Driven by regulatory tightening and expanding customer expectations, Nordic banks, especially smaller ones, are increasingly pressured to employ larger, more fully featured IT service providers that can harmonize global and pan-European regulations and offer a wider palette of IT capabilities.

1. Challenged by Regulation: The Changing
IT-Sourcing Landscape of Nordic Banking
At a time when banking IT systems are plagued by stricter regulations
and cost pressures, the entry of global software vendors in the Nordic
market is set to reform current practices and ameliorate crucial
challenges in the region.
Executive Summary
The Nordic banking market has remained largely
unchanged since the last Nordic financial crisis in
the late 1980s. In the coming decade, we are likely
to see major changes to the IT-sourcing landscape
of this market. In particular, three factors will
affect the way the banks manage their IT:
• Their local Nordic IT service providers will pro-
gressively struggle to deliver cost-efficient
solutions.
• Stricter regulations will force banks to cut
IT-related costs to meet tight capital require-
ments, even as the challenges of implementing
other regulations will continue to escalate IT
projects and costs.
• Emerging technologies, paired with increas-
ingly tech-savvy clients, will place stress on
innovation, marketing new solutions and
supporting new devices and channels.
These drivers will spur the entry of global software
and IT service providers and the emergence
of new service models, including platform as a
service (PaaS) and also potentially banking as a
service (BaaS) models. Nordic banks have tradi-
tionally been conservative in their choice of IT
service providers, but they now see strong incen-
tives to reassess their risk-benefit analysis and
consider new solutions when they build strategic
sourcing partnerships for the future.
Embracing Emerging IT Solutions
There appears to be a globally rising trend
among banks’ IT departments to move from old
homegrown legacy systems to package software
systems in core banking and other IT systems.
Drivers for these changes are the increasing
number of new regulations, cost pressures and
the need to remain competitive in a market where
margins are shrinking. The rate of migration and
renewal projects (starting and ongoing) vary across
regions and banks of different size categories.
Despite the fact that European banks are dealing
with the repercussions of the 2008-2009
financial crisis, or maybe simply because of it,
there has been a perceptible shift from tradition-
al legacy IT solutions to newer platforms. Some
examples are Frankfurter Bankgesellschaft, Nord-
deutsche Landesbank Luxembourg S.A, Roth-
schild Bank AG, Amsterdam Trade, Société
Générale, Barclays, Danske Bank, European Credit
Management Limited (ECM) and BNP Paribas
Securities Services.
• Cognizant 20-20 Insights
cognizant 20-20 insights | march 2014

2. 2
Local Nordic IT Service Providers
Under Fire
The weaknesses of Nordic banks’ IT solutions
have lately been exposed on several occasions.
In particular in the Norwegian market, where IT
service providers have been criticized for serious
Internet banking issues. Furthermore, local IT
service providers dominating the market keep
losing their general competitiveness as large
global IT service providers continue to enter the
market, using well-established offshore models
that offer higher quality at a lower cost.
As a result, higher capitalization requirements
and increased competition are escalating the
cost and pressure on banks to improve their sales
effectiveness. In essence, banks are being asked
to provide more services with existing or fewer
resources. This requires more process support
from the banking IT systems — particularly the
front office — to enable more automation, self-
service, omni-channel support and increased one-
to-one targeted campaigns and offers. All this
needs to be in place while IT spending diminishes.
The cost/quality pressure opens the market
to new providers of software as well as IT and
BPO services. Providers such as FIS, Misys and
Temenos can leverage global business models by
offering economies of scale, international part-
nerships that provide skills and access to offshore
centers that enable very competitive pricing.
Software vendors (or the banks themselves) will
be able to opt for innovative delivery models like
banking as a service (BaaS) through partnering
with IT-outsourcing service providers. These new
models, if accepted by the market, may prove to
be very competitive.
Smaller Banks Seek Alternative
Delivery Models
The change is harshest for smaller banks. These
banks are likely to look for new solutions and new
IT service providers. The smaller Nordic banks
often utilize a PaaS model with local vendors that
provide application maintenance and develop-
ment on their old legacy systems. These systems
are largely outdated, expensive and inflexible,
with significant limitations on scalability; further,
they are architecturally challenged to adapt to
modern omni-channel banking. The result is a
rigid, slow IT development process for the banks.
