Data – an IT issue, right?

When discussing data, it’s easy to couch the issues in technical language. This makes it tempting to see data as an IT issue. However, data lies at the very core of what banks do; it represents their source of enduring competitive advantage and the effective use of data will determine success in the digital age.

An explosion of data – and processing capabilities

The amount of data produced annually is increasing exponentially, by a compound rate of 40%, according to McKinsey estimates. This is being driven by an explosion in smart devices and user-generated content. The same is true in banking. As banking digitises and payments move away from cash, data is mushrooming and customers are using their mobile apps far more than visiting branches. Data variety is also growing – banks now can gain contextual and social data on customers, for instance.

The good news for banks (and other companies) is that with improvements in processing power, this data can be turned into insights that will help drive a more intimate customer relationship. Moore’s Law predicted the density of chip transistors would double roughly every two years, which has played out over time and allowed computers to become much more powerful. But, it is also interesting to look at storage costs (“Kryder’s Law”). These have fallen even faster thanks to increasing disk density: 1GB of data cost more than $200,000 in 1980 compared with less than 3 cents today.

However, banks are doing little with their data. A Capgemini survey found that only 37% of customers believe banks understand their needs and preferences adequately.

Some challenges

In order to capitalise on their data, banks will need to overcome challenges, like:

  • Tackling the prevailing mindset. Banks’ reputations rest on safeguarding customer assets. For many bankers, the priority is to lock down customer data to ensure that it isn’t compromised. While the privacy of customers must be maintained, this mindset will limit banks’ ability to leverage data to improve experiences.
  • Data silos. Banks’ IT systems have been typically built to offer specific products and services and data is product- rather than customer-focused. The data is bound up in multiple systems with no conformity on semantic standards. Banks will need to solve this problem if they are to get data flowing easily
  • Using unstructured data. Since few banks have a consolidated view of their structured data, trying to enrich it with unstructured might seem a challenge to far. However, the ability to do so would open new frontiers.
  • To leverage the power of big data and the internet of things, banks need to capitalise on real-time data, and move off batch systems. With rapidly growing databases increasingly being queried, banks also need to consider how they store data. Splitting read/write data from read-only data would be a good place to start since it would improve data management by separating the mission critical data from the mission sustaining data. This separation would also provide far faster querying to accommodate increased look-to-book; and it would make transactions cheaper by using in-memory for the (reduced in size) read/write database
  • Banks are likely to see skills shortages. To draw meaningful insight from massive amounts of data requires skills that combine technology knowledge (eg ability to use complex statistical models) with business acumen, problem-solving capabilities and excellent communication. This is why it is hard to find the right candidates and wages are high – a recent report looking at the UK market found three quarters of “big data” jobs were difficult to fill and wages were twice the national average

IT has a key role – but must work together with rest of organization

The IT team must provide the technological backbone for the company data, ensuring all company data is in a single data model against which users can run interactive queries and visualise outcomes in real time. For many banks, this will be best achieved through moving to a cloud-based model. The mainframe is a high performance computer, but unfortunately built for a world where storage and CPU were scarce and i/o abundant, which is the opposite of the situation today.

The IT team is also key for maintaining data security and should design it into the architecture from scratch. That’s why some companies are moving responsibility for security from general counsel to CIO. Another option has cloud providers run applications since they adhere to recognised data security standards.

As crucial as IT’s role is, most data does not reside with IT. Most customer data, for example, sits with the CMO, and there are other pockets of data across whole organisations. Further, IT doesn’t own all IT spending. According to Gartner, CIOs typically only control 50% of IT spending today. Also, data is far too crucial to the success of the bank for the CEO to delegate responsibility to any single department. The role of the Chief Data Officer, a fast growing C-level position, working directly for the CEO, is to bridge the data silos, to interpret business requirements for the CIO’s team, to oversee procurement and to ensure data is top of mind.

A key source of competitive advantage

Digitization is opening up banking to new competitors and new business models.

However, banks retain several sources of competitive advantage, even in the digital age, the most enduring of which is data. When it comes to data security, consumers rank banks higher than any other service provider. This advantage may diminish over time, but for now banks enjoy a better rating than some of their emerging competitors such as online retailers (in which just 6% of consumers have a lot of trust) and social media sites (2%).

