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Practice Head - Banking Practice
Associate Consultant - Banking Practice
iGATE Global Solutions Limited 158-162 (P) & 165 (P) -170 (P) EPIP Phase II Whitefield Bangalore -560066, INDIA
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..... 2................................................... 8........................... 3 Core Banking Solutions for Small Banks ........ 9 Technical Coverage of the Core Banking Solution..................................................................... 9.................. 6................. 15 Page 2 of 15 . 4 Community Bank...... 11............... 3.......... 7.................................................... 4 Credit Unions. 14 Conclusion.... Objective ................................................................................................ 11 Viability of Using ASP / SaaS model in core banking implementation ............................................ 4.............................................................. 5 Core Banking Solutions for Small Banks in depth ................... 5.............................. 14 Market Potential for SaaS / ASP model ................................................................................. 9 Functional Coverage of the Core Banking Solutions .............................. 11 Other Features of the Core Banking Solutions .............................Table of Contents 1................................... 10...........................................
Objective The objectives of this research paper are: • • • To compare the nature of business and products offered by US Community banks and banks. Page 3 of 15 . To compare the core banking products targeted at community banks. To study the viability of offering core banking solution on ASP model aimed at community banks.1.
3. away from daily customer dealings. helping to keep local communities vibrant and growing. Features of Community Banks Some of the important features of Community Banks are mentioned below. Many community banks are willing to consider character. and is not affiliated with a multibank holding company. 5. CEOs at mega banks are often headquartered in office suites. Mega banks. community banks channel most of their loans to the neighborhoods where their depositors live and work. community first bank shares). It derives its sources of funds from. many of the nation's mega banks are structured to place a priority on serving large corporations. Community banks focus attention on the needs of local families. Not all community banks will be restricted to a specific geographic area (for e. Community bank officers are generally accessible to their customers on site.g. on the other hand. Leasing and additional services ranging from Financial Planning to Wills. while large bank officers are likely to be detached physically and emotionally from the communities where their branches are located. hence a common applicable definition is difficult. and it lends money to. community banks comprise most of the commercial banks in the US. Unlike many larger banks that may take deposits in one state and lend in others. Because of the plethora of services banks now provide. businesses. family history and discretionary spending in making loans. size (less than $1 Billion) and different parameters applied to provide loans (more personal than statistical data is relied on). Core Banking Solutions for Small Banks Core banking is another way of saying the core functions of a bank. numbering 3. 4. geographic reach (generally restricted to a particular region). Community Bank Community bank is locally owned and operated commercial bank. the community where it operates. Core Banking for Small banks focuses primarily on Community Banks and Credit unions. 2. These functions represent the essential (core) business of banking. The definition of core banking may have been muddied by the emergence of packaged computer solutions which combine core banking functions with other elements of a bank’s operations but at the most basic level core banking manages financial transactions and their impact on the accounts of its customers. often apply Page 4 of 15 . Generally most studies on US banking define community banks on the basis of the nature of clientele (small business).2. Products Community Bank provides full Business Banking services including Commercial Lending. Community bank officers are typically deeply involved in local community affairs.771 at the end of 2007. 1. Conversely. Core banking solutions for small banks are those solutions where more than 80% of the banks using the platform have less than US$1 billion in assets. it is easy to forget that the root of banking is accepting deposits and lending money. According to the FDIC. and farmers. 3.
impersonal qualification criteria. Because community banks are themselves small businesses. member-owned. Community banks offer nimble decision-making on business loans. or a religious group and operated as a cooperative. they understand the needs of small business owners. The National Credit Union Administration (NCUA) is the federal agency that charters and supervises federal credit unions.$10 Billion < $1Billion Nature of a Bank Mega Bank Super regional Regional Community Banks A credit union may fall under any of the four definitions based on its size of deposits. 7. Majority of them are small in size and hence will come under community banks. a labor union. Credit Unions Credit union is not-for-profit financial institution typically formed by employees of a company. The reason is that these credit unions do not do the same amount of volume that larger banks do. Classifications of bank The banks in US are generally differentiated based on the size of the deposits held. They also insure savings in federal and most state-chartered credit unions across the country through the National Credit Union Share Insurance Fund (NCUSIF). Credit unions are required to ensure that its clientele become shareholders of the bank. Unlike banks. volunteer directed and not-for-profit.$100 Billion $1 . Comparing Credit Unions and Banks There are many significant differences between credit unions to banks. Mega banks must often convene loan approval committees in another state. credit unions Page 5 of 15 . such as credit scoring. The difference between a general bank and credit union is defined by the shareholding. The core concern of the mega bank is corporate 4. Size of deposits > $100 Billion $10 . Products Credit unions will typically offer the same products and services as larger banks. 6. Banks can afford to have “loss-leaders” or products that get customers in the door. some credit unions will choose not to offer every product and service out there. Credit unions may offer a full range of financial services and pay higher rates on deposits and charge lower rates on loans than commercial banks. Credit unions promote the financial well-being of members. The classification is provided below. including those of modest means. through a system that is cooperative. because decisions are made locally. Credit unions will more likely only offer the products and services that a large portion of the membership is likely to use. Their core concern is lending to small businesses and farms. However. a federal fund backed by the full faith and credit of the United States government. to all loan decisions without regard to individual circumstances.
