Banco Bilbao Vizcaya Argentaria SA unveiled in May a new customer-centric banking model called Plan Uno, which is intended to remove the walls between service delivery channels at the $662 billion-asset company. Within three years, BBVA plans to fully merge all customer channels to one service platform, meaning there will be no more business-line distinctions between in-person branch or electronic banking. Banking, investment or insurance products will be tailored for the individual, each constructed from the information in a single consumer profile that lies in the hub of BBVA's core operations.
What makes this ambitious plan possible is a modern core processing system, featuring relational database capabilities plus integrated products that interact fluidly and in real-time with the core. BBVA stands in contrast to most institutions running their operations on dated mainframes that offer less flexibility to add new services and products without substantial information technology work.
Despite the limitations of legacy core systems, U.S. bankers have largely preferred to get by rather than pony up for the substantial expense of an overhaul (which can eat up 50 percent of an institution's annual IT budget). Why? Bankers have generally felt no pressure to upgrade when profits were abundant and lacked the means to do so when earnings evaporated. Banks "seem to get stuck in the spot of, 'how do we justify the massive expense when we're not dealing with the pain?'" says Jim Washburn, head of the banking consulting group for Capgemini Financial Services.
But now, as banks confront the necessity of becoming more efficient, more will be forced to replace and update core systems.
According to an Aite Group survey of bank and credit union executives, 20 percent admit they have reached a critical stage in the need to replace their core systems, at the risk of losing business to spry competitors.
Despite the high upfront costs, Aite found that 56 percent of banks in need of a core upgrade could justify the expense because of new opportunities in revenue, cost cuts and compliance improvement.
Analysts say there are several drivers behind this new sense of urgency.
Competitors Are Plugging In
BBVA's Plan Uno is about improving customer profitability and loyalty. The company, which already has an enviable efficiency ratio in the low 40s, aims to capture all aspects of a consumer's economic life to boost cross-selling and shave expenses—a longtime goal of many in the financial services industry.
As it phases in Plano Uno over three years, BBVA expects its services, which include a Web page that users can customize for their own personal financial management, to attract an additional 500,000 customers. The company plans on eventually bringing unified platforms to all its global subsidiaries, which includes BBVA Compass in the U.S.
That should make banks here nervous. BBVA and fellow Spanish institution Banco Santander—another with U.S. expansion on its mind—have each done "fantastic jobs" at improving efficiencies in their global networks, says Robert Hunt, a core banking analyst for the research firm TowerGroup. When Santander acquired U.K.-based Abbey National Bank in 2004, a conversion to Santander's real-time processing system introduced a regimen of expense reduction that shaved Abbey's 70 percent efficiency ratio to 45 percent.
Besides the Spanish duo, many high-profile North American banks have started the process of modernizing their cores. Union Bank in San Francisco is working on one of the most ambitious core projects in memory, replacing all its disparate systems for checking, loan, consumer and commercial operations into a single real-time processing environment on Indian vendor Infosys' Finacle system. Citigroup is being watched closely to see how well it migrates its North American banking operations to a Fidelity National Information Services platform. Royal Bank of Canada is also said to be moving to a new core, according to the research firm Celent.
Hunt thinks that core-replacement announcements last year at three "super-community" banks—American Savings Bank in Hawaii, Community Bank Systems in DeWitt, N.Y., and Whitney National Bank in New Orleans—might be a prelude to an upgrade cycle for midsize institutions in the $5 billion to $20 billion-asset range. Over the last two years, only 3 percent of core replacements in the U.S. involved midsize or larger banks.
Aite research estimates the market for core replacements is starting to heat up—growing from 391 replacements in 2009 to a projected 575 by 2012.
Doing More with Data
Richard Kick of First National Bank of Long Island jokes that he could "keep two employees busy full time" just handling the data requests submitted to the data warehouse program built into its two-year-old core platform system from Fiserv. Marketing demographics and relationship profitability measures are among the regular data points the bank tracks. "You just get that insatiable appetite for more information," says Kick, an executive vice president.
The $1.6 billion-asset bank had sought to do such benchmarking years earlier, but balked at paying the steep fee for a less robust data-mining product for its old core system. Banks running on legacy mainframe systems often have to pay princely sums for custom applications or program interfaces to dig out numbers from these systems that weren't built to handle complex strategies such as relationship-based pricing, says Hunt.
Newer core systems are much more capable. "We're taking transaction data, frequency of deposits, amount of deposit, debit transactions, and bill pay transactions," says Steve Tait, president of Fiserv's depository institutions group. Banks can use these figures to predict customer attrition, derive optimum customer cross-sales models, and even predict loan defaults, he says. Kick says First National plans to add customer account profitability measures, not only for service means but to break down the performance of its account managers. "We want to take it a step further now."
Getting Beyond Batch
More than 50 percent of large U.S. institutions still operate in a batch memo-post processing environment, according to Aite Group. That creates added functional weakness in the event of a system crash, since the batch process depends on the six-to-eight-hour grind of manual exceptions handling. A batch-based system that goes down might require days of catch-up work, says TowerGroup's Hunt. Another shortcoming is bank batch systems cannot always update a memo-post file in time for the next day's business opening—meaning customers might be denied access to funds they deposited or could withdraw excess funds if a previous debit remains unposted.
Banks would like to automate issues like exceptions and funds availability. The best route would be through a connection from the account to the point of presentment, and "that requires re-engineering the bank and requires replacing the core systems," says Hunt. Real-time processing systems can trigger alerts on errors (such as a double-processed transaction) and have online reporting capabilities that would keep personnel alerted to exceptions throughout the day and could reveal a substantial software or hardware failure that needs addressing.
Buying Power
Banks looking at renewing or replacing their core system relationships have a new strategy in place: Let's make a deal. Almost any solution from vendors like Fiserv, FIS and Jack Henry & Associates today will include add-on modules or standard third-party interfaces for services like online banking or customer relationship management. This allows banks to get more services from fewer vendors, increasing the competition among providers. Banks are "looking at the contracts they have and renegotiating as a way to add features and reduce costs," says John Buhrmaster, president of the 1st National Bank of Scotia in New York.
For banks that want to maintain their previous IT investments, most vendors now offer easy plug-n-play interoperability of third-party systems. Jack Malinowski, chief technology officer of branch automation firm Benchmark Technology Group, says his firm has programming interfaces to add teller capture or voice over Internet protocol to most major systems. Although core providers would like to nudge him aside, they have to acquiesce to bankers' demands. "We don't consider the core systems are competitors to us at all," says Malinowski.
Gary Tice, chairman and CEO of the startup First National Bank of the Gulf Coast in Naples, Fla., says he chose to deploy Jack Henry's SilverLake core platform last year in part because it worked with external products he wanted, such as a Harland Financial Solutions' credit-scoring product.
Five or 10 years ago, banks had to get approval from the core processor to support such a product, says Tice. "That's not the case today."
