Spanish Banks Push for Continued IT
Transformation Investments Amid
Difficult Local Markets and Industry
Consolidation
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WHITE PAPER
Sponsored by: Finacle from Infosys
P et er Far l e y
Ma rc h 2 0 11
Da v i d M ed e ir os
PREFACE
This IDC Financial Insights White Paper, sponsored by Finacle from Infosys, is based
on the findings of a survey-based study conducted via both telephone and face-to-face
interviews in the last quarter of 2010. A total of 15 senior bankers at 14 different
banks and financial institutions in Spain contributed to the research findings.
The banking institutions in Spain surveyed for this primary market research study
were Banca March, BBVA, Banco Cetelem, Banco Camino, Banco Cooperativo
Español, Banco Popular Español, Banco Sabadell, Banesto, Banco Santander Group,
BNP Paribas Spain, Caixa d'Estalvis Laietana, Caja Madrid, Citibank Spain, and
Kutxa-Servimática. Information from the survey responses has been complemented
with wide-ranging discussions with a variety of key participants in the Spanish
banking sector.
EXECUTIVE SUMMARY
● Survey shows appetite for IT transformation but limited budgets
● Industry consolidation and balance sheet rebuilding take priority
● Spanish banks still committed to extend proven IT innovation
● Macroeconomic and sovereign issues cloud market landscape
● Improved customer capabilities still head IT priorities
● Compliance vies with channel improvements for budget
● Core transformation still seen as key to greater flexibility
Just about everyone accepts that banks need to be more efficient. In fact, over the past
decade Spanish banks have been among the global industry leaders in driving down
the percentage of maintenance and operating costs that absorb such a crippling high
percentage of IT budgets. And it is a testimony to most Spanish banks that they are
still trying to drive those debilitating ratios even further below the key 50% level that
is still a challenge for so many others.
March 2011, IDC Financial Insights #IDCWP13T
However, local circumstances mean even the most ambitious and seemingly sensible
plans have had to be compromised. The results of a survey carried out by IDC
Financial Insights toward the end of last year show that pragmatism is now the order
of the day. But it is a frustrating situation for so many banking technology executives
who have been at the cutting edge of so many innovative developments.
However, to be fair, while the Spanish banking sector had one eye so firmly focused
on improving areas of business that made a difference with customers, it also allowed
the other eye to wander away from the balance sheet risks and problems that crept up
on the blind side.
This white paper looks at the backdrop to the current challenges in Spain, analyzes
the responses to our survey of industry professionals, and draws some conclusions on
the opportunities available. It acknowledges there are those that recognize the need
for new investment, while only a minority are yet in a position to execute those plans.
It remains clear that there are difficult times ahead for the Spanish economy in
general and banks in particular. In fact there are many imponderables about how that
bigger picture will develop. Given that so many of the answers lie outside the ability
of local players to influence decisions being taken at EU and ECB level and
elsewhere, the opportunity to shape that bigger picture is likely to be limited.
BANKING MERGERS START TO CHANGE THE
LANDSCAPE
The unfolding events in Spain have already led to mergers last year between 12 of the
45 savings banks, or Cajas, with a 13th requiring support from the Spanish central
bank. This process is far from complete and has created an ongoing air of uncertainty
in the local banking market. This caution is reflected in the feedback to our survey —
despite acknowledgement that more investment in the technology that will drive
future efficiency is required, more important issues need to be resolved first.
Leading the way have been Caja Madrid and Barcelona-based La Caixa, the latter the
country's third-largest financial institution behind Banco Santander and BBVA. That
title has now passed to the new BFA Group.
Indeed, probably the most dramatic development in the Spanish banking landscape
was the creation at the end of last year of Banco Financiero y de Ahorros (BFA),
formed out of the merger of seven otherwise struggling financial institutions. But it
was interesting to note that rating group Fitch, in its assignment of an "A-" initial
rating to the new BFA Group, said it will remain under pressure from low interest
rates, high funding costs, low business volumes, and high restructuring costs. More
importantly, it also said that further benefits and synergies would only become
evident through branch rationalization plans and the implementation of a common IT
platform.
The banks which merged to form BFA were Caja Madrid, Bancaja, Caixa Laietana,
Caja Insular, Caja Avila, Caja Segovia, and Caja Rioja. Like many others, their
problems stemmed from the high concentration of risk exposure to the local property
and construction sector, the continued depressed state of which means that BFA will
take quite some time to both reduce risk concentration and sell distressed assets. But
this is not a unique problem.