Smaller banks will also find it increasingly difficult
to absorb the high capital expenditures related
to their current IT service contracts and license
agreements.
Larger banks, on the other hand, have more
ample capital cushions to absorb such costs. They
also keep more IT in house, as their very size
justifies their own application maintenance and
development centers. Larger banks have also, to
a larger extent, outsourced and/or offshored their
IT application/infrastructure to well-established
service providers. But this does not mean that
they could not further improve their cost/quality
ratio by giving IT sourcing an extra impetus. For
them, the changes are likely to be less dramatic
even if they continue with their existing models
and opt only to leverage some of the benefits of
the evolving IT service ecosystem.
Tighter Regulations Drive Cost Focus
On the regulatory front, too, the banks feel the
pinch. A number of new regulations aiming to
enforce higher capital requirements are being
implemented. The most important international
ones are BASEL III (global) and Capital Require-
ments Directive IV (CRD IV) within the EU/EEC.
A key principle of these regulations is cross-
border harmonization. Still, the relative success
of the Nordic countries in withstanding the
current financial crisis may lead to even stricter
requirements under the assumption that banks
which operate in growing or stable markets can
better adhere to such regulations. On top of the
increased capital requirements, a number of
other regulations are currently being implement-
ed. These will also be costly for the banks as they
require changes in systems and processes.
Tighter regulatory requirements drive cost focus
in three dimensions:
• Regulation goes across the IT and process
stack. Regulatory changes need to be
reflected in IT security, data availability and
consolidation, reporting, business processes,
product offering and product specifications.
These changes are often costly to implement.
The costs are especially high for Nordic banks
with a high degree of rigid legacy IT systems,
cognizant 20-20 insights
Regulatory changes need to be
reflected in IT security, data
availability and consolidation,
reporting, business processes,
product offering and product
specifications.

3. 3cognizant 20-20 insights
but the numerous restrictions in organization
and process (strict labor laws, limited access to
skills, etc.) are impacting all banks.
• Noncompliance impacts the bottom line.
The costs of noncompliance with new regula-
tions can be extremely high. So far, Nordic
banks have generally managed to steer clear
of the fines that other global banks — such
as Standard Chartered, RBS, UBS and several
other major banks — have received for their
inability to comply with the regulations.
• Compliance demands reduced expenditure.
Increasing capital requirements is a regulation
by itself — and higher degrees of capital in a
competitive market will be hard to achieve
without reduced capital expenditure.
There is a long list of upcoming regulatory and
compliance-related changes that will impact the
banking IT system, and we anticipate it to grow
further. Some of the biggest ongoing projects
are Single Euro Payment Area (SEPA), FINREP
reporting standard changes, Basel III, PCI DSS
(data security standard for improved card holder
protection), Foreign Account Tax Compliance Act
(FATCA), European Market Infrastructure Regu-
lation (EMIR), Markets in Financial Instruments
Regulation (MiFIR) and Markets in Financial
Instruments Directive (MiFID II).
To efficiently keep costs down while ensuring
compliance, Nordic banks need to partner with
organizations that have the necessary knowledge
of the applicable regulations, the tools to enable
compliance and, highly important, the ability
to implement the changes to the processes in a
cost-efficient manner. This will be very difficult to
do without the economies of scale and skills base
that only large global players have access to.
An increased focus on costs is also likely to
intensify banks’ efforts to attract and retain the
“right” customers in order to squeeze better
margins out of their customer base. Hence,
demands for data availability, data consolida-
tion and reporting are not only a compliance and
KYC concern, but also a major driver for strategy,
client segmentation, 360° view of the customer,
targeted marketing and other CRM improve-
ments. In turn, this drives the need for seamless
integration and standardization of information
technology across functions and increases the
pressure to phase out fragmented legacy envi-
ronments.
Another aspect of the regulations currently being
implemented that favors the global software and
service providers is the fact that the regulations,
in addition to being complex, are increasingly
harmonized on a global and/or pan-European
scale. Only a large global organization is able to
benefit from distributing the workload across
regions and offering solutions to a large number
of customers, each absorbing a share of the costs
of compliance with the necessary changes. The
smaller local players will be at a disadvantage as
the costs of maintaining skills and understand-
ing of each regulation — as well as the effort in
updating software and IT — can be absorbed by
only a handful of customers. Previously, these
small local players benefitted from their expertise
in specific local regulations that often escaped
the larger players’ focus, but this strength is now
quickly eroding.
