Nordic banks are pressured by high competition, changing customer service expectations and increased regulation. Thus they are adopting new sourcing models for their IT systems.

1. The changing IT sourcing landscape of Nordic banking
Executive Summary
Stricter regulative requirements, in parallel
with increased cost pressure and competition
in banking, set challenges for banking IT
systems and their maintenance. At the same
time global banking software vendors are
entering the Nordic IT market, jointly with
global service providers. We expects that the
Nordic banking IT services market will reform
remarkably in the next 5 years.
Introduction
The Nordic banking market has remained
largely unchanged since the aftermath of the
last Nordic financial crisis in the late 1980s.
During the coming decade we are likely to see
major changes to the IT sourcing landscape of
this market. In particular the Nordic banks will
experience that three drivers affect the way
they manage their IT:
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Their local Nordic IT service providers
will increasingly struggle to deliver
cost efficient solutions that satisfy
customer needs,
Stricter regulations will force banks to
reduce IT and other costs to meet
tight capital requirements, while the
challenges of implementing other
regulations will continue to drive IT
projects and costs up,
Emerging technologies paired with
increasingly tech savvy clients will
increase the pressure on innovation
and time to market of new solutions
and support for new devices and
channels.
The results of these drivers are likely to 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
traditionally been conservative in their choice
of IT service providers, but they now face
strong incentives to reassess their risk-benefit
analysis and consider new solutions when
they build strategic sourcing partnerships for
the future.
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What is happening in other regions?
There seems to be a globally rising trend
amongst the banks’ IT departments to move
from old home grown legacy systems to
package software systems in their core
banking and other IT systems. The drivers for
these changes are rooted in the need to
comply with increasing number of new
regulations, cost pressures and need to
remain competitive in the market where the
margins are being squeezed from all
directions. The rate of migration and renewal
projects starting and ongoing varies between
different regions and between banks in
different size categories.
Despite the fact that the European banks have
been battling with the aftermath of the 20082009 financial crisis (or perhaps because of
it?) there has been increasing trend towards
moving away from traditional home-grown
legacy IT solutions. A few examples of
European banks that have moved or are
moving all or parts of their IT to a new
platform are Frankfurter Bankgesellschaft,
Norddeutsche Landesbank Luxembourg S.A,
Rothschild Bank AG, Amsterdam Trade,
Société Générale, Barclays, Danske Bank,
European Credit Management Limited (ECM),
and BNP Paribas Securities Services.
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.
Higher capitalization requirements and
increased competition increase the cost
pressure and require the banks to improve
their sales effectiveness and in essence
provide more services with same or less
A Point of View to the Nordic Banking IT Outsourcing Landscape | October 2013

2. resources. This requires more process support
from the banking IT systems, in particular in
the front office, to enable more automation,
self-service, omni-channel support and
increasingly 1-2-1 targeted campaigns and
offers. All this needs to be in place while IT
spend is reduced.
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
offering economies of scale, international
partnerships providing skills, and access to
offshore centers enabling very competitive
pricing. Software vendors (or the banks
themselves) will be able to opt to set-up
innovative new delivery models such as e.g.
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
In particular the smaller banks are likely to
look for new solutions and new IT service
providers compared to what they have used
previously. The smaller Nordic banks often
utilize a Platform-as-a Service model with local
vendors, who are providing application
maintenance and development on their old
legacy systems. However, this is in the current
set-up a very expensive model. These legacy
systems are largely outdated, inflexible, with
significant limitations on scalability, and
architecturally unable to adapt to the modern
omni-channel bank. All this is resulting in rigid
and slow IT development processes for the
banks, which is intolerable in the long run.
The smaller banks will also find it increasingly
difficult to absorb the high capital expenditure
related to their current IT service contracts
and license agreements.
Larger banks have a significantly stronger
ability to absorb such costs. They also tend to
utilize slightly different models and keep more
IT in-house as they have the size to justify
their own application maintenance and
development centers. The larger banks have
also, to a larger extent, outsourced and/or
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offshored their IT application/infrastructure to
larger service providers. This does not mean,
however, that they could not further improve
their cost/quality ratio by improving their IT
sourcing. However, the changes for the larger
banks are likely to be less dramatic even if
they opt to continue with their existing
models and relationships, and only opt to
leverage some of the benefits of an
increasingly competitive IT service provider
landscape.
Tighter Regulations Drive Cost Focus
A number of new regulations with the aim to
enforce higher capital requirements are being
implemented. The most important
international ones are BASEL III (global) and
Capital Requirements Directive IV (CRD IV)
within EU/EEC, and a key principle of these
regulations is harmonization across borders.
Still, the relative success of the Nordic
countries in withstanding the negative effects
of the current financial crisis may lead to even
stricter requirements being implemented here
under the assumption that banks that operate
in growing or stable markets have a stronger
ability to absorb such regulations. On top of
the increased capital requirements a number
of other regulations are currently being
implemented. These will also be costly for the
banks as they require changes to systems and
processes. Tighter regulative requirements
thereby drive cost focus in three dimensions.
1) Regulation goes across the IT and
process stack. Regulative 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. In particular, the costs are
high for those actors in the Nordic
market that have a high degree of
rigid legacy IT systems, but the
numerous restrictions regarding
organization and process (strict labor
laws, limited access to skills, etc.) are
impacting all banks,
2) Non-compliance impacts the bottom
line. The costs of non-compliance with
the new regulations can be extremely
A Point of View to the Nordic Banking IT Sourcing Landscape | October 2013

