The recent Gartner ‘International Retail Core Banking Report 2013’ ranked many of the major technology vendors in this space, which provide vital current account back-end processing software to banks around the world. The report, covered in bobsguide, also highlighted some emerging trends such as a tendency to consolidate; the need to integrate ‘surround systems’ such as big data analytics, anti-fraud or the mobile channel into core banking systems; the rise of new customer banks in the Middle-East and beyond; and of new cloud-based delivery mechanisms. Bobsguide’s Neil Ainger talked to a number of core banking technology vendors such as Temenos and Fiserv below to assess their response to the Gartner report and the current state of the marketplace. Fiserv’s Richard Broadbent, vice president of strategy and international channel development, answers bobsguide’s subsequent Q&A questions.
Q1 (bobsguide): As the Gartner ‘International Retail Core Banking Report 2013’ is released and the list of core banking vendors in the so-called Magic Quadrant is revealed once more, what technology and market trends are you discerning?
A1 (Richard Broadbent, VP of strategy and international channel development, Fiserv): Retail banks’ legacy environments are extremely complex in nature and are getting more so. This trend is driven by a number of factors such as the sheer number of bank platforms - often a result of historical merger activity - to the emergence of new channels and transaction types. Any discussion about core banking system replacement needs to encompass not just the core itself but the systems and services that surround the core such as channels, payments and financial crime and risk solutions. It is a complex subject and vendors that are able to satisfy the full needs of a retail bank are clearly better placed to serve the needs of a bank than those that are not, but even where a vendor is not in a position to provide comprehensive solutions they need to understand the implications of an integrated environment and the role they play, so that they can provide appropriate advice and guidance to the bank.
Additionally, technology vendors need to consider the different sourcing / distribution methods a bank may require. Historically, retail banks have preferred an in-house delivery and operational IT style, but there is definitely an emerging trend now towards outsourced Software-as-a-Service (SaaS) solutions, which can be delivered and sometimes maintained in the cloud by third parties. This cloud trend is particularly prevalent for new market entrants and newcomer challenger banks.
Q2 (bobsguide): What other trends are you seeing in the core banking marketplace? For example, increasing standardisation and interoperability / connectivity requirements as banks move towards shared services platforms or common SOAs; less banks wanting more flexible, agile systems that can launch a product faster; a demand for more monitoring BI data, etc.
A2 (Richard Broadbent, Fiserv): The biggest trend impacting the core banking technology marketplace at the moment is the emergence of digital channels. Many retail banks have core banking systems that have been in place for 30-40 years - they were not built to deal with the demands of the digital era. Legacy core banking systems are being placed under increasing pressure as a result of this, so we are starting to see a lot of technology led replacements and the adoption of service orientated architectures (SOAs) in order to cope with these new channels. Fiserv is also seeing a strong focus on revenue generation after a long period of financial instability; as banks focus post-crash on finding new ways to drive revenue via new products and services. In a similar vein we are now starting to see a focus on one-to-one pricing models where fees are based on the value of the customer relationship.
While cloud computing and SaaS is not necessarily a new tech trend, its adoption levels are still low in the financial services (FS) sector due to the heavily regulated nature of the industry. However, as the regulators start to catch up with the desire for cloud services within banks, Fiserv is starting to see the early stages of adoption.
Q3 (bobsguide): Where are you seeing most of your growth from – (i) geographically? (ii) in terms of functionality and delivery mechanisms like SaaS?
A3 (Richard Broadbent, Fiserv): The core banking market globally is still a very attractive place for Fiserv. The Europe, Middle-East and Africa (EMEA) region sees the lion’s share of investment in new systems and upgrades in a dollar value sense in terms of total spend, but Asia-Pacific and Latin America (LatAm) are the biggest growth areas for Fiserv in terms of physical volume. Regulation is also having a big impact on growth in some markets. In the Philippines, for example, new regulations will make it much easier for banks to adopt cloud based services so we expect to see the demand for SaaS begin to grow.
Q4 (bobsguide): What proportion of your recent implementations are replacement / upgrade work in developed markets versus new build contracts in emerging markets?
