Top tier bonanza in store for core banking vendors - CapGemini

Core banking systems vendors could be on the verge of a bonanza in license fee sales, as top tier institutions look to replace their ageing legacy systems with new modular packaged applications, says international consultancy CapGemini.

In a new research report into the core banking marketplace, CapGemini observes that the vast majority of top retail banks globally are still using legacy core banking systems dating from the 1960s and 1970s in their domestic markets, despite rolling out packaged banking systems for international operations over the last three decades.

The firm - which surveyed 16 core banking vendors - says its study shows that a changing economy and increased regulatory requirements have put increased pressure on banks and core banking systems.

IT globalisation, increasing compliance and regulations - such as Sepa - and industry consolidation, are some of the key motivators for core banking system replacement, says CapGemini. As a result the primary drivers for system replacement are shifting from "cost reduction to growth".

"Tremendous industry consolidation, increased customer transaction demands and data management has led banks to feel increasingly limited by the capabilities of their core banking systems, and more than 90" of banks interviewed are now willing to have a common architecture and a modular applications suite globally," says CapGemini.

"To react to these trends, a bank's key support systems need to be transformed," says Gert Jan van Dorsten, principal consultant, Capgemini Netherland, financial services.

Whilst most package sales are still within tier three and four banks there are signs of larger, more strategic decisions by tier one and two institutions. These large banks are looking for sophisticated transaction processing software capable of handling large volumes and the ability to gain 'a single view of the customer' in terms of product usage.

"Banks willing to tackle planning and governance challenges can derive significant benefits by driving the replacement of outdated core banking systems, including meeting compliance demands, control over data management issues and a single view of their customer base," adds Van Dorsten.

Banks switching to 'process utilities' service model to cut costs - study

More than a third of the cost-reduction measures implemented by financial institutions in the past three years have failed to deliver the required savings and as a result banks are turning to a new process utility model based around the concept of shared services, to boost efficiency, says consultancy Booz Allen Hamilton.

According to research from the Economist Intelligence Unit (EIU), sponsored by Booz Allen Hamilton, an increasing number of companies are turning to this next generation of shared services which is focused on customer-facing activities such as opening accounts and billing statements.

Unlike efforts that have delivered savings by scaling internal services - such as finance, accounting, human resources - 'process utilities' pull together core activities for the delivery of products and services like opening accounts and billing statements, says EIU.

The survey of 499 banks found that 35% failed to reach their goals of achieving savings of five per cent or more over the past three years.

The average shortfall in savings was approximately nine per cent. A "failure to align objectives to broader business goals" was cited by 36% of respondents as a reason for coming up short, while 32% attributed it to a "failure to provide incentives."

This high rate of failure has led to more firms switching to 'process utilities', says EIU. To implement the new service models, bank executives are required to identity functional silos and geographic divides to identify the processes that can be shared across corporate boundaries.

'Account opening', which was cited by 47% of respondents that have adopted process utilities, is the most popular business process that has been structured as process utility. 'Billing/statements' and 'clearing' are also common choices, selected by 37% and 35% of respondents respectively.

Of processes yet to be converted, one third of those surveyed say that turning "IT infrastructure" and "IT application development" into process utilities is at the top of their planning lists, says the EIU.

Commenting on the research findings, J Scott Cade, principal at Booz Allen, says: "Process utilities are a proven path to boost efficiencies, cut costs and even deliver better customer service. This next generation of shared services is slated to become a key way for financial institutions to achieve their business goals."

EIU says more than half of the financial institutions that have implemented process utilities reported "improved economies of scale", and nearly four in 10 said "increased customer satisfaction" followed deployment.

But despite reports of higher efficiencies and reduced costs, the survey found that banks seeking to use the new operating model face a range of cultural, technological and organisational challenges. More than 38% of respondents cited "variation in customer needs" as a significant hurdle, while around one third cited "complex product offerings" as a barrier. Over a quarter stated that "multichannel management" was an obstacle to success.

SEPA – A Catalyst for Payments Consolidation by Way of Systems Integration

The following is an article by Paresh Madani - Head, Payments Center of Excellence, PrimeSourcing, i-flex solutions.

