Core Banking Solution for US Community Banks,Credit Unioins_Banking

8/8/2019 Core Banking Solution for US Community Banks,Credit Unioins_Banking

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Core Banking Solution on ASP model for USCommunity Banks

Authors

Shankar SundaramoorthyPractice Head - Banking Practice

&

Prashant KumarAssociate Consultant - Banking Practice

iGATE Global Solutions Limited

158-162 (P) & 165 (P) -170 (P) EPIP Phase II

Whitefield Bangalore -560066, INDIA



Table of Contents

1. Objective ..................................................................................................................3

2. Core Banking Solutions for Small Banks .............................................................4

3. Community Bank.....................................................................................................4

4. Credit Unions...........................................................................................................5

5. Core Banking Solutions for Small Banks in depth ..............................................9

6. Functional Coverage of the Core Banking Solutions ..........................................9

7. Technical Coverage of the Core Banking Solution............................................ 11

8. Other Features of the Core Banking Solutions ..................................................11 9. Viability of Using ASP / SaaS model in core banking implementation ............14

10. Market Potential for SaaS / ASP model ...........................................................14

11. Conclusion.........................................................................................................15



1. Objective

The objectives of this research paper are:

• To compare the nature of business and products offered by US Community banks andbanks.

• To compare the core banking products targeted at community banks.

• To study the viability of offering core banking solution on ASP model aimed at communitybanks.



2. Core Banking Solutions for Small Banks

Core banking is another way of saying the core functions of a bank. These functions representthe essential (core) business of banking. Because of the plethora of services banks now provide,

it is easy to forget that the root of banking is accepting deposits and lending money. The definitionof core banking may have been muddied by the emergence of packaged computer solutionswhich combine core banking functions with other elements of a bank’s operations but at the mostbasic level core banking manages financial transactions and their impact on the accounts of itscustomers.

Core banking solutions for small banks are those solutions where more than 80% of the banksusing the platform have less than US$1 billion in assets.

Core Banking for Small banks focuses primarily on Community Banks and Credit unions.

3. Community Bank

Community bank is locally owned and operated commercial bank. It derives its sources of fundsfrom, and it lends money to, the community where it operates, and is not affiliated with amultibank holding company. According to the FDIC, community banks comprise most of thecommercial banks in the US, numbering 3,771 at the end of 2007. Not all community banks willbe restricted to a specific geographic area (for e.g. community first bank shares), hence acommon applicable definition is difficult. Generally most studies on US banking define communitybanks on the basis of the nature of clientele (small business), geographic reach (generallyrestricted to a particular region), size (less than $1 Billion) and different parameters applied toprovide loans (more personal than statistical data is relied on).

Products

Community Bank provides full Business Banking services including Commercial Lending, Leasingand additional services ranging from Financial Planning to Wills.

Features of Community Banks

Some of the important features of Community Banks are mentioned below.

1. Community banks focus attention on the needs of local families, businesses, andfarmers. Conversely, many of the nation's mega banks are structured to place apriority on serving large corporations.

2. Unlike many larger banks that may take deposits in one state and lend in others,community banks channel most of their loans to the neighborhoods where theirdepositors live and work, helping to keep local communities vibrant and growing.

3. Community bank officers are generally accessible to their customers on site. CEOs atmega banks are often headquartered in office suites, away from daily customerdealings.

4. Community bank officers are typically deeply involved in local community affairs,while large bank officers are likely to be detached physically and emotionally from thecommunities where their branches are located.

5. Many community banks are willing to consider character, family history anddiscretionary spending in making loans. Mega banks, on the other hand, often apply



impersonal qualification criteria, such as credit scoring, to all loan decisions withoutregard to individual circumstances.

6. Community banks offer nimble decision-making on business loans, becausedecisions are made locally. Mega banks must often convene loan approvalcommittees in another state.

7. Because community banks are themselves small businesses, they understand the

needs of small business owners. Their core concern is lending to small businessesand farms. The core concern of the mega bank is corporate

4. Credit Unions

Credit union is not-for-profit financial institution typically formed by employees of a company, alabor union, or a religious group and operated as a cooperative. Credit unions may offer a fullrange of financial services and pay higher rates on deposits and charge lower rates on loans thancommercial banks.

The National Credit Union Administration (NCUA) is the federal agency that charters and

supervises federal credit unions. They also insure savings in federal and most state-charteredcredit unions across the country through the National Credit Union Share Insurance Fund(NCUSIF), a federal fund backed by the full faith and credit of the United States government.

Classifications of bank

The banks in US are generally differentiated based on the size of the deposits held. Theclassification is provided below;

Size of deposits Nature of a Bank> $100 Billion Mega Bank$10 - $100 Billion Super regional

$1 - $10 Billion Regional< $1Billion Community Banks

A credit union may fall under any of the four definitions based on its size of deposits. Majority ofthem are small in size and hence will come under community banks. The difference between ageneral bank and credit union is defined by the shareholding. Credit unions are required toensure that its clientele become shareholders of the bank.

