restoring profitability in the digital age - temenos · restoring profitability in the digital age...

Temenos White Paper

Restoring Profitability in the Digital Age

The structural factors, such as re-regulation and changing customer behaviour, which have driven down profitability in the post-crisis years are still biting and, what’s more, are being accentuated by digitization. Replacing legacy technology can have a material impact on the industry’s profitability, but also help it to innovate and stay relevant in the face of growing competition from agile new entrants.

9%

Average global banking RoE in 2013, five years after the banking crisis

Digitization is introducing more disruption to an industry still reeling from the aftermath of the banking crisis. Investment in technology will be key to restoring profitability – and staying relevant – in the digital age

in association with

Temenos White Paper2

03 Executive summary04 Introduction05 Profitability gap remains09 How modern core banking software can help restore profitability09 Banks using modern core banking systems demonstrate

significantly higher returns10 Banks are still not modernizing12 Why banks may begin to address their legacy systems13 How banks can move towards modern core banking software in a

low risk way

Contents


Executive summary

In 2012, we published a report “Bridging the Profitability Gap” which looked at banking industry profitability and found that, owing to structural factors such as new regulation, Return on Equity (RoE) had declined by around six percentage points, or 38%, compared to pre-crisis levels.

Two years on, banks’ profitability remains depressed and, what is more, the effects of digitization are exacerbating existing adverse trends. Digitization is handing more power to customers, further undermining banks’ ability to control

pricing and cost to serve, while opening the industry to more competition, especially from technology companies.

The case we made for legacy system replacement still holds. In the original report, we explained how system renewal could positively impact the industry’s profitability and sought to quantify that impact. In the present report, we update the quantitative analysis and find that the profitability impact continues to be significant; a fact made more compelling given the now extended period over which we run the analysis.

Nonetheless, we show, contrary to our expectations, that IT renewal remains a very pro-cyclical activity: that is, that banks are still more inclined to replace systems when profits are growing. Given the outlook for profitability and the key importance of IT renewal in helping banks to grow profits, we would have expected this pro-cyclical relationship to have broken down and reversed.

There are many reasons to believe that IT renewal will pick up from here. Not only is it essential to grow profits, but the subject is on the radar of all major bank stakeholders including regulators. The perceived risks around IT projects are diminishing as third-party systems become more sophisticated and large system integrators build expertise in this domain. Lastly, other factors such as growing M&A, a need to leverage investments made in digital channels and a shortage of legacy IT skills will add to the pressure to renovate.

Looking specifically at risk of renewal, we distil our experience from multiple successful replacement projects into a set of best practices. These range from choosing the right system – focusing not on a long list of functional requirements, but instead on the subset of functional and technological attributes that will really make the difference – to managing scope and ensuring strong project governance.

Two years ago, the industry faced a profitability gap which IT renewal could help to resolve. Now, the banking industry’s issues are more existential. As such, IT renewal cannot wait.


This paper is an update to “Bridging the Profitability Gap”, a study we published in 2012. The original examined the impact of the financial crisis on banking profitability. It found that, following a sustained period of high returns on equity (RoE),

averaging 16% in the years 1980-2007, banking profitability had been reset by a host of structural factors to a materially lower level. It also looked at how technology could play a role in restoring profitability to pre-crisis levels and attempted to quantify the extent of that impact.

The present paper takes a fresh look at the industry and the trend in profitability. We find that two years on, profitability has yet to improve. The structural changes that initially drove down RoE – tougher regulation, changing customer behaviour and more intense competition – are still prevalent and being exacerbated by the digitization of banking. Furthermore, despite the continued promise of modern core banking software to raise profitability, banks, in general, have still not begun updating their legacy systems. However, with third-party systems becoming increasingly sophisticated and a growing network of systems integrators in the core banking space, banks now have more options than ever to move to modernize their IT estates in a low risk manner and unlock the value-creating potential from technology renewal.

Introduction

https://www.temenos.com/en/market-insight/white-papers/profitability-gap/


Profitability gap remains

From 1980-2007 the banking sector enjoyed extremely high profitability, with banks earning an average annual RoE of 16%. This elevated level of RoE was facilitated and sustained by three main factors: deregulation, strong global macroeconomic conditions and high leverage.

However, owing to a number of structural changes in the banking industry following the financial crisis, global banking RoE was reset to materially lower levels. Despite access to cheap lines of credit, improving economic conditions and the non-cash boost of lower loan provisioning, RoE levels peaked at 10% and have not improved.