SEPA – A Catalyst for Payments Consolidation by Way of Systems Integration

(A paper presented at the SEPA Conference (International Payments) November 8-9, 2006)

This paper talks about how the Single European Payments Area (SEPA) initiative presents an opportunity for various banks across Europe to consolidate and optimize their payments processing. Corporates and banks, in particular, will be evaluating a number of routes toward SEPA compliance but, eventually, a phased approach will take precedence over the others. Let us look at how SEPA will affect – and influence – key players, and delve into how technology and, most importantly, systems integration will be critical in achieving SEPA compliance. While there have been a number of discussions and debates on how SEPA will affect banks, corporates and their customers, not enough is being discussed about how Information Technology can play a pivotal role. SEPA presents a unique setting for banks to consolidate their fragmented payment processing to a few platforms of scale. These platforms will centralize payment and messaging flows, to the ultimate benefit of the end-user.

Impact
There has been enough written about the impact of SEPA; the loss of revenues due to increased cross-border competition being uppermost on everyone’s minds. Studies conducted in the market indicate that despite SEPA bringing in increased efficiencies on account of greater Straight-Through Processing (STP) and better liquidity management, revenue losses and investment costs for SEPA adoption will outweigh the cost savings.

Opportunities
Then again, just as loss of revenue can be considered a negative, it can also be treated as an impetus to streamline the fragmented payments processing infrastructure, increase efficiencies, and help evolve new payments business models. The effect of SEPA on the banking sector as a whole would depend on banks’ ability to reduce infrastructure costs, reduce manual handling in some parts of the payment processing chain, and also evolve profitable pricing models. Developing new products, re-engineering pricing models to develop new lines of revenue, and steering customers towards the most profitable payments instruments are some strategic decisions that can help banks invest in future growth. For instance, banks could look at creating payments business models to include in-sourcing of payments business for other financial institutions.

Strategizing - The Way Forward
It is critical for financial institutions to adopt a proactive approach and address any concerns related to fragmented product-based silos in the process, thereby, avoiding inefficient processing; for instance, in the duplication of payment processing across different product processor-based systems. In the face of rising competition and falling revenues, banks may be called on to replace or adapt their existing product processing systems for cross-border payment transactions. Such systems would need to develop the capacity to accommodate new interfaces. Banks will need to look at integrated STP systems that help them add value and reduce costs.

Impact on Key Players
As stated earlier, while SEPA is expected to bring in increased efficiency in payments processing, there is also the apprehension of investment costs outweighing any saving in costs. Hence, it will become extremely critical to effectively manage the ramifications of multiple entities in the face of SEPA. Banks are expected to face maximum challenges; especially, in terms of overcoming increased competition, high investments, new pricing models, needs for re-evaluating and re-engineering payments infrastructure and, most importantly, the evaluation (/evolution) of new payment business and outsourcing models as part of the larger objective of creating Payments Business Utility Services.
As commercial and economic borders open up with SEPA, corporates will again have to look at new business models in order to cater to the business opportunities that would emerge post implementation of SEPA. Offering consistent pricing to customers both within and across national borders, and consolidating and centralizing treasury functions, and evaluating accounting structures would enforce changes on their existing back-office ERP applications. The end customer community may reap the maximum benefits, though they will have to carefully consider the availability and levels of new business services post SEPA implementation. These benefits will include low costs, speed in transfer, ease and reliability, and transparency in (as in domestic) cross-border accounting. A slew of business and technology considerations will have to be assessed before embarking on any change in payment processing and related IT Infrastructure. For instance, from a business perspective, the factors are:

• New rulebooks and frameworks for complying with SEPA Business Rules
• Bulk payment processing capabilities for low-value processing used for paying through ACHs such as STEP2
• Debit Transfer Processing
• TARGET2 Liquidity Management
• Pricing and billing capabilities
• Achieving operational efficiencies

On the Technology Side…
• Implementation of new payment instruments resulting in changes/ replacements of systems for new instruments such as SEPA Credit Transfer
• Adoption of open standards (ISO 20022) for SEPA Credit Transfer, Direct Debit, TARGET2 Liquidity Management
• Implementation of new SWIFTNet business solutions
• Integration with new clearing/ market infrastructures
• Inter-operability between multiple systems
• Ability to process volumes Needless to say, SEPA does not offer banks a common or single solution. It is recommended that banks view the multitude of factors specific to their business and future goals before setting forth on any implementation.