Products

Credit unions will typically offer the same products and services as larger banks. However, somecredit unions will choose not to offer every product and service out there. The reason is that thesecredit unions do not do the same amount of volume that larger banks do. Banks can afford tohave “loss-leaders” or products that get customers in the door. Credit unions will more likely onlyoffer the products and services that a large portion of the membership is likely to use.

Comparing Credit Unions and Banks

There are many significant differences between credit unions to banks. Credit unions promote thefinancial well-being of members, including those of modest means, through a system that iscooperative, member-owned, volunteer directed and not-for-profit. Unlike banks, credit unions



exist solely to serve their members, not to pay high dividends to an outside group of stockholders.Credit union income is returned to members and that's why credit unions can offer higher interestrates on deposits and lower rates on loans.

STRUCTURE Credit Unions / Community Bank Banks

o Credit Unions are member-owned, not-for-profit financial cooperativeso Credit Unions operate under a onemember, one vote systemo Most credit unions have volunteer, unpaidboardso Earnings of credit unions are returned tomembers in the form of higher interest rates ondeposit accounts and lower loan rates (minusoperating expenses)

o Banks are for-profit, board andstockholder controlled, financial corporationso Stockholders hold influence in the bankbased on the total value of their stockso Customers of a bank who are notstockholders do not own a financial interest inthe banko Boards are compensated for theirserviceo Profits of banks are divided among thestockholders (minus operating expenses)

TAXES

Credit Unions / Community Bank Banks

o Credit Unions do not pay federal income taxon earnings however state chartered credit

unions do pay other relevant taxes such aspayroll, property and sales taxeso Credit Unions were granted by Congress,a federal tax exemption based on their uniquestructure as non-profit cooperatives

o Banks do pay federal income taxes oncorporate profits, although there are manybanks that qualify for tax exempt status undersubchapter S of the IRS Codeo Banks do not have a tax exemptionbecause they are a for-profit businessintended to provide profits to their

stockholders. Their non-stockholdercustomers own no financial interest in thebank. Banks have paid more in dividends tostockholders than they paid in income taxeseach of the last eight years.

MARKET SHARE AND ASSET GROWTH


o Total credit union assets are $629 billion

o Average credit union asset size is $66 milliono Credit Unions have grown to $629 billion in95 years. .o Total credit union market share is 6%

o

Total bank assets are $9.1 trilliono Average bank asset size is $986 billiono Banks grew $641 billion in 2003 aloneo Total bank market share is 78%



MEMBERSHIP


o Under federal and state laws, credit unionsmay only offer membership to individuals whobelong to a select group. Other credit unions'field of membership is defined by geographicboundaries. o Banks face no restrictions on who they

serve

RATES AND FEES

Credit Unions / Community Bank Bankso Membership requires a deposit of as little as$5 o On average, compared to banks, credit unions

pay members higher dividend rates on depositaccounts and offer loans at lower interest rates

o Earnings from credit unions are given tomembers in the form of higher deposit rates andlower loan rates

o Credit Unions offer attractive pricing that putspressure on the other financial institutions tooffer more attractive rates, although in maycases not as low as a credit union. Withoutcredit unions, bank customers would most likelypay more for their financial services.

o Savings to credit union members is estimatedto have been $6.3 billion in 2002. $2 billion of

the $6.3 billion total benefit represents thegreater yield on savings that members receivefrom credit unions compared to bank interestrates. $2.3 billion of the member benefit comesfrom the lower rates that credit unions charge onloans compared to banks and the other $2billion of the credit union advantage is becauseof lower service fees at credit unions comparedto banks.

o Banks usually require a minimum deposit of$50 to $100 to open an account

o Compared to credit unions, banks pay thecustomer lower interest rates on depositaccounts and offer loans at higher interestrates

o Earnings from a bank are given tostockholders as profit sharing

Difference between Credit Union and Other Financial institution are mentioned below.

Credit Unions Other Financial Institutions

Not-for-profit cooperatives Owned by outside stockholders

Owned by members Owned by outside stockholders

Operated by mostly volunteer boards Controlled by paid boards



The following figure depicts the banking market segmentation by a focus on receiving deposits ormaking loans

Source: 2008 – Forrester Research Inc.

The Credit Union Segment Is More Highly Fragmented Than Most Other Banking Segments

The market structure of banking depends on the segment. For instance, the credit union market ishighly fragmented, with the top 20 credit unions comprising just 15% of total credit unionrevenues. Other banking segments, such as the credit card issuance or sales financing segmentsare more highly concentrated. And despite the pressures on profits of the subprime crisis, thecommercial banking sector was the sixth most profitable industry in the 2008 Fortune 500 ranking,reflecting 12.6% profit, based on 2007 revenues



The following statistics shows that the top eight commercial banks own 42% of the commercialbanking market.