Chart 1: Banks’ RoE levels globally

1980-2007 2008 2009 2013

16%

4%

7%

10%

Profitability gap 6% pts

Source: BCG, Thomson Datastream

6%

10%9% 9%

201220112010average

Global financial crisis New normal


Changing customer behaviour: Since our initial report customer behaviour has continued to evolve. Customers are ever more demanding, savvier and less loyal. As a result the cost to serve is rising, while at the same time eroding banks’ pricing power. Customers want to do banking on their terms, across their preferred channels and now, given heightened competition, banks are ceding to these demands. Like other retailers, they are extending their opening hours and offering services across more channels.

Customers have access to more information than in the past. The advent of the internet and, more particularly, price comparison sites has made product pricing in banking very transparent. Thus, customers are able to shop around easily for the best deals. And customers are less loyal than ever. A recent survey conducted by Deloitte found that more than eight out of ten people said they would probably or definitely switch if their primary bank charged an additional $10 per month for the same level of service (Chart 2). Other customers are not waiting and are already switching banks. A recent survey finds that 9.6% of customers in 2012 switched their primary banking institution during the past year to a new provider – up from 8.7% in 2011 and 7.7% in 2010.1 This changing behaviour is making it more expensive to serve customers through traditional channels.

More intense competition: The competitive landscape continues to change dramatically with incumbent banks facing competition on many fronts. First, there is competition from new banks, such as Metro Bank in the UK. Second, existing banks are launching new brands to gain market share, such as Credit Agricole launching BforBank in France. Third, there is competition from non-banks offering banking services, in particular retail companies providing retail banking products and services, such as Wal-Mart in the US. Fourth, there is increasing competition from leading technology vendors beginning to offer certain banking services, such as Google, Amazon, Apple and Facebook offering different forms of payments services. Finally, there is the phenomenon of consumers bypassing traditional financial institutions altogether, such as using a non-bank intermediary like Paypal or Lending Circle to make payments to each other.

Whatever the form of additional competition, the outcome is the same. More competition in a market allows customers more choice and, in turn, causes prices to fall. In banking, this means net interest margins will come under pressure, causing aggregate levels of RoE to fall.

Digitization: Many of the above-mentioned pressures are being exacerbated by the digitization of banking. Technology is changing the way we bank, while opening up the market to non-traditional players. Consumers now have access to information whenever and wherever they want it. This increases the expectations of customers in terms of service levels. In addition, new banking entrants are offering services through digital channels that are competing directly with banks’ existing offerings. To deal with this new competition, traditional banks are now implementing large digital transformation programmes to create integrated web cockpits for their clients, allowing them to access all required information in one place through all digital channels, and to remotely connect with bank advisors and investment experts.

Chart 2: Response to a bill increase of $10 per month

12%

51%

7%

30%

Definitely switch banksProbably switch banksDon’t know/not sureDo nothing, stick with the bank

Source: Deloitte Center for Financial Services

Sources

1 J.D. Power and Associates 2012 U.S. Bank Customer Switching and Acquisition Study

The actions taken by banks, including staff reductions, hiring freezes, increased offshoring and tighter procurement processes, have not addressed the root cause of high costs. It is clear that banking has changed and, in the absence of a structural response, RoE is likely to remain depressed compared to pre-crisis levels:

Regulation: In our previous report the main regulatory concern for the banking industry was the increased capital requirements being imposed. Governments and regulators were focused on making banks safer by requiring them to hold more capital relative to assets as a buffer against any future losses. At the time the actual level of capital required was still being determined and there was great uncertainty over how onerous the requirements ultimately would be. While many banks still need to address capital shortfalls, there at least seems to be more certainty about the requirements and many have begun implementing the required changes.

The bigger concern is how banks will meet the requirements of the various pieces of regulation that have been introduced in different jurisdictions. These include the Dodd-Frank Act, FATCA, MiFID II and Basel III, with their automatic exchange of information on EU residents’ savings income, etc. These regulations have different stipulations banks must adhere to ranging from ring-fencing retail operations to providing additional disclosure on foreign investors. The regulatory agenda may be clearer than two years ago, but there is still much to implement, all of which will cost money and further dent profitability.

