All posts tagged IT

The Core Banking Juggernaut Rolls On

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A lot has been said on the crying need for and the challenges and risks of core banking replacements with arguments and rationales flying fast and thick on both sides of the fence. 2005 has, in many ways been a watershed year in this regard, with the dust having settled down to a large extent and new age core systems leaving an indelible imprint on the banking landscape, at least to the extent of gaining acceptance and engulfing few legacy systems in its wake. The verdict is finally out given the move by some of the larger, Tier 1 banks in taking the plunge and embarking on a total overhaul of their core processing platforms.

This article seeks to highlight some of the trends in the core banking space and what 2006 holds out for banks and ISVs, as well as some of the critical success factors that banks need to be mindful of, in order to derive the maximum out of their core banking transformation initiatives.

The Story so Far…

What started off more as a promising outlook in the beginning of 2005 has been transformed into a huge wave that is only accelerating in momentum. The last 12 months have seen a number of Tier 1 universal banks take that first big step towards transforming their core systems. This wave has attained global proportions with banks across Europe, Asia Pacific, Australia etc. biting the bullet with the Americas looking at the proceedings with keen interest and likely to follow suit as well. After the whole-hearted acceptance of channel technologies through the 90s and the turn of the millennium, designed to provide an anytime, anywhere banking at virtually the customers fingertips, it is now the turn of the transaction processing systems to dominate the arena and transform banking processes and practices the world over to achieve higher levels of differentiation, agility and operational efficiency.

According to a well-known research firm, core system replacement spends in 2005 stood at about USD 13 Bn and are expected to rise to USD 34 Bn by 2010. It is estimated that the total spend on core system transformation (including hardware, software, network, IT services etc.) by European banks over the next 10 years could be as high as E100 Bn with budgets for software and services going up to E250 Mn for some banks. With 69% of European banks having embarked on a transformation of their core systems, either in terms of taking the plunge or having taken the first steps in staking out the core system space, the stage is set for new age core systems to dominate the European banking landscape, after having tasted major success and acceptance in the Asia- Pacific, Australian and CEE markets. The next couple of years alone could see core banking vendors, ISVs and IT solutions and services providers raking in as much as E10 Bn only through core banking replacement projects.

The clear growth potential as well as the highly fragmented nature of the core banking market (presently there could be well over a hundred solution providers and over a score of global vendors) with no clear market leader emerging saw some of the big names training their sights on and slowly moving in to take advantage of the opportunity. Among the notable ones are Oracles recent announcement of taking over an Indian vendor and SAP making the right noises about developing their own solution as well as explore possibilities of alliance/ buyouts of existing, wellentrenched core banking solution companies. This also saw the emergence of alliances like SAP-Accenture and a large number of such partnerships borne out of a need to leverage each others strengths and offer an end-to-end IT services and solutions proposition. It is only logical to assume that this trend is here to stay and will only snowball into gargantuan proportions given the attractive growth rates and margins this segment has to offer.

Crystal-Ball Gazing

While there are quite a few numbers and statistics to suggest that the core banking wave will only accelerate in momentum, size and force, what is probably of greater importance and interest is how this journey will pan out in 2006 and beyond.

Going forward, one would see a complete confluence in the paths of banks and ISVs through the role of core banking systems in the banks quest to re-define their very existence and survive and flourish in an intensely competitive and globalized banking landscape. Factors like operating efficiency, scalability, agility and time-tomarket, harmonization of enterprise-wide processes, a proactive approach to risk management and regulatory reporting, and most importantly a lowered total cost of ownership (TCO) of their IT infrastructure have assumed considerable significance for contemporary banks and will be the key drivers in selecting the chosen platform to power banks into the next orbit and beyond. This bodes well for new-age systems given the overwhelming and (now) oft-talked about limitations of legacy platforms in terms of architectural rigidity, complex interfacing needs, considerable manual hand-offs and lack of STP, real-time capabilities as well as high costs of installation and ongoing maintenance apart from the massive risk of technological obsolescence that could well be a major dampener in a banks quest for agility, efficiency and greater regulatory compliance.

