Core banking replacement market healthy, but vendor M&A a worry for banks

Core banking replacement market healthy, but vendor M&A a worry for banks

Financial institutions looking to replace their core banking systems should disregard vendor promises on future strategy and concentrate instead on the fundamentals, warns IT analyst group Gartner, as the trend for consolidation among suppliers looks set to continue.

At Gartner Symposium ITxpo 2006 in Barcelona, Alistair Newton, principal research analyst, stated that he expects four to six major announcements from European banks renewing their core banking systems in the next 12 to 18 months. Further, this prediction is based upon Gartner’s direct discussions with banks, rather than being a forecast based upon assumptions.

In terms of the vendor environment, Newton highlighted to delegates the consolidation experienced in recent years and told those attending the session that this trend would continue. He warned banks to accept that ownership of vendors may well change, and so advised them to eliminate surprises by factoring it into their long term planning.

His assertion was: in this environment selecting a vendor based upon the people you meet or their future promises for product development is a flawed strategy.

Inability to have confidence about the long-term survival of the company you buy from means purchasing decisions have to be taken based upon whether the fundamentals – the product’s current software architecture and existing functionality – meet your bank’s business needs now. In this situation it would seem future roadmaps are next to worthless (even more so than in normal circumstances).

The upside of this M&A activity is that Gartner expects the remaining vendors to invest more in their products, both in terms of adding new functionality and new support for emerging lines of business or financial products.

"Now is the ideal time to start planning to replace legacy systems with new, agile core banking systems," stated Newton. To prepare effectively he recommended that banks stay in regular touch with the market by conducting annual evaluations of vendor capabilities; undertake preparatory data migration and cleansing projects; and, work with their internal counterparts to rationalize or retire old product lines to reduce the scale of the project ahead.

The drivers for change vary by market, size and geography but drilling into the issues facing the larger, diversified financial institutions, Newton highlighted a couple of ‘killer applications’ which many banks are asking their IT functions to support.

The first, Dynamic Relationship Pricing, is the ability to dynamically link variable pricing models across multiple product lines, in essence linking one set of prices charged to another. The second, Offset Accounts, provides the ability to consolidate customer positions across diverse products and provide a single payment (or debit) of interest.

Both of these examples provide large, diversified institutions with the ability to compete against more focused and leaner, single product-based competitors. But both examples also have a tendency to flush out the shortcomings of older. silo-based architectures and legacy solutions. According to Newton, it’s the pressure to provide the business with these types of competitive advantage – rather than say simple cost reduction – that will drive the replacement market for core banking systems in Europe.

And how did the banks present respond to this astute view of the opportunities and threats facing them? One clear laggard among the delegates posed the question: "How long can this decision be delayed?". Newton’s acerbic answer: that depends on your competitors.

Comments: (0)