Arriving late on the modern banking scene, institutions in central and eastern Europe have not been weighed down by the baggage of complex legacy systems. Technology being implemented in the region is now finding its way west, writes Rekha Menon.
The transformation of the east European banking industry is, by all measures, remarkable. From a state-controlled era, in which often only one main bank provided both central and commercial banking activities, the region has developed a highly competitive banking sector in just over a decade, with diverse financial institutions providing a wide variety of financial services to both retail and corporate customers.
During this period, the banking industry has been characterised by the privatisation of public financial institutions and consolidation among local players, and foreign banks are becoming increasingly dominant, primarily from Sweden, Austria and Italy. Foreign banks, which now control more than 80% of the market, have not only helped to increase the availability of credit and raise the level of competition, but have also encouraged the widespread adoption of better banking technology in the region, which prior to the 1990s consisted primarily of semi-automated or crude banking systems.
Technology penetration
Although there is no significant difference between the banking systems deployed by foreign-owned and local banks within a country, the existing levels of technology penetration and sophistication among banks in the first wave of EU accession countries (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia) is significantly higher than in other countries further east. Analyst firm Datamonitor estimates that banks in the 10 EU accession countries spent $2.8bn on retail banking technology in 2004 and predicts that, increasing at a 6% compound annual growth rate (CAGR), banking technology investment will touch $3.6bn by 2008.
Priit Põldoja, CEO of leading Estonian bank Hansabank, says that technology accounts for nearly 20% of the bank’s operating expenditure. Hansabank, which was established in 1991, has always regarded technology as a critical asset to its business, he says. “At the moment, technology initiatives at our bank are focused on three key areas: creating an enterprise data warehouse and business intelligence architecture, Basel II and the internet channel. We want to introduce more integrated marketing through internet banking and create single-view reporting capabilities across all products that customers access over the internet.”
The late arrival of eastern European banks to the modern banking scene has worked to their advantage, especially with regards to their technology strategies. Unconstrained by any historical baggage, technological or otherwise, banks have been able to take a fresh perspective on their technology requirements and easily deploy modern technology solutions. They have been further assisted by the availability of easy-to-implement, sophisticated, standardised, off-the-shelf solutions in recent years.
Western legacy systems
That is in stark contrast to banks in western Europe, a majority of which are struggling with legacy systems. Their infrastructures have grown over the years, not by design, but in response to changing business needs or government regulations, resulting in inflexible siloed applications and, in many instances, obsolete technology platforms. The complex spaghetti architecture they end up with is prohibitively expensive to maintain and does not help them to keep pace with the latest business and technology trends.
Western banks are well aware of these issues. However, the high economic costs and potential risk of failure, with its negative implications for the bank’s brand image and customer service, make any change to the environment extremely difficult to implement.
The difference between eastern and western European banks is well captured by research data from core banking technology vendor Infosys. It shows that while the key driver for technology investment for eastern institutions is flexibility, the driver for western banks is reducing maintenance costs.
“Adoption of new technology is swift in central and eastern Europe (CEE). For banks in western Europe, the biggest barrier to new technology adoption is the inherent complexity of their existing systems,” says Amit Dua, head of European sales at Infosys.
Recently, Hrvatska Postanska Banka, the largest state-owned bank in Croatia, selected Infosys’ core and internet banking solution to power its retail banking technology transformation. In another case, Oberbank, a regional Austrian bank, selected IBM and i-flex solutions to provide the core banking platform for its operations in Hungary. Core banking solutions from Misys and Temenos are also popular in the region.
Eastern advantage
“Eastern European banks do not have to maintain processes supported by software that was developed in the 1960s or 1970s like banks in the West. Since the computer era in the CEE region truly began in the 1990s, it has given us the opportunity to adopt the latest standards and processes,” says Andrzei Miron, deputy head of IT at Raiffeisen Bank in Poland. “We can learn from the experiences and mistakes of other banks and implement flexible state-of-the-art solutions.” The bank deployed Temenos’ core banking solution in 2003.
Unsurprisingly, in several areas the technological sophistication of eastern European banks, especially those in the first eight EU accession countries, is leapfrogging ahead of their western European counterparts. The flexibility and modularity of the new generation core systems that are increasingly being deployed by banks in the region is enabling them to create new financial products and helping them meet new regulatory requirements easily. They also have better risk management and straight-through processing (STP) capabilities and much lower IT maintenance costs.
