Finding the best way to tackle legacy core systems has re-emerged as a key topic of debate among banks, from top tier global players to smaller, domestic institutions. With their vast, fragmented architectures, banks’ legacy systems are typically cumbersome and lack the agility required to adapt to today’s business and market needs. Factors such as evolving customer expectations, new regulations and the need to enter new geographies or launch new products require banks to have flexible systems that can continually adapt to support their evolving business needs.

With legacy systems so far having failed to address these changing requirements, banks should consider four crucial aspects to make their core banking systems more efficient this year: componentisation, going back to the core, compliance and customer centricity.

So let’s continue with the third C: compliance.

In addition to increased competition in the banking space and a need for cost reduction, it is regulatory initiatives such as the Single Euro Payments Area (SEPA), the Payment Services Directive (PSD), the latest Basel III proposals and the UK’s Faster Payments Service (FPS), to name just a few, that are driving banks to refocus on their core banking infrastructures. Banks need flexible solutions in order to comply and respond to the evolving legislative requirements.

As part of some of the regulatory changes, the ISO 20022 messaging standard, for example, has emerged as the recommended format for all payment processing steps under SEPA. It introduces a number of benefits, such as greater STP rates that enable banks to save time and money. What’s more, it offers a more standardised payments service that allows banks to conduct business across national borders, thereby delivering improved customer service. Crucially, ISO 20022 will streamline and standardise payment processes, which means that banks will also have a greater opportunity, as well as more time and money, to focus on innovating payment solutions and services.

In order to take advantage of the benefits new regulatory initiatives offer, the move from old, siloed legacy systems to a universal messaging standard will help both banks and their corporate customers to enhance their transaction processes and help them reduce the global maintenance costs dedicated to payments processing.

Finding the best way to tackle legacy core systems has re-emerged as a key topic of debate among banks, from top tier global players to smaller, domestic institutions. With their vast, fragmented architectures, banks’ legacy systems are typically cumbersome and lack the agility required to adapt to today’s business and market needs. Factors such as evolving customer expectations, new regulations and the need to enter new geographies or launch new products require banks to have flexible systems that can continually adapt to support their evolving business needs.

With legacy systems so far having failed to address these changing requirements, banks should consider four crucial aspects to make their core banking systems more efficient this year: componentisation, going back to the core, compliance and customer centricity.

So let’s continue with the second C: going back to the core.

If traditional banks want to be in a position to react to increasing competition in the banking market, an agile and modular core banking system will give them the necessary degree of independence, both on the business and on the IT level, to quickly expand their business, deliver more profitable products, enter new markets and ultimately attract additional lines of revenue. At the same time, banks will be able to focus on their key strengths while at the same achieving cost efficiencies.

In fact, a recent report by Ovum, ‘A Change for Good in Core Banking Systems’, suggests that banks’ core systems will assume greater prominence from 2010 as financial institutions continue to adjust to an altered competitive landscape and a revised set of priorities. With the renewed focus on core banking systems, a piece of Callataÿ & Wouters European market research conducted in 2010 backs these findings and shows that banks are keen to refresh their outdated systems. According to the findings, 66 per cent of respondents across the UK, Germany and France agreed that the events of the past two years in the finance industry have increased the importance of core banking systems to the business.

It looks like 2011 will be the year when a significant proportion of banks increase their investment in their core banking systems with 44 per cent of research respondents planning to increase spend on their systems over the next two years in order to enhance competitiveness, meet regulatory initiatives and manage risk.

With cost and competition being prime drivers for an infrastructure refresh, banks need to start ridding themselves of the burden of inflexible solutions which were typically designed and implemented when the financial world was a very different place.

With legacy systems so far having failed to address these changing requirements, I’ll discuss why banks should consider four crucial aspects to make their core banking systems more efficient this year: componentisation, going back to the core, compliance and customer centricity.

So let’s start with the first of the 4 C’s of core banking: componentisation.

Forrester’s research entitled ‘The Future Shape Of Banking Architecture In 2023’ , identifies a series of requirements as well as the architectural layers of the future banking platform. The key layers focus on personalised customer services and real-time information analysis; a separation of product design and customisation; and a clear distinction between core competencies and non-differentiation functions supported by selective sourcing.