3. high. So far, Nordic banks have
generally managed to steer clear of
the fines other global banks, such as
Standard Chartered, RBS, UBS and
several other major banks, have
received for their inability to comply
with the regulations,
3) Compliance demands reduced
expenditure. Increased capital
requirement is a regulation by itself –
and higher degree 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 in coming years and we
expect still more to come. Some of the biggest
on-going projects are: Single Euro Payment
Area (SEPA), FINREP reporting standard
changes, PCI DSS (data security standard for
improved card holder protection), Foreign
Account Tax Compliance Act (FATCA)
compliance, EMIR (European Market
Infrastructure Regulation, MiFIR (Markets in
Financial Instruments Regulation) and MiFID II
(Markets in Financial Instruments Directive).
In order to efficiently keep costs down while
ensuring compliance, the Nordic banks need
to partner with organizations that have the
necessary knowledge of the applicable
regulations, the tools to enable compliance
and, not the least, the ability to rapidly
implement the required changes to the
processes and IT systems 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.
Increased cost focus is also likely to affect the
efforts banks put on attracting and retaining
the “right” customers in order to squeeze
better margins out of their customer base.
Hence, demands for data availability, data
consolidation and reporting do not only
become a compliance and KYC concern, but
also a major driver for strategy, client
segmentation, 360 view of the customer,
targeted marketing, and other CRM
improvements. This furthermore drives the
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need for seamless integration and
standardization of information technology
across functions and increases the pressure to
phase out fragmented legacy environments.
Another aspect of the regulations currently
being implemented, that favors the global
software and service providers, is the fact that
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 sharing
the workload across regions and offering the
solutions to a large number of customers,
each taking a limited share of the costs of the
changes needed in the solutions to remain
compliant. The smaller local players will be
disadvantaged as the costs of upkeep of skills
and understanding for each regulation as well
as effort in updating software and IT to meet
new requirements is spread across only a
handful of small 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
regulations are likely to have the most impact
on smaller banks as they do not have the size
and capital to absorb the necessary IT system
changes using their current models. Hence,
regulative changes will be a driver for them to
choose new IT service delivery models that
enable a shift from capital expenditure to
operational expenditure.
Customers Drive the Innovation
Agenda
New technologies and a new generation of
tech savvy customers provide both
opportunities as well as threats to the Nordic
banks. The ones that manage to utilize the
new technologies and meet the high and ever
changing needs and expectations of these
customers will be able to offer new and better
suited products and hence expand their
customer base. However, in order to be
successful the banks will need to pursue the
right strategies, identify the right trends and
emerging technologies, build the right image
and services and quickly go to market while
A Point of View to the Nordic Banking IT Sourcing Landscape | October 2013