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©2011 IDC Financial Insights
The Spanish economy generally faces enormous challenges because of these issues,
which are likely to continue for several years to come. Spain is also currently in the
midst of a potential financial crisis over its level of sovereign debt, and is suffering
from high unemployment and falling property values. It is therefore trying to win a
mandate for fiscal austerity measures and changes to labor legislation to address
wider macroeconomic problems.
The performance of the banking industry in Spain reflects these challenges, in falling
profitability levels and industry consolidation. This has also eroded public confidence
in banks given contracting and increasingly poorly performing loan portfolios and
increased constraints on lending and credit. According to a recent report from
Moody's rating agency, the collective Spanish banking sector still needs a further €17
billion in extra capital in 2011 to meet unrealized losses in its domestic banking
operations (of which €12 billion is required by the Cajas).
However, despite that bleak environment, the survey shows that there is still a
reasonably optimistic mood in local banking circles, combining the sector's historic
inventiveness with pragmatism and focus on future opportunities.
ADVANTAGES TO BE GAINED
Although there is considerable caution about the appetite for current large-scale IT
investment, the realization that this will eventually become essential at most
institutions suggests a significant competitive advantage for those prepared to commit
sooner rather than later.
The survey shows most Spanish banks deny that the current financial crisis is having
a major impact on plans to upgrade or replace their technology infrastructure.
However, there is a clear acknowledgement that it is having at least some impact. But
the uncertainty means few banks will offer specific answers to questions regarding
when they plan to replace/upgrade key systems, or how much they plan to spend
when they do so. These constraints have forced Spanish banks to closely examine
their investment priorities for future banking IT development projects, making sure
that there is a clear focus on projects with the greatest return on investment and the
greatest level of responsiveness to market conditions and demands.
CUSTOMER FOCUS
The market conditions with the greatest immediate impact on Spanish banks are those
reflecting the fact that customers are demanding more from their banks in terms of
meeting their expectations, understanding their banking needs, and providing them
with a full range of service delivery channels and touchpoint options. This focus on
the customer is also reflected in Spanish banks' top IT strategies and top IT projects in
the core banking domain, which focus on customer-centered issues.
At Spanish banks, according to feedback in the survey, the approach toward longerterm core systems upgrades and replacements is driven by evolutionary and not
revolutionary factors, and is focused clearly on the capacity to produce bottom-line
business results. Top replacement/upgrading priorities focus on using core banking
systems' technology for controlling operational and development costs and enabling
improvement in the flexibility and efficiency of business processes. Solutions
©2011 IDC Financial Insights
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addressing issues around managing time, expense, and complexity, and for
"wrapping" core systems for flexibility and openness, are most desired.
In working with core banking technology vendors, Spanish banks place a priority on
enablement of greater process efficiencies, customization to their own specific needs
(in accordance with replicable and industry-standard development methodologies and
technologies), and overall dedication to full-service competence and credibility.
These factors take current priority over other desired abilities to provide cutting-edge
technology or an extensive array of new product features.
GLOBAL LIQUIDITY INFLUENCES
Remarkably, despite current problems, the Spanish banking system has endured the
recent worldwide liquidity crisis better than those in many other European countries,
due to Spain's conservative banking rules and practices. Spanish banks have
historically been required to maintain high capital provisions and to demand various
guarantees and securities from intending borrowers, due to regulations enacted in
response to the banking crisis of 1979 and a later real-estate-precipitated banking
crisis in 1993.
This regulatory framework has allowed Spanish banks (particularly those
geographically and industrially diversified large banks like BBVA and Santander) to
endure the real-estate deflation occurring in Spain better than expected. In fact, many
of the larger Spanish banks have been able to capitalize on their strong position to
buy up distressed (and healthy) banking assets elsewhere in Europe, Latin America,
and in the United States.
FURTHER CONSOLIDATION AHEAD
Nevertheless, with the unprecedented deepening of the country's housing crisis,
smaller local savings banks (Cajas) are known to have delayed the registering of bad
loans (which local rules allowed them to phase in), especially those backed by houses
and land, to avoid declaring losses. The Bank of Spain and regulators are therefore
now moving to proactively drive mergers of these institutions to strengthen balance
sheets and operating efficiencies.
The Spanish banking market therefore faces enormous challenges as it seeks to
consolidate, recapitalize, and reestablish growth trajectories. The legacy of
dysfunctional balance sheets is being exacerbated by wider macroeconomic malaise
as well as international investor skepticism over the country's ability to restructure
labor markets, increase productivity, and reduce unemployment in a way that will
allow it to reenter sovereign debt refinancing markets on more equitable terms.