In practice, this means that the big banks are focusing on what they are good at and outsource the rest, whereas new entrants are typically focusing on specific areas within the financial services value chain, such as loans, selling the products of other big players. This approach is already enabling, MoneYou in The Netherlands, for example, to sell loans managed by Fortis. Meanwhile Tesco in the UK, Carrefour in France and Volkswagen in Germany have all entered the financial services market offering payment services from traditional financial institutions in addition to their core offering.

With the traditional banking value chain breaking up, increasing competition in the space and the need to drive down costs, traditional banks, as well as new entrants, will require the flexibility to operate agile banking models that can adapt easily to changes in regulation and market and customer demands. As such, banks and corporates wishing to operate in this market need to ensure their infrastructure is based on a flexible and scalable Service Oriented Architecture (SOA) that enables them to easily and quickly roll out additional products, services and channels to respond to evolving market demands.

The 2nd C will follow next week, so watch this space …

Again?

Well this year it definitely looks more promising. According to analyst firm Juniper Research, mobile phone payments will reach a critical mass this year thanks to the creation of eco systems uniting hand set vendors, loyalty providers, trusted service managers, retailers and mobile phone operators. In the US, operators have already teamed up to build NFC infrastructure under the Isis alliance. Similar initiatives are on-going in the Netherlands and Korea.

Some statistics are there to support the statement made by Juniper Research. In the UK some 40,000 stores are equipped with NFC readers, capable of reading mobile phones and contactless debit and credit cards. They include Pret a Manger and Little Chef. The Co-Op and McDonalds also plan to make the service available across their UK outlets. The prognoses looks promising as well: 457 million NFC enabled handsets and 3.5 billion NFC transactions by 2015, equating to $30 billion turnover by 2012.

Consumers are ready too. Most of us have embraced NFC technology for a couple of years now. Oyster cards are used by thousands everyday to pay for a tube pass or bus ticket. But the technology capability doesn’t stop there. NFC also allows you to check into your hotel while you’re on the way there, simply by tapping your phone against a proximity reader. I’m sure next year, when you attend the GSMA World Mobile Congress in Barcelona, your mobile phone will be your entry pass. It’s probable that tapping your phone against smart posters will provide you with information about the conference sessions agenda. And when you’re back at the office your phone will provide the credentials for you to be able to login to your computer.

It took ATM’s 17 years to come to maturity. It took the Internet a good 10 years. So by this ratio, surely it will only take NFC a couple. Ubiquitous was the keyword of 2010. But it was just a word, now its time to move from talking to action. Just like language limits thinking, service limits markets. NFC is the service that will enable new convergence between industries. It will bridge the virtual and physical world and by doing this, it will revolutionise the payments world as we know it.

The new keyword for 2011 is NFC.

An exciting and promising starting point, however things turned out a bit different.

After having seen seven or eight personal finance management (PFM) solutions, your attention span starts to slip. You start to grow allergic to the word PFM and you begin to wonder whether Finovate has turned into a PFM pageant show. I spotted a couple of analysts from Gartner and Forrester at the event and I can already guess at their soon to be published research conclusion: “By 2014 there will be more PFM solutions on the market than banks”. Ubiquiem seems to be the latest addition to the list. Don’t get me wrong, I love PFM’s but I would like to see my local accounts and my offshore account in one portal. I would also like to see a standard for exchanging B2C data rather than having to rely on screen scraping technologies to make this work. Now, that would be innovative! It would be nice to see more thanjust another web 2.0 blue and green themed software package sporting glossy buttons and Flash charts.

Web 2.0 did feature in a number of community comparison, peer-to-peer trading advice and lending solutions like Friendsclear and Lovemoney.com. A word of advice to next year’s contenders though, don’t use the word “Twits” in your company name no matter how good you are.

Continuing in the web 2.0 realms, kudos to Fidor Bank for integrating virtual currencies and the ability to transfer more than cash, for example commodities, between accounts. I wouldn’t have expected that from a bank, least at all from a German bank.

I’m still wondering what the Capital Access Network and Ncore Systems presentations were all about – I couldn’t find head nor tail here. The Amsterdam branch of Finovate must have selected them. Talking about Holland, it seems that IDEAL, the Dutch payment system will get reincarnated by Payo in the UK.

Cardlytics and Linxo gave an insight on how to make money out of data mining. Couple this with a bit of location-based services and you’ll get a killer app next year. A slew of security solutions also passed the review but none really convinced me. Taking a picture with my phone of a barcode displayed on a merchant terminal to make a payment? Come on, bring on NFC now!