although there are many banks that qualify for tax exempt status under subchapter S of the IRS Code o Banks do not have a tax exemption because they are a for-profit business intended to provide profits to their stockholders. Credit union income is returned to members and that's why credit unions can offer higher interest rates on deposits and lower rates on loans. Banks have paid more in dividends to stockholders than they paid in income taxes each of the last eight years. not to pay high dividends to an outside group of stockholders.exist solely to serve their members. o Total credit union market share is 6% o Total bank assets are $9. . o Credit Unions do not pay federal income tax on earnings however state chartered credit unions do pay other relevant taxes such as payroll. unpaid boards o Earnings of credit unions are returned to members in the form of higher interest rates on deposit accounts and lower loan rates (minus operating expenses) Credit Unions / Community Bank TAXES Banks o Banks do pay federal income taxes on corporate profits. property and sales taxes o Credit Unions were granted by Congress. Credit Unions / Community Bank STRUCTURE Banks o Banks are for-profit. Their non-stockholder customers own no financial interest in the bank. board and stockholder controlled. financial corporations o Stockholders hold influence in the bank based on the total value of their stocks o Customers of a bank who are not stockholders do not own a financial interest in the bank o Boards are compensated for their service o Profits of banks are divided among the stockholders (minus operating expenses) o Credit Unions are member-owned. not-forprofit financial cooperatives o Credit Unions operate under a one member.1 trillion o Average bank asset size is $986 billion o Banks grew $641 billion in 2003 alone o Total bank market share is 78% Page 6 of 15 . one vote system o Most credit unions have volunteer. a federal tax exemption based on their unique structure as non-profit cooperatives MARKET SHARE AND ASSET GROWTH Credit Unions / Community Bank Banks o Total credit union assets are $629 billion o Average credit union asset size is $66 million o Credit Unions have grown to $629 billion in 95 years.
Without credit unions. o Savings to credit union members is estimated to have been $6.Credit Unions / Community Bank MEMBERSHIP Banks o Under federal and state laws. compared to banks.3 billion total benefit represents the greater yield on savings that members receive from credit unions compared to bank interest o Banks usually require a minimum deposit of rates. banks pay the loans compared to banks and the other $2 customer lower interest rates on deposit billion of the credit union advantage is because accounts and offer loans at higher interest of lower service fees at credit unions compared rates to banks. bank customers would most likely pay more for their financial services. o Earnings from a bank are given to stockholders as profit sharing Difference between Credit Union and Other Financial institution are mentioned below.3 billion in 2002. although in may cases not as low as a credit union. o Banks face no restrictions on who they serve RATES AND FEES Credit Unions / Community Bank Banks o Membership requires a deposit of as little as $5 o On average. credit unions may only offer membership to individuals who belong to a select group.3 billion of the member benefit comes $50 to $100 to open an account from the lower rates that credit unions charge on o Compared to credit unions. credit unions pay members higher dividend rates on deposit accounts and offer loans at lower interest rates o Earnings from credit unions are given to members in the form of higher deposit rates and lower loan rates o Credit Unions offer attractive pricing that puts pressure on the other financial institutions to offer more attractive rates. Other credit unions' field of membership is defined by geographic boundaries. $2. Credit Unions Not-for-profit cooperatives Owned by members Operated by mostly volunteer boards Other Financial Institutions Owned by outside stockholders Owned by outside stockholders Controlled by paid boards Page 7 of 15 . $2 billion of the $6.
the commercial banking sector was the sixth most profitable industry in the 2008 Fortune 500 ranking. For instance.The following figure depicts the banking market segmentation by a focus on receiving deposits or making loans Source: 2008 – Forrester Research Inc. based on 2007 revenues Page 8 of 15 . And despite the pressures on profits of the subprime crisis. The Credit Union Segment Is More Highly Fragmented Than Most Other Banking Segments The market structure of banking depends on the segment. Other banking segments. reflecting 12.6% profit. with the top 20 credit unions comprising just 15% of total credit union revenues. the credit union market is highly fragmented. such as the credit card issuance or sales financing segments are more highly concentrated.