Adding to the data advantage is the fact that banks have masses of it. They have millions of customers and records of billions of transactions. Google and Apple and other potential disruptors are spending billions of dollars on digital wallets and other means of getting access to the information that banks already have. It is now incumbent on banks to do something with this rich material, and not just use it for up- and cross-selling opportunities.

Realising experience-driven banking

Before the crisis, you were statistically more likely to change spouse than switch banking providers. But this is changing. Customers have choice. They have information. And, they are accustomed to the kind of rich, interactive experience afforded by e-commerce providers.

To retain customers, banks need to use data and analytics to bring value-added services. An EY survey found people would expand their relationship (or pay more) if providers gave expert advice, found ways for saving money and rewarded loyalty.

When financial providers combine this personalised service with other information, such as context and channel preferences, we begin to move into experience-driven banking. That is, using data to drive value-added insights and getting that information to customers at the time and place they need it, over their preferred channel.

It’s going to be hit or miss

Banking is at a crossroads.

Digitization is bringing major structural change including the opening up of the industry to new non-traditional competitors such as Google and Apple, which have cutting-edge analytical capabilities.

The industry can respond by building on the competitive advantages it has, particularly around data, to deliver a better, fuller, richer banking experience. Or, it can continue on a path towards disintermediation which will see it relegated to a role of providing highly regulated commodity back-office services.

In the same way as talent can’t be left to HR alone, data can’t be left to IT

Microfinance, Women & Technology

On 26 Jan, I was very privileged to be invited to present at the Career Women’s Forum’s annual WAVE conference. The topic I was given was “microfinance, women and technology” and below is a short summary of my talk.

How big a problem is financial exclusion?

There are 7.3 billion people in the world. Of those, roughly 4.8bn are adults. However, only 2.2bn adults have access to financial services. That is, more than 1 in 2 adults do not have access to financial services.

As with so many sources of deprivation, the issue affects some groups much more than others. For example, the young, the poor, the poorly educated and people living in rural areas are all disproportionately affected.

There is also a clear disparity between developed and developing economies. In mature economies such as the US, the percentage of adults who do not have a checking account with a regulated financial institution is about 8% (source: Five Degrees). However, if we look at Latin America, the number jumps to 60%. And, the highest proportion of unbanked people is in sub-Saharan Africa, where 88% of people do not have access to basic financial services.

Why does this matter?

While we sometimes love to hate bankers, a well-functioning banking system is critical for sustainable economic growth and wealth creation. People need a safe store for their savings. And a banking system is needed to match these savings with the needs of borrowers who need credit to build income-generating assets. Those assets can be tangible such as livestock, or intangible such as education.

This is why the microfinance industry was born: to provide small amounts of finance to those who would otherwise be excluded from financial services, and so foster economic development.

Why can’t financial services be offered to everyone today?

The issue is very much on the supply side. People want financial services, but financial groups aren’t able to offer them across the right channels and at the right price point to meet that demand.

There are demographic factors for this, chiefly around low population density and large rural populations, that make it difficult for banks to build profitable branch operations to service these needs.

Another major challenge for banks centres on the size and frequency of transactions. If I borrow $10,000 to buy a new car and the bank’s administrative costs are $100, or about 1%, that is not that material. If, however, I borrow $100 to pay for feed for my chickens and the administrative fee is $100, then there is a problem. Typically these types of loans tend to have much shorter durations, raising distribution costs further. So interest rates tend to be high and formal banking becomes prohibitively expensive for billions of people.

Why are women worse affected?

Globally, 55% of men have access to financial services compared with 47% of women. There are many reasons for the disparity, reflecting longstanding social disadvantages facing women in the emerging world.

First, men typically have control of assets and can use them as collateral for loans; women often can’t.

Second, women customers are often constrained by household chores, making it more difficult for them to meet loan officers or travel to a branch.

Third, the provision of education to women is often inferior and this translates into lower levels of financial literacy, so for example affecting the ability to make a business case for credit.

There are a number of other contributory factors such as the huge discrepancy in the level of male loan officers compared with female loan officers. The fact is that men are often more likely to grant loans to other men.

Women can make a bigger contribution to society

But lending to women can have a very significant impact on society. They are thought to be more important agents for change than men since they spend a larger proportion of any credit on items such as education that boost family and broader societal welfare.

And microfinance institutions (MFIs) really like lending to women because many studies have shown that they are more likely to repay loans than men.

This is why, beginning with pioneers such as Grameen Bank, MFIs have typically targeted women and why today around 70% of all microcredits are made to women.

