Monday, 18 August 2014

CBA proves the case for core banking replacement

CBA (Commonwealth Bank of Australia) has delivered record profits of $8.6bn AUD (£4.8bn, $8.0bn USD) for the year to June 2014. With a return on equity of 18.7% (versus typically 5-7% for US/UK banks and less for European banks) and a cost:income ratio of 36% for the retail bank (42.9% for the bank overall), this puts CBA amongst the most profitable banks in the world. It is also one of the banks with the fastest growing profits. This is despite fees paid by customers going down. The profit is being driven a combination of growing the revenues outperforming their competition and by increases in productivity. The CEO, Ian Narev, is clear that a major factor in the high performance of the bank is due to the major investments in technology, including the replacement of their core banking platforms.

For many banks the idea of replacing the core banking platforms is the equivalent of performing a full heart and lungs transplant while running a marathon. However, whilst most banks have not had the courage to embark on such a challenging endeavour, in 2006 CBA decided to. CBA made the task even harder by rather than choosing to replace their old legacy systems with proven technology they chose to be one of a very few pioneers with the new SAP Banking platform that, at that point, was largely unproven.

CBA have not been risk averse in adopting new technologies. They were one of the first banks to outsource their internet banking infrastructure to Amazon Web Services (AWS). See CBA and Amazon

The journey to their new banking platforms was not straight forward, bumps were found along the way and the costs rose above original estimates but there were releases along the journey which released business benefits and they have succeeded in delivering a completely new set of platforms to drive their business from. This has given them significant competitive advantage.

One consequence of simplifying their IT landscape has been a dramatic decrease in the number of high impact system impacts from 400 in FY2007 to a mere 44 in FY14. Considering the number of major outages that some of its competitor banks have had and the damage to the brand this is a significant achievement. It will undoubtedly have contributed to why CBA is #1 for customer satisfaction amongst Australian banks.

Among the benefits that the bank and the customers have experienced is a dramatic reduction in the time it takes to get innovations into production – two recent examples of this are Lock & Limit (allowing customers to block and/or limit the size of transactions) and Cardless Cash (customers being able to withdraw from ATMs using their mobile phones) which came to market in May 2014 ahead of competitor offerings.

CBA has also seen a significant increase in self-service with the percentage of deposits completed via an Intelligent Deposit Machine going from 10% to 37% over a twelve month period. With the launch of online opening of accounts (savings and current accounts) customers can now open accounts in less than 60 seconds.

None of the big UK banks has embarked upon a core banking platform replacement programme. Lloyds has consolidated and simplified its systems based on the legacy TSB platform. Santander has a single platform, Partenon, which is based on a banking package but it is legacy technology.  HSBC embarked on developing a single system for the Group, One HSBC, but that programme was stopped after a number of year. Nationwide Building Society is some way down the journey of implementing SAP Banking and is beginning to see the benefits with reduced times to launch products and propositions.
One of the key architects and sponsors of the technology transformation programme at CBA was Michael Harte. He is shortly to take up the role of COO with responsibility for IT at Barclays. There can be little doubt that his experience at CBA was the major attraction for his recruitment. The benefits that CBA is reaping following this six plus years journey are clear to see. The question is with all the challenges that Barclays faces, the size of the investment and the length of the return on that investment, the decreasing margins in banking and the amount of work needed to keep up with the regulatory burden whether Barclays will have the appetite and the staying power to embark upon what can be a highly rewarding but hazardous journey

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