In cooperation with the Business Engineering Institute St. Gallen (BEI), the Core Banking Radar of Swisscom has been monitoring the system support of banks since 2017 and analysing the most relevant systems for the Swiss market using a comprehensive assessment model(opens in new tab). Based on the update
of the already surveyed systems, Clemens Eckert and
Thomas Zerndt exchanged their views on developments in the core banking system market in Switzerland in an interview.
Text: Christine Popp, Bilder: Swisscom
7 August 2023
Thomas Zerndt: The current market for core banking systems is partitioned, especially in the segment of smaller and medium-sized banks. On one hand there are the dominant manufacturer systems: Avaloq is one, Finnova another. You could also include Olympic, Finstar, TCS BaNCS or Temenos. There is not much happening in that market; people are shying away from any change. There are a few outliers, such as Berner Kantonalbank (BEKB) on IBIS4D or Banque Cantonale Vaudoise (BCV), which still has an old system based on an IBM host (Osiris). And then there are the major banks with their own systems. But there are not many others, so the market is stable.
Clemens Eckert: I agree that it is a saturated market. There is no wave of migrations like there was in the 00s. Nevertheless, we receive about 4-8 tenders for core banking platforms per year. These cases don’t all lead to decisions. But if there is a change, it is not about switching from one core banking system to another. It is more about strategic issues or dissatisfaction with the existing provider, often due to a lack of agility. In the cases where a decision is made, Swisscom can position itself very well and win.
Thomas Zerndt: That’s my experience too. Banks are either up to their neck in it and have to migrate or change the system. Otherwise, banks change the provider set-up, leave a community, for example, and operate the core banking system themselves or with another provider.
Clemens Eckert: We see respectable investment volumes by the manufacturers in their core banking systems for the Swiss market. But in comparison with international systems, the Swiss investment volumes cannot keep pace. The advancements are enough for an evolution, but they are not sufficient to drive the technological or banking revolution and to introduce new technologies or innovations such as cloud-native, database-agnostic or a multitude of APIs.
Thomas Zerndt: I see it similarly. To exaggerate, we could say that core bank manufacturers are at a crossroads: either they reform in response to customer demand or they take a real step into the future, which involves even greater investments. If they reform to meet customer demand, they will never be the leader in the market; they will be producing from behind. The insights show that the core banking system manufacturers have barely evolved in terms of functionality. They are strongly focused on reforming the existing functionality to achieve state-of-the-art technology again.
Thomas Zerndt: I am convinced that we always have to take a dual view on the core banking market – what the banks are doing and what the manufacturers are doing. If you look at the market development, the banks and therefore also the functionality of the manufacturers will open up. There will be an increased push towards open architectures and platform architectures. These will become a common component of the banking systems at every bank. In addition, there will be increasing cooperation with FinTechs; it will no longer be possible to obtain everything directly from the core bank manufacturer. Banks will increasingly build up IT skills themselves. In terms of core bank manufacturing, cooperation with FinTechs and with neo-core banking system manufacturers will increase.
Clemens Eckert: If we look at surveys, such as the one published by IFZ in May 2023, we have to say that relatively little movement is expected in the market over the next five years. But all banks say they need greater flexibility and, as ever, lower costs. Banks can achieve flexibility using APIs, marketplaces for APIs or cloud technologies. I see these as being the main technological developments in the next five years. These will enable exactly what you have just outlined, namely cooperation with third-party manufacturers, FinTechs, neo banks, and so on. In terms of content, we are facing a few big issues, such as instant payment or the changeover to SWIFT MX. However, I also believe that the banks want to focus on contributing to a sustainable world, as set out by the Taskforce on Climate-Related Financial Disclosure.
Thomas Zerndt: That will certainly be the case. I agree that the banks have an expectation that costs will come down. I don't believe that will happen. As the architecture develops and opens up in the future, expertise in integration and the need for integration will increase. It will be the same in areas like sustainability – this is what drives the costs. Integration complexity has to be managed and cannot be talked away.
Clemens Eckert: The lack of adaptation to the Swiss market and absence of sufficient functionality for securities processing makes it relatively unlikely that neo-core banking systems will be introduced in Switzerland in the foreseeable future. If there is any development, it would be for a neo bank that focuses on an account-card-credit offering.
Thomas Zerndt: I slightly disagree. When we examined the neo-core banking systems, the innovative concepts that have spread there are amazing. One example is the SaaS product offered by Mambu. Another is Ariadne, which has built a standardisation tool for products based on the Dodd-Frank Act. There is also the process consistency of Thought Machine. There are many examples that have not yet been adapted for Switzerland but can be used in parts, for example in master data management, with minimal adaptation effort. In my opinion, collaboration of manufacturers and banks will be even stronger in the next five years, because innovative concepts are in demand.
Clemens Eckert: That's true; I would also be very happy if we saw a bank in Switzerland using smart contracts to diversify their product offering, for instance.
Thomas Zerndt: That would be one example. Through that, we would also achieve a standardisation of products in the Swiss market – making it possible to interact much easier from bank to bank in the interest of the client.
Thomas Zerndt: On the one hand, if we look at the functionality requirements of a core banking system for Switzerland, then compliance requirements and specific adaptations, for example, are extremely complex. On the other hand, the architecture in Switzerland is such that securities processing is often offered integrated with payment transactions and credit services. That is one aspect that neo-banking systems do not yet cover in the same way. The other issue is the maturity of the neo-core banking systems. If we think about it, it takes 10,000-15,000 person-years of development work for a core banking system to reach a certain level of maturity. This has simply not yet happened with the neo-core banking systems. The maturity will progress, and the collaborations will take place, but not in the next few years.