How can technology help the unbanked to bank?

Modern software can lower operating costs. By enabling financial groups to automate processes, to consolidate multiple systems, to eliminate errors and so on, modern software enables financial services companies to lower IT costs and to extract economies of scale from technology as they grow. In my experience, modern software can reduce IT costs by around 60% for MFIs, translating into lower total operating costs of around 10-15%. That, in turn, lowers interest rates.

Meanwhile, mobile helps to overcome distribution challenges while also lowering costs. Mobile technology enables banking to take place anytime and anywhere. You can still get access to banking services if you live in a rural community miles away from a branch. And, happily, mobile penetration rates are high across the whole world: in sub-Saharan Africa, 88% don’t have a bank account but only 31% don’t have a mobile. Further, as more banking transactions become self-assisted, mobile-originated transactions, where the marginal cost of processing is practically zero, will drive down total costs.

Cloud also offers infinite scaling with low overheads. By enabling firms to share IT infrastructure costs, the cloud lowers costs for all. The use of cloud in microfinance is still fairly nascent. But based on experience and projections we have made, we estimate that a public cloud deployment can shave another 25-30% from IT costs, translating into another 3-4% off operating costs (assuming the bank already runs modern software).

Big data – the simultaneous explosion in data and the capabilities to draw insight from it – can make a massive impact, for example, in being able to determine creditworthiness in the absence of credit or economic activity.

Peer-to-peer platforms can play an important role in democratising finance, putting borrowers and lenders in direct contact, and helping to enforce the right behaviours.

Some examples of technology making real, demonstrable difference

  • Kenya Women’s Trust: thanks to modern software, it has the efficiency and flexibility 1) to make very small loans and hold small deposits (its average outstanding loan is $250, the average deposit is $170); 2) to handle a wide and relatively complex portfolio of products e.g. education loans, clean energy loans, agricultural loans etc; and, 3) to offer multiple channels such as debit cards, ATMs and mobile banking.
  • Zidisha: a peer to peer platform that puts borrowers directly in contact with lenders. By cutting out the intermediary, it reduces the cost of borrowing and the return on saving. But it also incorporates a number of social features. Ratings, for instance, help lenders to identify people who may be more creditworthy in the absence of other credit scoring techniques (and can remove an existing barrier to financial services)
  • RenMoney: a fast-growing start-up which is adding about 1,000 customers a month in Nigeria, RenMoney has all its IT operations in the cloud. As a result, it operates with high efficiency and complete scalability. The companyhas just one IT guy!
  • Lenddo: an MFI which developed an algorithm to crunch the huge amounts of data that people share about themselves on social media channels. It looks at their friends, their recommendations and so on to develop a sense of creditworthiness. And it really works. The algorithm is such a good predictor that Lenddo is now going to stop lending and just work on its algorithm, selling to other financial institutions.
  • M-Shwari: a mobile-only banking service offered to existing M-Pesa customers in Kenya. M-Shwari grew to 3 million customers in 5 months after launch. Now, 16 months after launch, it has 9.3m customers which is roughly half the adult population in Kenya. It shows how quickly banking services can be adopted when the channel and the price point is right. The service is now being taken to other African countries, starting with Tanzania.

It seems clear that technology can play a massive role in overcoming the historical barriers to financial inclusion – and is already beginning to do so. With wider adoption of new technologies, especially if they can be layered on top of each other, it is entirely possible that we can bring financial services to everyone on the planet, and within our lifetimes.

Thoughts from Next Bank Europe

Earlier this month, I attended one of two days of the Next Bank Europeconference in Barcelona. The conference brings together industry thought leaders, progressive banking executives, technology providers and start-ups to discuss the future of the industry. Here are some of my thoughts and takeaways from the day.

Financial service industry disruption is a given

The conference, rightly, took as a given that the industry is undergoing the same kind of change that other industries, such as music and travel, have already been through. As Peter Vander Auwera from Innotribe put it in his keynote “it is obvious that financial services is the next industry to be disrupted”.

Nonetheless, it might be worth spending a sentence or two on how we got here. Changing customer behaviour, in particular a much higher propensity to change, is an important factor. But the key is technology change. As we point out in our paper on digital disruptors, the nexus of forces – cloud, big data, mobile and social – is transforming the industry’s competitive dynamics. Cloud lowers the cost of doing business, reducing a major entry barrier, but also allowing firms to focus on discrete parts of the value chain. Mobile allows new players to offer banking services without the need for branch networks, again reducing an entry barrier, but also to innovate with those services. Social media is providing the opportunity to inject a social context into banking, as well as giving more data and insights into customers’ lives. And big data is making it possible for firms to analyse exploding data volumes and draw meaningful intelligence from it.

