Friday, 2 December 2022

Temenos: "Bank transformation and cloud migration at the core”

5 min read

By Foo Boon Ping

Temenos’ product director, Cormac Flanagan and chief marketing officer, Martin Häring, discussed the industry’s path towards core banking modernisation and how it is leveraging the cloud and SaaS solutions to help banks transform and innovate.

Temenos’ recent quarterly results show that its cloud-based software-as-a-service (SaaS) business has grown significantly against its more traditional application business. It grew a strong 33% in the first quarter of 2022, consolidating the 58% annual growth in 2021 with the new subscription-based offering approaching almost a third of Temenos’ total software business.

Max Chuard,

CEO,

Temenos

Max Chuard, CEO of the Geneva-based banking software company, reported this as part of a wider trend as institutions accelerate their digital transformation and cloud migration amid the COVID pandemic. Temenos’ SaaS business continues to perform well with significant contribution from both new and existing customers in the first quarter of 2022. Sales from tier one and two banks, in particular, were also robust, accounting for 40% of software licensing in the quarter. He observed an increasing appetite among larger banks to implement cloud-based applications as part of their transformational IT renovation.

In 2022, Temenos launched new five-year subscription contracts for on-premise licence and maintenance as standard, including for renewals. It hopes this will accelerate growth by capturing greater contract value and recurring revenue.

Cloud will be de-facto standard in five years

Temenos product director Cormac Flanagan told The Asian Banker during the company’s community forum in London, the first since the pandemic, that the majority of banks are already “dev testing” applications on the cloud, a sign of greater readiness for the shift to an on-demand model of technology delivery and consumption. 

Cormac Flanagan,

Product Director,

Temenos

“Just the sheer economies of scale, price and the ease of use. The key now is when will more banks actually move production to the cloud. Production on cloud, whether through SaaS or doing it themselves, is inevitable. What will happen is when they get more confidence and competence in the cloud in terms of its resilience and security, it will be the de-facto standard. And that will be within five years,” he surmised.  

The level and pace of innovation and investments that cloud service providers such as Microsoft, Amazon Web Services (AWS), Google, are putting into their platforms are outpacing all the other individual infrastructure providers, precisely to address concerns about security and resilience.

The features and functionalities that these hyperscale enablers offer are the main drivers for the shift. For example, AWS released the Aurora SQL database for its cloud users at a time when databases were everything and the backbone of not the core of the system. AWS instantly commoditised advanced data storage and management capabilities by giving it away as part of its cloud service, bringing costs down and increasing economies of scale.

However, these hyperscalers, are also prone to the occasional large-scale service outages that affect thousands of businesses and millions of consumers. This means the need to build the necessary IT system redundancy through a multi-cloud architecture, which is no more or less onerous than what regulators demand for critical infrastructure, including the legacy ones the cloud is meant to replace.

Unbundled core banking system into component applications

Leveraging the on-demand model and open application programming interfaces (APIs), the company created its banking cloud, Temenos Banking Cloud, to help banks connect with its community of 12,000 technology developers and fintechs to offer open banking applications, banking-as-a-platform (BaaP) as well as develop and operate new distribution models like banking-as-a-service (BaaS) from one single platform. It described it as composable banking.

It fits in with the strategy to support bank’s front-to-back requirements through the front-end Infinity digital banking solutions and the Transact T24 core/back-end system.

Martin Häring, Temenos’ chief marketing officer, explained, “we have unbundled our whole core banking system into these components that customers have three options to have Temenos manage on Temenos Banking Cloud, or manage themselves on third party or private cloud or finally install on premise if they prefer.”.

Martin Häring,

Chief Marketing Officer,

Temenos

At the community forum, the company released the new high-water benchmark for TBC on AWS. It claimed the benchmark of 100 million customers and 200 million deposit accounts with 100,000 transactions per second and up to 61 transactions per second per core demonstrated its leaner and greener architecture.

“It shows our SaaS solutions are able to scale, we can support a lot of clients. We've made it more efficient. If a bank wants to deploy, it is going to reap the benefits of that efficiency from a cost perspective, less consumption of central processing unit (CPU) and resources,”

The packaged software company serves over 3,000 financial services clients, including 41 of the top 50 tier 1 banks, albeit primarily in core wealth management systems and front-end retail banking applications. Its core banking solution Transact T24 shares the same space as the likes of Edgeverve Finacle, Oracle Flexcube and TCS BaNCS, etc. Temenos also claims 60 smaller challenger banks as clients, competing with new so-called cloud-native digital banking solution providers like Backbase, Mambu and Thought Machine. 

Resilience and security remain key obstacles to core modernisation and cloud migration

For banks that have not moved to the cloud, resilience and security remain the key obstacles. Ironically, the reticence is less about regulations and regulators perse, who have at one time outright barred the industry from the cloud. Their stance however has changed significantly over the years. In fact, the regulatory position on the cloud have become far more progressive lately.

“I don't think regulation is an inhibitor, obviously, resilience is. You can solve that with multi-cloud. And the cloud service providers will do more to address this,” said Flanagan

In the long run, each individual bank, especially the larger ones, whether they have optimised their IT systems and data centres, have to think about the complexities and costs of owning, operating and maintaining legacy and very physical hardware and infrastructures, versus a cloud or SaaS-based on-demand technology model and stack.

Flanagan explained, “over time, cloud will reduce complexity, and that will reduce cost. And it is consumption-based, can be scaled and will there for 10 to 20 years, at a price and cost that can be locked in.”

Penetrating tier one and very large banks for core banking modernisation

Larger banks typically work with technology companies to develop and deploy highly customised and differentiated proprietary product solutions and systems. When they go to the cloud, they will deploy them on private cloud so that they control the environment to ensure resilience, security and scale. However, with the migration to the cloud, the adoption of SaaS solutions will increase, even with large banks.

“We get a bigger set of questions around SaaS, everyone wants to know your SaaS capabilities, your cloud credentials. It will just become bigger and bigger. The regulators have been quite disruptive in those conversations in general with the banks. It hasn't been a closed door. I think they see that cloud is going to bring up quite a lot of benefits.”

Flanagan suggested that banks aren't buying technology but banking functionalities. The underlying technology and architecture are open and the difference is in the breadth of functionalities and operating models that can adapt and scale to different market environments and practices.

The question of penetrating tier one and very large banks which historically have built around systems and are reticent to buying packaged software is about resilience, security and scale, and allowing them to control their own destiny, to keep their systems running.

Over time, these large banks have honed and optimised their in-house systems to do exactly what they need in their markets. However, the cost of doing so has become exorbitantly high, and the case for alternatives has also become more compelling.

Haring added, “how do we allow them to innovate faster without that cost envelope. That is the other driver for connecting with technology partners and fintechs, using their capability, intellectual property and connecting to their core banking infrastructure. We see few large banks really willing to change their core systems at one go. The strategy is to renovate the core”.

“As the vendor market matures, I think the larger banks, because of the cost drivers, are starting to take far more comfort in the resilience, security and scale that the vendor community can offer in that space. We're seeing more of the larger banks getting to look to the vendor community, compared to five or 10 years ago, where they just wouldn't even consider it,” Flanagan remarked.

“If any of them are looking at doing anything in their mission-critical core banking systems, they're definitely looking, and there's far more competence from vendors today to throw clarity into it as well. It's compelling,” he concluded.



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