Oracle Corp. is preparing to wage war with its main rival, SAP AG, to sell the next generation of core computer platforms to large banks worldwide.
Little wonder; the potential market is big. Financial Insights, a unit of International Data Corp., estimates 2005 sales in the U.S. alone to have been about $6 billion a year, and expects it’s primed to grow a compounded four percent a year, for the next three years. And the global market is much larger.
“Oracle believes that markets [like financial services] could be larger than the ERP (enterprise resource management) market, and the ERP market in 2004 was a $26 billion market, (worldwide),” says Zaineb Bokhari, an industry equity analyst with Standard & Poors who follows the industry. She says Oracle is in the process of re-shaping its business around a series of industry-specific “verticals” that it calls its Fusion strategy—financial services being one of them—and that SAP has a similar strategy.
The competitors are fairly evenly matched. SAP reported $9.2 billion in fiscal 2005 revenues, close to Oracle’s $11.8 billion for the same period. And both have assembled significant resources in the recent past to compete for this business: In late 2004, SAP has expanded its long-standing alliance with Accenture Inc. to include bank-related operations, and last November, Oracle bought 43 percent of Mumbay, India-based i-Flex Systems, for $605 million. Oracle had originally tried to buy 61 percent of i-Flex.
“This is a way for Oracle to chip away at the financial services market and raise their profile, and this is just the tip of the iceberg for them,” says Jeanne Capachin, vice president of Global Banking at Financial Insights. “SAP is doing it by partnering with Accenture and doing its own development, but Oracle took a different approach, and acquired i-Flex and Siebel, so they can develop their own stable of clients and applications. It makes a lot of sense, because we have more vendors than we need out there, a lot of them scrambling to get acquired.” Oracle’s $6.1 billion acquisition of Siebel Systems Inc., specializing in CRM (customer relationship management) systems, is hanging fire pending regulatory and shareholder approval.
Whichever firm takes the lion’s share of the market will make serious money for the foreseeable future, since the core platforms, which among other things handle a bank’s payments operations, need constant service and upgrading, and spin off much other bank-wide business for the vendor.
And they’re expensive to buy, easily costing a large bank $300 million, including labor.
Industry analysts say banks all over the world need to buy new platforms, even though market demand in recent years has been anemic (see Electronic Payments Week, Nov. 8, 2005). “Banks recognize that they need to move, even if they don’t know yet what they want to move to,” says Capachin.
They have to act because, among other reasons, the next-generation platforms are not only cheaper to operate and maintain than the last crop, but also more capable: Built around a data warehouse that contains all the information about the institution, they allow management to see across the entire company, in turn allowing them to better manage capital, market, and operational risks, design better and more innovative products, market more efficiently to customers, and to be more nimble in fast-shifting situations.
But as important as all that is, the main driver of this market is compliance. The main spur: the Bank of International Settlements’ 2004 Basle II Accords—an update of the 1988 Basle Accord for Capital Adequacy—which goes into effect this December for banks operating internationally. Not complying with Basle II could cost an institution real damage, not only because it would have to hold more than 8 percent in risk-based capital, but also because it will lose business: Savvy customers, like pension funds which need to protect their investments, can be expected to gravitate to companies with the best risk management systems.
But there are other drivers, varying by region, that are almost as important. In the U.S., for instance, these new platforms simplify compliance with the provisions of the Sarbanes-Oxley Act of 2002, and the various anti-money-laundering and anti-terror financing laws and regulations connected to the Bank Secrecy Act and the USA Patriot Act.
In Western Europe, the Single Euro Payments Area (SEPA) requires modern computer systems; the industry-wide cost of complying with SEPA by the 2010 deadline is generally estimated to be as much as $10 billion. Eastern European institutions, meanwhile, not only need to comply with Basle II, SEPA, and U.S. anti-money laundering/terror finance standards, but also don’t really have modern banking platforms.
The same holds in South and East Asia—potentially a giant market—and much of the Middle East. South America and Africa are not typically included in this laundry list, since their economies, aside from Brazil and South Africa, are simply too small to support many sales. But all international banks need to demonstrate to their U.S. counterparts that their sysytems have the same ability to fight money laundering and terror financing as the U.S. institutions.