Within this context, as a major economy of the European Union, Spain is also subject
to the larger challenges facing the euro region, including slow growth and systemic
issues that are even casting doubt on the very future of the euro as a pan-European
currency.
Not surprisingly, there is little evidence of much immediate appetite for substantial
investment in new projects while the industry still faces so much uncertainty. There is
little doubt that there will be further industry consolidation, and there could well be
future surprises that require as yet unforeseen bank rescues.
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©2011 IDC Financial Insights
However, wherever there is turmoil there is opportunity. It is therefore clear to most
banking industry leaders in Spain that the banks which emerge from this period will
not only have to be stronger, but leaner and more efficient.
KEY SURVEY FINDINGS
Market Conditions and Their Impact
The majority of banks that responded to our survey indicated that the current financial
crisis has had only a moderate or small impact on their plans to either replace or
upgrade their core banking systems, or no impact at all (see Figure 1). However, it is
also the case that a majority of the banks surveyed indicated that the current financial
crisis is having at least some impact on their plans to replace or upgrade their core
banking systems.
FIGURE 1
To W hat Extent Has the Economic Crisis of Recent Years, and
its Impact on the Banking Industry, Affected the Plans You
May Have Had to Replace or Upgrade Your Core Systems
(Choose One)?
Not at all
2
To a small extent
4
To a moderate extent
5
To a great extent
1
Accelerated plans
2
Deferred or delayed plans indefinitely
1
0
1
2
3
4
5
6
(Number of respondents)
Source: IDC Financial Insights, 2011
Because of the uncertainty in the market, the majority of Spanish banks seem to be
adopting a "wait and see" attitude toward upgrading or replacing their core banking
systems. A majority of the banks interviewed indicated that they have set no specific
timescale for when they plan to replace or upgrade their core banking systems.
Similarly, the majority of the banks surveyed also indicated that they have no specific
answer to the question of how much they plan to spend on their next core banking
system upgrade or replacement.
©2011 IDC Financial Insights
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However, we know from wider conversations with industry leaders that these formal
responses to questions mask an underlying concern that insufficient attention is being
given to improving efficiency through upgrading core systems and other legacy
infrastructure. Because of this, some believe there could well be a bigger price to pay
in years to come.
The market conditions — whether local, national, or regional — with the greatest
perceived impact on Spanish banks are customer-centric. These reflect the fact that
customers are demanding more from their banks in terms of meeting their
expectations, understanding their banking needs, and providing them with a full range
of service delivery channels and touchpoint options (see Figure 2).
In an industry as highly regulated as banking, one of the few differentiating factors
among banks is the ability to provide a higher degree of customer service. Many of
the banks interviewed indicated that in response to customer demand, they would be
paying increasing attention in the near future to channel and touchpoint management
options, including social networking, collaborative tools, mobile banking, and
Internet-based offerings.
FIGURE 2
W hich Conditions Specific to Your Local Market are Currently
Having the Largest Impact on Your Decision to Upgrade or
Replace Your Core Banking System (Choose Three )?
Managing customer expectations and relationships
73
Managing customer touchpoints/delivery channels
53
Need for improved risk control
40
Changes in technology standards
33
Regulatory requirements: European
27
Regulatory requirements: National
27
Industry consolidation
20
0
10
20
30
40
50
60
70
80
(%)
Source: IDC Financial Insights, 2011
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©2011 IDC Financial Insights
Current Business and IT Priorities
This "focus on the customer" is also reflected in Spanish banks' top applications of IT
to business strategy and top IT project investments.
In the area of IT business strategy, the focus is clearly directed externally, on the
customer (acquisition, satisfaction, and product choice), rather than on internal factors
such as cost reduction or profitability improvement (see Figure 3).
Spanish banks' top IT project investments also reflect strategic priorities oriented
externally, toward customer demands for banking services through online and mobile
channels, and toward mobile-channel platform integration.
FIGURE 3
W hat are the Top 3 Focus Areas of Your Application of
Information Technology to Your Business Strategy (Choose
Three)?
Improve customer service/satisfaction
73
Acquire new customers
60
Introduce innovative new customers
53
Reduce costs
47
Improve profitability
33
Cross-sell to customer base
20
0
10
20
30
40
50
60
70
80
(%)
Source: IDC Financial Insights, 2011
Also among the top IT project investment priorities at Spanish banks are the alwaysnecessary categories of compliance/risk management, and also fraud/security
initiatives. Compliance and security concerns are mounting under increasing
regulatory pressures, driven by global initiatives such as Basel III and Solvency II as
well as national-level initiatives, with many banks aiming toward implementing
integrated risk control approaches (see Figure 4).
