While German banks wait for SAP before making core system investments, and while no major UK bank has yet successfully implemented a replacement core system, Spanish retail banks have leap-frogged their European counterparts in terms of core processing capabilities, according to Datamonitor.
While large UK retail banks remain beset by legacy system issues, Spanish retail banks have leaped ahead in their core processing capabilities, according to a new Datamonitor report, Core Systems in European Retail Banking 2001-2005. Some of the most complex and business critical applications that banks maintain are their 'core systems'. A core system is at the centre of every bank's technology infrastructure and contains records of customer transactions, and the processing of those transactions.
Quick service
A very sophisticated core system is needed if banks are to instantly process most applications at the branch, with the central office only taking care of more exceptional items.
Great benefits are to be gained from technological integration between the branch and the bank's central core systems: In addition to the expected operational efficiencies, better integration between the distribution channels and the core system can dramatically improve the customer's overall experience.
Maintenance
Traditionally, core systems have been maintained and developed internally in an organic manner, resulting in complex architecture that has been built up over decades. Datamonitor says that the IT departments of large retail banks across Europe are now technology companies in their own right, having annual budgets measured in hundreds of millions of dollars and staff levels anywhere between several hundred to a few thousand employees.
However, banks are now looking at the idea of starting with a clean sheet and, although the overall market for core systems in Europe will only experience an average annual growth of 1.2% between 2001 and 2005, the report sees it shifting away from being internally dominated.
As a result of consolidation and rationalisation in banks, the share of internal spend will steadily decline from 47% in 2001 to 37% by 2005, representing a great opportunity for vendors. However, as a core system replacement is the most risky, complex and expensive IT project that any bank is likely to undertake, they will no doubt be cautious and overall progress will be slow.
Spain's model
The report reveals that banks in France and the UK spend 21.5% and 19.8% of their IT budgets respectively on developing core systems. Spanish retail banks, however, have the lowest core systems spend in Europe at only 16.9%. And they are currently, on average, some of the most profitable banks in Europe, thanks in part to the cost savings and operational efficiencies gained from their core systems.
One of the key factors in the Spanish retail banking community achieving this level of operational efficiency is the replacement of legacy core systems with packaged core systems designed and maintained by third party vendors. That, combined with the re-engineering of their business processes, has enabled Spanish retail banks to improve their financial performance and the actual methods of banking.
Alnova, an Accenture subsidiary, is the main vendor that has been replacing core systems in Spain, having 22 of the country's banks on its customer list.
"By doing some heavy investment in packaged core systems over a ten year period, the Spanish retail banking community has surged ahead of its European counterparts providing them with highly sophisticated operational efficiency. The Spanish experience will be a model for many European countries", says Markus Siivola, Datamonitor technology analyst.
Germany waits
In the German market, SAP has had its core banking offering for small and mid tier banks available for some time. However, SAP is now rolling out a core system for larger banks which is being developed and implemented concurrently in Deutsche Postbank and UBS. Because of the great respect that SAP commands in the German banking world, the major retail banks are apparently waiting to assess SAP's offering before they consider other packaged core systems.
For this reason, the report expects the packaged core systems licence market in Germany to increase at a compound annual growth rate of 13% over the four years leading up to 2005.
UK consolidating
The UK has the largest core systems market, totalling 21% of the European market. However, the UK banks have shied away from packaged core systems on a larger scale, currently only accounting for 10% of the European packaged core system licence market.
Part of the reason for this conservative approach, according to Datamonitor, is the intense consolidation of the banking industry and the other major IT projects that have occupied its attention in recent years. And the memories of failed implementations in the past still haunt many IT directors, making them a little reluctant to be the first to take the plunge.
Siivola concludes, "European core systems still have a long way to go and some banks will seem to remain unconvinced of the benefits of a packaged core system. Only recently, a Scandinavian bank decided to design a brand new core system internally. This is despite the fact that an internal IT project will bear a significant cost in terms of time and money, and on average half of internal IT projects fail. So, while the move towards external spending has started, it won't be plain sailing all the way."
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