Downward pressures on profitability persist


Chart 3: Transactions going online and mobile

The following are the major forces enhancing the downward pressures discussed above:

• Mobility – The proliferation of smartphones and the adoption of the cloud has allowed banking services to be offered anytime, anywhere, and accessible through multiple channels and apps. This changes the industry dynamic from economies of scale to ‘economy of access’. According to Deloitte’s research, approximately 10% of mobile phone users conduct some banking transactions by phone. Chief among these users are members of Generation Y – born between 1979 and 1994. The number of transactions conducted at branches is decreasing at a CAGR (2008 – 2012) of 8%, while mobile and online transaction volume is increasing at a combined CAGR (2008 – 2012) of 9% (Chart 3). Deloitte research forecasts that mobile banking will surpass online banking as the most widely used banking channel by 2020 — if not sooner.

• Social media – The use of social media in banking has placed much more importance on the social context of banking service provision. Social media usage is constantly increasing worldwide and the number of financial services offered through this channel is booming. Over 90% of people aged between 18 and 29 years use social media, proving it is a channel that the banking industry cannot ignore. These figures indicate that it will soon be one of the best means to remain connected with clients in a cost-effective manner. Many banks are already engaging with customers through social media, including Fidor Bank in Germany, which is using social media to offer innovative banking products, and National Australia Bank which has built a social ecosystem to provide enhanced customer service.

• Analytics – Data is being transformed from a value enabler to the value itself. Customers are aware that banks have a lot of their data, and now expect them to utilise it to provide value-added services. Pressure is on incumbent banks to use the data they collect to offer customers enhanced service to compete against competitors such as Mint, which offers personal financial management. Analytics is nowadays considered a key tool for improving competitive positioning. A Deloitte survey of senior business intelligence advisors in the US found that more than 80% of them consider analytics a good way to improve their competitive positioning (chart 5).

• Cloud – Regulatory hurdles and security concerns are easing, which is increasing the provision of cloud banking services. The cloud lowers the cost of entry and the minimum efficient level of scale, allowing innovators to participate in small parts of the value chain.

Mobile Branch Online

Source: Deutsche Bank, Tower Group, Deloitte analysis

2008 2009

16%

201220112010

18.6

13.6

0.0

23.8

15.1

1.4

27.3

14.8

3.1

29.5

14.8

5.7

31.5

13.6

8.5

5

10

15

20

25

30

35

0

Billi

ons o

f tra

nsac

tions


Chart 4: Using data to drive business value

Analytical Sophistication

Addi

ng V

alue

Business User Statistical Expert

Chart 5: Does analytics improve competitive positioning?

25%

30%

29%

3%

14%

Significantly improved

Fairly improved

Improved very little

Did not improve at all

Don’t know/Not applicable

Source: Deloitte Analytics, Global Financial Services Analytics Toolkit

Source: Deloitte’s Analytics Advantage Survey

Simulation &Optimization

• Simulate and experiment with possible scenarios

• Find the best solution out of many• Generate structured business cases

• Forecasting and predicting future outcomes• Modelling and understanding correlations and

causalities

• Grouping and segmentation of customers, products, etc.

• Exploring data specifics of the segments

• Visualising data & relationships• Cause explanation and anomaly detection

• Integrated performance reporting• Setting the basis for integrated performance management• Interactive dashboards for providing the right level of insight

• Standardized, static reports (e.g. Monday morning Weekly Sales report)• In-system reports (Open orders)

Predictive Modelling

Segmentation

Visual dataexploration

KPIreporting

Operationalreporting

Typical level of maturity in Financial Services


Banks have the choice of several levers to address the internal and external challenges they are facing and increase profitability. A key lever is the implementation of a modern core banking system. This will allow banks to respond to internal challenges, for example, product and channel growth and cost management, as well as external ones, including regulatory requirements and increasing competition.

In our last report we outlined the four key ways that modern core banking technology enables banks to raise RoE:

1. through providing the opportunity to move into more profitable markets and segments,

2. by raising asset yield within existing business,3. by cutting costs sustainably, and 4. by achieving economies of scale.

For more details about the ways core renewal can help a bank improve its RoE, together with detailed specific examples, please refer to our initial report (https://www.temenos.com/en/market-insight/white-papers/profitability-gap/).

How modern core banking software can help restore profitability

Banks running modern core systems have experienced the above benefits, and in turn generated higher returns than their peers.

For the past five years, we have used information from The Banker database to analyse the performance of banks using modern core banking systems, in comparison with those using legacy software. We use a third-party source to identify the banks using software from the biggest vendors in the marketplace, and then we compare the average values for these banks against all others.