With the high adoption rates of new age core processing platforms (few examples that come to mind are DBS adoption of the Finacle solution from Infosys and various banks like HSBC, ABN AMRO etc. at varying stages of transformation), more and more banks will embark on this path. An equally significant number of banks would go through 2006 closely watching the outcome of these transformations in the banks that have taken the bold, first step before embarking on a similar step.

For long, the North American banks seem to have been by and large untouched by this transformation given the greater dominance of legacy applications and the myriad of systems that have mushroomed around these legacy platforms. The threshold of transformation for these banks is probably a bit higher than for banks in Asia Pacific, Europe, and the Middle East. Few banks have tried to delay the inevitable through some process reengineering initiatives, large customizations of their existing, dated technologies through superficial wrappers, costly workarounds and porting of old technologies to new, faster platforms. However, banks are realizing that they have probably capped out on the benefits through these initiatives, and nothing short of a complete overhaul of their IT platforms will enable them to sustain the onslaught of the new age banks as well achieve their stated financial, customer and stakeholder objectives. So, whilst the pace of transformation may vary based on the banks operating environment, the relative degrees of maturity and consolidation of their respective businesses, what is inevitable is the eventual transformation of the banks platforms to new generation technologies.

Consolidation in the core banking space will continue at a frenetic pace. More and more of the larger ISVs will want their share of the core banking market and are more likely to buy out existing platforms and leverage the advantages of an existing, proven solution and a captive customer base rather than engineer a solution from scratch. This obviously foretells bad tidings for the relatively smaller, marginal solution providers, who could see their market shares evaporate rapidly and eventually become acquisition targets for the majors. Successful ISVs and solution providers will need to operate through a combination of organic and inorganic growth strategies to capitalize on this wave and deepen their hold in this market. Like the ERP wave, this wave is likely to well last for quite a while; at least through this decade and beyond.

Strategic challenges facing the banks stakeholders

Whilst new age platforms undoubtedly offer great promise, banks need to be mindful of the critical success factors, which if properly understood and addressed will ensure a smooth transition for the bank and its customers as well as provide a vastly improved and agile business environment. Some of the critical success factors could be:

When to Transform – Banks need to clearly understand the maturity and readiness levels of their own businesses, their stated long-term as well as short-term business imperatives as well as their own operating environments before embarking on a core system change. This will enable them to set ambitious, yet realistic expectations from the transformation, both in terms of time and business benefits.

Key Expectations From the Transformation – Banks need to identify clear business, customer and any other tangible/ intangible benefits they need to achieve from the transformation. Whilst most stakeholders could have varying expectations i.e. A CIO will expect a well-integrated operating environment and a low TCO, a marketing manager the flexibility to design and roll out new products, whereas a COO would be more concerned with streamlined, straight through processes and minimal operating risk. It is critical to have complete clarity on the desired outcomes from the transformation, at a short, medium and long-term level.

Change management and transitioning strategy – Adopting a new technology without streamlining the existing processes (which typically would have been configured keeping in mind the limitations and capabilities of the existing platform) seldom yields the desired business benefits. Hence, a core banking replacement inevitably brings with it changes not only to the IT environment, but also a major overhaul of business processes, greater degree of process consolidation and harmonization, and therefore, a re-definition of the organization structure and roles and responsibilities of the bank staff. This transition needs to be properly managed in terms of clear, consistent and timely communication on the business benefits expected from the transformation and the consequent impact on the banks financials, its market position and the employees themselves. Ultimately, employee buy-in and acceptance of the new operating environment will be the single most factor determining the success of the replacement.

Choice of Technology – Given the trials and tribulations associated with core system replacements, it is important that the banks stakeholders identify the right technologies to work with right in terms of future-proofing the bank against technological obsolescence, ease of interfacing to other applications within and external to the bank, as well as ease of modification of business processes and features to respond to business opportunities in a fleet-footed manner, and most importantly the extent of automation, STP and real-time capability the system offers.

