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Banking & Financial Software Opportunities in the European Union

By Scott Goddin & Nicholas Strychacz, Portland US Export Assistance Center

Due to the prevalence of older-generation software platforms, industry analysts hold that upgrading the estimated 4,500 banking systems in Europe will require about EUR (Eurodollar) 100 billion in investment over the next several years, with larger individual bank upgrade projects requiring more than EUR 250 million in the same timeframe. Legal harmonization of Internet banking regulations has been achieved in France, Germany and the United Kingdom through EU Directives, with other countries likely to follow in the next few years. Although the European Parliament’s legal affairs committee recently scrapped a proposal that would have strengthened the EU-wide software patents directive, there is still an impetus among financial institutions to upgrade their software systems in order to better compete in the expanding European and global arena. As this competition accelerates, opportunities for enterprising U.S. software firms will increase.

U.S. software firms already have an important presence in the European online banking market. In Germany, for example, U.S. firms hold five of the top ten positions (by annual sales volume). Generally speaking, U.S. software is viewed in Europe as very reliable, and U.S. firms often have an edge over similar European firms due to their reputation for excellent business practices and for meeting the needs of clients efficiently. Besides this, U.S. software firms of all sizes tend to have more experience in the larger, more mature, and more homogeneous U.S. market where new technologies and ideas are more easily accessible. For these reasons, U.S. software firms hold a considerable competitive advantage over their European counterparts. As advanced software and information technology is considered one of the keys to business success in banking, demand for services from U.S. firms is high and will likely increase over the next few years.

Issues and trends in the EU Internet banking sector
The following trends in the EU Internet banking sector offer promising prospects for Oregon firms looking to enter the European software market with a range of software applications and services open for development and customization. The U.S. Commercial Service has characterized the import climate for computer software and services in all areas as “excellent.” There are no trade restrictions on the export of software and services from the United States to the European Union.

Online banking security: The EU financial industry is especially aware of Internet security issues and plans to upgrade security software; this upgrade is a high priority for European banks. Of German banks, 46 percent reported that they needed to upgrade the software currently installed and invest in the installation of firewalls. Viruses constitute 78 percent of security breaches in Europe; phishing attacks account for 12 percent of security breaches. A recent study by Deutsche Bank[1] found that there is a high negative correlation between security concerns and the adoption of Internet banking practices. Until these concerns are fully addressed, the European Internet banking regime will not be able to realize its full potential.

Standardizing software: The software currently used by banks in Europe is sufficient for operations at a national level. However, operating an EU-wide or international network will require that banks standardize software that can be also be adjusted to their particular needs. The share of EU banks expected to require an upgrade to a standardized software platform is expected increase by 50 percent over the next few years. Furthermore, most banks will need to increase spending on process optimization in order to increase their software’s efficiency and effectiveness. Total spending on process optimization is anticipated to be about 17 percent of the total information technology budget outlay.

Customer Relationship Management (CRM) software: CRM software is used to build and maintain client relationships when customers are not as loyal to their financial institutions as they once were. Therefore, CRM software systematizes requests made by clients and raises overall customer satisfaction – a factor that can play an important role in this increasingly competitive sector. In 2005, the demand for CRM software in the EU increased by 7 percent and analysts believe that such demand will see the fastest increase in demand within the entire Internet banking sector over the next few years.

Case studies of five EU countries
United Kingdom: The prospects for exporting banking and financial services technology to the U.K. are solid with information technology considered to be one of the top 14 “best prospect sectors” for U.S. exports to the U.K.. However, U.S. firms must have a finely honed and strategic business plan before entering the market, as the U.K. market is highly developed, sophisticated, and competitive. Potential exporters must have a sustainable competitive advantage in order to maintain a lasting presence and the U.S. Commercial Service recommends that potential exporters to the U.K. have a proven, substantial market presence in the U.S. before expanding their operations abroad.

Germany: In 2000, 11 percent of Germans engaged in online banking. In 2006, the figure stood at 34 percent, with a strong likelihood of high further growth. Such a large increase in the number of individuals engaging in online banking was proportionate to increased spending on Internet banking software. In 2005, the market for banking software was nearly EUR 5 million and is anticipated to grow by 5-8 percent annually over the next few years. Beyond investment in online banking software, efficient information technology equipment is considered to be one of the keys to business success in banking. The U.S. Commercial Service has found that some German banks are operating inefficiently and will be required to speed up the automation process. Therefore, as competition heightens, banks will be forced, in order to reduce costs and to remain competitive, to invest increasingly in modern information technology software and equipment. German banks are especially interested in automating their securities trading, business processes, and credit processing solutions. Investment in introducing modern information technology equipment and upgrading existing platforms is anticipated to grow at 5.4 percent annually.