What this analysis shows is that banks running modern core banking systems have materially better profitability metrics. Over the past five years, banks using third-party banking applications have enjoyed on average a 19% higher return on assets (RoA), a 28% higher RoE and a 6.5% lower cost-to-income ratio than banks running legacy applications. The correlation exists across a large data series, over time and across regions, the last being particularly important given the significant disparity between the recent performance of banks from emerging and developed economies.

The differential in performance between Temenos customers and all other banks is even greater. Over the past five years, Temenos customers have enjoyed on average a 32% higher RoA, a 42% higher RoE and an 8.1% point lower cost-to-income ratio than banks running legacy applications (see Table 1 below). Compared to banks running other third-party banking applications, this difference is smaller but still significant: over the past five years, Temenos customers have demonstrated a 17% higher RoA, a 16% higher RoE and a 2.3% point lower cost-to-income ratio.

We believe this analysis offers highly compelling support for adopting third-party core banking software as a means of improving profitability. Through our research, we have identified a strong and sustained correlation between third-party software usage and superior performance. In short, our opinion is that using third-party systems is a significant factor in superior bank performance, and using core banking from Temenos can drive even more pronounced outperformance.

Banks using modern core systems demonstrate significantly higher returns

Source: The Banker – ‘Top 1000 Banks 2008 - 2012’, IBS Intelligence, Temenos

* Third party applications include those from vendors Temenos, OFSS, Infosys, TCS, Sopra, Avaloq, ERI Bancaire, Misys

Table 1

Third party banking applications*

Temenos

Return on assets 19% 32%

Return on equity 28% 42%

Cost to income ratio -6.5% -8.1%


Banks are still not modernizing

Despite the strong case for core replacement illustrated here as well as in our previous paper, banks are still reluctant to modernize their core systems.

There have been very few major IT simplification projects announced and kicked off by banks globally. As a result, the banking industry still has the lowest penetration of third-party software compared to any other industry (see Chart 6 below).

One of the major reasons why banks have not launched any major IT simplification programmes is that IT spending (e.g. M&A spending) tends to be pro-cyclical, that is, banks tend to spend much more freely when times are good and profits are high. This is illustrated in Chart 7 (page 11), which shows a very high correlation between banking profitability, measured in terms of RoE, and spending on core banking software. Therefore it is not surprising that as profitability has remained suppressed, banks have not invested with any significance in third-party core banking software.

Chart 6: Penetration of third party software by industry

IT spending as a % of total costs

% of pre-packaged software penetration

Source: BCG, Forrester, Gartner

Bankin

g

10%

20%

30%

40%

50%

60%

70%

80%

90%

14%18%

10%

18%

10%

19%

7%

32%

6%

37%

4%

42%

3%

78%

3%

82%

Telec

om

Insuran

ce

Public Sec

tor

Health

care

Consumer

Energy

Industrial

Goods


Another reason for banks’ reluctance is the real and perceived risk of launching projects, not helped by the many project failures in recent years. IT transformation projects are usually the largest projects banks will undertake, and can consequently involve challenges. However, by employing best practices (please refer to later section, on page 13, on best practices) and a strong business integration partner, banks can position themselves to achieve a successful transformation project.

According to a study by IBS Intelligence, the payback period for core banking transformation projects is quite long (on average 4.5 years) due to high initial investments, while benefits are mainly realised in the post implementation phase.

A further explanation for why major projects haven’t been launched lies in the fact that banks have not yet needed to act. Until very recently, the economic, competitive and regulatory environments in the developed world have been sufficiently benign as not to penalise banks too seriously for inefficiency. Meanwhile, a buoyant backdrop in the developing world has allowed practically all banks to enjoy high growth, regardless of operational efficiency and agility.

However, the picture is changing and we believe delaying core system renewal further will have more profound negative consequences for banks.

Chart 7: New name core banking sales vs. bank RoE

0

50

100

150

200

250

300

350 20.0

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

CB Deals (#, LHS) Bank RoE (%, RHS)

%

Source: Thomson Reuters, IBS Intelligence


Why banks may begin to address their legacy systems

While banks have not begun simplifying their IT systems due to lagging profitability levels, there are a number of reasons why we believe the traditional correlation between profitability and IT spending will break down.