One of the interesting takeaways from listening to the BBVA Open Talent Finalists (apart from how many of them seem to have originated out of London’s vibrant fintech scene) was that they all make pervasive use of some or most of these new technologies to offer potentially disruptive services e.g. ClauseMatch(the winner) offers a “cloud-based platform for negotiating commercial agreements”, Aire, which “uses an algorithm to make the best use of credit scoring” and Lendstar “a financial social network” allows friends to share money “using a single mobile application”.

What advantages, if any, do banks have in the digital world?

These kinds of conferences can sometimes be a bit too dismissive of incumbent banks’ ability to compete, but several of the speakers did point out that banks do have some great assets for the digital era. As Marco Bressan – CEO of BBA Data & Analytics – highlighted, banks have an abundance of customer data and stated that “Google & Amazon are investing billions to try to even get close”. Banks also have massive customer bases, a reputation – albeit not what is was – for security, and the ability to offer integrated services across the value chain (payments, credit, deposits, etc) which few entrants can or are allowed to do.

New entrants attacking areas with high margin/low regulatory oversight…

If you look at where new (non-banking) entrants are concentrating their efforts, it is logically in areas with low regulatory oversight but high profitability, areas like remittances and FX. Unsecured lending is another such area, underserved by banks today for a bunch of reasons such as high administrative costs, and there are many ambitious start-ups moving to fill the gap, including Kreditech, a company I met during one of the coffee breaks. Kreditech’s business model is interesting: a big data approach to credit scoring, taking into account up to 15,000 data points, combined with very high levels of automation (decisions made in seconds, loans made in under 15 mins) and convenience (applications can be made over any channel or device, money paid into current account, withdrawn from ATM or paid against credit card).

…as well as the point of interaction with the customer…

The other area where new entrants are focusing is on payments and wallets, gateways into financial services. Unlike a lot of people, it seems, I see Apple Pay as a major strategic move in the long game of bank disintermediation. If Apple or any other provider of payments or wallets, such as PayPal, is able to increasingly direct traffic, recommending products and services, then banks will lose the point of interaction with their customers and, by extension, control over pricing and the capability for cross- and up-selling. It allows Apple et al. to suck value out of banking without having to involve themselves in the heavily regulated business of banking.

…Leaving banks at a clear crossroads

If new entrants pick off the most lucrative parts of the value chain, which cross-subsidize banks’ other businesses, and come to control the point of sale of financial products, then banks will see themselves increasingly relegated to the role of providing heavily-regulated, commodity middle and back office services, such as transaction execution and clearing.

This leaves banks at a clear crossroads: accept this fate or fight back. Joydeep Bhattacharya, Managing Director and Interactive Financial Services lead at Accenture, spoke of his company’s vision of the Everyday Bank where, as he put it, a bank “engages with its customer at their moments of truth” providing them with the information and the tools to take better decisions.

Can banks be innovative?

Can banks fight back? Can they realize the Accenture vision of the Everyday Bank? Can banks be innovative? Not within their existing structures…that was the conclusion of an interesting morning panel discussion at Next Bank. Michael Dooijes from Rabobank, an entertaining panellist, told us that nothing short of a revolution would work: “innovation won’t come from existing leadership. They won’t make the cut,” he said. Marcus Treacher, from HSBC, a more circumspect contributor, suggested that banks’ hierarchies were counter-productive and undermined the entrepreneurial culture banks need to foster.

Some mindset changes needed

Certainly, some mindset changes are needed, without question. For one, if banks are to achieve the Everyday Bank vision, they need to change the way they look at data, moving from being data custodians to being data analysts, interpreting and analysing customer data to bring value to customers’ lives. They must also stop looking at customers as just profit centres and, like so many start-ups do, think about how they can help customers – to budget better, to reach their financial ambitions, etc. Lastly, they need to set out a realistic plan of action, which in many cases will begin with fixing some of the basics, such as having a robust data model and real-time processing capabilities. As Joydeep Bhattacharya from Accenture put it, “there’s no point trying to be Amazon if you can’t fulfil the basics”.