Spain: After decades of slow growth, the current vitality of Spain’s economy has induced an impressive increase in investment. The Spanish financial sector is no exception, with large sums earmarked for upgrading and installing software. The primary trends for development include multichannel solutions, increased Internet-based operations, and an evolution from call centers to contact centers. One of Spain’s largest savings banks, Caja Madrid, is expected to invest $1.2 billion in information technology by the year 2010. The U.S. Commercial Service expects that this increase in investment will create many business opportunities in the banking industry for U.S. information technology firms and service providers.

France: France has one of the more interventionist governments in the EU, and, as such, many high-technology firms, including information technology firms, are publicly owned. This, coupled with strong support of “national champions,” means that competition in France can be fierce. Still, the number of financial institutions that use online banking is relatively small. Many banks have begun connecting their branches to online banking applications, and many more have indicated that they will soon being this process. Increasingly, French banks are recognizing that for them to remain competitive, they will need an infrastructure based on networked service centers. As the French banking sector begins to adopt Internet banking strategies, opportunities will emerge for agile and competitive U.S. firms.

Italy: Of the countries examined in this report, Italian banks are the least likely to pursue online banking; Italians are more reluctant to use online banking services than other Europeans: only 3.5 percent of Italians have used the Internet for financial transactions. This is due partly to security concerns, partly to high fees charged by banks (as well as fees charged for local telephone calls, which apply to using the Internet), and partly to a culturally held “fondness for cash.” Too, the distributive structure of Italian commerce - small shops and business that cater to a local clientele - is not conducive to e-commerce and online banking. Italian banks must institute several reforms in order for online banking to flourish, not least a restructuring of the financial institutions’ business model regarding online banking and a fundamental shift in perceptions regarding e-commerce. For these reasons, the overall prospect for exporting software to Italy is not as promising as for other European countries.

Breaking into the European software market
A difficult initial hurdle for U.S. firms attempting to enter the market is the strict regulatory and bureaucratic process. U.S. firms should carefully check as to which regulatory approval procedures are required for their services or products in order to be competitive in the European market. In most cases, U.S. firms will have to register with the EU as well as the particular country that they are trying to enter. Although standards testing is not always required by law, products that receive high performance and quality marks can greatly increase their competitiveness and marketability. Database and other applications that integrate personal/private customer information into a business process may also be subject to the EU Privacy Directive (find more information at www.trade.gov/td/ecom/shprin.html).

Modes of distribution tend to vary depending on the specific country. In general, U.S. firms should work through a competent local agent, distributor or systems integrator. Another option is to enter into a joint venture with a European IT service company that would take the U.S. firm’s technology/service as an add-on to its own portfolio. IT consultants with a focus on banking can also be a helpful, if more expensive, option. These consultants will be well acquainted with the local business etiquette and environment and will have contacts with European IT decision-makers.

Local advisors or IT consultants can also help make localization changes necessary for entering the European market, as software that is developed in the United States will have to be adjusted to European practices. For example, manuals and instructions will have to be translated into the language of the country in which the software will be distributed. Similarly, U.S. firms need to keep in mind that business models that have been successful in the United States may not be as effective in Europe. Therefore, market entry and expansion strategies must be adapted to the local market and must take into account the differences in foreign markets.

Participating in trade fairs in Europe is one of the best and most cost-effective ways of researching the target market. At such events, a U.S. firm can investigate competitors and find customers, potential agents and distributors. Trade fairs are considered to be an excellent method of introducing new technologies and products, and present a gateway to the European market.

While the market challenges may seem imposing, the globalization of banking and finance will mean that applications proven successful in the U.S. market will gain traction in the EU as European banks meet global competition head-on. These potential clients will seek to retain and expand traditional client relationships through the service offerings available through new software applications while also seeking to increase their back-office and transactional efficiencies through upgraded software platforms. Oregon firms selling applications and services that support online banking infrastructure or business process functions will find significant market opportunities and willing customers as they seek to rediscover the “Old World”.

About the author
This article was co-written by Nicholas Strychacz, a student intern at the Portland USEAC and recent graduate of Lewis and Clark College, where he majored in international affairs. Nick is planning to attend graduate school next year toward a degree in international economic policy.

Scott Goddin is director of the Portland US Export Assistance Center (www.buyusa.gov/oregon) and has been working in international trade with the U.S. Department of Commerce for more than 20 years. He works with Oregon and Southwest Washington high-technology companies to develop international markets, specifically helping them to design market-entry strategies; find and evaluate distributors, VARs or agents; evaluate product or service delivery methods; and “internationalize” their companies.

Goddin has served as a U.S. trade negotiator working on Asian market access and standards issues for U.S. high-tech and communications companies and intellectual property rights issues in Korea, Taiwan and China. Goddin also has served in temporary assignments as a commercial attaché at American Embassies in Seoul, Taipei and Nairobi and has managed the office in Portland supporting local Oregon firms since 1997. You can learn more about export assistance at www.export.gov or contact Goddin directly at scott.goddin@mail.doc.gov.

[1] “What We Can Learn From the Differences in Europe,” Deutsche Bank Research, February 2006.
 

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