don’t fear modernizing your core: banking innovation in the digital age

© 2016 NTT DATA, Inc.

Innovation in the Digital Age April 19, 2016

Don’t Fear Modernizing Your Core

© 2016 NTT DATA, Inc. 2

What are the factors supporting and hindering core deposit system

replacement?

2Can banks’ existing core deposit systems enable the innovation

required to compete in an increasing digital financial marketplace?

1Do banks believe they need to modernize their core deposit systems, and if so, are they

planning to?

3

Is there a rising threat as consumers look for

banking alternatives?

4What is the path for success to

modernize their core deposit systems?

5

Key Questions: Investigating Core Deposit System Modernization#NTTDBanking I @NTTDConsulting


Survey Snapshots

Banker: • 114 banker surveys

conducted with core deposit executives

• Director level bankers and above

• Distributed between small, regional, and national banks

Consumer:• 1,010 consumer

survey responses• Online survey• U.S. based• Reflect higher income• Required to be 18+

Household Income

19%

21%55%

5%

Less than $49,999

$50,000 to $99,999

$100,000 to $249,999

$250,000 or more

Age DistributionOverall mix of respondents reflects a

higher income base Even distribution of respondents

across age segments

31%

50%

19%18-34 35-54

Over 55

#NTTDBanking I @NTTDConsulting

Bank Interview Summary

114 surveys were conducted to understand core deposit system status, roadmap and performance

40%

24%

36%Top 5 Nationwide Banks (U.S. Bank, Wells Fargo, Citigroup, Bank of America, JPMorgan Chase & Co.

Large Regional Banks (PNC, Citizens Bank, SunTrust, Capital One, BB&T, etc.)

Other Banks (Community, Brokerage, Insurance, etc.)


Rise of Expectations:• Consumers want and expect real-time and intuitive financial transactions• Millennials are raising the expectations in consumers who have significant assets

Market Factors Make the Need to Modernize Banks’ Cores More Urgent

Consistent Experience Across Channels:• Mobile has already surpassed online for some banks• Consumers still want branches

Banks’ Best Customers are at Risk:• 60% of banking profits are at risk from FinTech1

• 40% of revenue could disappear by 20251

Inefficient Legacy Applications:• 78% of IT budget is spent on maintaining legacy systems • 70% of bankers do not feel their processes can quickly adapt to change


1. McKinsey & Company, "The Fight for the Customer: McKinsey Global Banking Annual Review 2015"


Major Challenges with Current Core Deposit Systems:

37%

Major Challenge % Responded 8-10

The cost of maintaining legacy systems

Complexity of integrating with other systems

Cost of product development

Scalability of the systems to support growth

Improving the customer experience

Cost of responding to regulatory 35%29%29%28%26%26%

Q16 On a scale of 1 to 10, please rate the degree to which each of the following is a challenge or limitation with your organization's current core deposit system strategy.


Bankers Identified at Least One Major Challenge with Their Existing Deposit Systems

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More than 50% of bankers expect that a new core will enable faster response to customer expectations

New products/innovation ………………………………………………….. 53%

Improvements in processes within the business ……………………... 49%

Increase the customer experience ………………………....................... 48%

Improved agility to respond to business needs …………………........ 48%

Ongoing cost and maintenance ………………………………………….. 46%

Overall financial return on investment ………………………………….. 46%

Improved functionality …………………………………………………….. 45%

Major Business Benefits of a Modern Core Deposit System:

Q24. On a scale of 1 to 10, please weigh each of the following business benefits that would result from investing in a modern core deposit system


Bankers Expect a Wide Range of Services34


0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

1 in 10 banks are making fundamental changes

But Struggle to See the Path to ModernizationCurrent Architecture and Product Strategy:

Adding new functionality through external and third party applications

Significant changes to the core deposit system to support new functionality

Little to no investment to add new functionality to the core deposit system

Fundamental "re-architecture" of the core deposit system in process (or being considered) to support 21st century initiatives

Complete change to a new core system in process (or being considered)

Q18. What is the bank's current position on the architecture and product strategy for core deposit systems over the next 3 years?