Clemens Eckert: I think even neo banks need to cover the securities business in Switzerland. If we look at the banks that have been founded in recent years, they almost always offer securities trading for their clients. Because neo-core banking systems cannot cover this area, they will have a hard time in Switzerland. Moreover, the Swiss market is very small and expensive to conquer, which makes it unattractive in terms of turnover for the neo-core banking system manufacturers to come to Switzerland.
Thomas Zerndt: The second argument is a very powerful argument, we have also seen that. There are up to 400–500 installations worldwide, but there is only potential for a few installations in Switzerland. I don't see the issue with securities functionalities in the same way. We will have the concept of architecture modularisation everywhere in the future, which will allow individual modules to be added or removed. This means that the integration of neo-core banking systems is entirely possible.
Clemens Eckert: Banks would simply have to operate a securities book keeping system in parallel with a neo-core banking system.
Thomas Zerndt: Exactly, that is quite standard in Germany; it's not an issue at all. It works. One can simply reconcile the positions and transactions.
Clemens Eckert: We are seeing systematic investments at the existing core banking manufactures in Switzerland and corresponding reform programmes. But the investments planned will not be enough to catch up with or make up for some technological developments, although functional gaps can be closed over time. This shows that a disruption of the Swiss core banking market could occur at some point. The IFZ study suggests that this may not happen in 5 years’ time, but perhaps in 10.
Thomas Zerndt: I see the question of manufacturer readiness in somewhat broader terms: they have to invest, and as you say, they are investing respectably. They have to invest in cloud-native technologies, in modularisation, in opening up and making the platform more flexible, in improving the time-to-market for the banks. But if we look at whether there is awareness of the impact on the manufacturer's employees in this transformation process and the need to realign the company accordingly – the manufacturers are already struggling here in some cases. In other words, I think they are prepared in terms of the concept and initiative, but bringing the banks and their own employees along with them is a key challenge. The job profiles will change.
Thomas Zerndt: The fascinating thing when you talk to banks is that there is always an underlying dissatisfaction with the manufacturer, which goes up and down. At present, this is somewhat accentuated. There is a much greater spotlight on the ability of the core banking manufacturers to deliver because the banks want to act freely on the market in terms of new functionalities, platforms, and customer support in the customer journey. The core banking system manufacturers have to follow suit; the banks are often dissatisfied and increasingly starting to build solutions independently. They talk to FinTechs and new providers, they integrate these offerings and products into their own solution and gradually make themselves more independent of the current core banking system.
Clemens Eckert: I agree that the banks are looking for ways out of the lock-in effect they feel with their core banking system. Above all, they are looking for more agility, faster time-to-market and lower costs.
Thomas Zerndt: Exactly. And the striving for lower costs that has been evident for the past 20 years will not become a reality. The costs will remain, particularly because the competence to achieve independence has to be built up within the bank. So, banks will increasingly develop IT competence as well.
Clemens Eckert: One challenge that the banks will have to face is the customer's expectation of consistent advice across all channels. It is possible to envisage a future where a customer starts talking online with a bank ChatGPT that offers advice. The customer might continue to receive support within the secured E-Banking application but breaks off at a certain point and expects to be advised further in the branch by someone who picks up from exactly the same point.
Thomas Zerndt: I am sure that this development will accelerate. We can even imagine a more wide-reaching advisory process that goes beyond the customer’s own bank and involves other companies. At some point we will reach embedded banking, where customers buy something and the banking service in the sense of invisible payment is integrated into the purchase process, so to speak.
Clemens Eckert: We operate in highly complex architectures. With every interface, with every best-of-breed system that a bank chooses or builds, the architecture becomes more complex. If we suddenly need to keep two experts on hand to operate and develop each of these interfaces or systems, it becomes very expensive. This is where a well-positioned system integrator with appropriate integration solutions and flexible collaboration models can offer excellent support services.
Thomas Zerndt: I would certainly agree to an extent. If the banks expand each system and then add two employees per system area, for example, it will become very expensive and lack expediency. From my point of view, banks have to invest in IT competence. In particular they have to ensure their own governance, which means that the banks have to have a high degree of freedom to make decisions about the system design. There is a second consideration: banks have to learn to work more with partners - to optimally integrate and use additional services banks want to offer their customers in the future. Of course, I agree that with an offer like Swisscom has, the bundling of several systems is a stand-out feature.
Clemens Eckert: Another element could be that banks increasingly agree on common standards, especially the banks that barely compete in the market.
Thomas Zerndt: I think the issue of a common standard is crucial for the Swiss financial sector. I also believe Swisscom can play a leading part here because it has the market power and a leadership role. This will greatly increase and support interoperability – or data exchange – between the banks. That would be a good thing for the future.
Business Engineering Institute St. Gallen
A long-term partnership exists between Swisscom and the Business Engineering Institute St. Gallen (BEI) within the “Ecosystems” Centre of Excellence. This centre deals with topics such as eco-systems, digitisation and transformation, as well as other issues relating to the structure of the financial industry in the future. In addition to its research activities, the BEI carries out projects related to the design and implementation of innovative, cross-sector business models.
Core Banking Radar methodology: https://ccecosystems.news/core-banking-radar-methodik/(opens in new tab)