Automation in banks – where do the incentives come from?

When you use one of the terminals in a bank or make a transfer using online banking facilities, you are quickly given the impression that the banking industry operates on a widely automatic basis. Thus you might just ask yourself, what do the 50,000-strong workforce at Commerzbank or the 270,000 employees at HSBC still do exactly?

The impression you obtain at the terminal results from the fact that bank-internal processes are often based on document management processes (ECM, DMS), i.e. all correspondence but not the money transfers, accounting entries or the bank’s actual core business. Try to guess the number of times that you have already completed a contract or a document at the same bank which always included the same data. In our opinion, ECM and DMS deal with roughly 5% of business transactions.

The regulatory requirements for banks worldwide are the cause of everlasting projects that often have to be mapped in a bank’s different IT landscapes. For example, KonTrag, MaK, MiFID, Basel II, IFRS and Liquidity Risk number among the legal regulations most recently issued, to name just a few. Many global requirements are often extended to include national requirements such as FATCA, which affects US citizens who have accounts abroad, or regulations issued by the Monetary Authority of Singapore, Hong Kong etc.

For this reason, the IT and project staff in a bank are kept back from their actual tasks such as ensuring that processes are efficient or automated etc., particularly because regulatory requirements have to be implemented within a specific time frame.  In larger banks, up to 20 software manufacturers or suppliers can be involved in implementing regulatory requirements, resulting in a huge amount of coordination.

IT departments worldwide face major challenges because they have to ensure that the requirements are coordinated and implemented professionally and on time, that the latest releases are installed everywhere at the same time and that coordination between the business units for testing purposes is effective.

Therefore, it is hardly surprising that, after nearly 40 years of electronic information processing, there are roughly 4000 software providers worldwide. The potential for optimisation can be seen by looking at the example of a large Nordic bank that wanted to implement a five-year optimisation project to reduce its IT providers from 4,000 to 250.

In view of this, many banks are hoping for a “panacea” from the manufacturers of core banking systems. The best-known providers are first and foremost SAP, followed by Temenos, TCS, Misys, FLEXCUBE/Oracle or the smaller companies such as ERI / OLYMPIC or Avaloq. In theory, this would reduce the risk involved in timely implementation dramatically because there would be no need for reconciliation work between the different IT solutions.

When the extensive list of partners associated with providers of core banking systems is considered, it quickly becomes obvious that these providers will not supply or be able to supply all the functions needed. It could be discussed at length which functions belong to a core banking system and which functions providers of core banking systems should buy from elsewhere.

Is a core banking system the correct strategy for achieving sustainable automation based on the premise “Quality enhancement at reduced cost”? Is it possible for a software provider to create an overall core bank management system?

Or to put it another way: How can an external software provider develop all banking-related functions when numerous banks have failed to achieve this in recent decades even by deploying huge IT departments with many thousand employees?

The question is justified; however, it seems hard to believe.

The fact that, in this “ideal scenario”, a bank would become dependent on just one provider, in the true sense, should also deter an IT decision maker from this strategy.

Quite a different development can be seen in other industrial sectors such as the fashion, car or sports industries. It would appear that by concentrating skills on sales, customers and product design is what makes outperformers such as Apple, Volkswagen, Samsung etc. so successful. Component production is mostly taken on by specialised subcontractors who provide entire structural units such as brakes, fittings, interiors etc. In some (famous) cases, even the entire, ready-for-sale end-product such as trainers or mobile phones are provided!

Focussing on one core banking system provider would seem to be contrary to what the rest of the German and international industrial sector is doing. A core banking system provider is defined as being the central point of all systems – whatever that central point may be – with all other functions and providers grouped around this. Other providers can really only stay in business if the core banking system provider fails to provide a certain function.

Can you imagine a bank not using functions supplied by a core banking system provider because these are in the wrong position in the architecture and prevent radical optimisation of automation on the long term although this has been included in the price of the package?

Who at the bank would be in a position to assess this?

It would not be possible without a general master plan or without the design. This might have given SAP the incentive to set up BIAN (Banking Industry Architecture Network).

Below is a statement from the BIAN website:

BIAN’s mission is to assist and guide the banking industry towards a consensus-based approach to achieving the vision of a flexible architecture which is closely aligned with increased agility and reduced costs. To achieve this goal, leading banks were asked to share their requirements for core services and leading software and services vendors to implement these services based on formally defined semantics.

In July 2012 Hans Tesselaar, Executive Director at BIAN, published the following:

According to research released a few months ago by Infosys and Ovum, around three quarters of European banks are using outdated core systems. Given the great costs associated with core system renewal, this will come as no surprise to banking IT professionals.

We should, however, be concerned at the survey’s findings that suggest these systems are affecting the ability of European banks to innovate and accelerate growth.

80% of respondents see these outdated systems as barriers to bringing new products to market, whilst 75% say these systems hinder, rather than enable, process change.

At a time when European banks need more than ever to be focusing on achieving growth, these findings make for difficult reading. For as long as out-of-date legacy systems continue to hinder speed to market, European banking will also remain out-of-date, slow to respond and inefficient.


Therefore, what is the right strategy?

IT providers and banks should imitate other successful (!) industrial sectors by firstly drawing up a functional master plan that is not linked to providers and manufacturers. However, expenditure is by far not as high as would first seem if a sensible, practical top-down approach is implemented. Similar to the architect, who clearly defines the size of the shower unit in the bathroom but only specifies the fittings for the shower when this is necessary.

The following stage focusses on finding the providers for the components if these are not to be developed in-house. Finally the components and functions are connected to a workflow/process flow/BPM system. If the visual aspects are then separated from the processes and data storage, the most important design rules have been observed in order to scale the organisation. What was the rule in this case?

“Scale up in good times and scale down in bad times”.

Scalable organisation for staff, time zones, countries, languages and locations: this is the challenge facing a modern IT organisation.

Of course, the most difficult aspect will be to implement the architectural phases besides the planning phases for new requirements in order integrate these appropriately into the master plan. Integrating “modern” ways of thinking and approaches into future IT planning procedure is a process that can be started at any time. Particularly because the transition is always smooth. Arguments that claim that these sorts of changes can only be “mastered” by radical broad-brush methods do not represent the facts.

Automation can be defined as the technical and economic processes in industrial production as well as the mechanical  generation of goods and services. It is essential to know what needs to be produced and how. The financial services providers that exemplify automation are included in the following list. Most of them are not banks.


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