Best Practices: BBVA Compass Brings Accenture's Alnova European Best Practices to Its U.S. Operations

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1 Best Practices: BBVA Compass Brings Accenture's Alnova European Best Practices to Its U.S. Operations IDC Financial Insights: Bank Technology Management Strategies IDC Financial Insights: Customer- Centric Bank Strategies BEST PRACTICES #FIN Global Headquarters: 5 Speen Street Framingham, MA USA P F Karen Massey Aaron McPherson IDC FINANCIAL INSIGHTS OPINION Banks in emerging markets often deploy advanced banking technology before those in more developed economies because they have less investment in legacy systems. As a result, systems integrators and IT vendors like Accenture often build next-generation core systems for European, Asian, and emerging markets; mature them; and then import them into the U.S. market. They have been aided in this strategy by the acquisition of U.S. institutions by foreign banks, principally in Europe and Canada. After studying one such case, that of BBVA Compass and Accenture's Alnova core banking system, IDC Financial Insights finds the following: Foreign banks play an important role in modernizing the U.S. financial system by bringing market-tested advanced technology into their U.S. acquisitions. More rigorous regulatory regimes in Europe have forced banks to modernize in areas such as real-time processing. Foreign countries such as Spain, while smaller than the United States, are much more concentrated, allowing the emergence of world-class institutions capable of making long-term technology investments. Technology investments have already improved the competitiveness of the U.S. subsidiaries, by lowering costs, reducing time to market, and improving cross-selling effectiveness through better customer data management. IT vendors should seek to partner with foreign banks that have invested in U.S. institutions as a way of establishing their nextgeneration products in the U.S. market. April 2013, IDC Financial Insights #FIN IDC Financial Insights: Bank Technology Management Strategies: Best Practices

2 TABLE OF CONTENTS In This Study 1 Situation Overview 1 Business Needs... 2 The Selection... 2 Management Challenges... 3 The Best Practices 3 Implementation... 4 Benefits Achieved... 4 Future Outlook 5 Essential Guidance 6 Actions to Consider... 6 Learn More 7 Related Research... 7 P #FIN IDC Financial Insights

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5 IN THIS STUDY In this study, we show how a European bank, BBVA, was able to make its U.S. acquisitions more profitable by importing technology developed in its home and emerging markets. We believe this illustrates an important benefit of allowing foreign ownership of domestic banks: the ability to modernize by drawing on resources and expertise from around the globe. SITUATION OVERVIEW BBVA Compass was created in 2007 when Banco Bilbao Vizcaya Argentaria (BBVA), headquartered in Bilbao, Spain, acquired Compass Bancshares in Birmingham, Alabama. BBVA Compass is a leading U.S. banking franchise with operations throughout the Sun Belt region and ranks among the top 20 largest U.S. commercial banks based on deposit market share. It operates over 700 branches in Alabama, Arizona, California, Colorado, Florida, New Mexico, and Texas. In addition, BBVA Compass has been recognized as one of the nation's leading Small Business Administration (SBA) lenders, earning Lender of the Year honors in 2009 and BBVA Compass contributed about 11% of total BBVA revenue in 2011, with 32% coming from Spain and the rest of Europe, 25% from Mexico, 25% from Latin America, and the remaining 7% from Turkey and Asia. Compass Bancshares was the largest in a string of U.S. acquisitions BBVA undertook: 2004's California-based Valley Bank, 2005's Texasbased Laredo National Bancshares, and 2006's Texas-based State National Bank and Texas State Bank. All of these acquisitions were aimed at leveraging BBVA's Latin American experience by securing a leadership position in the U.S. Hispanic market. In 2009, BBVA further added to its portfolio with its purchase of another Texas bank, Guaranty Bank, from the FDIC. BBVA's focused strategy and decision to avoid the subprime mortgage market enabled it to invest $12 billion in its U.S. franchise at a time when other major banks were retrenching. The varying and duplicative infrastructure it inherited with its acquisitions gave BBVA a strong case for a major overhaul IDC Financial Insights #FIN Page 1

6 Other factors included: The shift away from branch banking to online and mobile customer service channels The opportunity to bring ideas and best practices from global markets to developed economies Successful implementations of advanced technology in other markets, making it easier to build a business case in the United States Business Needs As BBVA evaluated the U.S. market, it saw that domestic institutions were hampered by legacy technology that hindered the development of innovative products and processes, promoted product-based rather than customer-based marketing strategies, and prevented true multichannel customer service. In making its investments, BBVA therefore had the following primary goals: Institute a customer-centric banking model, which focuses on growing the value of each customer relationship, rather than focusing on the growth of existing products. This avoids the problem of selling customers products and services they do not need or use, yet costs the bank money to support. Enable seamless multichannel delivery, leading online and mobile capabilities, and faster time to market. Improve use of data to drive product development, using lean management techniques to streamline processes and reduce costs. The Selection The bank spent nine months in 2008 reviewing core banking providers. Due diligence included a formal RFP process and workshops with the short list of vendors selected to visualize and "try out" the technology in terms of touch and feel, including actual test cases. The BBVA Compass document included more than 50 pages of criteria that were used to decide on Accenture's Alnova. The decisive factors were: Familiar architecture compatible with other BBVA technology assets Page 2 #FIN IDC Financial Insights

