BBVA Unit's Core Revamp May Not Become a Trend

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BBVA Compass' ambitious core overhaul should pressure its competitors to update their systems, but continuing financial issues and increased compliance costs may hold many of them back.

In theory, the advantages a core migration could bring BBVA Compass — faster product development and more targeted marketing — would catalyze other financial institutions, especially large regional banks in its area, to match the upgrade.

But analysts said they do not expect BBVA Compass' replacement of its core processing system, the brains behind retail banking operations, to ignite a frenzy of spending on "rip-and-replace" initiatives by other institutions.

"Replacing a core is a massively scary proposition," said Madhavi Mantha, a principal and head of banking research at Novarica, a division of the Novantas LLC consulting firm in New York. "I think a lot of banks are still not there, quite frankly."

Many U.S. banks are running core systems that are at least 30 years old. Instead of investing in entirely new systems, which carries financial and operational risks, banks have tried to address changing demands by cobbling together add-on software programs.

While improvements in the economy have helped banks free up some technology funding, investment dollars are still "scarce," Mantha said. Many banks are reserving their funds for changes they will need to make to comply with new and pending laws.

About 700 financial institutions worldwide are expected to replace their core systems this year, according to a 2010 report from the Aite Group LLC research firm in Boston. The bulk of the spending — 36% — is expected to be by banks in Europe, the Middle East and Africa. Banks in the Asia-Pacific region are to account for 30%, followed by 28% for North America and 6% for South America and the Caribbean.

In BBVA Compass' case, it is deploying technology that its parent company, Banco Bilbao Vizcaya Argentaria SA of Madrid, Spain, already uses in nine other countries. The U.S. unit, which is based in Birmingham, Ala., has 716 branches in seven states, including Texas, Arizona, Alabama and California. It reported $63.3 billion of assets as of the end of the year.

In its core overhaul, BBVA Compass is deploying a system from the technology consultant Accenture PLC called Alnova Financial Solutions. While about 100 banks use Alnova, BBVA Compass is the first to install the system in the U.S. The bank said it expects to be able to improve its ability to cross-sell products to customers and reduce costs. It will also move to real-time processing of customer transactions as opposed to batch processing, which has been the norm for U.S. banks and creates a lag in posting transactions to customer accounts.

"That is going to provide much better information about the customer, and it's going to allow [us] to better assess their needs," Sergio Fidalgo, the chief information officer of BBVA Compass, said in an interview Tuesday.

The new technology will also help BBVA Compass move to a customer-focused approach from a product-centric marketing strategy, analysts said.

By moving to Alnova, BBVA Compass will be able to refer to a single customer information file that showcases the entirety of a customer's product relationship, Fidalgo said.

"By coming to the U.S. with this model, BBVA will be positioned to have a very good view of the customer … and really lead this charge into customer-centric banking as opposed to" product-centric banking, said Bruce Voelker, a managing director in Accenture's North America banking practice.

BBVA Compass also expects to speed up product development as a result of the upgrade. In the past, it could take up to six months or more to roll a new deposit product out, said Shelaghmichael Brown, a senior executive vice president and head of retail banking at the bank. BBVA Compass expects that to shrink to as little as a month, Brown said.

A major reason for the lag in development time is because of the fact that "vintage" core banking systems often require entirely new lines of code to be written, said Jost Hoppermann, vice president of banking applications and architecture at the Cambridge, Mass., research firm Forrester Research Inc.

"This kind of flexibility regarding product definition will be crucial for the success of financial services firms," Hoppermann said.

BBVA Compass' project, which has been widely rumored in the banking industry for some time, began in 2009 and is expected to be completed in 2012, executives said Tuesday. It is one of only a few significant core conversions taking place in the U.S. Core conversions are especially rare because they carry the risk of technical setbacks, can cost billions of dollars and last several years.

Regardless of whether BBVA Compass' move prompts competitors to embark on projects, its move to real-time processing could highlight the need for other banks to update their systems, Mantha said.

BBVA isn't the only bank overhauling its U.S. operations. Citigroup Inc. is undergoing a core platform change for its North America consumer banking operations, which it expects to result in a "streamlined application environment" and more consistent service for customers across all channels, a spokeswoman said in an email Wednesday. The Jacksonville, Fla., vendor Fidelity National Information Services Inc. has said it is working with Citi on the project.

Union Bank in San Francisco, a subsidiary of Mitsubishi UFJ Financial Group, is upgrading to a core system from Infosys Technologies Ltd. of India.

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