As with other cost/quality challenges, the regula-
tions are likely to hit smaller banks the hardest, as
they do not have the size and capital to absorb the
necessary IT system changes using their current
models. To stay in the race, they need to choose
new IT service delivery models that enable a
shift from capital expenditure to operational
expenditure.
Customers Drive the
Innovation Agenda
Nordic banks embracing new technologies and
a new generation of tech-savvy customers are
being hit with alternate tides of benefits and
threats. The ones that manage to utilize these
technologies and meet the ever-changing needs
and expectations of customers will be able to
offer new and better-tailored products and,
consequently, expand their customer base. To
succeed, however, banks will need to pursue the
right strategies, identify the right trends, build
the right image and make a leap in the market
while continuously innovating solutions for the
next generation of changes. Those that fail in
As with other cost/quality
challenges, the regulations are
likely to hit smaller banks the
hardest, as they do not have the
size and capital to absorb the
necessary IT system changes
using their current models.

4. cognizant 20-20 insights 4
this will find their market share dwindling and
will be scooped up by winning rivals as well as
emerging nontraditional banking players armed
with superior products and nimble operations. To
stay afloat, banks will need to rely on IT service
providers and technology solutions that provide
the agility and time-to-market (TTM) that enables
them to swiftly reply to changing customer
demands. Companies basking in complacency
might find their profits weighed down by costly
and outdated IT service providers.
Customer needs will impact banks in several ways:
• Seamless omni-channel banking: Customers
expect that they will receive the same level of
service independent of which channel they use.
Furthermore, they expect that they can start
a process with a bank through one channel
and complete it through a different channel.
In order to satisfy this need, banks need to
have fully integrated and efficient IT enabling
information that is seamlessly shared across
channels, processes and solutions.
• Complete relationship overview: Customers
expect their banks to have a complete
overview of the relationship they have with
the bank, including current services and their
history of both product use and communica-
tion concerning solutions and offerings. This
requires a complete log of customer interac-
tion independent of which channel is and has
been used.
• Increased service-level expectations: Cus-
tomer experiences spur big changes. Banks’
performance and service levels now depend
on the experience customers have with other
nonbank services. When using a tablet appli-
cation from a bank, the user will compare the
user-friendliness and functionality of the appli-
cation not just with the applications of other
banks, but with services across industries:
online retailers, utility providers, local cinemas,
etc. Creativity and enhanced service provided
by any industry will raise the bar of expecta-
tions for banking customers.
• Ability to provide customized offers and
products: To retain customer loyalty and offer
fast-paced customized services, banks need to
pass disparate customer data through a sieve
of strong analytics. The resulting customer
information needs to be available across all
channels so decisions can be made and actions
taken based on it. Also, the decisions need
to be made according to the same principles
and information independent of who makes
it and through which channel. This requires
highly sophisticated capabilities for analyzing
customer data and transactions, which thereby
enables feeding actionable insight into the
operative processes across channels.
The Solution: Global Software and IT
Service Providers
In order to face the challenges we have described,
Nordic banks will be forced to reinvent their
business models and, as a key component, their
IT-sourcing models. The formula for survival will
be to form partnerships with software and IT
service providers that can offer the right quality
of service and skills at a competitive price level.
Forming such partnerships will foment a robust
business model and a stronger focus on core
activities. Typically, the partnerships are flexible
enough to consider individual bank’s preferenc-
es with regard to risk appetite, control and fee
model.
The key advantages of forming closer partner-
ships with the software and IT service providers,
potentially establishing such PaaS models, are:
• Operational and IT cost reduction as well as
reduced compliance costs.
• Increased agility and improved cost/price ratio
through transaction-based pricing models.
• Quicker TTM through access to large vendors’
innovation capabilities, availability of required
skills and scalability of resources.
Large global IT service providers already score
significantly higher than smaller local players
on client satisfaction , and they have the ability
to provide a cost/quality ratio that is difficult for
When using a tablet application
from a bank, the user will
compare the user-friendliness and
functionality of the application
not just with the applications of
other banks, but with services
across industries: online retailers,
utility providers, local cinemas,
etc. Creativity and enhanced
service provided by any industry
will raise the bar of expectations
for banking customers.