7 Existing relationship with Accenture and Alnova and success using Alnova in multiple countries (BBVA Compass represents the 10th time BBVA has implemented Alnova in a subsidiary.) Superior expertise in implementing a core banking transformation Breadth of retail banking functionality Flexibility to grow and add new functionality Ability to run on existing mainframe, reducing hardware costs Management Challenges This project was not just a technology project focused on replacing the core system but a bankwide project that included realignment of the line-of-business and technology groups. Real-time processing, while straightforward in concept, turned out to have far-reaching process and regulatory implications. For example, exception handling in a batch environment can be done before the nightly run. With real-time processing, decisions must be made to either delay a transaction or let it through and fix it afterward. Additionally, before it could proceed to replace its U.S. core systems, BBVA Compass had to consolidate 26 customer information files (CIFs) into one. Then it had the foundation to support a single nextgeneration core. Since this was the first time Alnova was being used in a U.S. bank, the team had to walk through all the U.S. regulations and make sure that the new system supported them. BBVA Compass then needed to demonstrate compliance capabilities to the regulators themselves. Foreign ownership of the bank heightened regulatory scrutiny further; although BBVA did not require a bailout and did not have the same level of problems as some other European banks, it had to assure U.S. regulators that Europe's debt problems would not impinge on the bank's U.S. operations. In total, the core conversion team spent thousands of hours analyzing processes, interviewing bank employees, implementing changes, and training employees on the new procedures. Over the years, BBVA Compass had allowed the banks it acquired to operate much as they had been doing, with the result that there were still six different cultures, organizations, and process flows. Educating all the necessary parties on the solution and getting their agreement on needed changes was arduous and time-consuming, requiring frequent intervention from senior management IDC Financial Insights #FIN Page 3

8 THE BEST PRACTICES In the course of completing the first core conversion in a major bank in over 10 years, BBVA Compass and Accenture worked out several best practices. Given the complexity of the compliance requirements, one team was dedicated to documenting and implementing regulatory support. The size of the project ($362 million, not counting Accenture's professional services fees) required BBVA Compass to suspend all other development for the bank and increase the size and capacity of its design and development group. Implementation BBVA Compass states that five factors contributed to its success in implementation: Detailed weekly reviews with senior management on both the business and the technology sides Parallel business process reengineering and change management to realign the organizational structure and incentives on customercentric principles Establishment of a strong project management office (PMO) to monitor progress and manage issues as they arose Engagement of a team outside of the development group to perform testing functions, for greater objectivity (BBVA Compass states that it performed close to 20,000 test cases.) Incremental deployment so that problems could be solved in smaller markets before moving to larger ones, and management problems identified and resolved Implementation began with a single branch in Colorado in April 2012 where all resident customers were migrated to the new platform. Colorado was chosen because it was one of the bank's smaller states and provided an opportunity to test system performance. After six weeks, the bank felt comfortable that the pilot was successful and extended the rollout to all 38 branches in Colorado. Conversion followed in California, Arizona, and New Mexico. Four months later, Alabama and Florida were converted, with the process concluding in September 2012 with Texas' 385 branches. Page 4 #FIN IDC Financial Insights

9 Benefits Achieved While the core conversion is not complete as of the time of this writing, BBVA Compass is already seeing the following benefits: A "product factory" that allows for faster product development and more streamlined origination, as well as relationship-based pricing The integrated customer database that has supported improved customer service and retention, as well as cross-selling based on the customer's total relationship with the bank Real-time updates to deposit accounts that support a consistent view of the customer across all channels Consistent corporate data across the enterprise; no more reconciliation of reports Improved synergies with the Latin American franchise Cost savings of 13.2% in 2012, of which 12.4% is from direct cost reductions and 0.8% is from productivity improvements (cost avoidance) Centralized and flexible product and fee definitions, including bundling and relationship pricing Reduction of up to 75% in time to market Reduction in time to open a sample retail deposit account, from more than 40 minutes to as little as 5 minutes (87.5%) In Texas, sales of an average of five products to each new household, compared with two products per household seven years ago (Across the bank's entire U.S. portfolio, cross-selling has improved to 3.6 products per household in 2012 compared with 2.4 products in 2008.) As the project proceeds, BBVA Compass projects its cost savings will increase to 22.8% by Much of these savings have been achieved already by reducing the number of core systems supported, as well as optimizing bank processes. The remainder will come from extending the benefits listed previously to other lines of business. FUTURE OUTLOOK Deposits were complete in September BBVA Compass is still working on migrating consumer loans, mortgage and small business loans, and debit cards. The next deployment is scheduled for the first 2013 IDC Financial Insights #FIN Page 5