Consolidating Payments Processing
If one were to pick the top few areas that banks would be evaluating to achieve payments processing efficiencies, it would most certainly have to include:
• Increasing the rates of STP (areas such as analyzing payment patterns for auto-enrichment and repair; automatic matching of payments between Directs and Covers)
• Centralized liquidity management
• Understanding a variety of transactional attributes that would be used in the derivation of pricing
• Efficient payment flow tracking and tracking of payments (dashboard functionality, automatic handling of exceptions)
To analyze transactional patterns and attributes for pricing and payment flows, Payment Analytics would come into play. If one considers the different processing steps involved in an all-encompassing payment processing model, we recommend the following steps for optimization:
• Receipt, safe-store and authentication
• Message enrichment and transformation - (including auto
repair)
• OFAC/Compliance checking
• Debit account validation (including IBAN check)
• Debit authority check-mandate verification (for DD MT204 &
PEDD)
• Funds/Credit check (VOSTRO disposition) and earmarking
• Payment routing (Chain build)
– Book clearing, NOSTRO (Serial, Direct-cover)
• Credit account validation/qualification (including account v/s name matching)
• FX processing (standard rates, special rates, among others)
• Pre-advise (MT210)/notification generation and dispatch
• Pre-advise (MT210) matching (for incoming)
• Direct v/s Cover matching – MT103 v/s MT202 / MT910 (for incoming)
• Fees and charges calculation (including correspondent fees)
• Cut-off times check (clearing/ treasury) and value dating
• Liquidity desk–scheduling, warehouse, timed payment holds, among others
• Liquidity desk – Funds checks (including TARGET2 cash messaging)

Liquidity desk – Payments prioritization, alternate routing
(if needed)
• Message formatting and bulking (if required)
• Message final validation (OFAC, cut-off, etc.) and release (InterAct, FileAct)
• Acknowledgment (ACK/NACK)/confirmation match and handling
• Book-keeping and MIS
• Advising (SWIFT, e-mail, fax, paper)

If one considers the overall enterprise payments IT infrastructure, there could be multiple options for the consolidation of payment processes and components such as:
• Payment initiation systems
• Payment types (wholesale and retail)
• Payment processing factory components (currently siloed across different product processors and
payment processing systems)
• SWIFTNet solutions for business (Funds, etc.) and market infrastructures (STEP2, TARGET2,
Faster Payments), thereby consolidating the SWIFTNet ISO20022 processing
• Liquidity management
• Payment interfaces and gateways- consolidate via a centralized messaging hub
• Complementary systems (e.g. Accounting, Billing)
• Payment networks

Many SEPA migrations will witness the gradual consolidation towards an enterprise payments infrastructure. It would be advisable for banks to move to component-based, service-oriented payments architecture with a central messaging hub to interface with the myriad of systems, including direct business processing. Common payment processing components such as compliance checks, credit management and pricing can be developed as Web Services, which can then be reused across applications.

Possible Approaches for SEPA Migration
From a generic implementation adopted by the smaller banks (e.g. indirect participants) by connecting to an external SEPA compliant SWIFTNet infrastructure, to banks
wanting to create a consolidated payments, liquidity and SWIFTNet infrastructure as discussed earlier, the approaches towards SEPA migration can vary. Significant among these routes will be that of a SEPA SWIFTNet messaging hub that can act as a single window to external networks and systems and connecting to market infrastructures such as TARGET2 and STEP2, as well as for other SWIFTNet Business Solutions in the areas of funds, cash reporting, exceptions and investigations and trade services.

Systems Integration – The Way Forward
In a nutshell, there are going to be multiple businesses and IT infrastructure changes that will drive compliance towards SEPA and, ultimately, towards the larger goal of enterprise payments infrastructure consolidation. Most organizations have set up a SEPA Implementation Committee/ Group cutting across business and IT divisions. While such groups will have SEPA compliance in immediate focus, they cannot afford to ignore the larger objectives, and not define roadmaps accordingly. All these paths will lead to changes across multiple applications and payment processes, and the creation of new applications and processes. This would imply that most SEPA initiatives would involve systems integration, thereby, introducing the need for selecting an IT solutions partner. A cost-effective solution backed by a vendor’s expertise in global payment processes is what will win in the end.

Author
Paresh Madani
Head,
Payments Center of Excellence,
PrimeSourcingTM, i-flex solutions