The internet is an extremely popular banking channel for customers in the CEE region, where banks are investing heavily in enabling customers not only to access their financial information, but also to buy a variety of financial products online. Several banks in eastern Europe are able to offer customers a consolidated view of their financial information across delivery channels – a distant dream for most banks in western Europe.
Raiffeisen in Poland, for instance, is in the middle of a service-oriented architecture (SOA) based project that is aimed at creating a real-time integrated multi-channel environment. The first phase of the project is focused on corporate banking customers, and the next phase is to integrate the internet channel with back-end systems and other delivery channels for the retail segment.
“Our customers are becoming more demanding, especially in the internet domain. And multi-channel integration is essential to remaining competitive – customers expect it,” says Mr Miron.
Despite stealing a march over western European banks in deploying modern technologies and applications, banks in eastern Europe still have a lot to learn from them, Mr Põldoja emphasises. “Since western banks have been around much longer, they have greater expertise and depth both functionally and technically. The richness and variety of financial products that they offer is also greater,” he says.
Mr Põldoja also warns that as eastern European banks grow in size, they might face similar architectural issues as banks in western Europe. “At Hansabank, we are at present struggling to create an enterprise-wide data platform. Ever since our inception, Hansabank’s advantage came from being a small, flexible bank that could easily deploy new technology and come out with new products. But as we grow, we are faced with challenges similar to those of our western European counterparts in terms of creating a simpler architecture,” he says.
Since its launch in 1991, Hansabank has expanded its operations to Russia and the Baltic countries of Latvia and Lithuania.
Cross-border operations
The eastern European banking market is dotted with several such cross-border banking operations running on multiple banking platforms. Raiffeisen, which has the most extensive presence in CEE through a network of about 18 banks created both organically and through acquisitions, has a mix of core banking solutions from Temenos and Misys across its network. Managing heterogeneous technology platforms is difficult and expensive, says Mr Miron. “The bank is expending a lot of effort to consolidate and reduce costs,” he adds.
Another Austrian banking group, Erste Bank, which has undergone rapid growth in the past few years by acquiring about 10 banks in CEE, announced plans last year to standardise on SunGard’s System Access SYMBOLS core banking solution. Although Erste Bank’s operations in Hungary and the Czech Republic had already implemented the solution, it still took the bank nearly three years to arrive at a final decision. “We were looking for a new generation core banking solution that was able to support the processing of a comprehensive range of banking products and deliver customer-centric banking services using one integrated technology foundation in order for our bank to continuously enhance the quality of its services and thus reach the heights of customer satisfaction,” says Peter Weiss, head of group IT functions at Erste Bank Group.
Mr Weiss says that the bank’s user experiences with System Access SYMBOLS implementations in Hungary and the Czech Republic was a key consideration in selecting the core banking solution for the entire group.
Erste Bank’s announcement is interesting because SYMBOLS is going to be deployed not only at its CEE operations, but also in Austria, where it presently has a homegrown IBM mainframe-based legacy system.
Western banks in general have adopted the less risky strategy of deploying modern solutions for overseas locations while continuing with legacy systems in their home countries, where the size of operations is usually much bigger and more complex. If the Erste implementation goes through, it will set a precedent of sorts by probably being the first case of reverse IT decisioning in a core banking replacement deal: a western European bank deploying a core solution in its home location that was first implemented in a branch in eastern Europe.
Ralph Silva, senior analyst at research and analysis firm TowerGroup, believes that this trend will grow. “To date there have been only a few situations in which the East has been used as a test centre for a technology to be used in the West, but there will be more such projects in the future,” he says.
A symbiotic relationship is developing between western European banks and their operations in the East. Olivier Trancart, CEO at i-flex solutions, says: “In western Europe, retail institutions are scared about how to manage core banking platform transformation because of the complexity involved, union issues and the retirement of maintenance staff for ageing legacy systems. But now there is a trend for them to use successful implementations in CEE subsidiaries to bring about system changes.
“However, rather than opting for end-to-end replacement of legacy technology platforms, western European banks are going for incremental process change and CEE systems are partially finding their way into western European banks.”TABLE1: CENTRAL AND EASTERN EUROPEAN RETAIL BANKING TECHNOLOGY SPENDING, 2004-2008, BY COUNTRY ($M)TABLE2: CENTRAL AND EASTERN EUROPEAN RETAIL BANKING TECHNOLOGY SPENDING, 2004-2008, BY SOURCE ($M)