Source: Forrester Source: 2002 US Economic Census

5. Core Banking Solutions for Small Banks in depth

This section of the report deals with in-depth knowledge about each solution. The followingorganization offering core banking solution in US are taken into account.

1. FIS - Horizon2. Fiserv - AFTECH3. Harland Financial Solutions - Phoenix4. Metavante - IBS5. Open Solutions - TCBS6. Jack Henry - Core Director

The analysis of the Core banking solution is done on the following criteria’s.

1. Functional Coverage2. Technical Coverage

6. Functional Coverage of the Core Banking Solutions

The functional analysis of the core banking solution is done broadly on the following criteria.

1. Payments2. Account and Cash Management3. Loans (Including mortgages)



Payments

Company Solution

OutgoingDomesticCredit

Transfers

OutgoingInternational

Transfers

Incoming

Payments

DomesticDirect

Debits

InternationalDirect

Debits

Standing

Orders

Collection of

Cheques

Debit

CardsFidelity Horizon

Fiserv AFTECH HarlandFinancialSolutions Phoenix

Metavante IBS OpenSolutions TCBS

JackHenry

CoreDirector

Account and Cash Management

Company SolutionCurrentAccounts

SavingAccounts

TermDeposits

CashWithdraw/Deposits

FX inCash

BankCheques

TravellersCheques

Fidelity Horizon

Fiserv AFTECH HarlandFinancialSolutions Phoenix


Jack Henry

Core

Director

Loans (Including Mortgages)

Company Solution Guarantees

OverdraftonCurrentAccount

PersonalLoans

RevolvingFacility

MortgageLoans

Fidelity Horizon

Fiserv AFTECH HarlandFinancial

Solutions Phoenix


Jack HenryCoreDirector



7. Technical Coverage of the Core Banking Solution

Core BankingSystems Hardware Platform Supported Databases Supported

Mainframe Unix Windows DB2 Oracle SQLServer Other

Horizon

AFTECH

Phoenix

IBS

TCBS

Core Director

8. Other Features of the Core Banking Solutions

MetaVante - IBS

Multi-currency No

Multi-Lingual No

CRM FunctionalityMetavante Enterprise Contact Management, MetavanteRelationship Profitability.

ASP vs. On-Premise 100% ASP

Internet

Metavante Consumer eBanking and Business Internet

Banking.IVR

Mobile Phone None

Interface to Core

Batch + Memo Post vs. Real Timetransactions Batch + Memo Post

Benchmarking

Courtesy: Celent Report (2006)

Fidelity - Horizon

Financial reportingSophisticated General Ledger capabilities, cost reduction inreporting

Integrated transaction processing:

Automated Clearing House, Unposted item repair, Returnitem processing, Alternate transaction entry, Automatictransfer processing



Integrated RelationshipManagement

Summary of all your customers and their relationships,Unlimited addressing and correspondence delivery options,Tracking of customers’ collateral, User-defined informationand notes, Database management (Tools to automate fileclean-up)

Integrated Deposit Management

Account setup is fully automated, including all document

preparation, Automate the administration of rewards andcustomer affinity programs

Integrated Loan ManagementLoan setup is fully automated, Automated reporting to multiplecredit bureaus, Mortgage servicing application,

Integrated Service ManagementTax Reporting, Security, Report management, Documentimaging

Harland Financial Solutions – Phoenix

Relationship Information

Relationship Information Management that allows you toestablish relationships between other customers, accounts

and household information, Special instruction, Alerts, E-mailCapabilities, Customer identification – display a customer’sphoto & signature, Unlimited addresses on a customeraccount level

Back Office

NSF Processing; View image of the check; Aggregatecustomer totals; Eliminates manual entries; View items bybank, branch, officer or account number; Complete ACHprocessing

Reports

Spooled reports that you can view and search in a point-and-click window, Loan Exception Reporting, Colson – createreports for Small Business Administration (SBA) loans

Universal Loans

Convenient account information such as messages, paymentschedule, and more displayed on the first customer

information window; Loan delinquencies highlighted; Onlinepay-off calculation; Custom loan payment schedules;Adjustable rate mortgages ; Full escrow system with automaticdisbursements; Loan collateral, property description and loancomment files; Real-time loan posting option; History kept forlife of account

Universal Deposits

Online stops; Special instructions messages; View images ofthe check in statement detail; Unlimited combined statements;History with unlimited retention; Account Analysis

Time DepositsHistory for life of account; Flexible rate and accrual options;Online; Retirement plans; Unlimited term and renewal options

General Ledger

Cost accounting; Flexible budgeting; Holding company;