Technical Coverage 6. Payments 2. The following organization offering core banking solution in US are taken into account.TCBS Jack Henry .Phoenix Metavante . 2.IBS Open Solutions . FIS .Core Director The analysis of the Core banking solution is done on the following criteria’s. 1. Core Banking Solutions for Small Banks in depth Source: 2002 US Economic Census This section of the report deals with in-depth knowledge about each solution. Functional Coverage of the Core Banking Solutions The functional analysis of the core banking solution is done broadly on the following criteria.AFTECH Harland Financial Solutions . Functional Coverage 2. 5. 3. 6.Horizon Fiserv . Source: Forrester 5. Account and Cash Management 3. 1. 4.The following statistics shows that the top eight commercial banks own 42% of the commercial banking market. Loans (Including mortgages) Page 9 of 15 . 1.
Payments Outgoing Domestic Credit Transfers Outgoing Internatio nal Transfers Internat ional Direct Debits Company Fidelity Fiserv Harland Financial Solutions Metavante Open Solutions Jack Henry Solution Horizon AFTECH Incoming Payments Domestic Direct Debits Standing Orders Collectio n of Cheques Debit Cards Phoenix IBS TCBS Core Director Account and Cash Management Cash Withdraw/ Deposits Company Fidelity Fiserv Harland Financial Solutions Metavante Open Solutions Jack Henry Solution Horizon AFTECH Current Accounts Saving Accounts Term Deposits FX in Cash Bank Cheques Travellers Cheques Phoenix IBS TCBS Core Director Loans (Including Mortgages) Overdraft on Current Account Company Fidelity Fiserv Harland Financial Solutions Metavante Open Solutions Jack Henry Solution Horizon AFTECH Guarantees Personal Loans Revolving Facility Mortgage Loans Phoenix IBS TCBS Core Director Page 10 of 15 .
On-Premise Internet IVR Mobile Phone Interface to Core Batch + Memo Post vs.7. Alternate transaction entry. Other Features of the Core Banking Solutions MetaVante . Technical Coverage of the Core Banking Solution Core Banking Systems Hardware Platform Supported Databases Supported SQL Server Mainframe Horizon AFTECH Phoenix IBS TCBS Core Director Unix Windows DB2 Oracle Other 8.IBS Multi-currency Multi-Lingual CRM Functionality ASP vs. Automatic transfer processing Financial reporting Integrated transaction processing: Page 11 of 15 . 100% ASP Metavante Consumer eBanking and Business Internet Banking.Horizon Sophisticated General Ledger capabilities. Metavante Relationship Profitability. cost reduction in reporting Automated Clearing House. Return item processing. Real Time transactions Benchmarking Courtesy: Celent Report (2006) No No Metavante Enterprise Contact Management. None Batch + Memo Post Fidelity . Unposted item repair.
Automate the administration of rewards and customer affinity programs Loan setup is fully automated. Special instructions messages. Account Analysis History for life of account. Custom loan payment schedules. Report management. Aggregate customer totals. Loan delinquencies highlighted. Security. Tracking of customers’ collateral. officer or account number. Retirement plans. Colson – create reports for Small Business Administration (SBA) loans Convenient account information such as messages. Real-time loan posting option. property description and loan comment files. Account reconciliation. Mortgage servicing application. accounts and household information. Unlimited addresses on a customer account level NSF Processing. Automated reporting to multiple credit bureaus. Unlimited combined statements. Special instruction. E-mail Capabilities. Unlimited addressing and correspondence delivery options. Database management (Tools to automate file clean-up) Account setup is fully automated. Ten user-defined totaling levels Overdraft protection with sweep capability. Eliminates manual entries. Full escrow system with automatic disbursements. branch. including all document preparation. Holding company. and more displayed on the first customer information window. Customer identification – display a customer’s photo & signature. User-defined information and notes. View images of the check in statement detail. Tax Reporting. Document imaging Harland Financial Solutions – Phoenix Relationship Information Management that allows you to establish relationships between other customers. View image of the check. Adjustable rate mortgages . Online. History kept for life of account Online stops. Loan Exception Reporting. Alerts. Flexible budgeting. Flexible rate and accrual options. View items by bank. Complete ACH processing Spooled reports that you can view and search in a point-andclick window. History with unlimited retention. Loan collateral.Integrated Relationship Management Integrated Deposit Management Integrated Loan Management Integrated Service Management Summary of all your customers and their relationships. ACH Origination Relationship Information Back Office Reports Universal Loans Universal Deposits Time Deposits General Ledger Cash Management Page 12 of 15 . Online pay-off calculation. Unlimited term and renewal options Cost accounting. payment schedule.