Surprisingly, looking at the guest list, it seems that bank attendance was less than 30% which leaves me to wonder who the participants were pitching to.
All in all, an interesting day with lots of ups and downs but not the wow factor I was expecting. Maybe Chris should have brought up Susan Boyle on stage after all.

Secondly, looking at these companies a bit more closely, it seems that mobile payments, e-invoicing, personal finance management and authentication solutions are still among the hottest things happening today in the financial technology world.

So what can we expect from this event?

Well, in anticipation of Tuesday, let’s have a look at what happened to some of the companies at Finovate Spring in 2010. Worklight, which makes portable mobile apps, partnered with Sage on money management apps. Kabbage, which provides online real-time credit to merchants selling goods online, raised $6.65 million earlier this year. Mint, the personal finance website, expanded into Canada.

Blippy, a site that lets you ‘tweet’ about and share purchases with friends, had its credit card details exposed – ouch. Wikinvest’s founder was jailed in London – no, sorry that’s another wiki something I’m thinking off …

All in all it looks pretty promising and I hope to see a lot of bankers at the event because it’s no secret, we’re in dire need of some good innovation to spruce up our balance sheets.

Oh yes, if you’re interested in attending the event and don’t have a ticket yet, tough luck, you’ll have to wait till next year because it’s completely sold out. Then again, you can read my blog next week and find out who the big innovators in finance are.

Well, it’s time to stop talking about customer relationship management. It hasn’t achieved what it was implemented to do and won’t achieve any more.

That’s it, finished, period.

Tribal relationship management is the next new thing. Today, the customer chooses the bank, not the other way around. Or better, the customer chooses what their peers choose. Marketing should be directed at the (digital) ‘tribes’, not the individual customers. So for example, when you’re buying a new car, it’s unlikely you will make your decision based on a review you read in a car magazine, it’s much more likely you’ll base your decision on what peers are saying on a car review forum. If you buy a BMW, unless you’re a geek, you’re not buying the car for its technical prowess but to belong to …, well, something.

The same applies to banking. If, as a bank, you are an avid sponsor of rugby and that on top of that you are a transparent and open bank, there’s a good chance that you will create a following amongst the rugby community or ‘tribe’. You could argue that the RaboDirect Melbourne Rebels provide their sponsor quality air time but the marketing effect is compounded by RaboDirect’s customer’s sense of belonging to or being associated with a cool rugby ‘tribe’. Look at the partnership between Rabobank and the Van Gogh Museum in Amsterdam – surely as an art buff, you’ll want to bank with them…?

Of course just sponsoring isn’t enough. You need to engage with your ‘tribe’. Thankfully, social media is there to help you with that. Participate in forums, reply to questions and be seen as active and caring. In return, the tribe members become unpaid marketing champions for a cause. Equally if one customer comes out and moans about bad services, there will be ten others who will shoot them down if they are wrong.

And you don’t even need to compete on price. Compete on cost, but don’t compete on price. Because if you do, you will enter the vicious cycle that looks like this: margins are reducing so let’s close the branches and let’s go internet banking, what about a CRM project, maybe a bit of BPO, no it doesn’t work so let’s buy another bank with a branch network, still not working, so let’s have a look at this social media thing. Back to square one.

By the way, if you haven’t read the book Tribes by Seth Godin, I strongly recommend it. It’s the innovative marketers bible and applies across industries.

How will that work?

Well, you walk around the shop, pick up the items you want to purchase, go to the cashier, they scan the items and the till totals it up. You take out your phone and tap it on the Barclaycard branded NFC terminal and the transaction is completed.

Right?

Wrong!

That’s always what happens when we think of a new piece of technology replacing an older piece of technology, we think too much about replacement. And then obviously you start wondering why this new piece of technology would be better or more convenient than the older one. I mean, those cards work pretty well, don’t they? They’re small, ubiquitous and I can use them anyplace, anytime. So why replace it, what’s the added value of the new technology? Next thing you know, NFC gets bogged down and all we are hearing now is that maybe that mobile payment stuff is over hyped.

So, here’s how it will work.