Increasing high profile IT failures – There have recently been a number of high-profile IT failures. In the UK alone, major high street banks Lloyds and RBS/NatWest have had a series of IT failures leading to customers being denied access to their account information online and unable to withdraw cash from their ATMs. While the root cause of such failures is not always made public, it seems clear that legacy IT systems designed and built in a banking world revolving around 9-to-5 branch banking cannot cope with the demands and expectations of the new digital reality. Digital touch points are only going to increase, putting further pressure on legacy systems. Banks will need to act sooner rather than later to ensure their systems can cope with the new digital reality.

Regulator involvement – Partly as a result of the high-profile IT failures discussed above, regulators are becoming more concerned about the state of banking IT systems. One of the most significant lessons learned from the financial crisis was that the banks’ information technology and data architectures were inadequate to support the broad management of financial risk.2 Regulators want to ensure that systems are resilient, and seem to be coming to the conclusion that legacy systems are of great concern and need to be addressed. Some regulators will be more aggressive than others in their involvement, but at the least many will try to influence banks to update their systems, while others may go as far as mandating banks to modernize their systems and even setting deadlines.

Improved third-party software – The attractiveness of third party software to the financial services industry has never been greater. Vendors are now offering truly packaged, out-of-the-box software with standardized processes, products, and country-specific functionality. Banks now have the option of purchasing software in a componentized manner, reducing the risk of implementations by installing software in stages rather than taking a “big bang” approach.

Growing partner ecosystems – As well as the better options available in terms of third-party software, banks also have an ever growing choice of leading systems integrators to assist with the implementation of the software. More and more systems integrators are signing partnerships with core banking vendors, meaning there are more qualified consultants available to perform implementations, further reducing the risk of core system replacement.

IT budgets increasing – Our recent report “The financial services industry reaches an inflexion point” found that banks are increasing planned IT spending. The survey indicated that 65% of respondents expected their IT budgets to rise in the coming year - the highest rate in 5 years. As IT budgets rise, banks will have more financial flexibility to undertake core system renewal.

Increasing investor focus on IT spending – Investors are increasingly conscious of the magnitude of IT spending within a bank’s cost structure. Furthermore, investors are aware of the inefficiencies and costliness of legacy IT systems and the potential impact on competitiveness. Investors are likely to push banks more aggressively towards complete IT platform remodelling.

Impact of digital technologies – While banks have increased spending in areas such as mobile and analytics, capturing the full benefits of these technologies requires a fully-integrated architecture. A modern core-banking system is required to facilitate offerings such as a 360° client view, end-to-end straight-through processing, paperless know-your-client and on-boarding processes together with digital signature and new authentication protocols.

Diminishing legacy technology skills and vendor support – As well as the complexities and inefficiencies of legacy systems, a growing concern for the banking industry is that many of these systems are no longer being supported by vendors. Banks are also facing a progressive lack of knowledge of these systems – often several decades old – as legacy system experts retire.

Acceleration of mergers & acquisitions – Following the financial crisis there has been an acceleration of mergers & acquisitions in the sector as banks either try to achieve scale by acquiring other banks or retrench into key segments by divesting certain businesses. In order to achieve the expected synergies post-merger, banks must rationalize their application landscape and core banking is one of the many areas to target.

Sources

2 BIS / Principles for effective risk data aggregation and risk reporting


How banks can move towards modern core banking software

Successful transformation programmes achieved in recent years have enabled banks to gain valuable experience, sharing knowledge with their peers to identify common pitfalls. But the digital era has brought an additional level of complexity to core banking implementations. Therefore we have set out best practices for banks looking to undertake a core replacement project:

1. Select a great core banking productThere is often a heavy focus on functionality during the selection of a new core banking platform. This is, of course, important and something we would regard as a minimum bar for selection. However, there are several areas that need close examination, as poor support for any of them is likely to lead to severe problems during implementation, including excessive customisation, and may endanger future support of digital features. Areas to examine include:

• Multi-channel architecture – support for all existing channels and provision of a general framework for supporting future channels in a manner that minimizes rework for each channel and supports cross-channel servicing. This architecture should not only support multiple channels, it should also enable the full digitization of the bank.

• 360° customer view – provision of an operational customer-centric view of product ownership and balances, even for products that are not maintained in the core-banking platform itself (e.g. credit cards often fall into this category), including support for credit-risk management and corporate hierarchies and relationships. Analytics features will contribute to this exhaustive customer view, but will require adapted data architecture.

