Where can a top commercial bank turn for growth? Mergers and acquisitions make sense from the boardroom perspective, as it is an activity that provides an immediate, tangible outcome in terms of customer growth, asset growth and geographical reach. Strategic mergers have the added benefit of striking fear into the hearts of the competition.
However, when the smoke clears, it is a rare acquirer that has delivered above-average returns for shareholders. Whether due to political pressures, integration difficulties, elusive merger synergies or the high price often paid to close the deal, the path to growth through acquisition should be considered, at best, a long-term strategic gamble.
Another path to growth involves moving up the risk-reward curve to acquire new customers. As evidenced by the spread of relaxed credit policies and other riskier, less-sustainable business models, the industry as a whole took on more risk than the reward warranted. Consider the recent troubles in subprime mortgages or the credit card crisis in international markets during the late 1990s and into the early 2000s.
Ignoring fundamentals
These problems can be seen as the pursuit of growth without attention to the fundamentals: the operational and organisational underpinnings of the financial networks. Indeed, unless banks have the ability to shift the risk-reward curve downward – allowing a bank to achieve the same returns with less risk – the only lever available to bank management is the choice between “less risky” and “more risky”.
Organic growth – that is, winning market share from the competition with superior products and services – offers the most sustainable path to growth. Acquirers pay more for banks that can demonstrate organic growth, and shareholders are more open to green-light proposed acquisitions for banks that can show organic growth. The ability to acquire customers from competitors demonstrates that a bank has a handle on its risk-reward curve, and can out-price and out-manoeuvre its competition without taking on outsized risks.
System support
However, organic growth requires underlying systems that support high performance, scalability and extensibility. To win over customers in a competitive banking market, banks have to provide 24/7 availability with rapid service that doesn’t strain under increased demand and the ability to provide access to information and transactions for any product or service, anytime and anywhere.
Growth is not just a strategy, but also the outcome of a set of consistent, repeatable practices based on a sound infrastructure. Growth will follow therefore:
- when financial institutions develop deep and lasting relationships with customers through customer data analysis;
- when bank operations become a competitive advantage through cost efficiency and a low cost-income ratio;
- when data can flow seamlessly between multiple systems, across branches, product lines and geographic regions both domestically and internationally; and
- when bank executives can launch new products in a timely manner and have them in front of the customer while the opportunity is still relevant.
All these practices can be achieved with the deployment of proven, scalable and effective technology.
For the CEO pondering infrastructure investment amid the latest claims of new technology, we can only observe that the decision to “stand still” brings with it an increasingly high opportunity cost. Fortunately, today’s solutions – including TCS BaNCS – offer capabilities that far surpass earlier generations of core banking solutions, with a lower risk of operational failure and higher efficiency.
With TCS Financial Solutions, the commercial bank CEO of today has the power to deploy an agile technology platform backed by superior implementation to deliver impressive results to shareholders, customers and employees alike.
In this article, we look in greater depth at the fundamental market drivers in core banking and payments, including two examples of financial institutions reaping the benefits of higher efficiency and lower risk with TCS BaNCS.
Core banking
Modern core banking systems provide transformative opportunities for commercial banks, both in the products they can provide and the customers they can serve. These adaptive characteristics have been an imperative for banks in the emerging business environment, where competition depends on a bank’s ability to make the most out of each customer relationship.
By reshaping their core systems, banks can develop truly differentiated products and services that will present a compelling value proposition to banking customers.
Customers seek:
- banks that maintain consistency of information across multiple channels, and that can initiate transactions based on that information;
- banks that provide a personalised, customised service in line with the leaders in e-commerce;
- banks as internationally minded as they are, whether this involves a need to remit funds abroad or manage a multi-currency account;
- banks that allow them to follow their principles, whether to follow the religious tenets of Islamic banking or the ability to invest in socially responsible funds; and
- banks that do not waste their time and money.
TCS Financial Solutions helps commercial banks adapt to the new market expectations with TCS BaNCS Core Banking. Our technology expertise and commitment to service-oriented architecture (SOA) enables banks to draw upon the extensive capabilities of TCS BaNCS in a way that best fits their organisation, whatever the size or scope of their operations.
Furthermore, TCS Financial Solutions draws on a set of highly effective procedures and deployment frameworks, refined over decades of experience with clients in financial services, to ensure project success and certainty in implementation (see Case Study I).
As payments become faster and more transparent in today’s connected world, the diversity of payments-related services has expanded. For instance, retail customers seek to make payments through an expanding array of channels, from in person to ATM to mobile to the internet.
Merchants seek to speed up and simplify transactions at the point of sale while still accepting multiple forms of payment. Large corporate and institutional customers seek the automation of initiation, forecast and reconciliation of complex sets of payment instructions through a single channel.
Regulatory effects
Regulation has also changed the structure of the payments industry. Comprehensive and far-reaching mandates such as the Target2 consolidation of real-time gross settlement (RTGS) systems and the formation of the single euro payments area (Sepa) have created new costs and opportunities for banks.