Despite this promising outlook, though, and its own announced intentions, Oracle isn’t really ready. There are questions, for instance, about whether i-Flex’s Flexcube platform can be scaled to handle a really large bank, despite its claims of being what it calls “the world’s top-selling core banking solution.” CitiGroup, for instance, used Flexcube to replace its own Cosmos platform for its foreign branch system, but has announced no plans to use it in the U.S., despite the fact that i-Flex started life as a Citi unit, and subsequently spun off. That factor is unlikely to prove a convenient fact for Oracle’s sales team.
Flexcube is a next-generation, distributed computing-based system. It is a big step up from the last generation, big-box type of platform, and a major competitive advantage for Oracle, although SAP’s system—a mix-and-match set of capabilities—is similar. Put simply, the goal of distributed computing is to connect users and resources in a user-friendly, scalable way that can easily interact with other computer systems. The World Wide Web is one example of this idea; grid computing, which links many separate computers into one big machine, is another. Computer experts consider such systems to be much less sensitive to user mistakes, and more powerful than many combinations of so-called “big box” systems. They’re also cheaper to operate.
Most core platforms used today are those big box systems, and typically run on a Computer Sciences Corp. (CSC) Hogan platform. Hogan is omnipresent and very capable, and has been constantly upgraded. Fidelity National Financial Corp. acquired the U.S. distribution rights late last year with the intention of rounding out its product line, and expanding into the big bank market from its current base in the community and regional bank markets. “People right now are pretty stuck with Hogan, because there really isn’t a viable alternative, but I don’t think they’ve had any new sales for 12 months,” says Capachin.
And Hogan has its problems. Aside from the fact that the market is looking to next generation products to solve approaching compliance and marketing issues, Computer Sciences is widely considered a prime candidate for a sale to private equity investors sometime this year, despite its size—it reported $14 billion in fiscal 2005 revenues in its April 2005 10-K. Since Hogan is rumored to be a relatively low-profit, low sales unit—the unit’s revenues are folded into CSC’s 2005 Global Commercial sector revenues of $9.38 billion, and not specifically broken out—the smart money thinks that pre- or post-deal, Hogan will be sold, arousing fears that future support of existing and future installations may suffer.
The alternative to a major new installation—so-called “virtualization”, basically a huge software patch—is an interim move, say experts. J.P. Morgan Chase & Co. recently announced it had completed such a project, but Morgan was an especially egregious example of an out-of-control computer system, since the one it had been using had been cobbled together from five bank systems of varying quality—from Manufacturer’s Hanover Trust Co., Chemical Bank, Chase Manhattan Bank, J.P. Morgan, and Bank One. Until recently, Morgan was even been running some COBOL programs written for Manufacturer’s Hanover in the 1980s. It had to do something relatively fast, and before the next generation platforms were ready.
CitiGroup and Bank of America are said to be other institutions in serious need of a major installation. Citi, for instance, is rumored to still be using the old mainframe systems of Commercial Credit Corp., which Sanford Weill acquired in the 1980s, and on which he built Citi. And Citi’s hardly alone: “Pretty much any big U.S. bank that grew through acquistions is a mess,” says Capachin. It’s no wonder Oracle is going after the space.
One exception: Wells Fargo & Co., which, before it was finally merged into Norwest Bank in 1989, had a famously Borg-like integration unit that immediately converted acquired banks to the Wells platform, whatever the cost. That platform is aging now, however, and probably also needs replacement.
Oracle’s big advantage in the market is that aside from SAP, no other company is prepared to take on the logistical and engineering challenges presented by large banks. Open Solutions Inc., Fidelity National, and Fiserve, for instance, have all been focused on smaller banks, and Open Solutions’ platform, based on distributed computing, is built to use an Oracle database, much like i-Flex’s.
This leaves the field pretty much open to Oracle and SAP, although it would be unsurprising if IBM chose to play some hands. And Oracle is a strong competitor, despite some muttering among its many enemies that its customer service, for instance, leaves much to be desired. When Oracle bought PeopleSoft in a famously acrimonious 2005 hostile takeover, for instance, it was widely predicted that PeopleSoft customers would leave in droves when their user licenses came up for renewal.
Not so, says S&P’s Bokhari. “SAP had a Safe Passage program that they set up with the idea they would pick up a lot of new business (from that), but the number of new customers that came from that program was in the tens,” she says.
How much market share Oracle and SAP will take between them is anybody’s guess. But expect both to become major factors in the payments business, whether their competitors like it or not. (Contacts: Oracle Corp., 650-506-8920; SAP AG, 610-661-3200; Standard & Poors, Zaineb Bokhari, 212-438-2000; Financial Insights, Jeanne Capachin, 508-988-6719)