Whilst you’re having a tall double blended mint mocha chip Frappuccino at your local Starbucks – which was ready and waiting for you as you had already pre-booked it using the Starbucks app by the way – an alert pops up on your phone telling you about a great sale on that pair of shorts you were looking for. You finish your cuppa and walk around to the shop. You spot the item you like, tap your phone against it, pull up the reviews about it from your Facebook friends and a number of independent reviews. You see that the price of the item in the shop compares pretty well with other stores and, hold on; you’re getting a 20% discount if you purchase a matching pair of socks. You click on Buy-It-Now, go and find the socks, tap your phone against the item and click on Buy-It-Now again. You walk out the shop with the brand new items in hand.

So what have we achieved here, a replacement of a card by a phone? No, we applied new technology to achieve a new and enhanced customer experience. No more dreaded waiting times at the tills during the New Year sales, how about that for convenience!

And what’s happened to the shop assistant? Well, they became a sales consultant, and yes, they will still wrap those socks for you because that’s well worth waiting for.

Well, let’s fast forward to 2011 and find out thanks to these short newsflashes …

UK cheque usage drops massively. The UK Payments Council says UK cheque usage has dropped massively before the anticipated deadline of 2018 in favour of mobile payments. The previously floated idea of introducing a paper-based alternative to cheques as part of a commitment not to leave the customer “high and dry” when the cheque clearing scheme is finally abolished is dropped and a mid-term review is planned in 2014.

SEPA struggles to survive. SEPA, loathed by many bankers for creating a level playing field, struggles to survive in the midst of new entrants in the payment space. The new entrants, proposing low cost payment services closely integrated with the mainstream social networks, come to maturity and partnerships with banks start to form.

Belgium follows suit to Ireland and Portugal. Standard & Poors lowers Belgium’s credit rating from ‘stable’ to ‘negative’ after the country has been without a government for more than twelve months. The IMF is looking at bailing out the bankrupt country amidst fears of massive capital flight.

Google launches new online, location aware bank. Gbank, Google’s first foray into banking, opens in the US. Although the bank offers simple current account and payment services, it is the first bank to really know its customers. Making extensive use of the location aware capabilities of its customers’ phones, strong relationships with high street retailers and its vast behavioural database, the bank is able to offer its customers the best shopping experience, anytime, anywhere.

Lloyds returned to the private sector. The UK government, in dire need of votes after the tuition fees debacle and VAT hike, and spurred by a continued strengthening of the banking sector plans an early release of its stake in Lloyds Bank. This is about 18 months earlier than the original target date of 2014. Mr Miliband’s aides refused to comment. A Labour source said: ‘This is not going to look good for the party.’

Europol investigates virtual robbery. Europol have arrested two people believed to be part of a group accused of stealing online IDs and passwords belonging to Facebook users and using their Facebook Credits to sell merchandise via real-money trading websites. Facebook Credits have known a spectacular increase in usage over the last six months and are now considered to be on par with PayPal volumes. Regulators have been struggling to keep up with virtual currencies.

And finally, what we’ve all been waiting for …

Eurostar will have Wi-Fi in 2012. Eurostar, the operator of the passenger service linking Britain, France and Belgium announces that all its trains will finally have Wi-Fi by the end of 2012. Unfortunately, no changes are planned to the onboard food catering though.

On this note, I’d like to close this blog by wishing you all a great 2011 and hope you’ll keep reading.

Oh yes, please don’t use these insights to make financial decisions, always consult your banker first.

I will launch a mobile app. And not one with the HTML screen scraping style. No, a real secure and ubiquitous mobile app! After all, it’s 2011, not the 80’s.One that doesn’t require a physical two-factor authentication token. One that I can bank and drive with, basically.

I will read up about Service-Oriented-Architecture and realise that it’s all about core componentisation and simplicity and not about best of breed spaghettis and complexity.

I will ask my teenage children to explain to me what social media is. I’ll set up a Facebook account. I’ll even tweet. And not about my latest laps time or that I’m having a coffee at my nearest Starbucks, because, really, who gives a damn? No, about something useful and interesting like who’s going to win Strictly.

I will be transparent and open. My customer isn’t always right but they always need to know. I’ll engage my customers through social media and other channels. My customers will become my marketing champions.

I’ll think about my position in the banking value chain. Am I a producer, a service provider, a distributor or all of them? What am I really good at? What’s my core competence?

I will set up an internal cloud and by the end of 2012, I’ll be able to provide systems to my users in 24 hours instead of the current twelve weeks. OK, I admit, I lied about the twelve weeks.

And finally, this time, I won’t invest my bonus money in Bernie Madoff’s (look-a-like) investment fund.

So, what do you think? Easy, right?