According to a profitability gap research conducted by Temenos,
banks that use new or updated core banking systems are more
profitable than lenders that do not. Ben Robinson, strategy
director, Temenos, tells Meghna Mukerjee why banks
running Temenos core banking systems have scope to yield even
better returns and how core banking transformations are important
for retail banks
Go deeper with GlobalData
Banks using new core banking systems are “far
more profitable across a range of metrics” as opposed to lenders
that do not, according to results of a profitability gap research
conducted by banking software vendor Temenos.
Ben Robinson, strategy director at Temenos,
says the results of the research throw light on a structural gap
that has emerged in the “premise of banking profitability”.
“For a period of almost 30 years, banks had
high return on equity (ROE) across the world, so the average annual
return on equity was 16%. It plummeted in 2008 to approximately 4%
but in 2010 it was a much better economy, very cheap liquidity,
with banks writing back assets, and ROE peaked at 10%.
“Our contention is 10% is more or less a new
normalised level of ROE for the banking industry. Now there is also
more transparency, more pricing pressure – new entrants are coming
into the market, which again puts pressure on prices,” explains
Robinson.
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By GlobalDataTemenos conducted the profitability gap
research to instate that core banking renewal in general can enable
the banking industry to bridge the existing profitability gap, and
the research results also show that banks running Temenos core
banking systems had “even better profitability”. “We had more
customers with higher ROE,” adds Robinson.
Based on the work Temenos has done, the vendor
has found four ways in which core banking systems can help improve
ROE.
“The first one is cutting costs. Banks now are
generally cutting costs in places that are not going to keep costs
out of business. These costs will find their way back when the
cycle improves. What core banking systems can do is take costs out
sustainably and automate the processes. It’s a way to remove costs
in a systemic way, for good, across the cycle.”
The second way, Robinson says, is by
“improving return on assets”. “Either because banks can sell more
to existing customers or because they have less provisions against
their loans, and for both of those you need really good data. That
is what core banking systems give banks – real time, global data,
about the customers and their risks so that banks can decide what
products might be suitable.”
Robinson explains that banks think about
consumers in relation to their products but rarely do they have a
view of their customer as a single entity that wants something
specific. “Banks never rally draw on that kind of information to
sell more to their existing customers,” explains Robinson.
According to Robinson, the way customers view
retail banks is not very different to the way they approach
retailing in general and banks need to start thinking about
offering “great customer services and price offerings”.
“As a customer, I can either use the internet
to seek the best priced product or want the best customer service.
Banks thought their customers would never leave but I think that is
changing because now customers shop around and have multiple
banking relationships.”
The last thing, says Robinson, is economies
and scale – using Bank of Shanghai as an example. “Bank of Shanghai
uses Temenos’ T24 core banking platform across the entire bank and
they are adding about 700,000 new customers in a year without
really any increments or processing costs.
“Bank of Shanghai has seen an explosion in
profitability because essentially the costs are pretty much flat.
It is the business that scales – banks don’t need to increase their
IT headcount or their processing costs. They just add more and more
volume on to their existing systems.”
Robinson says going forward what has to change
is banks not segmenting their customers appropriately as only
approximately 20% of retail banking customers are actually
profitable to lenders. “And that is a terrifying statistic because
most banks don’t know who these customers are and they can leave
tomorrow,” he explains.
“What our systems enable banks to do is get a
granular level of data to segment customers properly, and based on
that, treat customers correctly or adopt a strategy. If a bank is
going to come in with the best rates in the market, it is going to
have to put massive amounts of volume in to the system. You have to
know who your profitable customers are.”
Techombank through its core banking
capabilities, says Robinson, gives discretion to its customer
advisers to swap or change the products on offer based on the
individual customer profitability.
“Most banks don’t know, at an individual
customer level, how profitable their customers are. Techombank know
it – so they not only have the data but they also take advantage of
it.”
So far, mostly small banks have replaced their
core banking systems, but recently bigger banks have “developed
their appetite for core banking systems replacement” and have done
so in those parts of the business that have “either low customer
numbers or low volumes”.
“The bit that has never really been touched,
particularly in developed markets, is retail banking because it is
the bit with the spaghetti code and has100s of different systems.
It’s a very complicated transformational project,” says
Robinson.
Geographically, markets that are faster
growing have seen greater adoption of core banking systems just
because the decisions are not being justified based on the cost
benefits.
“You have got markets with new banks starting
up so we see much higher levels of historic adoption in corporate
baking, universal banking, retail banking and much higher levels of
penetration in the Middle East and some parts of Asia than we do in
Europe or the US.
“The industry is maturing, systems are much
better – they scale and you can implement them piece by piece.
Banks don’t have to have a big bang, risky replacement.
Historically we have not seen much happening with regard to core
banking systems in big retail banks but we will see that
changing.”