5. cognizant 20-20 insights 5
To support the bank’s strategic
intent and aspirations, its IT
department needs to carefully
evaluate the available software
options against the bank’s business
needs and TCO of each option.
smaller players to match.1
Global players also
benefit from the international harmonization that
is increasingly reflected in banking regulations.
With determination and the right partnering, they
can build stronger delivery models that provide
superior benefits to their clients and enable them
to capture significant market share. PaaS model
variants already exist in places like Finland where
Samlink provides this service — though based
on an aging legacy system. Both software and
service providers seem ready for this change and
they are increasingly partnering to deliver PaaS
implementations and services of core banking
solutions. The question is whether the previously
risk-averse Nordic banks are willing to replace
their long-standing local IT service providers with
new global players. With the potential benefits
outweighing costs and risks, Nordic banks should
see this as a palatable option. Those that hesitate
for too long, however, risk being left behind in a
market with a rapidly changing landscape.
Investigate the Banking as a Service
Model
While larger banks might make the shift from tra-
ditional local IT service providers to larger global
ones, smaller banks are likely to go even further
and consider completely new service models such
as the banking as a service (BaaS) format.
A BaaS model that enables a bank to shift away
from current capital-expenditure-intensive solu-
tions will incur numerous benefits:
• Old legacy platforms can give way to sophisti-
cated software that is developed and serviced
by a large software provider.
• TTM will radically shrink in making changes
in business models or responding to new
customer needs, because new services and
product offerings will be quicker to launch with
modern solutions.
• Furthermore, fees can be paid — for example
— in a form of transactional costs or in some
form of pay-as-you-go licensing, limiting the
capital expenditure and providing agility by
tying costs to revenue, operations and transac-
tion volumes.
• Finally, tighter relationships with global
software and service providers offer even small
banks a network of knowledge and competency
that they otherwise would struggle to obtain.
Current local IT service providers offering the
more traditional PaaS solutions are facing sig-
nificant challenges in reinventing themselves to
meet the BaaS model requirements and compe-
tition created by the newcomers to the Nordic
IT market. Traditional local IT vendors need to
champion investments in innovation. Realistically,
this can be done only by replacing the current
legacy system with a global packaged banking
product. But this generates several complications
for the vendors. To mention just a few:
• The sheer renewal project size is easily beyond
vendors’ capabilities, skills and financial
resources.
• Their financial model will change, because in
the new model a large portion of the customer
revenue will flow through as product licenses
to a third-party software vendor.
• Working as a systems integrator of a global
packaged software product (as opposed
to being a software developer of a custom
solution) is a specific competence, and the
systems integrator needs to constantly add
value both for its customer and its software
vendor partner, or risk becoming obsolete.
The Challenges Ahead
Banks need to consider whether the chosen
software product solution(s) can evolve in accor-
dance with requirements such as functionalities,
competencies and continued compliance with
changing regulations.
In order to support the bank’s strategic intent and
aspirations, its IT department needs to carefully
evaluate the available software options against
the bank’s business needs and TCO of each option.
Most of the leading banking software providers
offer products that are at least “good enough”
to meet typical banking requirements. But that
may not be enough to get a competitive or cost
advantage over local competitors. In addition,
the fit with the existing application architecture
and the rest of the infrastructure needs to be
validated.

6. cognizant 20-20 insights 6
The Nordic banking market is a small market. Any
local customizations, however minor, are done on
an as-needed basis, usually initiated by a systems
integrator working for a particular customer
and further built upon by the software product
company. It is thus important for the bank to
verify that its global vendors partner with local
vendors or establish enough local presence to
create the localized version complying with the
local regulations.
In general, banks should review the strategic
and cultural fit with the software and IT service
partner candidates. Projects related to renewing
or migrating banking systems are typically
long and somewhat risky. There is no need to
further complicate project management due to a
mismatch in values or in ways of working. Banks’
IT departments have a good opportunity to
evaluate the cooperation and fit with the software
and partner candidates during the RFI and RFP
processes.