A4 (Richard Broadbent, Fiserv): Fiserv is a geographically diverse organisation with a strong customer base in both developed and emerging markets. This results in a healthy balance between new build projects and upgrade work with existing clients, so we don’t see any real trends emerging there. However, there are clear pockets of activity in certain markets, such as Vietnam and Myanmar, where there are high levels of new build core banking system adoption as the economies there grow.
However, the key point I’d like to make is that at Fiserv we are actively looking to move away from the upgrade cycle where a bank customer looks to adopt incremental functionality. Core banking system vendors typically release upgrades for their solutions every one to two years, which can be very disruptive for retail banks looking to adopt new functionality. At Fiserv we are working to provide incremental functionality without the need to upgrade, in order to minimise disruption and increase the Return on Investment (RoI) for our customers.
Q5 (bobsguide): Do you think we’ll continue to see a consolidation trend among core banking technology vendors such as Fiserv and what impact do you think this will have upon bank end users, which typically focus on innovation and price as key determining factors?
A5 (Richard Broadbent, Fiserv): There has already been significant consolidation among core banking technology vendors so any further consolidation is likely to be around acquisition of market share, and will in my opinion be on a much smaller scale than we have seen previously. That said, there will be on-going acquisition of solutions that sit around the core, as vendors look to round out their portfolio or leverage outside innovation.
A bigger challenge for banks and therefore for core banking vendors is innovation that is being introduced through the emergence new competitors, particularly in the payments arena, with non-traditional players such as PayPal increasingly challenging traditional banks. I believe Fiserv’s portfolio of payment solutions can help banks to quickly off innovative, relevant solutions to their end customers.
Q6 (bobsguide): Is there increasing demand for better regulatory and risk reporting functionality across payment chains and improved BI customer data?
A6 (Richard Broadbent, Fiserv): Absolutely, risk and regulatory reporting are key issues, as is identifying effectively using customer data. There has been significant focus on risk, financial crime and compliance solutions due to the emergence of digital channels, the electronification of payments, and the increasing post-crash regulatory burden.
The emergence of new channels and their use in society also means that there is a huge amount of customer data now available to retail banks. Knowing how to manage and use this data is clearly a continuing challenge for banks, which is driving demand for bespoke and cost effective business intelligence (BI) solutions that can help to target end users, improve customer service and grow the business. It is crucial for a bank to understand how new services such as mobile banking and social media are impacting the whole organisation by monitoring behaviour patterns, the rate of adoption and usage, etc. In addition, retail banks must assess the impact that this trend towards customers wanting more and more consumer technology from their banks, is having on other areas of the business. For instance, more and more processes typically become automated as customers’ demand 24x7 service, and more technology adoption can enable probes and improvements to customer satisfaction levels to be launched.
Q7 (bobsguide): As bank CIOs budgets are increasingly constrained by regulatory compliance costs and ‘keep the lights on’ legacy costs what impact is this having on the core banking market in terms of available tech budget and preparedness to invest, a preference for Opex SaaS solutions, as opposed to old style Capex build-out solutions, etc?
A7 (Richard Broadbent, Fiserv): Maintaining regulatory compliance is a significant burden to financial institutions (FIs), absorbing large quantities of the resources available to bank chief information officers (CIOs). However, this doesn’t diminish the demand placed on CIOs by the business to support critical programmes of work. CIOs are therefore increasingly looking to vendors to provide third party support and end-to-end solutions that address these business challenges, while simultaneously delivering innovation. FI commercial models are increasingly geared towards operational expense (opex) outlays, via SaaS for instance, rather than traditional capital expense projects where banks build out IT systems themselves or install and run ‘off-the-shelf’ packages themselves. That way of doing business is dying out.
Q8 (bobsguide): Anything to add?
A8 (Richard Broadbent, Fiserv): It’s been an interesting discussion about the trends in the core banking technology marketplace and the only thing I’d add is that, historically speaking, the banking industry has been a fairly static environment but this is now changing. The last 5-10 years have signalled an exciting new age for banking. The emergence of new channels has led to new providers and newcomer market entrants, which present a challenge to traditional banks and an increased obligation to provide relevant services to their customers. This is the key ‘consumerisation of IT’ trend that I expect to see impacting banks in the years ahead.