Account reconciliation; Ten user-defined totaling levelsCash Management Overdraft protection with sweep capability; ACH Origination



System Tools

PhoenixXM connectivity; Date tickler system – set upreminders on a customer or account level; Customerprofitability analysis; Context sensitive online help; Auditconfirmations; Fast account searches from one convenientwindow – search by customer name, account number, socialsecurity number or telephone number; Unlimited customizable

fields in each application; Branch banking; ODBC compliantMSSQL or Sybase; Safe deposit boxes; Flexible parametersfor system customization; Customizable notices; Maintenancehistory – display a complete history of all changes to anaccount since it was opened; View interest rates for allaccount types from one convenient window

Fiserv – AFTECH

Automated Lending Servicesincluding

Integrated automatic credit bureau requests; Scoring & Risk-based loan pricing; Automated approval; Automated disbursal;Application Queuing & Routing; On-line graphical reporting

Fraud detection Fraud detection services

Shared Branching Shared Branching services

Email Advantage Email notice, statement and marketing

Signature Signature Capture

Open Solutions – TCBS

CRM

Customer-centric banking with our relationship-based centralinformation file (CIF) and Customer Relationship Management(CRM) capabilities

Operations Streamlined operations

Processes Marketing-focused processes

Business Intelligence Data mining

Multi-Lingual Multi-lingual capability

Multi-Currency Multi-currency processing

ScalabilityTCBS is industry-proven core enterprise solution and an open,flexible and scalable solution

Jack Henry – Core Director

Electronic Funds Transfer

Internet Banking ServicesProfessional Services & Education

Business Intelligence Services

Asset Management & Protection Services

Item & Document Imaging Services



9. Viability of Using ASP / SaaS model in core banking implementation

Organizations, both large and small, are increasingly outsourcing their applications to applicationservice providers (ASPs) for a variety of reasons such as cost reduction, shortened time-to-market, lack of internal expertise, and risk reduction. However, the adoption of the ASP / SaaSmodel has not been smooth sailing for many organizations, and only a few organizations have a

formal approach to making ASP / SaaS outsourcing decisions. Partially to fill this void, develops avalue-driven approach to outsourcing using ASP /SaaS based on outsourcing theories and theindustry’s best practices. The various advantages and disadvantages of using ASP / SaaSmodels are mentioned below.

Advantages:

1. Specialization. Expert resources are increasingly becoming a rarity across all industries.ASPs expertly and cost-effectively build personnel and equipment resources, focusing on thevery business aspects their customers need to address.

2. Broad marketability. Specialization in a certain facet of business can oftentimes be spreadacross parallel market opportunities. Many common business functions such as word

processing, database management and personnel resource management have cross-industry outreach. In these areas, ASPs can reconfigure consumer applications and serviceswith industry-specific flavors to send packages targeted at multiple channels.

3. Repackaging other ASPs. Applying the value-added reseller scheme to the hostedapplications market opens up even more diverse solution sets. The opportunity to wholesaleothers' services or ASP offerings for a comfortable profit margin has strategically positionedmany ASPs already.

4. Consistent, predictable revenue. Even in new or volatile markets, with an establishedcustomer base, ASPs can effectively track past revenues and plan for anticipated growthoftentimes much more reliably than providers offering only licensed-based software that sellsin peaks and valleys.

Disadvantages:

1. Ownership of critical client functions. Building a business that clients can trust withmission-critical functions such as database warehousing, data security and clientmanagement can be a challenge for upstart ASPs.

2. High service-level expectations. ASP clients tolerate next-to-no slippage in service.Always-on applications, responsive customer service, and high online throughput aremeasures of service providers' success.

10. Market Potential for SaaS / ASP model

According to Gartner, Inc. Software as a service (SaaS) represented approximately 5 percent of

business software revenue in 2005 and, by 2011, 25 percent of new business software will be

delivered as SaaS. Gartner also predicts that SaaS will triple in size by 2011 from 2006.

According to McKinsey & Co. adoption of the model has been growing at well over 20% year over

year, and is set to explode. Around 61 percent of CIOs at North American companies with sales

over $1 billion are already planning to adopt one or more SaaS application.


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Deutsche Bank projected that the SaaS market will account for half of the application software

spend by 2013.

Analysts, the world over, predict that up to 30% of all software applications are expected to be

delivered through this mode in the coming years.

11. Conclusion

1. Detailed study of the core banking solution is required to identify the right product for smallbanks in US.

2. Core banking solution deployment in a particular geography or with a specific line of functionlike deposit / payment products only, is another solution fast emerging as SaaS-able.

3. Metavante, Fiserv, Jack Henry, Fidelity, Harland and Open solutions can be considered for ademo in that order. Metavante would be the right fit as they claim to have a 100% ASP model,

the details from other vendors on this front is not publicly available.

Core Banking Solution for US Community Banks,Credit Unioins_Banking

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