New vehicles

One way to getting the groundwork right and to achieving a culture in which innovation can thrive would be to start again. To take whatever great assets exist and use them to seed a new organization, with a different brand and identity, free from legacy systems, legacy processes, legacy bankers and legacy hierarchy. This is what many banks seem to be experimenting with, such as BNP Paribas’ Hello Bank.

One other option is to try to absorb some of the start-up culture and creativity by working more closely with them. One of the afternoon sessions was given over to a panel on this subject and we heard from banks such as Rabobank, Sberbank and Intesa Sanpaolo about how they are working with incubators and bootcamps to help mentor start-ups, with a number of objectives in mind – to know what is happening, to draw inspiration from what is happening and, where applicable, to bring that innovation in house by buying the start-up or setting up a commercial venture together.


One other obvious way banks can embrace external innovation is to open up their platforms and so, even though I missed it, I was pleased to see that the subject of APIs had such prominence on day two. With APIs, banks could let third-party developers build and licence apps on their platforms. Similarly, they could offer other providers’ products. While in both cases this would involve potentially giving up some revenue streams, it would both foster innovation and also keep customers coming to their platform (and thus mitigate the risk of disintermediation). In keeping with the mantra of the digital age, the choice for banks is to cannibalize their business or let someone else cannabilize it for them. Or to quote Andrew Shaw from Kreditech when I asked if he would consider licensing their platform to incumbent banks, he said “we’ve had approaches and discussions about that, but it’s getting to the point where we’d rather white label banks’ products onto our platform.”

Why Apple Pay Matters

Over the last week or so, since Apple launched Apple Pay on 9 September, I have been reading lots of commentary – like this article from the New York Times – that Apple Pay is no big deal. Sure, they say, it may lead to some marginal improvements in convenience for consumers and it will likely cut fraud, but it is hardly the revolution in payments that we might have expected.  After all, through Apple Pay we’ll still be using credit cards, albeit indirectly, and paying over the same card issuer schemes. So how can Apple Pay really be shaking things up? Well, part of what makes Apple Pay interesting lies precisely in its attempt to preserve the status quo. However, Apple Pay is also a highly strategic move in the long game of financial services disintermediation.

A lifeline for Visa and Mastercard

Apple Pay uses a technology known as HCE (Host Card Emulation), which Wikipedia describes as “virtual and exact representation of a smart card using only software”. HCE has been endorsed by Europay, Mastercard and Visa (EMV) and both Visa and Mastercard have worked closely with Apple to help bring Apple Pay to market. The reason? While Apple Pay dematerialises the physical wallet, it is otherwise pretty conventional in the way it works. A merchant acquirer terminal reads the wireless instructions sent by Apple Pay, which are then processed through the existing card schemes. So, although EMV will likely see some compression in fees over time as Apple is able to exert more pressure and the incidence of fraud (which in part justifies present fees) falls, the future of EMV is safeguarded – for a while at least.

A stay of execution, but do merchant acquirers and scheme operators have a long term future?

The world is moving towards real-time payments. Mexico, the UK, Singapore and Sweden all operate real-time payment systems, many other countries are implementing such a system (e.g Australia) and countless others are investigating the possibility of real-time payments. With real-time payments, an individual can make a mobile payment – using a service such as PayM in the UK – and the recipient will receive value instantly (before settlement). But as well as receiving instant value, the merchant does not have to use a merchant acquirer service or pay fees to the credit card scheme operator. It is difficult to see how, long term, these real-time peer-to-peer payments won’t supersede credit card payments even though eventually it probably will come down to a choice for Apple (which theoretically could also process payments using iTunes if it wanted).

The data prize

The convenience and the fraud prevention aspects of Apple Pay are interesting, but the real value is in the data. Apple Pay doesn’t store any of a customer’s data on the smartphone itself and most of the sensitive data is encrypted. However, that does not stop Apple from gaining information regarding such things as the merchant name, the date and time of the transaction, which it can then associate with a person’s Apple ID.

A marketplace for financial services

With more data comes more power. Pretty soon, Apple will be a position to recommend third-party products and services to you (a service it can monetize in a number of ways such as taking a commission), it can help you make better and more informed spending decisions (e.g. letting you know there is a sale on at a merchant you use regularly) and so on. This would ultimately enable Apple to offer a marketplace for financial products without having to offer those services themselves.

