We use the banking framework (see Banking Framework for more details of what we mean by the different areas of a bank) to categorise the changes required for a cross border integration that are over and above an in-country integration.
Core Banking Engine
The first and most important area of extra cost is that related to payment systems. In Europe most countries have their own approach to
- cheque clearing
- Automated Clearing House Payments
- Domestic Real Time Gross Settlement payments
- Debit card inter bank authorisations and settlement.
Examples of differences are
- message and file formats
- cycle times/clearing cycles
- cut off times
- rejects, returns, unapplieds processing
- accounting for interest and available funds on uncleared payments.
Collectively, this represents a major re-engineering of the payments and accounting aspects of the core banking engine of the bank.
Another area that will require significant development effort inside the core banking systems are the tax aspects of products. Most governments use tax incentives to affect their citizens behaviour as regards certain types of banking products, for example encouraging savings via tax exempt savings accounts or giving tax relief on certain types of mortgage or business loan. The exact tax rules are different for every country (maxima, minima, terms, rates etc) and the products are normally crucial to competing in the country. These products usually require complex development in the core banking systems.
Mortgages Product Engine
The practices around buying and financing property in Europe are frustratingly disparate considering the universal human need that is being fulfilled. This filters through to the systems and processes (e.g. roles of lawyers, land registries, notaries public etc.) as well market customs on fees and commissions. Taking a mortgage engine from one country and modifying it to cope with the process in another requires a lot of software development. The recent introduction of the European Mortgage Code has brought some elements of consistency to the compliance and quotation process but nonetheless overall market conventions are very different.
Pensions and investments are very heavily influenced by tax and social security legislation which are unique to each of the different European countries. As a result the back office systems and processes for the life and pensions areas of insurance are very different in different countries. The receiving bank will have a major change to its software for these products to cope with another country’s processes. (This is less true of general insurance products such as house, car, loan protection and travel).
Sadly these product engines are country sensitive as well. The reasons are that:
- Leasing and asset finance are tax sensitive (e.g. capital allowances for business investment)
- At the low end they get caught up in consumer finance related regulation and compliance.
- Different countries have different (often environmental) rules about asset disposals for many classes of assets.
All this leads to a lot of extra development in systems and processes for a receiving bank to be able to support another country’s asset finance business.
Fund Management and Stock Broking
The operational aspects of buying and selling investments (Government Bonds and Company Stocks) is quite distinct in most of the European countries. There is some consolidation of stocks and bonds processes because of Euronext but there is still a long way to go with each country’s Government emitting paper in a way unique to the country. As a consequence the back office processes and systems are very different in each country. This is further exacerbated by the retail administration processes for fund management and stock broking being heavily country specific (e.g. in the tax treatment of dividends and the compliance processes). A cross border integration between the fund management arms of banks would be substantially more expensive than the in-country equivalent; similarly for the stock broking arms of banks.
Some of the gateways are pretty well multi-country (e.g. SWIFT gateway technology and protocols) however many are not such as the Automated Clearing House (ACH) ones and the Insurance Industry versions. As a result on balance this represents a major area of cost as the moving country’s gateway functions have to be incorporated into the receiving bank’s systems and operations.
There are big differences between what functions are carried out in branches and what are not across European countries. For example, in the highly urbanised UK much of the cash and cheque processing is carried out away from the branch, whereas in geographically dispersed countries such as France and Spain much more work is carried out in branches. The cheque processing regimes also affect the branches (truncation or not) as does the existance of passbooks or not. The layout of branches, in terms of open plan areas and secure areas has an effect on what processes are carried out where. Finally, the different compliance regimes in different countries mean that branch staff in one country can quote and take orders for financial products that they cannot in other. All in all this represents a major set of changes to the branch platform software and hardware.
There can be quite sophisticated process relationships between a banking group and the intermediaries in a particular product sector (for example, between Insurance Brokers and an Insurance company inside a banking group). These relationships can be based on an industry standard for messaging from that sector in the country of concern or the development of bank owned software and hardware to provide access to the bank’s own systems for quotations and product setup. There is almost no cross country standardisation in these areas. Indeed there is so little commonality that it may well be the case that this is not an area for cross border systems integration.
Tied Sales Force
The compliance regimes are different in different countries (e.g. in demonstrating/proving an analysis of needs has been carried out or that the salesman has made clear what he can or cannot provide advice about). This turns into important differences in the types of sales tools, quotation aids that a tied sales force use. Also the tax regimes of different countries affect the products that are/can be sold. All this means that to incorporate another country’s sales force onto a country’s sales platform will be an expensive development.
Management Information and reporting
The European Union is trying to harmonise the regulatory environment for banks and financial institutions across the EU but there still remain substantial differences on the information that regulators its format. Even the statutory accounting standards, despite the best efforts of IAS committees resist harmonisation. Whatever country is involved, there will be significant IT costs involved in producing external information for the acquired bank’s regulators whilst producing consolidated information for the regulators in the acquiring bank’s country.
Areas of the banking framework (relatively) unchanged
Within the product engines part of the framework some platforms are already pretty multinational for many banks.
- Financial Markets – have been cross border, multicurrency for a long time. A cross border merger ought not to cost much more than a within country merger.
- Cards Platforms – much of the cards processing is based on multinational third party platforms such as First Data and Tsys, sometimes insourced sometimes outsourced. Furthermore the drive by the card schemes (VISA and MasterCard) to achieve international standards means that, whilst a merger of cards functions has a significant cost, the cross border one is not materially more expensive than an in country merger.
Within the channels part of the framework, again some platforms probably do not need a lot of modification to cope with another country over that for supporting another bank (language and currency differences apart and these are discussed in the section called Target Systems Configuration and Preparation).
- Electronic – Much of the underlying ATM hardware and software, (Base24, NCR, Diebold, IBM etc.) is designed with a global market in mind. There are also international standards such as CIRRUS to help. Other electronic channels such as Internet Banking and Corporate electronic channels have little that is determined by the country in which it is based.
- Phone – The capabilities of the telecoms providers across Europe (e.g. in being able to provide virtual call centres) are becoming indistinguishable from country to country and the telesales/telesupport providers (e.g. CRM players such as IBM and Siebel) are also providing the same solutions across Europe.
- Mail – The big technology developments for incoming mail are around making electronic images of the documents prior to processing. This is not materially different in one country or another. (Although the conventions on whether incoming mail is handled in the branch or centrally are different in different countries the capability to take on another country should not be much more expensive than another bank in the same country). “Mail out” does not seem to be significantly different across countries as all countries’ banks seem to have highly centralised print and distribution models.
The systems and the operational approach to the Customer Relationship Management area, as a whole, is essentially determined by the bank not by the country of the bank. If the hypothesis is that the receiving bank’s CRM systems are to be used there is not much that would cause the cost of migrating a bank from another country to be more expensive than migrating a bank from the same country. Some (slight) exceptions to this gross statement would be.
- Address standards; postcodes can be an important data item in some countries and less in others.
- Credit Reference agencies work on different data and different algorithms for credit scoring individuals in different countries.
- Some countries have a National Identity Number, and use it extensively as a key in identifying individuals and businesses. Others do not.
- Different countries have different rules about data protection for individuals.