations and assisted banks to remove
costs upwards of €100m ($136m) for a typical 10-country
implementation.
Over the past few years,
international banks have used multi-country banking to buy assets
to enter new markets and standardise operations from a single
operations centre to enable a uniform customer experience.
LW: Banks are
seeking our help to simplify their operating models. They are
looking at what aspects of their business need to be local,
regional or global. They are asking what parts of their business
can they outsource?
We have witnessed a significant
uptake in outsourcing in the past four to five months.
For example, we have recently
signed outsourcing deals in Europe with Danske, Nordea, Bank of
Ireland and ABN AMRO. The latter wanted to expedite its business
integration with Fortis in the Netherlands and incorporate newer
technology such as the Cloud.
Such an integrated platform at ABN
AMRO will definitely be more conducive to the bank offering a
customer-centric operation.We are even starting to see an interest
in outsourcing in countries where the banking industry has not
historically taken to the concept, such as in Italy.
RBI: What is your
take on banks’ current levels of IT spending?
SK: Banks continue
to be plagued by today’s constantly changing market issues.
Research by leading analysts clearly indicate that between 60-70%
of a bank’s IT budget is towards keeping the lights on with the
existing applications and infrastructure. We see banks stepping
ahead to make it a strategic initiative to renew and build a
competitive operations platform in the next three to five
years.
Also, the change in regulations
over the past 12 months has had an impact on the priorities at
board level. The predictions from analysts clearly state that banks
are seriously evaluating the options to bring the risk and finance
functions together for running the bank with risk adjusted
performance measures.
MM: Major banks
are becoming more strategic but many of the larger international
lenders, are still consolidating recent acquisitions.
We see investment in data and
analytics. Banks are increasingly becoming more aware of the amount
of data that they hold and how they can transform data into
knowledge and the benefits that it can bring.
Increasingly, banks are starting to
build data models that will transform the way they manage risk and
use analytics to serve customers in a better way. We really are
starting to see a new evolution in customer centricity.
AA: We are way
ahead of where we were pre-crisis due to market share gains.
Without being arrogant about it, we have developed a business model
which addresses banks concerns at this time.
RBI: How is IT
investment by banks being affected by recent market conditions?
Increased regulation, etc?
SK: In a recent
study commissioned by Oracle, we learned that 31 per cent of
European banks have had issues with their IT systems that has meant
they have struggled with regulatory reporting.
Also, almost half of banks did not
have confidence in the accuracy of their risk and counterparty
related data. In addition, 48 per cent agreed that the pressure to
hit reporting deadlines has meant in the past that the data used
just needed to be ‘good enough’ to get the reporting done, instead
of 100 per cent accurate.
We see a greater momentum among our
customers to address new regulatory reporting by looking at the
whole landscape rather than just buying themselves another tool for
reporting.
MM: When you talk
to banks’ IT departments, identifying the right way to service
their infrastructure remains a huge focus for them. Customer
relationship management (CRM) investment is a major trend for many
banks, some of whom are now evolving onto a second generation form
of CRM.
And CRM, when used properly, can
truly become the glue between all channels, the front office and
the back office. CRM can assist banks to improve sales and enable
branch staff to be more sales oriented as opposed to service
oriented.
LW: The regulatory
agenda will impact the mature markets and affect IT spend. It will
not affect the BRIC countries to anything like the same extent. But
you will see banks in, say, China, who will invest to get their
standards up to world class levels – they will want to measure up
against what is required in other parts of the world.
RBI: How is
decision-making within banks evolving?
SK: Since Y2K, IT
investments have been on the board’s radar. The board members now
see IT as an essential investment to preserve and grow the value of
the brand.
The ability to view and seek
information down to a business unit or product has become essential
for the Board. The CFO, CEO or COO is not comfortable signing
reports unless there is access to numbers that have been reported
on.
Also, now that IT is seen as a
service partner to business units, it has established the
governance for business units to be stakeholders in all IT
projects. This has helped drive greater results for bank in either
of the four Cs – customer intimacy, cost effectiveness, competitive
differentiation or compliance to regulations and risk
management.
AA: I would say
that banks in the past have failed to understand customer
profitability.
They never really looked at profit
per customer. When they do, they may find that two-thirds of their
retail customers are not profitable. So banks are now realising
that investments on IT require optimised use of analytics and
business intelligence.
LW: Banks have
data all over their organisation that needs to be cleaned up and
consolidated.
Whether it is analysed on a
customer, product or geographical basis, I expect to see
significant expenditure by banks in this area. Cleaning up the
information landscape and making sure they pull together the data
will help banks answer in their credit-decisions and also from a
regulatory perspective.
In one interesting engagement I
know of in the US, a major universal bank expects to save upwards
of $400m over the next five years by thoroughly cleaning up its
data.
On profitability, banks are certainly now starting to give
priority to measuring customer profitability. They are asking if
they should move their business model away from free current
accounts. They are asking which customers can we afford to offer
free current accounts?
