14 October 2008

NIS banks need to embrace new technologies to remain competitive

Vincent Kilcoyne discusses agility and innovation in the central and eastern European region

As more central and eastern European states join the European Union (EU), the region is attracting interest and investment. But how are these changes affecting local banks, and what must they do to survive?

Continuing EU expansion over the past five years has thrust a large number of small financial institutions from central and Eastern Europe (CEE) into the competitive European marketplace.

The CEE market can be divided into two categories: accession states and newly-independent states (NIS). Accession states that have either recently joined the EU or aspire to do so soon face many challenges. These include bringing themselves in line with existing pan-European regulations and directives such as the Single Euro Payments Area (Sepa), while staving off increased competition and being agile enough to adapt to the changing treasury and retail banking landscape.

In the treasury space, accession state banks must now provide the full range of services offered by major western banks, including structured finance, commercial lending and a comprehensive range of complex financial instruments. On the retail banking side, competitors are bringing new products and channels to the market – putting great pressure on local banks to offer the same wealth of services.

For the NIS banks, joining the Euro community might be some way off, but competition with new market entrants is no less of an issue. Banks must bring both their processes and capabilities in line with the rest of Europe, while embracing new techniques and technologies. Many of them are using systems that are up to 20 years old, and therefore offer too restricted an infrastructure to deal with today’s banking practices. As these systems reach the end of their lifecycle, the banks must not simply replace them, they must also address a major shortfall in functionality.

New banks are also appearing via third-party funding – primarily from Tier One financial institutions that have one goal: market share. Often, these banks’ back office systems are fairly rudimentary, which allows rapid market penetration. However, once a considerable client base has been acquired, the focus shifts to product definition to retain market share, and subsequently more robust back-office systems are sought.
One bank in the Ukraine, for example, is currently experiencing the changing complexity of product development requirements. It has recently launched a set of three interlocking current accounts in three currencies, with associated credit cards on each of the nine accounts. Only the most feature-rich and evolved core banking application would be able to handle such a complex processing requirement.

At the crossroads
The changing market has put CEE banks at a turning point in their development. To remain competitive, they need technology to help them evolve, at a low cost of ownership. They can either purchase new systems to be deployed alongside their existing infrastructure to enhance functionality, or replace their entire core banking infrastructure.

Many NIS banks are opting for a wholesale replacement option. This ‘rip and replace’ method gives CEE institutions a distinct advantage over larger competitors. Free from the operational scale and complexity that prompts larger banks to implement technologies in phases, they can undertake immediate, wholesale change. This affords them a low cost of ownership and scalability without the awkward transition period, along with the platform to bring new services and products to market faster.
Crucially, much of the technology on the market has been developed to meet western European needs. CEE banks must choose carefully to ensure that their systems help them to replicate their business model easily across different countries. Capabilities such as multilingual functionality are also essential for banks that want to expand beyond their domestic area.

A native advantage
Despite the pressing need for transition, CEE banks are not at a permanent disadvantage compared to their western competitors. In fact, they have many factors in their favour: local knowledge, physical presence, an existing client base and a recognisable brand. While larger competitors will keep costs down by restricting their activity to main commercial centres, domestic banks can use their established branch network to deliver innovative financial products in more remote areas – giving them a clear advantage and wider potential client base. Equipped with these inherent advantages and the flexibility offered by new, modern technology solutions, they can ensure that they not only match the capabilities of their competitors, but are also in a position to innovate in their own right.

Vincent Kilcoyne is head of market strategy at Temenos: www.temenos.ch

This article first appeared in the Winter 2008 edition of Finance on Windows magazine.

Add a comment