Where would this leave traditional banks? Unfortunately, unless banks make the necessary changes to their business to take a much more active role in customers’ commercial and financial lives (see my paper on lessons from industry disruptors), the future looks like one where banks will lose the direct relationship with the customer and, by extension, any control over price or any capability to cross- or up-sell; that is, a future as a provider of a highly-regulated commodity service.

You see, Apple Pay is about more than making your iPhone stickier; it’s about making Apple stickier.

IBS League Table and Forrester Banking Platform Deals: Some Comments

In the last two weeks, the results of two annual surveys have been released which, taken together, serve as a barometer of demand conditions and competitive dynamics in the market for large ticket banking applications. In 2013, more than in any other year, the difference between banks’ propensity to spend on core banking systems compared to broader ancillary applications, such as mobile platforms, is stark. Nonetheless, there are many reasons to be optimistic about a pick-up in demand for core systems in 2014.

What gets measured

The two annual surveys are namely the International Banking Systems (IBS) journal’s 2014 Sales League Table, which looks at new name sales across core banking and treasury and capital markets (TCM) in 2013, and the Forrester “Global Banking Platform Deals in 2013”, which examines both new and existing name deals across multiple banking platforms including core banking as well as mobile and analytics.

Demand for core banking hits multi-year low

The IBS league table shows Temenos extended its lead in core banking sales, taking up its market share by four percentage points compared to 2012. As a Temenos employee, this is good news: it shows our strategy, value proposition and execution are all sound and winning out in a competitive market. However, there is an inconvenient fact that punctures any feeling of euphoria: the market has been shrinking over recent years. The graph below, which strips out TCM sales from the IBS data, illustrates the extent to which the market has declined. It has halved since 2007 and experienced its worst year since 2001.


Other banking applications faring much better

In contrast, the Forrester survey, in which Temenos also comes out on top, shows that the overall demand for banking platforms remains strong. While there was a small drop in volume of new name business, this was more than offset by strong growth in sales to existing customers (up by 12%) such that overall sales of banking platforms were up by 4%. Moreover, excluding core banking from the Forrester numbers, new name sales were likely up by around 5% and combined sales by around 10%. It would seem that banks are much happier to spend money in areas like mobile, analytics and CRM than in core banking, presumably because the size, cost and complexity of these projects are more manageable and the payback promises to be shorter (Capgemini estimated in a recent report that the average payback for core banking projects is 4.5 years).

Room for optimism about core banking market

Notwithstanding years of decline, there are many reasons to think that 2014 will see a strong rebound in core banking sales:

  1. Western Europe is growing again – the IBS league table showed growth in Western Europe in 2013, of 5%. This is a significant datapoint because W. Europe is the largest market for core sales (around a quarter of the total market), it has the largest average deal sizes and it has fallen the furthest since the market peak in 2007 (by around 60% vs 50% for the overall market).
  2. Large deals are coming back – our estimate is that almost 20% of deal volume was from tier 1 and 2 banks in 2013 (compared to c15% in 2012) and these deals tend to be much larger in scope and value.
  3. Deal momentum grew all year (38% of deals came in Q4 vs. 30% in Q4 2012)
  4. Budgets are up – a Temenos/Deloitte survey from last year of 205 senior bankers said that 65% expected a higher IT budget in 2014, the highest reading for six years
  5. The industry is maturing. This is not a reason to be more bullish about 2014 per se, but the industry has matured significantly over recent years. The implementation record is improving, for instance, as large systems integrators like Accenture build core banking practices. Also, there are now several vendors who have componentised their systems, allowing banks to progressively renovate their IT estates, minimising risk and disruption while delivering continual, demonstrable value to the institutions.
  6. Banks are unlikely to realise the benefits from mobile and analytics investments without also modernising core systems. The Forrester survey showed banks investing in ancillary systems, but while banks can produce new apps and customer interfaces, if they rely on batch systems for information updates, the analytical capabilities and the information underpinning the customer experience will always sub-optimal
  7. The industry needs a structural answer to a structural issue. The graph below shows the strong correlation between sales of core banking systems and bank RoE. A pessimist might argue that bank RoE is likely to be only modestly higher in 2014 and thus core banking sales will only see a slight improvement. However, this historical relationship should break down. Why? Because the confluence of various factors – changing customer behaviour, new regulation, new competition, new technology – has reset banking RoE to a materially lower level. In this new environment, it is incumbent on banks to modernise IT to return to more profitable times. This is because banks need to reduce IT spend (which accounts 14.3% of costs vs. a cross- industry average of 7% and a Temenos customer average of 5.4%). But, it is also because banks will require the agility and flexibility that comes from core modernization if they are to see off the threat from non-traditional players and realise the growth opportunities from digitalization.



