API-equipped banks put pressure on technology vendors

By Alex Hamilton | 10 January 2019

Technology vendors need to support the adoption of microservices or risk banks pivoting to a model of self-sufficiency, according to Hans Tesselaar, executive director at BIAN

“Each year you see fewer and fewer core banking vendors appearing on industry rankings tables,” he says. “In 20 years from now maybe there will only be seven or eight left, because hardly any banks buy full-blown core banking systems anymore.” In 2014, Gartner listed 19 core banking vendors in its Magic Quadrant rankings. Four years later in 2018, it listed eight.

Tesselaar believes that technology vendors may have to move to a more modular approach to survive, “where banks can pick, for instance, the payments offering from vendor A and another from vendor B.” As things stand, a number of major core vendors position themselves as holistic platforms upon which banks can build their new products. “That is what they offer today,” says Tesselaar. “They claim they can take care of the integration between all of these bits and pieces. At BIAN we say that there can be a model with many independent pieces. We see vendors within our membership who are moving in that direction and others who are adopting a ‘wait and see’ approach.

According to a 2018 KPMG survey, as much as 25% of a large bank’s staff are now made up of IT professionals, and there has been a 60% increase in the hiring of internal IT staff. Conversely, smaller banks are reducing their workforces, reporting a 40% decrease in hiring, which the report identifies as a result of increased systems outsourcing.

To successfully kickstart a technological mindset shift in a major retail bank, says Tesselaar, changes need to come from the boardroom down. “It’s a strategy decision. Of course, the CIO and COO have to implement things and ensure they attract the right partners and the right staff, too. It’s a sea-level change and I think most of the Tier 1 and Tier 2 banks are in that decision-making phase, looking at how to move forward.”

Yet it’s not “change for changes’ sake” he adds. “At least not with the banks that I meet within the buying community. They say: ‘what's in it for us?’ and they look at specific areas within the bank, where change can be made and where areas exist they aim to keep untouched.” The closest you’ll get to superfluous change is when a bank announces a new app feature to attract attention, he adds, but even in those cases “they are very thorough and very well supported”.

The adoption of private clouds, either within existing software contracts, internal infrastructure, or with fresh installs, has meant a slash in running costs for a bank, freeing up money which would have been allocated to maintaining the mainframe, says Tesselaar.  This savings made, and any extra budgetary allowance that might arise from them down the line, can be put towards making system changes.

That change needs to start with a map of a bank’s existing environment. “Then you will have a clear overview of what is doing what. Once you know where you are today, and have identified pain points, you can start to remove problems and move into a new world.”

Netherlands-based Rabobank created a 3D model of its existing IT environment, adds Tesselaar. “It included all the systems and dependencies and put it in the hallway of the head office. It’s huge. It makes people aware that these things aren’t something you can solve overnight. There are so many dependencies and so many systems are interacting with each other. Sometimes there’s an expectation that these things can be solved in two, three years but that just isn’t the case. The time is now to start identifying what you have and to build a migration plan.”

Outdated challenger arguments

The narrative that banks are slow, dull, and innovation-averse is one that Tesselaar disagrees with. “Of course, challenger banks have the advantage that they have started from a blank sheet of paper. That’s not the case with well-established banks. They have a huge install base, a huge customer base, and still they provide services without major issues. I far as I can tell they’re keeping up very well with the challengers.”

When it comes to disruptions and downtime, Tesselaar says that people will always blame those with the bigger brand name. “It’s always Shell that is the issue, never the smaller oil companies. Of course, if an HSBC or a Lloyds goes down there are much more people who are affected by it than if a challenger has the same problems. It happens to everybody and I don’t think there is actually a difference between the downtime for large banks and challengers, it’s just that the impact is different.”

Fintechs, says Tesselaar, spend much of their time focusing on payments, “the easy part of banking”. “There is more under the hood than just payments. If they look into what banking means besides that, they have a long way to go. I don’t see them as an immediate threat. How willing are people to move from their established bank to a fintech? It’s a question I don’t think [the industry has] an answer to.”

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