Temenos have announced that they are focusing on expanding in the US market over the next few years. The announcement was made at the annual Temenos Community Forum. Ben Robinson tells Billy Bambrough about how they hope to crack the US market
Temenos currently have a handful of customers in the US but the Geneva based banking software company are hoping that under the leadership of David Arnott they can double the size of their existing US business within the next three years.
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Ben Robinson, director of strategy and marketing at Temenos, tells RBI: "We have big aspirations for the US. We would be disappointed if we didn’t double the size of our existing business within the next three years. I would hope we can do better than that. We’re starting from quite a low base. The point is that for the first time ever we really have a proposition that is interesting to US banks."
The US is no easy market to crack. But Robinson believes Temenos are capable of making Temenos a major player in the US. "The reason we think banks want Temenos technology is because no financial provider in the US today has 24/7 capabilities. The existing providers is arguably older. The situation the US is in is that as they have bought up each other, data centres are supporting multiple systems meaning the R&D money they can put in to any one of these systems is diluted as they have to maintain multiple cores but the US is not actually behind in every sense.
"It is far more efficient for everyone to share a back office and if you compare the US market to the German market and the reason they are able to support thousands of institutions where every other market is consolidated it because the back office out sourcing model is quite efficient. I think in many ways the US market is more advanced."
Temenos bought the US-based compliance technology company TriNovus back in March 2013. According to Temenos, the acquisition will provide $17m of contracted revenue backlog and the deal is expected to contribute 5-10% of group revenues within the next three years. Robinson explains the thinking behind the deal: "We had a few existing customers before we bought Trinovos.
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By GlobalDataThe point about Trinovos, the reason it’s so interesting, is that they have 800 customers, mainly community banks. If you think about why foreign vendors have problems in the US markets the issue is often that they go over from Europe with their international core banking systems but they don’t have the ancillary products that the US banks want.
"Temenos have a market leading hereditary compliance solution which is the biggest payment banks face in the US today so we have all those existing relationships and a reason to talk to them. In addition we have all those ancillary products, check processing etc. and then they also have a data centre running a core banking system.
"The point is we have a customer base that we can immediately start cross selling our products to.
Ben Robinson, director of strategy and marketing at Temenos
"We’ve put T24 into the data centre in the US and then we’ll start to run the back office for these existing customer and then hopefully attract a load more."
The banking industry has been markedly slow in moving away from bespoke systems to the kind of packaged software sold by Temenos, preferring to remain on individual legacy systems. Robinson tells RBI: "It doesn’t make sense for banks to be continually updating their software every few years to try and keep up with new technological developments.
"That is why Temenos exists. Particularly as technology cycles are accelerating. If you happen to spend 20 years on a mainframe, it’s not so bad but if you are using the wrong internet banking capabilities then customers can tell pretty quickly.
"Our whole premise is that no bank can eventually afford to keep building this their software internally. The only option for the market is for a third party to do that development, spread that cost among several hundred odd of its customers and then roll it out in a package annual release format.
"Banks made sufficient returns in the past so they didn’t have to worry about the bottom line so much. When the industry is making such good profit it’s not a big deal that they spend too much on IT. With Basel 3 and with more pricing pressure from new competitors and from increased competition as account switching becomes more common banks have less room for error with their software."
"Basel 3 and account switching means that even though banks are profitable again, reorganising their IT to make it more cost effective is still a priority.
"The margins at banks are being squeezed by the actions of their customers. Fund costs are going up, right now banks don’t feel it too much as banks are happy to extend two lines of credit but the wholesale markets dried up.
"I think the profitability in retail banking has changed in a very structural way. That’s the first point. The second point is that previously the technology wasn’t up to it. We were asking banks to do a complete replacement.
"Temenos and most of our competitors are moving to a modular componentised architecture set up which allows for progressive renovation. Thirdly, the partner network was very immature. We asking for big banks to take and implement our software all in one go, Temenos will do the implementation and you have to change your environment too. What we have now is much more interesting proposition.
"We can do a phase migration so we can replace your system bit by bit. It can run on any hardware platform you want, and on any database you want. It’s going to be one of our big partners, an IBM or similar, who is going to do the integration work. This all combined makes it far more credible. "Layering this with the structural change in profitability and the advances the technology has made, we’re getting to the point where you might see a seminal shift way from internal IT spending to external IT spending.
"There is still a lot of inertia about changing your bank. That said, a decade ago the attrition rate of banks was 3%, the number is now 12% globally. This is a huge change and if the trend continues then we will see account switching become very common very quickly, meaning banks need to be all the more careful with their IT spend."
When it comes to the rest of the world Temenos are focusing on the emerging markets. With new banks eager to adopt a widely used system and not get bogged down in legacy software the emerging markets are a key area for Temenos and it’s competitors.
"Penetration rates are highest around the Middle East and Africa where you have a lot of new banks starting out, no new bank today would consider building its own system.
South America is an area where we see really strong growth. Asia also is a very high growth area for Temenos. Countries like Indonesia, Philippines."
"Core banking is still our biggest market. Penetration rates are at 20%, very few banks have moved to third party software. There is a big opportunity around the world.
"What we can do now is go to what we call a retail model bank and we try to keep projects quick and low risk by going in with something that is pretty vanilla and try to discourage the bank from making to many changes to the system initially.
"Until they go live and then they can do what ever it is they want. That’s the plan. And all that you get in the micro finance world is probably a more limited version of the software but it’s only been limited by what parameters we have set. It’s limited by the number of modules that you sign up for.
"For example if a customer signs up to T24 we might only switch on half of the modules but at a later stage we can switch on more. If a banking only wanted retail banking software at first but then expanded to asset management we can open up the system to handle more requirements. Europe remains a difficulty for many vendors as legacy systems mean the transition to a more universal IT structure are expensive.
"What’s happening in Europe is that we are doing much better than we had thought. In a nutshell it was growth in the emerging markets which was offsetting flat growth in Europe. The prognosis for Europe is better than we thought as we get traction from these non-core banking products into the base, we are seeing bigger projects coming up.
"It’s almost counter-intuitive in this environment to do something, these guys have decided that now is the time to do it. The share holder expectations on it aren’t that high. It’s relatively easy to get good resources in the market. A lot of banks are thinking that now is a good time to kick off a big project. It’s the combination of these two things – very good take up of our existing customer of our channels products and our business intelligence products and then starting to see these larger products come back.
"Temenos is taking market share as well. The multi-product strategy is working. We are selling more of those products outside of the core product. Changes we’ve made to strategy and the sales force are bearing fruit."