Become ambassadors for a business-friendly Switzerland

Earlier this week, we held a meeting of the Swiss Technology Industry Group in Zurich with a presentation from Martin Naville, CEO of the Swiss-American Chamber of Commerce –­.

Martin’s presentation, which provoked a lot of lively debate, concerned the competitiveness of the Swiss economy. It made three main points:

The Swiss economy is special. Martin showed us a diagram illustrating the split of Swiss GDP by domestic companies (c.65%) and multinationals (c.35%). There is nowhere else in the world with such a concentration of MNCs (in Switzerland, there are 1.9 Fortune 500 companies per 1m inhabitants compared to Holland, at no.2, with 0.88). These MNCs have been the engine of economic growth in Switzerland in recent years, growing at around 10% a year over the last decade, creating more than 50% of new jobs and accounting for 75% of R&D investment (which, in turn, is 50% higher per capita than in the US).

Switzerland remains very attractive to big business. Switzerland offers many advantages as a hub location for MNCs: central European location, stable fiscal and political environment, good infrastructure, high quality of life, high R&D spending, excellent universities etc. and the World Economic Forum ranked Switzerland the most competitive country in the world in 2013, for the 5th consecutive year –

A complacency is setting in which threatens to undermine Switzerland’s attractiveness to MNCs. Obviously, there are a number of factors affecting the country’s competitiveness which lie outside of its control. For instance, the strength of the Swiss franc has increased the cost of doing business in Switzerland by 30% in USD terms over the last 3 years (Zurich is now twice as expensive as Dublin). But, there are number of areas directly under the control of the state and population where Switzerland is advancing a less business-friendly agenda or introducing more instability to business planning, both of which threaten competitiveness. Martin cited many examples: popular initiatives against big business (Minder, the 1:12 salary cap, the cartel law), against immigration (e.g ecopop and the initiative about mass immigration on which the electorate is voting today), economic policy issues (such as USA-EU free trade agreement) and infrastructure (falling investment as well as other issues such as the backlash against nuclear power, which currently accounts for 42% of energy generation). Martin’s point was clear: MNCs typically carry out a detailed strategic review every five years to consider their optimal location and none of them is bound to Switzerland. Just as the virtuous cycle of the last decade attracted more and more MNCs, so a vicious cycle could emerge (and warning signs are there e.g. Merck Serono, Yahoo).

In his closing remarks, Martin asked us, as senior professionals in the technology industry, to be vigilant about such complacency and to counter it as much as possible – for the good of ourselves, our industry and the Swiss economy overall. We need to become ambassadors for a business-friendly Switzerland, he concluded.

More information

If you interested in reading more about Switzerland’s competitiveness and attractiveness for MNCs, I can strongly recommend Martin’s paper from 2012 entitled “Multinational Companies in Geneva and Vaud: Growth Engine at Risk!”

For more information about the Swiss Technology Industry Group, a networking group for senior professionals working in technology sector in Switzerland, please visit our site on Linkedin –


Smart, strategic IT investments are the only way to restore banking margins

The banking industry is undergoing significant change. Banking customers are starting to flex their muscles, knowing that they have choice and prepared to exercise it. Technology change is blurring the industry’s boundaries and allowing non-banks to compete effectively for banking services. And, new regulation is raising the cost of doing business. As a result, banks need to simultaneously invest in innovation while lowering their costs. This is no mean feat and will require them to make smart, strategic investments in technology. Below are some predictions for the top investment areas in 2014:

1. Digital channels. Changes in technology have rendered banking anytime, anywhere, and accessible through multiple different channels and apps. While most customer-facing industries are reacting fast, banks are encumbered by old technology that makes it difficult for them to offer a rich, interactive and seamless experience to their customers across digital channels. As such, banks need to make disproportionate investments to catch up and provide an experience comparable with other retailers; a matter made more urgent by the fact that many of these same retailers are launching banking services themselves.

We see this investment principally being in renovating old legacy internet and mobile banking applications. We believe User Experience Platforms (UXPs), productivity-enhancing solutions that allow banks to build apps and deploy across multiple channels and devices, will see strong growth. We also think we’ll see more examples of banks engaging in “open banking”, where they allow third party developers access to their platforms to develop apps and other extensions. We also believe there’ll be more instances of banks opening their own app stores.