However, the focus on the customer is key for future investments as well, with the
most frequently mentioned top IT investment project being a refresh or upgrade of
online channels. In a similar vein mobile-channel platform integration was also
among the most frequently mentioned top IT project priorities.
©2011 IDC Financial Insights
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FIGURE 4
W hat are Your Top 3 IT Projects (in Terms of Investment) for
This Financial Year (Choose Three)?
Online channels upgrade/ref resh
60
Compliance/risk management
53
Fraud/security initiatives
40
Mobile-channel platf orm integration
40
Back-of f ice consolidation
33
BPM/process intelligence
27
Core systems replacement
27
Branch systems transf ormation
7
0
10
20
30
40
50
60
70
(%)
Source: IDC Financial Insights, 2011
The technology factors driving the need for core systems replacement at Spanish
banks are evolutionary, not revolutionary, and clearly focused on their ability to
produce bottom-line results. Wholesale changes in service or computing models
(moving to real-time systems, or moving from an application services provider or
ASP model) are seen as less important than basic bottom-line business factors such as
controlling operational and development costs, enabling improvement in the
flexibility and efficiency of business processes, and staying ahead of general
technology obsolescence (see Figure 5).
Many of the banks interviewed indicated that a number of the key limitations to their
existing core banking systems were in the areas of constraints on data governance
structures and barriers to cross-functional, cross-line-of-business data availability.
The ability to provide solutions with sophisticated yet easy-to-use data analytics, easy
business process design and incorporation of business intelligence, and tools for
managing unstructured data will be critical for any core banking systems vendor in
the Spanish market.
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©2011 IDC Financial Insights
FIGURE 5
W hich are the Most Important Technology Factors That are
Causing the Need for Core Systems Replacement at Your Bank
(Choose Three)?
73
Need for more flexible business process/work
67
Reducing platform costs
53
Lower IT/development costs
40
Technology obsolescence
33
Application rationalization
27
Move to real-time systems
7
Move from ASP model
0
10
20
30
40
50
60
70
80
(%)
Source: IDC Financial Insights, 2011
This emphasis on business practicality is also reflected in Spanish banks' perceptions
of the primary technology barriers to core systems upgrading and replacement.
Spanish bankers told us that the top technology barriers to core systems replacement
are mainly practical, bottom-line business factors (such as the necessary time,
expense, and complexity of defining business solutions and implementing solutions to
automate them), rather than operational limitations, such as the lack of available
solutions, problems with documentation, or the need for customization (see Figure 6).
Furthermore, Spanish banks' strategies for core systems modifications largely avoid
large-scale changes (extensively reengineering systems, or replacing them entirely);
rather, the focus is on "wrapping" core systems for greater openness and integration
(see Figure 7).
©2011 IDC Financial Insights
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FIGURE 6
W hat are the Most Important Technology Barriers to Core
Systems Replacement (Choose Three)?
Time and expense of implementing existing solutions
93
Complexity of technology implementation
80
Difficulty of defining business processes
47
Need for extensive customization of new system
40
Lack of documentation for current system
27
Lack of solutions available from vendors
13
0
10
20
30
40
50
60
70
80
90
100
(%)
Source: IDC Financial Insights, 2011
FIGURE 7
W hich of the Following Best Describes Your Approach to Core
Systems Strategy (Choose One )?
Wrapping core systems for greater openness/integration
40
Other/no response
27
Reengineering core systems for greater "componentization"
20
Replacing some core legacy systems where required
13
0
5
10
15
20
25
30
35
40
(%)
Source: IDC Financial Insights, 2011
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©2011 IDC Financial Insights
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In considering how core banking information technology can be transformative,
Spanish banks focus on process efficiency (streamlining end-to-end processes
through straight-through processing, bringing new products to market more quickly,
and making cross-selling of products easier). Other application areas (product
standardization, regulatory compliance, post-M&A consolidation) are also seen as
important, but not ones where technology is "transformative" (see Figure 8).
FIGURE 8
W hat, in Your Opinion, are the Most Important W ays That
Technology Can Enable Banking Transformation (Choose
Three)?