• Product catalogue – a framework for defining new products and product variants and managing the lifecycle of products, providing faster time-to-market with support for governance of product design, launch and retirement.

• Integration – provision of a consistent integration framework for real-time and batch interfaces, ideally driven primarily by configuration of the platform, rather than customisation. Specific interfaces such as for payments and finance/GL should be supported out of the box. The package should reinforce straight-through processing and also support paperless technology that will enable online and remote flows.

• Management of data – the ability of the platform to manage huge volumes of data that will be generated folliowing go-live. This should include enabling historical data to be archived and deleted, support for feeding downstream analytics platforms and operational data stores and support for master data management. Potential data integration based on a cloud solution could be considered at an early stage.

• High availability multi-entity architecture – the architecture should enable 24x7 operation and a high-availability dual site capability, minimizing or avoiding any impact on service due to end of day/end of period processing, supporting real-time straight-through processing, and multiple entities, jurisdictions, countries, currencies and time zones.

• Product architecture – there should be a clear paradigm for what is included in the core product, what is regional or national customization, and what is specific for the bank, as well as what can be configured versus what requires product customisation. Related to this, there should be a clear approach for implementing core product upgrades and a track record of existing users of the product updating their implementations to the latest version.

2. Find the right partners and get them alignedCore banking suppliers should have a range of credible partners to implement their platforms, reducing the risk of being locked into a single provider. Invest time and effort in selecting the implementation partner – or partners – that will work with you, bearing in mind that it is not possible or even desirable to offload all the risk onto them. Consider carefully the use of a single fixed price contract for the implementation – in our experience these can give banks a false sense that they have hugely reduced their risks and generate the wrong sort of incentives for suppliers. Once you have selected a partner, aligning all parties in terms of approach and methodology is important – and this process should involve the core banking platform vendor, as they will have their own processes, particularly in relation to core product customisation. Global integrators will be able to provide and implement recommendations to reach state-of-the-art solutions leveraging digital technology. For example, Deloitte Digital is a separate service line gathering multi-disciplinary experts for defining and executing digital transformation initiatives, thanks to their holistic approach.

3. Define clear business requirementsConduct a thorough review of the chosen platform, including identifying the business requirements to be addressed. Business requirements should be the main framework for managing the scope of the programme and the common thread throughout all aspects of the programme delivery. In order to capture requirements and to start evaluating the business change, a process-led approach should be used, adopting end-to-end processes that cover not only the core banking platform but also satellite systems and manual operations. This was an approach we followed at a global bank that was rolling out corporate banking into dozens of countries, giving it a standard process blueprint that it could then tailor to each country as required.

4. Manage scope, with a focus on ‘adopt’ not ‘adapt’Making sure the scope of the project is properly managed is one of the key factors in ensuring delivery within the expected timelines. The entire organisation must be aligned to the principles of scope management, focusing on opportunities to optimise scope rather than inflating it. The key principle for this is to adopt the new banking platform, not to try to adapt it to legacy processes and functionality. Moreover, some of the existing requirements could now be managed in a completely different way, thanks to the use of new technologies. The bank will enjoy the advantages of adopting a new way of doing things, rather than initiating heavy adaptations and changes to the standard package.

5. Design the end-to-end solution with the aim of minimising complexity One of the challenges of implementation is the complexity of integrating a new banking platform into a bank’s existing technology landscape. A common approach to reducing complexity is to undertake a “big bang” migration, or at least a series of big bangs by customer segment, which can avoid the need to operate dual interfaces with complex routing of data between old and new systems. We also recommend optimising the footprint of the new platform to minimise the amount of integration – a bigger footprint can be easier to implement than a smaller footprint with more interfaces. Finally, it is also important to define the end-to-end solution, which will cover many more systems than just the core banking platform – and using the end-to-end process approach described above can help with this.


6. Define quick wins to sustain internal buy-in Define a roadmap with early deliveries to ensure the programme has achievable short-term milestones. A transformation journey is a hard endeavour and needs these key intermediate milestones to ensure pressure points are present, motivation is continuous, and benefits are recognised. Helping employees to realise the benefits of the new technologies as early as possible is important for internal buy-in. Demonstrations of how the new platforms will facilitate their daily work – for instance, in increasing the time advisors share with clients – will motivate them to move onto the new system.

7. A step-by-step approachAvoid jumping in to a new phase without having signed off the current milestones. Starting new phases with previous deliverables under discussion is a real temptation, and in most cases, rework is the reward.