Conclusion

The core banking landscape is poised at one of the most exciting and defining phases and is likely to witness considerable momentum, debate and analysis over the next few years. This is also the most opportune period for banks and ISVs alike to leverage off the transformation opportunity and create history for themselves. The next 2-3 years will undoubtedly see, in good measure avid discussions of banks success stories enabled through new-age technologies as well as the odd instance of new-age systems not being able to deliver on their promise. What is of essence is that this is probably a unique era in the age of core banking systems, which banks and ISVs need to fully understand in relation to their business dynamics, define a clear vision of their expectations from the technology transformation, align their stakeholders and operating environment towards the same, and most importantly monitor this transformation closely to re-define the battleground and etch their names in the banking hall of fame.

Become Educated About Breeze Mobile Banking

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When Standard Chartered Bank decided to develop a unique mobile banking solution, which would ultimately be named Breeze, they took a very different approach into the design and development. For starters, instead of offering their customers the same features and functionality seen with other mobile banking solutions, a tremendous amount of research was conducted directly with the customers. With this, bank officials were able to capture the essence of what customers wanted to see in a mobile banking application.

Beyond that, officials with Standard Chartered Bank realized that other online and mobile banking solutions simply did not provide the type and degree of security needed to keep information online safe. Obviously, if this bank was going to launch Breeze as a comprehensive solution, it had to be designed for the people and by the people, but the bank needed to put additional or different security measures in place so all personal and financial information would be protected.

Well, changes are already being seen in a new version of Breeze being called Typhoon. Standard Chartered Bank wants to be careful as they move forward with mobile banking, knowing they will continue to provide customers with the functionality and features needed to conduct personal and business banking but they also want to choose the timing for offering new versions carefully.

Additional information is important to understand, helping financial institutions identify the areas in which their system is weak. As an example, the amount of money allotted to IT departments for overall operations includes less than 5% being spent on training for security awareness. Additionally, of companies interviewed, as much as 90% stated the company had some type of computer security incident within the past 12-month period.

Because information such as this is easy to come by, it should be used by all businesses with online presence, especially for financial institutions. If more banks would conduct research and put appropriate security measures in place, incidences of cybercrime would decrease. For the people at Standard Chartered Bank, they wanted to make sure that when their mobile banking application was used on the iPhone, and soon the iPad, customers would have peace of mind knowing their information is protected. The way this was accomplished was to implement a type of second-tier protection.

The second change seen with the newer version of Breeze is that mortgage accounts, investments, and other loans can be viewed. The first version of Breeze was excellent but accountholders were not able to access accounts such as these. Now, the Typhoon version of mobile banking will be more liberal, providing the opportunity for customers to confirm the receipt of payments, changes in interest, current balances, and more.

The new version of Breeze will have another feature, allowing credit cards for paying bills. The first version was relatively flexible in this area but again, some limitations existed that have now been enhanced. The final change seen in the new version of Breeze is that customers can request to have the second, temporary password sent via SMS to the iPhone resent.

Initially, this second PIN was initiated once the bank customer logged into the Standard Chartered Bank website with the standard user name and password. From there, the customer would wait for the SMS to be received, at which time he or she would return to the site, enter the second password, and then have account access. With this change, if a customer were to log off only to remember another task needing to be done, rather than go through the entire process again, a request could be sent via Breeze on the iPhone, at which time the bank’s system would initiate a different temporary PIN. As time passes, more changes will be seen with Breeze, something of which bank customers are excited.

Precautions about Net Banking

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Net Banking has become steadily popular over the past few years. People are using it to shop online, to book rail and air tickets and transfer money across cities and countries. But simultaneously with the increase in the use of net banking the incidents of cyber crimes also have registered a continuous growth. Many times money is transferred illegally from the bank accounts without the knowledge and permission of the owner.

Net Banking is a facility on the internet to operate ones account. To use this facility the customers arrive at the website of the bank where they have got their accounts. By entering a Username and Password they can access their own account and by using yet another password can transfer money in or out of that account. But before using Net Banking it is always necessary to read all the instructions of that particular bank. Guidelines of all banks are not similar and there are minute but important differences. Therefore, it is necessary to read them carefully.

Many people consider the Net Banking like the normal banking. But no, it is very different and one needs to be extra careful. It is necessary to check your internet banking account at regular intervals. The intervals can be every two or three days or at the most one or two weeks. If you do not check your account for a long time, you may not come to know of what is happening to it. If you find any discrepancy, inform the bank authorities at once.

