Large banks often develop their own core banking software, and are selective with their use of standard solutions. However, small and medium-sized banks often use core banking software provided by software companies. This software has to be specially adapted to their needs. At savings banks and cooperative banks in Germany, these core banking systems are provided to local branches by group IT departments. Banks like these have undergone extensive consolidation in recent years, allowing for huge economies of scale. Simultaneously, their IT systems are being modernized. This contrasts to the market for core banking systems used at small, independent banks, which is dominated by a variety of well-established solutions. In a recent study, Steinbeis staff at the Focos Transfer Center Research | Consulting | Studies, Karlsruhe University of Applied Sciences investigated the current market for core banking systems.
The term “core banking system” has no uniform definition and is commonly used to mean two different things. In the broader sense, it refers to a complete banking system, which generally includes all products, sales channels, reporting systems and control modules. The second, narrower interpretation is only used to describe the classic product area of payments, lending and deposits, plus legal reporting requirements and rudimentary support for different sales channels.
The market for core banking systems in Germany is not very transparent. From a customer perspective, this is unsatisfactory, as investing in a core banking system is a major long-term decision associated with high costs. This is where the study by the experts in Karlsruhe aims to help. The study focused on the broader definition of core banking and key functions, as well as software architecture. By pinpointing the strengths and weaknesses of different systems, the study aimed to help banks decide which product to use and to provide software engineers with pointers for improvement. The study also examined likely market developments. To provide data for the study, software providers were asked to evaluate their products using a structured questionnaire. Reference customers were also surveyed.
The overall ranking was based on products’ ability to address all banking needs. This included one score rated as an overall solution, and another for the actual modules provided.
The overall rankings were derived from all questions in the survey, and reflect the extent to which different software packages offer a complete solution. Essentially, they are a maximum synthesis of all scores. Although summarizing scores in this way inevitably leads to a loss of differentiation, it delivers rankings with which make it possible to compare all providers at a glance. It indicates the ability of software to meet customer requirements without modifications (i.e. the standard delivery package) or with special modifications.
At the top of the ranking comes a large group of leading software providers with very similar scores. It is worth taking a closer look at these, as this uncovers significant differences. As none of the software providers came top of every category, the differences level out in the overall ranking. At the top of the overall ranking come providers whose software is designed as a complete banking solution in the most comprehensive sense.
Reference customers of six of the solution providers were surveyed. Compared to their own expectations, providers that did not offer a complete banking solution (and thus offered lower levels of functionality), scored better in the eyes of customers. The survey revealed that customers often made very selective use of these types of products, and that the software engineers underestimated their own products and did not want to make false promises.
Two different types of customers were identified in the core banking market: “standard software users”, and “component users” who carefully pieced together their own complete solution. Standard software users prefer one-stop, all-round solutions, with a single point of contact who is fully responsible for the system. Banks who choose this option have little or no IT expertise themselves – if the overall package gets the job done, they are prepared to accept certain weaknesses. While these “standard software users” merely want the best overall solution, “component users” create their own by selecting individual components. These users are prepared to take on responsibility for the overall system. They use components they know they can trust and prefer not to make compromises when selecting them. Component users look for the best product for each application. This requires a certain amount of expertise, as the overall responsibility for the resulting IT landscape lies with the user.
As outlined above, the study shows that banks fall into two different groups: standard software users and component users. This distinction is mirrored by the different types of software providers: universal specialists and module specialists. To interpret the software providers’ self-assessments correctly, it is important to consider this divide.
Technological progress has also led to a change in software solutions: modern solutions use contemporary platforms and architectures. In terms of programming languages, there is a clear trend towards integrated Java elements, especially at the front end. With the advent of new technology, systems are becoming more and more modular, making it increasingly easy to piece together allround solutions from a selection of components. This will affect the market standing of software providers, as increasing integration means new areas will open up for component providers. This trend means universal providers will face increasingly challenging demands, as they will be forced to compete more and more with component providers. One thing is clear, however: providers unable to keep pace with technological change will disappear from the market. At the most, outmoded technology is only useful to banks for serving existing customers, not attracting new ones. For software providers, the study’s main conclusion is that the most important features for modern core banking systems are an attractive and user-friendly interface, plus scalability and openness.
Prof. Franz Nees
Prof. Dr. Andrea Wirth
Focos Transfer Center Research | Consulting | Studies, Karlsruhe University of Applied Sciences (Karlsruhe)
su1204@stw.de