M&A considerations, namely cutting costs, are becoming a major driver for core system replacement. Heather McKenzie explains.
The impact of technology on a merger or acquisition is not considered as much as it should be, according to Robert Hunt, senior research analyst at US-based financial industry research company Towergroup. He says: “When an acquisition or merger takes place, the organisations will look at the customer base and the market potential, but technology is only brought into the equation at the end.”
This is a mistake, he adds, because banks with older, legacy core systems will find it difficult to merge operations. “Many of the older core banking systems don’t have good documentation and the databases are not relational.
“Sometimes the documentation with older systems is so weak it is difficult to ensure that a conversion will be 100% accurate. The element that is inaccurate adds significant extra costs, because mistakes are made during conversions.”
Banks that have modernised their core systems and processes – including manual processes – have a lower cost of operations and maintenance, can deliver services in real time and have higher straight-through processing (STP) rates. It is easier to do a conversion when one of the banks has a modern system based on strong databases and good documentation, says Mr Hunt, even if the banks are using two disparate systems.
Many hold up the acquisition of the UK’s Abbey National by Spain’s Banco Santander in late 2004 as an example of how modern core systems can contribute to an acquisition. “The Santander and Abbey transaction is a classic. Santander was able to outbid its rivals and justify the higher transaction price because it has a very modern core banking platform,” says Andreas Andreades, chief executive officer of Swiss software company Temenos.
“By stripping out Abbey’s systems and converting the bank on to its Partenon core banking system, Santander reckoned it could realise €300m annual savings in technology costs. If you capitalise that by 10 – which is what banks do in an acquisition – Santander could easily justify the acquisition price based on those IT savings.”
The deal was valued at £8.5bn-£8.9bn and created the world’s 10th largest bank. It was one of the largest cross-border European bank mergers, resulting in a bank with market capitalisation of a reported $62bn.
Cost cutting
Mr Hunt agrees with Mr Andreades on the significance of the Santander and Abbey deal. “The Banco Santander acquisition of Abbey was the first time I have seen a bank incorporate technology as part of its justification for an acquisition,” says Mr Hunt. “The Spanish bank has a history of acquiring banks and reducing costs.”
Mr Andreades believes M&A considerations are becoming a major driver for core system replacement. “Unless a bank has sorted out its systems side, a merger or acquisition will be very challenging. Where else will they cut costs following a merger? If it is in the branch or in their product line then revenues will suffer. I think most banks know that the savings have to come from the back office and IT areas,” he says.
Switzerland’s EFG Private Bank is another that has profited from its modernised core banking system. A user of Temenos’ Globus and T24 products, the bank has expanded through organic growth as well as through acquisitions to be the fifth largest private bank in Switzerland with CHF22bn ($16bn) assets under management.
Established in 1995 it now has operations in Zurich, Geneva, Guernsey, Miami, Buenos Aires, British Virgin Islands, Hong Kong, Singapore, Stockholm, Gothenburg, Malmö and Helsinki.
Rapid growth
“EFG Bank has been able to acquire other banks and put them on to its system within six weeks,” says Mr Andreades. “This has enabled it to become a much larger bank within a very short period of time.”
Several of EFG’s businesses are run from a single implementation of Globus based in Switzerland. Because of time differences, some overseas offices run their own Globus implementations either locally or in Geneva. All of the major maintenance on the system is undertaken in Geneva.
Since 1993, when Globus was first implemented at EFG’s parent bank, the solution has been rolled out across all the group companies, which previously ran on legacy packaged solutions. Modules have been developed for the requirements of specific markets, which are then added to the pool of available solutions for the other group banks.
Ian Cookson, EFG Bank Group’s head of technology and special projects, says: “Globus is the most practical and easy-to-use packaged solution for setting up new companies and merging data that I have seen.
“For a group such as ours, with a complex relationship between subsidiary companies and a strategy for growth through acquisition, this is a major advantage.”
Mr Cookson says he has seen some private banks “hobbled by problems with their core technology. Not only does this constrain their ability to set up and support offices in new locations, but it also makes it impossible for them to consider strategic acquisitions. Because we have had a reliable infrastructure that provides advanced functionality since our inception, we have devoted few resources to fixing problems and have been able to focus on serving our customers and growing our business.”
Europe is not the only region where M&A activity is taking place in the financial sector. Daragh O’Byrne, product marketing manager at Misys Retail Banking, says a significant amount of consolidation has taken place in Nigeria, Africa’s most populous country.
“Nigeria was a very overbanked country – almost everyone had his or her own bank,” he says. “The government recently significantly raised minimum capital requirements, which has resulted in a lot of mergers. Having a modern core banking system was a definite advantage in that context.”
Many of Misys’ customers are in emerging economies, says Mr O’Byrne, where governments are privatising publicly owned banks. “Governments are realising that one of the biggest problems in selling off their banks is the technology infrastructure. If the bank has unmodernised core systems, this makes them unattractive to investors. Banks that have not tried to beautify themselves in order to be acquired really struggle.”
Model standardisation
Banks that modernise their core systems are able to transplant their operations more easily into new markets, says Mr O’Byrne. “Pireus Bank in Greece has implemented Misys’ Equation product in several countries where it has acquired banks. It can take its model that has been developed for the Greek market and transplant it into local country operations. On the wholesale banking side, Fortis Bank in Belgium has used our software in many different locations, some of which are acquisitions and others of which are international operations. In both cases, they are able to deploy standard models to these disparate locations.”
If a bank was still in any doubt about the efficacy of replacing its core banking system, then it should consider the experience of Industrial Bank of Korea, which expects to achieve a return on its investment of $104m within 19 months.
The bank went live on Temenos’ CoreBanking solution in September 2004 and since that time has realised an increase in revenues of $54m and reduced its business processing costs by $13m, says Ilman Chung, a partner at IBM Business Consulting in Korea, which jointly implemented the system with Temenos.
“The bank reckons it has generated $29m in profits from the new arrangements and has achieved lower IT costs as well as greater productivity,” says Mr Chung.