Please note that the banks do not consider them responsible for any thing happening to your account as a result of the activities of the unauthorized operators who are called hackers. Moreover, no insurance is available in this regard. The Banks say that appropriate upgradations are carried out from time to time by their IT departments for risk mitigation. They also issue instructions to the customers to manage their accounts through virtual key boards by way of which the characters typed by them are not identified by the hackers. Many banks send their account holders SMSs regarding any activity taking place at their account. SMS alerts are also an important tool since any transaction carried out on account is reported to the account holder through as SMS.

If you use any website for the purpose of shopping or transferring money, first make inquiries about the reliability of that website. This information can be had from seeing the internet address of the web site or by asking from any computer expert. Make sure that you write down the internet address of that particular site correctly.

Make sure that you use your own computer or lap top for the Net Banking purposes. Never use cyber cafes for net banking. If you had to use some other computer for the purpose of Net Banking, change your password immediately. Moreover, never forget to log out the site you used for Net Banking.

All this care is necessary because the internet frauds are increasing at an alarming rates. In the internet terminology these frauds are known as Phishing. In phishing, a persons personal details are obtained by fraudsters posing as bankers, who float a site similar to that of the persons bank. The customers are asked to provide all personal information about themselves and their account to that website on the pretext of databases upgradation. The number and password are then used to carry out transactions on their behalf without their knowledge. Regular e-mail users might have already noticed subjects or mails with messages such as:” Verify your account”, ” You have won the lottery “, ” if you dont respond within 48 hours, your account will be closed, ” security advisory”, ” 2008 A Category results” and the like. You could even receive an e mail purportedly from your bank, software vendor, or an online portal asking you to update your credit card information. Never respond to such mails and call your bank or vendor to make sure they have asked this information. Make one rule, never respond to such e mails.

Sometimes, the fraudsters indulge in hacking in which personal data is stolen through hacking. Hacking is an act in which the cyber criminal steals information stored or transacted in any computer. Sometimes. A spy ware is installed in the computer to steal the information and gain access to all files. The hacker gets in to the system with the help of spyware and steals information. The hacker is always on the lookout for unsecured systems and files. The spyware usually comes in the form of a virus. This spy transports all files pertaining to bank accounts to the hacker. Therefore, it is advisable not to store much information about your accounts on your computer or e mail which is unsecured. Generally , an accepted method of keeping the hackers at bay is frequently changing passwords. This however is not enough. One should make sure that the net connection is secure. Unsecure Wifi and broadband connections can be misused by professional hackers to obtain confidential details regarding an account. The best way is to operate your account at home or on a personal computer.

There are a few other things you can do. Get the latest version of the Antivirus and Internet security suite. Please dont buy a pirated CD. The anti virus soft wares have the anti phishing filters built in. Moreover, get the latest version of the Internet Explorer and Firefox. Both have an internal anti phishing engine built in to alert you when you are on a site that steals data.

In short, it is always advisable to use the following precautions while using Internet for any kind of transaction involving money.

Net Banking has become steadily popular over the past few years.
But simultaneously with the increase in the use of net banking the incidents of cyber crimes also have registered a continuous growth.
Use your home computer or lap top for the Net Banking.
Never use cyber caf for the Net Banking.
Put password on your computer as well and also the screen saver password.
Check your account regularly.
Install a good fire wall in your computer. It would make hacking difficult.
Always log out after using net banking.
Never reveal password to anyone. Do not even write it on a piece of paper or diary. Just memorize it. It should be alphanumeric. Change it frequently.
Never reply to queries from bank online about account or personal details.
The personal information should not be kept in a public computer or in e-mails.
Before using Net Banking it is necessary to read all the instruction of the bank.
Use the SMS alerts facility of the bank as any transaction carried out on the account is reported to the account holder through SMS.
If you use any website for the purpose of shopping or transferring money, first make inquiries about the reliability of that website. ( The End)
By: Iqbal Amrohi

Software Investment Banking – The Art Of Business Valuation

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One of the most challenging aspects of selling a software company is coming up with a business valuation. Sometimes the valuations provided by the market (translation – a completed transaction) defy all logic. In other industry segments there are some pretty handy rules of thumb for valuation metrics. In one industry it may be 1 X Revenue, in another it could be 7.5 X EBITDA.