Sepa is the banking industry’s response to a 2001 EU law mandating that banks charge the same fee for cross-border and national payments within the euro area. Studies indicate that the industry may have to invest €5bn or more to meet the goals of Sepa implementation by 2010. Unfortunately, since the actual implementation date still remains an uncertainty, this means increased operating costs for banks that may have to operate parallel payments systems for some time to come.
Another hidden cost may be local or regional Sepa derivatives, which although counter to the principles of Sepa, remain a real possibility.
Based on these challenges, only the possibility of building economies of scale founded on enhanced service levels may help banks offset the predicted loss of revenues and the large investments required for Sepa implementation. To derive the optimal value from this massive investment, financial institutions seek more than just compliance.
Innovative propositions
A few large banks have already begun to approach customers with “eSEPA” and other innovative customer value propositions. The next five years will be critical to the payments market, which will continue to evolve at a rapid pace. In this environment, as strategies are being defined and solutions conceptualised, success will be determined by flexibility of solution architecture, adaptability of supplier partners and certainty in execution (see Case Study II).
Our experience in core banking and payments demonstrates that commercial banks must transform their systems and improve business processes to remain competitive for the long run. With TCS Financial Solutions, banks can rely upon the advanced business solutions of TCS BaNCS, combined with the strong domain knowledge, implementation experience and strength in IT services and outsourcing capabilities of Tata Consultancy Services.
Commercial banks provide vital services – core banking and payments – upon which the global economy depends. TCS Financial Solutions is committed to helping the commercial banking industry to strengthen its capabilities, so that financial institutions along with their customers may achieve their fullest potential.
CASE STUDY I: NOVA LJUBLJANSKA BANKA
Nova ljubljanska banka (NLB) is the largest bank in Slovenia, with about 9,000 employees serving more than three million customers across 16 European countries with universal banking services, including leasing, factoring and forfeiting, insurance and asset management.
NLB faced a rapidly changing landscape for European financial services. EU growth and market harmonisation led to new opportunities and competitors, but NLB’s existing systems were not flexible enough to capture new market opportunities or provide a competitive advantage. Responding to the challenge, NLB went live with TCS BaNCS in October 2001.
A key focus of the NLB project was to place 30-year-old legacy systems that were spread out across business units, product lines and geographies. TCS BaNCS Core Banking provided a consolidated system that dramatically improved NLB’s risk management, along with its ability to quickly roll out new banking products. The implementation also included customer relationship management, which helped NLB to achieve a significant reduction in bad debt exposure. Centralised operational control also contributed to fewer processing errors, and the ability for staff to focus on sales goals instead of back-office tasks.
Since then, mergers have helped the organisation to grow, but not at the expense of flexibility. NLB bankers continue to offer a wide range of services and introduce new products with a rapid time-to-market. Improved access to information contributes to a stronger focus on sales and customer service.
Aided by the flexibility of TCS BaNCS, NLB achieved an efficient transition to the eurozone in 2007, and the bank is prepared for other compliance-related initiatives. Now it enjoys back-office efficiency, the bank continues to increase profit margins and reduce its cost-to-income ratios. Development costs have been reduced, with improved maintainability of banking applications. Faster transaction servicing bolsters customer retention rates and improves the quality of customer care.
With TCS BaNCS, NLB has future-proof, scalable technology that will serve it well in the upcoming emergence of a global banking market for increasingly global customers.
“Nova Ljubljanska Banka has implemented TCS BaNCS Core Banking, resulting in significantly improved business performance, better business control and flexibility, while enhancing our levels of compliance,” says Zlatko Tratar, chief information officer at NLB.
CASE STUDY II: SOCIÉTÉ GÉNÉRALE
With 120,000 employees in 77 countries, Société Générale (SocGen) is the number one non-mutual retail bank in France, a major European player in specialised financial services and the third-largest corporate and investment bank in the euro zone.
With the emergence of the impetus for consolidation of European payments (for example, TARGET2 and the single euro payments area [Sepa]) in 2000-01, SocGén made a strategic decision to invest in a consolidated payments platform to provide payment services for its corporate cash management business across its multicountry operations.
To develop a long-term product roadmap and implementation approach, SocGén teamed up with TCS Financial Solutions to implement the TCS BaNCS Payments solution.
The product architecture and solution design had to meet the ongoing requirements of existing national payment standards while also providing the adaptability and flexibility for alignment to Target2 and Sepa goals.
The TCS BaNCS Payments solution consolidated operations into a single, central back office, which had previously been run in silos across multiple countries.
External interfaces for treasury, risk monitoring, regulatory reporting and general ledger now have a single point of control, simplifying the maintenance and management of critical data.
Similarly, the financial accounting, pricing services, risk management, payments and funds transfer with multiple payment products are all under centralised control in a single system, contributing to a lower cost of operations and higher degree of control and customisation.
The new solution architecture supports the transition to new standards, with greater controls and efficiency. At this time, all of the required solution blocks are in place for migrating RTGS clearing operations onto Target2, and a solution is being readied for a very competitive Sepa offering.
From these efforts, SocGén stands to realise an excellent return on investment.
Krishnan Ramanujam is chief operating officer at TCS Financial Solutions, a strategic business unit of Tata Consultancy Services.