Top Modernization Fears1. Information security risk

2. Catastrophic failure

3. Implementation and integration

4. Public image

5. Dependence on specialized vendor resources



Banks Want to Change Their Core Deposit Systems

of banks will assess their core deposit system within the next three years

80%Plans to Assess Core Deposit System:

Q17. Have you conducted an assessment of the costs and steps necessary to replace your core deposit system

16%

21%

37%

6%20%

80%

Have conducted an assessment within the past three years

In the process of conducting an assessment

Plan to conduct assessment in the next 12 months

Plan to conduct assessment in the next 36 months

Don't anticipate conducting an assessment


20%


of banks

expect to start a modernization effort

0% 10% 20% 30% 40% 50% 60%

Increasing investments in the current system to ensure we are competitive moving forward

Maintaining investments to the current system in order to support business needs

Expecting to begin planning for a core system replacement or transformation within the next three years

Replacing our core system over the next three years

15%of banks

expect to actually replace their core over the next

three years

4% More than

recognize that they will need to increase

investments in current environment to

maintain parity

1/2

Current State of Investment in Core Banking Deposit Systems:

Q15. Which of the following best describes the current state of investing in your core deposit systems?



Bank Challenges vs. Customer Expectations


Customers expect to bank when and how THEY choose

Customers want innovation:

1 in 3 consumers would strongly consider switching primary banks for

better online or mobile technology

1 in 4 consumers would strongly consider switching primary banks for one they consider more tech-

savvy in general

Customers want access:

63% of banks acknowledge being challenged by the complexities

of integration

Banks struggle to innovate:

The vast majority of spending, 78%, within core deposit systems is on maintenance and

regulatory compliance

Majority of core deposit systems were architected 30+ years ago

Banks are challenged by integration:


of consumers would consider Target or Walmart as a banking alternative

47%

Consumers are beginning to think of alternative providers as “this is how banking should be”

of consumers indicate awareness of alternative providers like Google Wallet

53%


46%of consumers have an account with an alternative provider


Bank Expectations Top 8 Things Consumers Want From Banks

Banks Need to Modernize Antiquated Core Deposit Systems#NTTDBanking I @NTTDConsulting

Access

Innovation

Incentives

New products/innovation

Modernized Cor

e Deposit Systems

Improvements in processes within the businessIncrease the customer experienceImproved agility to respond to business needs

Ongoing cost and maintenance

Overall financial return on investment

Improved functionality

• Ability to use my money immediately after making a deposit

• Better customer service• Better benefits/cost of the relationship• Best tools for money management• Best online and mobile technology• Better/more convenient bill pay • More convenient locations• Personalization


Banks Should Not Fear Upgrading Their Core#NTTDBanking I @NTTDConsulting

Build Out the Business Case

Find the Core That’s Right for

You

Determine the Right Model

• Upgrade a U.S. platform • Partner with a

non-U.S. vendor• Partner with a

non-U.S. bank

• Big Bang• M&A• Shadow Bank

• Aggressively quantify tangible benefits

• Get comfortable with intangible benefits

• Identify risks

1 2 3


Bank’s Struggle: • Market forces are now hastening the need to update aging core systems

• Banks want to modernize their core, unfortunately this desire is tampered by the fear of failure and the view that customers will not flee

• The response has been to “Band-Aid” solutions through third party and externalized apps

Consumer Expectations: • While consumers are generally satisfied with their bank, they are open to switching banks for the right

innovations/incentives

• Consumers familiar with FinTechs describe them as “how banking should be”

Customer Retention: • The best model to retain and grow customers is through:

• Providing innovative solutions

• Across all the customer channels

• While providing superior customer service

Path to Modernization: • The path to modernizing success involves a rigorous plan to mitigate implementation risk and leveraging the

conversion model appropriate to the institution

Conclusion#NTTDBanking I @NTTDConsulting

Contact Us

NTT DATA Consulting, Inc. 704.936.1600 | [email protected]/usconsulting@NTTDConsulting | LinkedIn: /NTTDATAConsulting

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Peter Olynick │ Senior Practice Lead, Retail [email protected]


don’t fear modernizing your core: banking innovation in the digital age

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