This “series” cuts through market noise to explore what we believe are the most relevant and inevitable global trends for investors seeking growth.
In it, we take a closer look at what we think is a valuable framework for understanding growth drivers worldwide-our “MANTRA” (Mass Affluence, New Technology, Restructuring and Aging).
Core Banking Systems (CBS) are often called the central nervous system of a bank, and for many banks, their CBS is in need of serious intervention.
A bank’s CBS is essentially the IT infrastructure that links banking services, customer accounts, back-office processing, etc. Many of these systems have become outdated and inefficient, particularly given improving technology, evolving customer demands and a more competitive banking sector.
Banks, already dealing with a challenging business environment over the last few years, are also facing regulations that require increased capital levels, which may lead to lower returns and place a renewed emphasis on cost-cutting.
IT systems are generally a good place to reduce costs, particularly when banks may be overspending on the wrong infrastructure; they appear to be opting for a patchwork approach to improving IT system performance, instead of a more comprehensive overhaul. This strategy typically ends up being costly over the long run. For example, banks spent 7% of 2012 revenue on IT compared to a 4% average for most industries.1 Reluctance to engage in a complete overhaul of the system has often been based on the daunting size of the endeavor, not to mention the upfront costs and the risks involved. Ironically, studies show that, on average, banks that made the transition saw pre-tax profit growth accelerate by up to 30% and IT cost/income ratios improve significantly.2
That said, over the past few years changes in technology and implementation have helped make large, overhaul decisions easier. For example, Temenos Group (“Temenos”), one of the world’s top CBS vendors, has made changes to its product architecture and has developed a modular approach that should enable easier adoption.
The opportunity for companies like Temenos is significant. The company estimates that banks spend $5.5 billion on external software. However, adding the amount that is spent on internal banking systems upgrades puts the market size closer to $26 billion.3 Creating or upgrading internal systems is expensive and as margins erode in other parts of the business, we would expect that banks will increasingly look to third-party sources for the right platform solutions. We believe this may create an attractive long-term growth opportunity for Temenos.
Temenos is taking advantage of that opportunity with a multi-product, multi-channel approach. They’ve also recently acquired TriNovus in the U.S., which is the largest financial services market in the world with over 18,000 institutions that spend more than $10 billion annually on software.4
Given the turmoil in the banking sector over the past few years, management teams have unsurprisingly been wary of undertaking big-ticket capital investments. However, as we begin to see some stability in the banking sector, we would expect them to start thinking more strategically and, as one of the top competitors in the space, Temenos is positioned to service this potential demand.
1 Morgan Stanley: Temenos Group AG, March 2013.↩
2 McKinsey: Overhauling banks’ IT systems, March 2010.↩
3 Temenos: Winning with products in a multi-speed world, February, 2013.↩
4 Temenos: Capturing the U.S. opportunity, May 2013.↩
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