8. Strong governance with executive sponsorship Executive support and sponsorship must be present continually. This is not a side-project. It must absolutely be at the top of the executive’s agenda. Lack of management commitment is one of the main causes for programme failure and is often characterised by lack of scope control – with the principle of ‘adopt’ not ‘adapt’ becoming compromised. A core banking programme needs business and management support on a full-time basis and should not be labelled as an IT programme.

9. Deliver smartly and communicate effectivelyIn the words of Paul Marriott Clarke, MD Retail Banking at Metro Bank, “The big lessons for me are to work to challenging but achievable deadlines, encourage institutional honesty about where we are, and ensure effective communication”. Define an effective communication strategy as well as a clear vision of the main benefits of the programme. Share with all people how they will benefit from the change. The communication plan should:

• Outline key communication priorities and needs of key leadership groups,

• Ensure an integrated overall approach to programme governance, ensuring that time is used as efficiently as possible to support a fast-tracking environment,

• Define a detailed schedule for communication both within and between groups, including key inputs, outputs, and frequency of meetings,

• Set guidelines and standards for communication development and delivery,

• Emphasise the strategic move the bank is making in implementing a modern platform, enabling new digital processes, and in turn achieving a competitive advantage in the market.

10. Invest in a good business case and use itThe business case should demonstrate cost savings (such as lower operational costs) and increased revenue (such as a range of new offerings and a faster time-to-market). Metrics are fundamental to assessing the real value of the programme, giving comfort to the bank´s shareholders and sponsors. The business case can also be a key tool to support decision making during the programme.

A big plus is that the new technologies can visibly impact the business case, with their tangible benefits already proven on the market (e.g. the digitization of banks enabling an overall decrease in the number of branches).

Conclusion

Following our initial study, “Bridging the Profitability Gap”, published in 2012, we have found that an additional two years on from the financial crisis, profitability in the banking sector has yet to improve. The structural changes that initially drove down RoE – tougher regulation, changing customer behaviour and more intense competition – are still prevalent and being exacerbated by the digitization of banking. Furthermore, despite the continued promise of modern core banking software to raise profitability, banks, in general, have not yet begun to update their legacy systems. However, with third-party systems becoming increasingly sophisticated and a growing network of systems integrators coming into the core banking space, banks now have more options than ever to modernize their IT estates in a low-risk manner and unlock the value-creating potential from technology renewal.


Authors

Chris McGinnis is Head of Strategy at Temenos, based in London, and can be contacted at [email protected] or @chrismcginnis99 on twitter

Ben Robinson is Chief Marketing Officer at Temenos, based at the company headquarters in Geneva, and can be contacted at [email protected] or @robinsonbenp on twitter

Patrick Laurent is Partner at Deloitte and leading the EMEA Temenos Solution Centre. He can be contacted at [email protected]

Pascal Martino is Director at Deloitte and leading the strategy and operational efficiency practices. He can be contacted [email protected]

www.temenos.com

TEMENOS™, TEMENOS ™, TEMENOS T24™ and ™ are registered trademarks of Temenos Headquarters SA

©2014 Temenos Headquarters SA - all rights reserved.

Warning: This document is protected by copyright law and international treaties. Unauthorised reproduction of this document, or any portion of it, may result in severe and criminal penalties, and will be prosecuted to the maximum extent possible under law.

Founded in 1993 and listed on the Swiss Stock Exchange (SIX: TEMN), Temenos Group AG is the market leading provider of banking software systems to retail, corporate, universal, private, Islamic, microfinance and community banks, wealth managers, and other financial institutions.

About Temenos

Headquartered in Geneva with 59 offices worldwide, Temenos software is proven in over 1,600 customer deployments in more than 150 countries across the world. Temenos’ products provide advanced technology and rich functionality, incorporating best practice processes that leverage Temenos’ expertise around the globe. Temenos customers are proven to be more profitable than their peers: in the period 2008-2012, Temenos customers enjoyed on average a 42% higher return on equity, a 32% higher return on assets and an 8.1 percentage point lower cost/income ratio than banks running legacy applications.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 200,000 professionals are committed to becoming the standard of excellence.

About Deloitte

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

© 2014. For information, contact Deloitte Touche Tohmatsu Limited.Designed and produced by MarCom at Deloitte Luxembourg.

201405005-1

restoring profitability in the digital age - temenos · restoring profitability in the digital age...

Documents