Streamline end-to-end processes (improve STP)
93
Enable more rapid time to market for new products
80
Enable cross-selling opportunities
67
Enable more standardized products
33
Enable more compliance with changing regulatory requirements
20
Improve post merger and acquisition consolidation
7
0
10
20
30
40
50
60
70
80
90
100
(%)
Source: IDC Financial Insights, 2011
Partner Selection Criteria
Spanish banks have historically preferred to develop their own solutions rather than
relying on packaged options from vendors. By an overwhelming margin, core
banking systems in Spain are either entirely custom built, or a mix of a packaged and
in-house-developed systems (see Figure 9).
And, while there is no immediate sign that that pattern is to be reversed,
conversations with senior banks reveal an increasing awareness of both the
improvement of packaged vendor solutions and the cost effectiveness that these can
offer. This suggests that vendors are likely to receive a more sympathetic hearing than
in the past, particularly as internal IT resources are going to be under more intense
scrutiny as the mergers force management to look for widespread areas of savings
and greater efficiency.
So, for the time being at least, the patterns of the past might not be the best indication
of future activity.
©2011 IDC Financial Insights
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FIGURE 9
W hich of the Following Best Describes Your Current Core
Systems Environment? (Select One Only)
Custom system developed entirely in-house
47
Mix of packaged and in-house developed system
33
Packaged core system from external vendor
7
Outsourced/ASP-based vendor solution
7
Shared processing center
7
0
5
10
15
20
25
30
35
40
45
50
(%)
Source: IDC Financial Insights, 2011
Spanish banks clearly perceive that the capability to customize and tailor solutions to
each bank's specific needs is a critical vendor skill, but at the same time, solutions
must be created according to widely adopted industry and technology standards (see
Figure 10).
Solutions must be created according to existing and accepted development
methodologies, and be sufficiently industry-standard that the solution could be used
by the vendor for resale or reuse by another banking unit or institution.
At the heart of this has been a historic concern about the ability of vendors to fulfill
implementation commitments. That said, there were certainly signs from some of our
interview conversations that this is not only less of a worry, but that some vendors
have been able to demonstrate a sharp improvement in core competencies.
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©2011 IDC Financial Insights
FIGURE 10
W hat W ould be Your Ideal Method of W orking W ith an External
Vendor? Select One Only
47
Custom development based on existing dev't methodology
33
Partner with vendor to develop new system for resale/reuse
13
Fully custom-built development
7
Implementation of packaged solution
0
5
10
15
20
25
30
35
40
45
50
(%)
Source: IDC Financial Insights, 2011
Vendors are also expected to be credible, competent, and dedicated to providing fullservice offerings. These factors are considered by Spanish banks to be more
important than product or technology factors such as ability to provide state-of-the-art
technology or best-of-breed product functionality (see Figure 11).
FIGURE 11
W hat are the Most Important Factors in Choosing a Core
Systems Vendor? (Select Three )
Ability of vendor to offer end-to-end service
60
Existing reference sites
60
Vendor viability (financial stability)
47
Ability to implement successfully
33
Best-of-breed product functionality
33
Future proof of technology roadmap of vendor
27
0
10
20
30
40
50
60
70
(%)
Source: IDC Financial Insights, 2011
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CONCLUSION
The Spanish banking market has certainly established many innovative products,
services, and working practices in the last decade or more. We are confident that it
will therefore emerge stronger from a difficult period of significant and wide-ranging
challenges at all levels — global, regional, national, and industry-specific. But, for
now at least, these challenges have driven Spanish banks to take a "wait and see"
approach to making major changes to their core banking systems.
Despite this hesitancy to make large-scale changes, within Spanish banks, a slow
return to positive growth in technology spending is expected in 2011. This will be
driven by demand for improved customer service externally and the desire for better
use of business intelligence and the obligation to comply with regulatory demands
internally. Spanish banks are seeking cost-effective, customizable solutions, based on
industry-standard development technologies that improve efficiencies, enable
innovation and incorporation of business intelligence into business processes, and
improve customer service deployment without the need for wholesale core banking
platform replacement.
Survey highlights:
● Current uncertainties in the economy and the banking industry, both worldwide
and within Spain, are making Spanish banks hesitant to undertake large-scale
changes in their banking technology platforms.
● New technology investments at Spanish banks are predominantly targeted at
initiatives that strengthen customer relationships and customer service options.
● The predominant technology strategy at Spanish banks is to "wrap" an existing
core banking system with new applications that enable acquisition of new
customers, improve systems for providing service to existing customers, and
enable the introduction of new products.
● Most Spanish banks use a core system either developed entirely in-house or
developed as a tailored or customized solution in cooperation with a vendor.
Partnerships with vendors are based on vendors' ability to offer complete, end-toend solutions based on replicable, industry-standard technologies and methods.
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