Increased regulation, reduced profits and changing customer demands are driving banks to replace home-grown software with commercially available alternatives.
Simon Paris, head of global banking at SAP, said the strategic change has been a long time coming.
Paris told Computer Weekly at SAP's banking conference in London: “We have talked about it for 20 years but in the last two years banks have been doing it.”
Paris said that, despite the complex nature of banking IT and its substantial budgets, it trails most sectors in IT cost-effectiveness. He said the banking sector is an emerging market for off-the-shelf banking applications.
”Banks are now moving from mainframes, customised applications with lots of integration and people, to off-the-shelf software.”
Moving to supplied software marks a significant departure in financial services, where software is traditionally highly bespoke and created in-house. Much of it is also decades old, so moving off the shelf is more of a pioneering change than perhaps the label suggests.
Nationwide is transforming into a full service bank and is implementing SAP throughout the back office and Microsoft in the front office. Nationwide's £1bn technology investment has transformed the IT department from a development shop into an integrator.
Shift in software expenditure
According to Gartner, banks spend about 6% of their revenue on IT. This compares with the retail and wholesale sectors that spend 1.1% of revenue on IT, utilities 2.8%, industrial manufacturing 1.8% and a sector-wide average of 3.6%. The only sector that spends a larger proportion of revenue on IT is the software and internet sector, at 7.6%.
Only 18% of banks' total software expenditure is external. Paris said that, for banking-specific apps, this drops to 5%; and for core banking software the figure is even lower.
But banks are spending more on transforming the business than most sectors, second only to telecommunications companies and the software and internet sector, according to Gartner.
Chris Skinner, CEO at financial services thinktank Balatro, said the industry is talking about between 40% and 60% of bank services being cloud-based by 2016.
“I do not, however, see the large banks outsourcing lock, stock and barrel, because it is a core competency," said Skinner.
"Some have more developers than SAP and Microsoft put together."
Banking on SAP
SAP global banking
- About 3,700 customers in banking in 120 countries
- Over 2,600 Business Analytics and 1,300 Business Suite customers
- 180 core banking clients in 48 countries
- 83 million bank accounts managed with transactional banking
- Over 1,000 database clients
- More than 200 mBanking, eBanking, mPayments in 25 countries
- About 100 cloud clients
- Over €1bn in revenues and over 1,000 people dedicated to banking
SAP has grown its banking business in recent years (see panel, right). Although its global banking division only accounts for 3% of customer base and 8% of revenue, it is the fastest growing division, with 20% growth.
SAP is addressing three challenges facing banks with its packaged software. These are: navigating risk and regulation; taking out cost and complexity; and creating true multi-channel operations.
The IT trends guiding SAP's products are cloud computing, mobile, big data, consumerisation of IT, and social media. The company is also pushing its High-Performance Analytic Appliance (HANA) in-memory technology to banks, as a way of increasing processing power.
HANA is a data warehouse appliance for processing high volumes of operational and transactional data in real-time. HANA uses in-memory analytics, an approach that queries data stored in random access memory (RAM) instead of on hard disk or flash storage.
A HANA appliance uses an SAP Sybase replication server to copy and synchronise data from an SAP data warehouse or enterprise resource planning (ERP) application in real-time. By running in parallel to the source SAP ERP application, HANA allows business users to query large volumes of data in real-time without having to wait for scheduled reports to run.
SAP wants to be to corporate-to-bank transactions what SWIFT is to bank-to-bank transactions. SAP's $4.3bn acquisition of Ariba, combined with the fact that 60% of corporate transactions touch an SAP system, may well help the company deliver a cloud-based corporate-to-bank transactions service.