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Time to SWIFTize European Banks

Europe, this patched up network of countries with different political and cultural backgrounds is of course hard to unite.

But what’s taking so much time for European banks – creaking with costs, shuddering at upcoming compliance requirements – to realize that they need to do something FAST, and TOGETHER – to stay afloat?

Within IT and operations (business processes), most large to mid-size European banks have certainly gotten to Industrialization 101:

- there are the standardized backend chunks (incidentally comprising 75-90% of IT/operations costs at several banks) which you try to outsource or move to low-cost locations

- and the differentiating front-end closer to the customere that you retain in-house and focus your brains on

A look at the top 20 eurozone banks will show different stages of progress in industrializing or outsourcing, but also a lot of duplication or waiting somebody else to make the first move. Particularly, the sustained crisis may make several Tier-1 banks create industrialized factories or white-labeled shared services.

In my opinion, it will be an era before anything good comes out of this given the heat, my friends, is ON!

Step-by-step approaches won’t work: maybe it is time to SWIFTize European banks!

SWIFT is a model that has worked: a “co-opetition” between 8000 finance firms across over 200 countries, providing a shared network that helps pump millions of financial transactions daily.

While politicians and senior citizen in Brussels/Strasbourg furrow their brows over whether a political or a banking union will save the euro, why can’t European banks agree to setup joint shared service centers that can become the low-cost “factories” for the non-differentiating backend, going beyond just financial transaction networks?

In fact, why setup centers from the scratch? Here are some thoughts:

Phase 1:

-          Take the top 20 eurozone banks

-          identify their existing IT systems and processing centers

-          figure out which bank is “best-in-class” at which process (e.g. securities processing, fund accounting, HR services etc.) or systems

-          mark on a map where they run these centers (usually Easter Europe, India etc.)

-          build these centres up to scale so all banks can benefit from the resulting economies of scale

Phase 2:

Once the “easy” pieces in the Banking IT/process landscape are moved out, it will be time to look at the parts which have more “brains” – software that needs more standardization before they can be shared: this is where we need something like the BIAN standards to be adopted across the board, enabling more and more of the standard applications to be shared, and banks’ internal IT teams then focusing on differentiating / customer-facing front-ends to be built up as “Apps” on this shared back-end.

If this sounds too simple, I would like to know what you think - why will such an approach work, and why not?


Comments: (2)

A Finextra member
A Finextra member 07 August, 2012, 10:46Be the first to give this comment the thumbs up 0 likes

Samarth - Great thought. My view points below -

Some reasons why it may not work

1. Poses a risk of being a single point of failure.

2. With the back-end process and system architecture shared, I would assume respective banks' do not have usual empowerment to model their enterprise data which inturn aligns to their analytics strategy. With analytics strategy a key to enhance customer profitability, this arrangement may hinder some banks to innovate new things and reduce their ability to compete with established banks. Little freedom on business process changes also will reduce competitiveness between banks.

3. Mobilization of an association (between banks) to create & maintain this shared system is very difficult.

4. Apart from EBA regulations, different euro zone countries have local regulatory boards as well. Adherence to local regulatory & compliance items without impacting the shared model may pose difficulties.

It may work because there is definitely a potential to reduce a lot of cost collectively. However, I believe the cost reduction can be significant by doing the below instead of sharing IT systems & processes itself  -

1. Sharing infrastructure alone (cloud) - Since it takes a bigger share of cost compared to software creation & maintainance.

2. Ensuring enterprise architecture adhers to common standards like BIAN there by reducing system integration costs drastically.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 07 August, 2012, 16:08Be the first to give this comment the thumbs up 0 likes

Technically, this could work. Politically, I'm not so sure. But, it's definitely worth trying. As I pointed out in my comment to another Finextra blog post today, a good starting point for this cooperation could be a national utility to handle sanctions screening centrally instead of each bank doing it individually.

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