4. continuously innovating new solutions that
prepare them for the next generation of
changes. Those, who fail in this, will find their
market share dwindling and being taken over
by their more successful rivals as well as new
non-traditional banking players emerging with
superior products and nimble operations. In
order to succeed the banks will need to rely
on IT service providers and technology
solutions that provide the agility and time-tomarket that enables them to swiftly reply to
changing customer demands. Or else, their
profits will be weighted down by their costly
and outdated IT service providers.
Customer needs will impact the banks in
several ways:
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Seamless omni-channel banking:
Customers expect that they will
receive 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
the same process through a different
channel. In order to satisfy this need
the banks need to have fully
integrated and efficient IT enabling
information to be 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 services they currently have,
history over both product use and
communication with regard to
solutions and offerings. This requires a
complete log of customer interaction
independent of which channel is and
has been used.
Increased service level expectations:
Banks performance and service levels
are now also compared to the
experience that customers have with
other non-bank services. For example,
when using a tablet application from a
bank, the user will compare the user
friendliness and functionality of the
application not only to the
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applications of other banks, but also
other service providers, be it the
online retailers, utility providers,
public services providers or the local
cinema. Hence, the creativity and
service provided by these industries
will raise the bar of expectations also
for banking customers.
Ability to provide customized offers
and products: Banks are put under
increasing pressure to understand
their customers and not only to meet
the customer needs, but also to
understand which customers to
target, attract and retain. This
requires the banks to collect, analyze
and feed into the customer service
processes the information to make
these decisions quickly and accurately
for each customer. And this
information needs to be available
across all channels and the decision
made and action 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
analytical capabilities that analyze the
customer data and transactions,
create insights from them, and
thereby, enable process automation
and feeding of actionable insight into
the operative processes across
channels.
The solution: Look to global software
and IT service providers
In order to face these challenges Nordic banks
will be forced to reinvent their business
models and, as part of it, their IT sourcing
models. The formula to 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 with both software
providers as well as IT service providers will
enable a completely new business model and
a stronger focus on core activities. There are
several variants available for the partnership
A Point of View to the Nordic Banking IT Sourcing Landscape | October 2013

5. models that offer potential for adjustments
based on the individual bank’s preferences
with regards to risk appetite, control and fee
model.
behind in a market with a rapidly changing
competitive landscape.
The key advantages of forming closer
partnerships with the software and IT service
providers, potentially establishing such PaaS
models, are:
While larger banks might make the shift from
traditional local IT service providers to larger
global ones the smaller banks are likely to go
even further, considering completely new
service models, such as “Banking as a Service”
(BaaS) models.
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Operational and IT cost reduction - as
well as reduced cost of remaining
compliant - through economies of
scale,
Increased agility and improved
cost/price -ratio through transaction
based pricing models,
Quicker time-to-market through
access to large vendors’ innovation
capabilities, availability of required
skills and scalability of resources.
The large global IT service providers already
score significantly higher than the smaller
local players on client satisfactioni and they
have the ability to provide a cost/quality ratio
that is difficult for smaller players to achieve.
The global players also benefit from the
international harmonization that is
increasingly taking place within 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, for example in Finland where Samlink
provides this service, though the services
provided are based on an ageing 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 forming a
new model of partnership. However, with the
current development the potential benefits
are quickly outgrowing both costs and risks.
Therefore, the Nordic banks should take the
leap of faith sooner rather than later. Those
that hesitate for too long, risk being left
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Investigate the “Banking as a Service”
Model
A BaaS model that provides a shift away from
the current capital expenditure intensive
solutions will bring in numerous benefits:
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Old legacy platforms can be replaced
by up-to-date packaged software that
is further developed and serviced by a
large software provider that also sells
the same solution to other smaller
banks.
Time-to-market will be reduced in
making changes in business models or
responding to new customer needs,
since new services and product
offerings will be easier and quicker to
launch using the features provided by
the modern solutions.
Furthermore, fees can be paid for
example in a form of transactional
costs or in some form of pay-as-yougo licensing further limiting the capital
expenditure and providing a
completely different agility tying costs
to revenue, operations and
transaction volumes.
Finally, tighter relationships with
global software and service providers
offer even small banks with a network
of knowledge and competency that
they otherwise will struggle to obtain.
Current local IT service providers offering the
more traditional PaaS (platform as a service)
solutions are facing significant challenges in
reinventing themselves to meet the BaaS
model requirements and in facing the
competitive pressures created by the new
comers to the Nordic IT market. The
traditional local IT vendors need to renew
their legacy platforms in a quick pace.
A Point of View to the Nordic Banking IT Sourcing Landscape | October 2013