Another risk to consider is the need for data con-
version from the legacy systems. For example,
conversion testing and integration can make
migration to a new platform exceedingly compli-
cated, due to the nature of disintegrated legacy
systems, their inherent data structure and the
quality of the data accumulated over the years.
All these make extracting nuggets of coherent
data complex. New (packaged software) platforms
generally have stricter business rules than the
legacy systems did. For example, packaged
systems may require fixed collateral for a loan,
whereas older systems might have loan and col-
lateral data distributed across separate systems
with weak or no data links between them. These
kinds of conflicts in the business rules are likely
to significantly complicate the automated export
of data during migration to a new platform. Fixing
misalignment between business rules in old and
new systems will require a significant amount of
manual effort in restructuring and cleaning the
data sets. But the migration needs to be done in
a fairly short time window — typically overnight.
This makes time-consuming manual labor an
unfeasible option.
Banks, therefore, need to lean on the best
practices and data conversion tools that their
vendors can provide. They can adopt tools like
automated data extraction and data cleansing
or running the old system and the new system in
parallel for a period of time. The preparations for
the data conversion need to be started as early
as possible, since it is likely to form the critical
path in the migration project given the careful
planning, control and testing it requires.
The Bottom Line
Nordic banks, especially smaller banks, are facing
increasing cost pressure due to:
• Increased regulations of the financial industry.
• Changing customer expectations.
These pressures require the banks to rethink their
IT cost structure and sourcing strategies. Banks’
current IT departments and/or local IT service
providers with their legacy platforms are strug-
gling to even meet regulatory requirements and
hardly have sufficient means to tackle the chal-
lenges created by customer expectations.
At the same time, global banking software
vendors and IT service providers are entering the
Nordic banking IT market with increasing determi-
nation. Their entry has been made easier by the
consolidation driven by pan-European and global
financial regulations. The previously high market
entry criteria created by the purely local practices
and regulations are quickly becoming obsolete.
Competitive advantages created by large scale
and access to global sourcing models that we see
in other industries’ IT markets are also becoming
activated in the banking IT market.
In order to remain compliant, competitive and
relevant for customers and owners, banks need
to investigate new software and IT service
partner options as well as new service models for
sourcing their banking IT platforms. Depending
on the banks’ market strategies, availability of
capital, appetite for risk and lifecycle phase of the
current IT platforms, bank CIOs need to examine
a wider range of options for sourcing their future
IT solutions.
Conversion testing and integration
can make migration to a new
platform exceedingly complicated,
due to the nature of disintegrated
legacy systems, their inherent data
structure and the quality of the
data accumulated over the years.

7. About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-
sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50
delivery centers worldwide and approximately 171,400 employees as of December 31, 2013, Cognizant is a member of
the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing
and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.
World Headquarters
500 Frank W. Burr Blvd.
Teaneck, NJ 07666 USA
Phone: +1 201 801 0233
Fax: +1 201 801 0243
Toll Free: +1 888 937 3277
Email: inquiry@cognizant.com
European Headquarters
1 Kingdom Street
Paddington Central
London W2 6BD
Phone: +44 (0) 20 7297 7600
Fax: +44 (0) 20 7121 0102
Email: infouk@cognizant.com
India Operations Headquarters
#5/535, Old Mahabalipuram Road
Okkiyam Pettai, Thoraipakkam
Chennai, 600 096 India
Phone: +91 (0) 44 4209 6000
Fax: +91 (0) 44 4209 6060
Email: inquiryindia@cognizant.com
­­© Copyright 2014, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is
subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.
About the Authors
Ilkka Schulman is a Director within Cognizant Business Consulting and leads the Strategic Services in the
Nordics. He can be reached at Ilkka.Schulman@cognizant.com.
Sari Inkilä is a Senior Manager – Strategic Services within Cognizant Business Consulting. She can be
reached at Sari.Inkila@cognizant.com.
Erik Tjønneland is a Senior Consultant – Strategic Services within Cognizant Business Consulting. He can
be reached at Erik.Tjonneland@cognizant.com.
Footnote
1
KPMG’s annual “Nordic Service Providers Performance Report” places the traditional providers of IT
services to the Nordic banks at the bottom of the customer satisfaction rankings. Meanwhile, the top
rankings are dominated by large global service providers.