10 half of Beyond cost savings and efficiencies, BBVA Compass sees its new core platform as part of a larger strategy to differentiate itself by establishing a new relationship with customers, regulators, and employees. A pervasive lack of trust in the financial sector has emerged from the excesses of the financial crisis, major scandals such as the LIBOR price-fixing case, and a general perception that banks are more focused on providing value to their shareholders than on fulfilling their important role in society. By refocusing the bank on the customer, BBVA Compass plans to restore confidence that it places its customers' interests first. By optimizing customer service, new product development, and pricing, the bank seeks to counter the growth of monolines and nonbanks in financial services. By improving its reporting and governance capabilities, the bank will build confidence with its regulators. In short, this is much more than a back-office systems consolidation. BBVA Compass' implementation of Accenture's Alnova represents the introduction of fresh thinking and global best practices into a market that has been stagnant for too long. ESSENTIAL GUIDANCE For more than a decade, IDC Financial Insights has covered the core banking market in the United States, and during that time, the predominant story has been one of stasis and hesitation. Both U.S. and foreign core banking vendors have searched for a way to persuade U.S. banks that the risks and costs of a core replacement are worth it. BBVA Compass and Accenture have found a strategy that works: leverage the successful partnership to develop and prove nextgeneration solutions in local markets and import those solutions to the United States through foreign acquisition of U.S. banks. This is a promising shift in the otherwise checkered history of foreign bank investment in the United States. Instead of seeing U.S. expansion as a solution to saturation in its home market, BBVA has acted as a private equity investor, growing the value of its U.S. investments by transforming its IT infrastructure and organizations using models from outside the United States. We recommend that other global banks with U.S. holdings adopt the same strategy. Actions to Consider Now that BBVA Compass and Accenture have paved the way, other U.S. banks will have more data to support their own decisions to replace aging core systems. It is clear to us that the strategy of growth by acquisition and diversification is no longer sustainable; large banks have become unmanageable, and the result has been a debilitating Page 6 #FIN IDC Financial Insights

11 series of financial disasters, scandals, and failed banks. The time has come to shift to a strategy of superior performance, focusing on providing core banking services faster, cheaper, and more effectively. A "not built here" mentality must give way to a greater willingness to admit that the U.S. banking industry has fallen seriously behind the rest of the world in many ways the industry must learn from foreign institutions and nonbanks much as the Detroit automakers were forced to learn from Japanese competitors a generation ago. Otherwise, U.S. banks will become little more than regulated utilities, providing lowvalue transaction processing services at low profit margins. LEARN MORE Related Research Best Practices: Core Transformation Case Study Stanford Federal Credit Union Deploys Open Solutions' DNA to Be Real Time and Customer Centric (IDC Financial Insights #FIN238967, January 2013) Perspective: Big Data, Big Opportunities in 2013 (IDC Financial Insights #FIN238645, December 2012) Worldwide Financial Services 2013 Top 10 Predictions: Leveraging Technology Disruptors Is Path for Success (IDC Financial Insights #FIN237980, December 2012) Results from IDC's 2012 Vertical IT and Communications Survey: How Do You Stack Up Against Your Bank Peers? (IDC Financial Insights #FIN237991, November 2012) Best Practices: Cloud Vendors and Banking Making Contracts Work (IDC Financial Insights #FIN237441, October 2012) Business Strategy: Managing the IT Relationship Between Banks and Vendors Tough Love (IDC Financial Insights #FIN236550, August 2012) Vendor Assessment: Core Banking in North America 2011 Deals (IDC Financial Insights #FIN235725, July 2012) Synopsis This IDC Financial Insights report shows how the Spanish bank BBVA Compass was able to leverage its assets in Spain and Latin America to increase the value of its U.S. acquisitions. In 2007, BBVA Compass embarked on a quest to transform itself into a world-class institution, using the best processes and technology from its global footprint. With the help of Accenture and its Alnova core banking 2013 IDC Financial Insights #FIN Page 7

12 system, BBVA Compass was able to substantially improve its efficiency ratio while improving customer service, sales effectiveness, and governance. Karen Massey, senior analyst, Consumer Banking, IDC Financial Insights says, "We see the BBVA Compass core replacement project as an important precedent, establishing how non-u.s. financial institutions can create value through U.S. acquisitions. This has important implications for the competitiveness and success of the U.S. banking industry as a whole." Copyright Notice Copyright 2013 IDC Financial Insights. Reproduction without written permission is completely forbidden. External Publication of IDC Financial Insights Information and Data: Any IDC Financial Insights information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Financial Insights Vice President. A draft of the proposed document should accompany any such request. IDC Financial Insights reserves the right to deny approval of external usage for any reason. Page 8 #FIN IDC Financial Insights