6. 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:
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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
3rd party software vendor,
Working as a system integrator of a
global packaged software product (as
opposed to being a software
developer of a custom software) is a
specific competence, and the system
integrator needs to constantly
generate added value both for their
customer and their software vendor
partner, or risk becoming obsolete in
the equation.
Beware of the Challenges
Banks need to consider if the chosen software
product solution(s) can evolve in accordance
with requirements, such as extend of the
provided functionalities, availability of and
access to required competencies, continued
compliance with changing regulations, in the
future.
In order to support the bank’s strategic intent
and aspirations, the bank’s 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 the typical banking requirements. But
that may not be enough to generate
competitive advantage over local competitors,
or the price that the bank has to pay to get the
advantage, may exceed the potential ROI. In
addition, the fit with the existing application
architecture and rest of the infrastructure
needs to be validated.
As the Nordic banking market is a small
market, any, however small, local
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customizations in a global product are done
on a need basis, usually initiated by a system
integrator working for a particular customer
and built further upon afterwards by the
software product company. It is thus
important for the bank to verify that its
selected global vendor(s) partner with a local
vendor(s) or establish enough local presence
to create the localized version complying with
the local regulations.
In general, bank 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, therefore,
there is no need to add further complexity to
the project management due to mismatch in
values or 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
conversion from the legacy systems,
conversion testing and integration, which are
making the migration to a new platform
complicated. These activities can prove to be
quite challenging due to the nature of
disintegrated legacy systems, their inherent
data structure and the quality of the data
accumulated over the years. All these are
resulting in complexity of extracting coherent
data sets for data conversion and migration
purposes. New (packaged software) platforms
have generally stricter business rules than the
legacy systems have had. For example
packaged systems may require fixed collateral
for a loan, whereas older systems might have
loan and collateral 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. Hence,
fixing misalignment between business rules in
old and new systems will require significant
amount of manual work effort in restructuring
and cleaning the data sets. However, usually
the migration needs to be done in a fairly
short time window, possibly overnight. This
A Point of View to the Nordic Banking IT Sourcing Landscape | October 2013

7. renders time-consuming manual labor to an
unfeasible option. Therefore, banks are
advised to lean on the best practices and data
conversion tools that their vendors can
provide. These best practices and tools may
include e.g. 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 due to the careful planning,
control and testing it requires.
What does all this mean?
Nordic banks, especially the smaller banks, are
facing increasing cost pressure due to
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Increased regulations of the financial
industry, and
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 even struggling to meet the regulatory
requirements and have hardly any means left
to rise up to the challenges created by the
customer expectations.
platforms, the bank’s CIOs need to start
looking at a wider range of options for
sourcing their future IT solutions.
References
i
KPMG’s annual “Nordic Service providers Performance
Report” place the traditional providers of IT Services to
the Nordic banks right at the bottom of the customer
satisfaction ranking. Meanwhile, the top of the same
ranking is dominated by large global service providers.
About the Authors
Ilkka Schulman is a Director at 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 at
Cognizant Business Consulting. She can be reached at
sari.inkila@cognizant.com.
Erik Tjønneland is a Senior Consultant Strategic Services
at Cognizant Business Consulting. He can be reached at
Erik.Tjonneland@cognizant.com.
At the same time global banking software
vendors and IT service providers are entering
the Nordic banking IT market with increasing
determination. Their entry made easier by the
consolidation driven by the pan-European and
global financial regulations. The previously
high market entry criteria created by the
purely local practices and regulations are
quickly becoming almost obsolete.
Competitive advantages created by large scale
and access to global sourcing models that we
see in the IT market of other industries, are
becoming valid also in the banking IT market.
In order to remain compliant, competitive,
and relevant for the 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 life-cycle phase of the current IT
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A Point of View to the Nordic Banking IT Sourcing Landscape | October 2013