Since it is critical to our business to help our information technology clients maximize their business selling price, I have given this considerable thought. Why are some of these software company valuations so high? It is because of the profitability leverage of technology?

A simple example is what is Microsoft’s incremental cost to produce the next copy of Office Professional? It is probably $1.20 for three CD’s and 80 cents for packaging. Let’s say the license cost is $400. The gross margin is north of 99%. That does not happen in manufacturing or services or retail or most other industries.

One problem in selling a small technology company is that they do not have any of the brand name, distribution, or standards leverage that the big companies possess. So, on their own, they cannot create this profitability leverage. The acquiring company, however, does not want to compensate the small seller for the post acquisition results that are directly attributable to the buyer’s market presence. This is what we refer to as the valuation gap.

What we attempt to do is to help the buyer justify paying a much higher price than a pre-acquisition financial valuation of the target company. In other words, we want to get strategic value for our seller. Below are the factors that we use in our analysis:

1. Cost for the buyer to write the code internally – Many years ago, Barry Boehm, in his book, Software Engineering Economics, developed a constructive cost model for projecting the programming costs for writing computer code. He called it the COCOMO model. It was quite detailed and complex, but I have boiled it down and simplified it for our purposes.

We have the advantage of estimating the projects retrospectively because we already know the number of lines of code comprising our client’s products. In general terms he projected that it takes 3.6 person months to write one thousand SLOC (source lines of code). So if you looked at a senior software engineer at a $70,000 fully loaded compensation package writing a program with 15,000 SLOC, your calculation is as follows – 15 X 3.6 = 54 person months X $5,800 per month = $313,200 divided by 15,000 = $20.88/SLOC.

Before you guys with 1,000,000 million lines of code get too excited about your $20.88 million business value, there are several caveats. Unfortunately the market does not care and will not pay for what it cost you to develop your product.

Secondly, this information is designed to help us understand what it might cost the buyer to develop it internally so that he starts his own build versus buy analysis. Thirdly, we have to apply discounts to this analysis if the software is three generations old legacy code, for example. In that case, it is discounted by 90%. You are no longer a technology sale with high profitability leverage. They are essentially acquiring your customer base and the valuation will not be that exciting.

If, however, your application is a brand new application that has legs, start sizing your yacht. Examples of this might be a click fraud application, Pay Pal, or Internet Telephony. The second high value platform would be where your software technology “leap frogs” a popular legacy application.

An example of this is when we sold a company that had completely rewritten their legacy distribution management platform for a new vertical market in Microsoft’s latest platform. They leap frogged the dominant player in that space that was supporting multiple green screen solutions. Our client became a compelling strategic acquisition. Fast forward one year and I hear the acquirer is selling one of these $100,000 systems per week. Now that’s leverage!

2. Most acquirers could write the code themselves, but we suggest they analyze the cost of their time to market delay. Believe me, with first mover advantage from a competitor or, worse, customer defections, there is a very real cost of not having your product today.

We were able to convince one buyer that they would be able to justify our seller’s entire purchase price based on the number of client defections their acquisition would prevent. As it turned out, the buyer had a huge install base and through multiple prior acquisitions was maintaining six disparate software platforms to deliver essentially the same functionality.

This was very expensive to maintain and they passed those costs on to their disgruntled install base. The buyer had been promising upgrades for a few years, but nothing was delivered. Customers were beginning to sign on with their major competitor.

Our pitch to the buyer was to make this acquisition, demonstrate to your client base that you are really providing an upgrade path and give notice of support withdrawal for 4 or 5 of the other platforms. The acquisition was completed and, even though their customers that were contemplating leaving did not immediately upgrade, they did not defect either. Apparently the devil that you know is better than the devil you don’t in the world of information technology.

3. Another arrow in our valuation driving quiver for our sellers is we restate historical financials using the pricing power of the brand name acquirer. We had one client that was a small IT company that had developed a fine piece of software that compared favorably with a large, publicly traded company’s solution. Our product had the same functionality, ease of use, and open systems platform, but there was one very important difference.