flexible and scalable solution CRM Operations Processes Business Intelligence Multi-Lingual Multi-Currency Scalability Jack Henry – Core Director Electronic Funds Transfer Internet Banking Services Professional Services & Education Business Intelligence Services Asset Management & Protection Services Item & Document Imaging Services Page 13 of 15 . Application Queuing & Routing. Audit confirmations. Automated approval. Flexible parameters for system customization. Automated disbursal. Customizable notices. Scoring & Riskbased loan pricing. Unlimited customizable fields in each application. account number. View interest rates for all account types from one convenient window Fiserv – AFTECH Integrated automatic credit bureau requests. ODBC compliant MSSQL or Sybase. Branch banking. Maintenance history – display a complete history of all changes to an account since it was opened. statement and marketing Signature Capture Automated Lending Services including Fraud detection Shared Branching Email Signature Open Solutions – TCBS Customer-centric banking with our relationship-based central information file (CIF) and Customer Relationship Management (CRM) capabilities Streamlined operations Marketing-focused processes Data mining Multi-lingual capability Multi-currency processing TCBS is industry-proven core enterprise solution and an open. Safe deposit boxes. On-line graphical reporting Fraud detection services Shared Branching services Advantage Email notice. Fast account searches from one convenient window – search by customer name. Context sensitive online help. Customer profitability analysis. social security number or telephone number. Date tickler system – set up reminders on a customer or account level.System Tools PhoenixXM connectivity.
2. data security and client management can be a challenge for upstart ASPs. the adoption of the ASP / SaaS model has not been smooth sailing for many organizations. Many common business functions such as word processing. 4. predictable revenue. Specialization. In these areas. Disadvantages: 1. adoption of the model has been growing at well over 20% year over year. Partially to fill this void. 3. Repackaging other ASPs. ASPs can effectively track past revenues and plan for anticipated growth oftentimes much more reliably than providers offering only licensed-based software that sells in peaks and valleys. ASPs expertly and cost-effectively build personnel and equipment resources. 25 percent of new business software will be delivered as SaaS. Expert resources are increasingly becoming a rarity across all industries. Page 14 of 15 . shortened time-tomarket. Ownership of critical client functions. Advantages: 1. However. both large and small. 10. Around 61 percent of CIOs at North American companies with sales over $1 billion are already planning to adopt one or more SaaS application. 2. by 2011. Market Potential for SaaS / ASP model According to Gartner. The opportunity to wholesale others' services or ASP offerings for a comfortable profit margin has strategically positioned many ASPs already. and high online throughput are measures of service providers' success. focusing on the very business aspects their customers need to address. ASPs can reconfigure consumer applications and services with industry-specific flavors to send packages targeted at multiple channels. Inc. The various advantages and disadvantages of using ASP / SaaS models are mentioned below. Specialization in a certain facet of business can oftentimes be spread across parallel market opportunities. and only a few organizations have a formal approach to making ASP / SaaS outsourcing decisions. Consistent. Broad marketability. High service-level expectations. Software as a service (SaaS) represented approximately 5 percent of business software revenue in 2005 and. develops a value-driven approach to outsourcing using ASP /SaaS based on outsourcing theories and the industry’s best practices. lack of internal expertise. Applying the value-added reseller scheme to the hosted applications market opens up even more diverse solution sets. and is set to explode. with an established customer base. Even in new or volatile markets. ASP clients tolerate next-to-no slippage in service. Building a business that clients can trust with mission-critical functions such as database warehousing. Always-on applications. database management and personnel resource management have crossindustry outreach. Gartner also predicts that SaaS will triple in size by 2011 from 2006. responsive customer service. According to McKinsey & Co. Viability of Using ASP / SaaS model in core banking implementation Organizations.9. are increasingly outsourcing their applications to application service providers (ASPs) for a variety of reasons such as cost reduction. and risk reduction.
Deutsche Bank projected that the SaaS market will account for half of the application software spend by 2013. Metavante. 3. 2. Fiserv. Metavante would be the right fit as they claim to have a 100% ASP model. the world over. is another solution fast emerging as SaaS-able. Core banking solution deployment in a particular geography or with a specific line of function like deposit / payment products only. the details from other vendors on this front is not publicly available. Conclusion 1. Analysts. Jack Henry. Fidelity. Harland and Open solutions can be considered for a demo in that order. Page 15 of 15 . predict that up to 30% of all software applications are expected to be delivered through this mode in the coming years. 11. Detailed study of the core banking solution is required to identify the right product for small banks in US.
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