Digitalisation has changed the competitive dynamic from “economies of scale” to “economies of access”. Whoever controls the point of customer interaction will control pricing and margins, so it is critical banks get this right – and fast.  

2. Analytics. Investing in analytics is key to unlocking the value of customer data, to transforming customer experience and to seeing off the most existential competitive threats.

Banks need to extract actionable insight from their customer data. They are custodians of massive amounts of customer data, but they do little with it, partly because it is locked up in siloed databases. One of the most important ways for banks to improve their RoE will be to cross-sell effectively, and this will require them using data to make appropriate product and service recommendations to their customers. Given the extent to which customers are switching providers, it is also essential that banks use customer data to reward loyalty, and to identify and act early when there are signs that a customer may be considering defecting.

But, as well as using data for their own ends, banks are now expected to provide banking customers with value-added services based on their data. Increasingly, in the consumer’s mind, there is a trade-off between entrusting an organisation with their data and getting some service in return. So far, banks are doing little in this regard and, as such, they run the risk of losing out to providers who offer these services, such as Mint, which offers financial management, or the providers of digital wallets, like Amazon.

Within analytics, we foresee banks making large investments in areas such as data extraction tools, in-memory databases, digital wallets, predictive analytics and loyalty services.

3. Payments. A lot of financial firms see the payments market as some sort of panacea to the issue of low margins. But, while revenues are growing, there are several cost and margin headwinds. So, smart IT investments are also key to capitalise on the payments opportunity.

Boston Consulting Group predicts payment revenue growth of 8% per year through to 2022. However, there are significant margin headwinds in the form of new regulation, such as SEPA, and increased competition, mainly from other banks, but also from non-banks such as PayPal. In addition, the industry as a whole is failing to extract economies of scale: BCG found that between 2007 and 2011, operating costs rose as fast as payments volumes. So, while revenues are growing, profits are not.

Investment in IT is, thus, fundamental if banks are to expand both payments revenues and margins. They need solutions that will allow them to innovate, to personalise their services, to drive automation and economies of scale, to offer integrated services and to comply with new regulation easily and cost effectively.

We predict strong growth in payments hubs, which TowerGroup defines as “seamless gateway[s] through which a financial institution’s customers can make any type of payment, in any form or currency, to any payee”. We believe this is the only technology option capable of meeting banks’ complex needs, especially the challenge of driving automation while retaining the flexibility to customise products, to innovate and to adapt quickly to change.

4. Core banking. While banks are rightly preoccupied with digital channels, their ability to offer optimal customer experience will always be compromised without also renovating legacy core banking systems. Banks need to introduce modern, real-time systems, built around customers and not products. Banks can produce new apps and customer interfaces, but if they rely on batch systems for information updates, the analytical capabilities and the information underpinning the customer experience will always fall short. Banks need to provide customers information when they need it, not when their legacy systems can produce it.

Moreover, replacing legacy systems remains key to restoring RoE to pre-crisis levels. Unlike in payments, most banking markets are not witnessing strong revenue growth and so sustainably reducing costs is critical to growing margins. Furthermore, with the advent of digital channels, customers are making many more enquiries than before without any corresponding increase in transactions, adding to the cost to serve. Therefore, banks need to modernise their IT estates to allow for system consolidation that will reduce hardware and maintenance spend, at the same time as leading to higher levels of straight-through processing to boost productivity and scale economies.

5. Risk and compliance. Keeping up with new regulations and new reporting formats is still a major compliance headache for banks, reflecting the continued high number of new regulations hitting the statute books, as well as the lack of coordination in their introduction. While the eye of the storm may now have passed, spending on risk and compliance will remain a top priority for banks in 2014.

6. Cloud. While there is already fairly broad adoption of banking software-as-a-service in certain vertical and horizontal markets, such as wealth management and CRM, we still believe the majority of banking software purchased in 2014 will be for on-premise deployment. That said, we foresee an acceleration in the move towards SaaS, across all banking tiers. What is more, we predict that increasingly these SaaS solutions will be deployed in the cloud, especially private and vendor/community clouds, but also in the public cloud as bank and regulator resistance softens and as banks seek to capitalise on the significant economic benefits and opportunity for operational simplification. In 2014, we predict that we’ll see the first fully-regulated banks running their core processing in the public cloud.