The end-user customer’s perception of risk was far greater with the little IT company that could be “out of business tomorrow.” We were literally able to double the financial performance of our client on paper and present a compelling argument to the big company buyer that those economics would be immediately available to him post acquisition. It certainly was not GAP Accounting, but it was effective as a tool to drive transaction value.

4. Financials are important so we have to acknowledge this aspect of buyer valuation as well. We generally like to build in a baseline value (before we start adding the strategic value components) of 2 X contractually recurring revenue during the current year.

So, for example, if the company has monthly maintenance contracts of $100,000 times 12 months = $1.2 million X 2 = $2.4 million as a baseline company value component. Another component we add is for any contracts that extend beyond one year. We take an estimate of the gross margin produced in the firm contract years beyond year one and assign a 5 X multiple to that and discount it to present value.

Let’s use an example where they had 4 years remaining on a services contract and the last 3 years were $200,000 per year in revenue with approximately 50% gross margin. We would take the final tree years of $100,000 annual gross margin and present value it at a 5% discount rate resulting in $265,616. This would be added to the earlier 2 X recurring year 1 revenue from above. Again, this financial analysis is to establish a baseline, before we pile on the strategic value components.

5. We try to assign values for miscellaneous assets that the seller is providing to the buyer. Don’t overlook the strategic value of Blue Chip Accounts. Those accounts become a platform for the buyer’s entire product suite being sold post acquisition into an installed account. It is far easier to sell add-on applications and products into an existing account than it is to open up that new account. These strategic accounts can have huge value to a buyer.

6. Finally, we use a customer acquisition cost model to drive value in the eyes of a potential buyer. Let’s say that your sales person at 100% of Quota earns total salary and commissions of $125,000 and sells 5 net new accounts. That would mean that your base customer acquisition cost per account was $25,000. Add a 20% company overhead for the 85 accounts, for example, and the company value, using this methodology would be $2,550,000.

After reading this you may be saying to yourself, come on, this is a little far fetched. These components do have real value, but that value is open to a broad interpretation by the marketplace. We are attempting to assign metrics to a very subjective set of components. The buyers are smart, and experienced in the M&A process and quite frankly, they try to deflect these artistic approaches to driving up their financial outlay.

The best leverage point we have is that those buyers know that we are presenting the same analysis to their competitors and they don’t know which component or components of value that we have presented will resonate with their competition. In the final analysis, we are just trying to provide the buyers some reasonable explanation for their board of directors to justify paying 8 X revenues for an acquisition.

Banking Certification Exam

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The current day is a day of brutal competition among the biggies in the software industry. Because flow with the newer and sharper technology is never ending, the content Technology companies who definitely are implementing the greater end software go on introducing the certifications and tests to gauge the potential employees which join them. For precisely the same purpose, Certmagic has introduced Banking Certification exams inside the technical circle; this exam is one very sought-after and difficult exam to break into. However, once this exam has been cleared, the candidate should expect some fireworks in her career. This particular exam is about the introduction of a Team Leader that can work cohesively having a team, and derive the absolute maximum possible output, so that the enterprise level expectations and promises are completely fulfilled. Designing, Configuring, Installing and Troubleshooting the application form server for the enterprise level could be the basic criteria just for this examination. The successful candidate will also have to tidy up the presales, post install supports. The potential candidate is predicted to get a detailed and expertise level knowledge in at least one on the following products from your Banking Certification software giant: Specialties on the Dynamic Infrastructure: Business Resilience, Information Structure, Virtualization and Consolidation. Further, as being a prerequisite just for this certification, our recommendation is that the IT professional appearing just for this test holds any one of the following certifications from the technical domain: Apart out of this, the self paced training kits are giving the strategy for both practice and practicing the Banking Certification exams and give the top solution. The expert professionals offer the information and guidelines when getting the Banking Certification study material in the perfect manner. It makes all the possible ways for as an efficient professional. The Banking Certification exams are giving the methods for overcoming areas inside the IT sectors. The Banking Certification offers the techniques for solving the complex problems as a result of latest developments.