Will BBVA Compass kick-start core banking transformation in the US?

OVUM VIEW

Summary

BBVA Compass, a top-25 bank in the US, recently announced that it has moved most of its legacy core banking systems onto Accenture’s Alnova Financial Solutions banking platform. It is the first of the larger banks to have successfully replaced its banking platform in the last decade. The bank believes that having a realtime, customer-centric system will allow it to deliver a differentiated customer experience. In addition, it has already seen significant efficiency and productivity gains and expects to see more; it is on track to obtain 23% efficiency savings.

While the move provides a direct competitive catalyst for the other banks operating in this region, it also psychologically important for the whole US market. Firstly, it counters the prevailing myth that banking platform transformation is unfeasible for large banks. Secondly, it is the first large-scale universal banking deal for a large US bank with an international vendor (for domestic operations). With US localization proving completely achievable, it will also benefit the wider set of international players, which should concern the main incumbent providers in the US. Momentum for core transformation in the US market has been building for a while, and Ovum believes this move marks an important inflexion point.

Core banking replacement was driven by senior management’s desire to implement a customer-centric relationship banking model

BBVA Compass is the US arm of the Spanish banking group BBVA, which acquired a major presence in the US market through a number of acquisitions during the latter half of the last decade, including Texas State Bank in 2006, Compass Bank in 2007, and Guaranty Bank in 2009. It now runs under the single BBVA Compass brand and is significant regional player operating in southern US states, with a particularly strong presence in Texas. It services around 1.3 million households, and has $67.9bn in assets and $50bn in deposits; based on the latter it is a top-25 player in the US.

At the group level, BBVA’s primary operating model is a universal banking one, and the bank operates a relationship banking model to drive multiple products per customer. Historically, this model has been far less developed in the US due to market fragmentation and the strength of monolines in mortgages, credit cards, and auto loans. However, with the financial crisis driving major disruption in the value chain, BBVA feels that that role of banks in the financial system has increased, and, as such, the CEO of BBVA Compass strongly believes that there is the potential for a universal banking model to become successful for banks that can be truly customer-centric.

This customer-centric approach was initially driven by BBVA Compass through organization change to collapse all product and sales siloes into one, but there was a strong senior management view that this could not be achieved in full without technology change. The acquisition-led growth of the US business meant that the bank operated with multiple back-end systems (it had around 26 different customer information systems), and overall processes and architecture were not customer-centric in design. Driven by executive management, BBVA Compass has therefore embarked on a large-scale bank transformation program that includes core system replacement, as well as development of its own online and mobile banking systems and business process redesign. The bank has just completed the majority of the rollout, moving its customer base over for its deposit products, and plans to shift its consumer loan, small business, and mortgage servicing systems over in 1Q 2013.

Moving to a realtime system enhances customer experience and drives efficiency gains

A particular benefit for BBVA Compass of the new platform has been the move to a realtime system – most large banks in the US still run batch-based processing systems. The bank believes that this provides a differentiated customer experience by delivering greater account transparency to customers and supporting the development of a seamless, multi-channel experience. While the bank felt that the latter could have been achieved through a separate channel platform, a realtime back-end significantly reduces both IT and process complexity.

The bank has also seen significant efficiency and productivity gains and expects more to come. It claims to have achieved 13% savings in 2012 against its baseline retail servicing and operations costs, and expects to increase these to around 23% by 2015. This is largely through direct savings, achieved by greater straight-through processing (an additional advantage of realtime systems) and lower reconciliations/back-office operations requirements, and productivity benefits. For example, opening a retail deposit account can take as little as five minutes compared to the 40 minutes that it used to take, allowing branch operatives time to see more customers or cross-sell during customer engagements.

The US core replacement market is warming up, and the international vendors are likely to be strong players

BBVA Compass’ platform transformation is the first by a super-regional bank in the US in the last decade, and Ovum knows that some other major banks plan to complete similar transformations in 2013. It is likely to be a strong wake-up call for a market that has been highly reticent to embark on such projects due to past project failures. While economic conditions mean the impact of such a move will be felt over a number of years rather than in a flurry of activity, Ovum believes that it does mark an inflexion point for core platform transformation in the US market.

Significantly, it also lowers a major hurdle for the international core banking platform vendors that have historically had limited success in the US large-bank segment (while Accenture is headquartered in the US, Alnova’s presence is primarily in Europe and Latin America). This limited success has been largely caused by concern about the ability to localize systems and understand US requirements. BBVA Compass has proved that US localization is, in fact, achievable, and Ovum expects such vendors to expand, notably in the US, at expense of the incumbent providers to large banks.

APPENDIX

Author

Daniel Mayo, Practice Leader, Financial Services Technology

daniel.mayo@ovum.com

Further reading

“Can vendor packages meet the needs of tier-1 banks in core systems replacement?” IT003-000516 (October 2012)

The Business Case for Core System Transformation, IT003-000484 (May 2012)

Retail Banking Core Platform Transformation Strategies, IT003-000351 (May 2011)

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