Oracle moves into core banking applications

Oracle is acquiring a majority interest in I-flex Solutions, a vendor of software for the banking industry. The firm, based in India, is 41% owned by Citibank, which runs I-flex. Oracle is buying Citibank's stake and is offering to buy another 20% of the outstanding shares from other shareholders.

Strategically, this is an important move for Oracle. Although Oracle claims 17 of the world's 20 largest banks as clients, those banks are mostly running Oracle's database and accounting or HR software. Oracle has not, to this point, offered software applications to support banking operations. That's about to change with Oracle's takeover of I-flex, which Oracle will run as an independent entity, according to Charles Phillips, an Oracle tri-president who will join the board of I-flex.

The move into banking software is a strategic decision for Oracle. The market for such software is potentially huge yet immature.

• The market is huge. Today's ERP systems, which are at the center of offerings from Tier I vendors such as Oracle and SAP, started in the manufacturing industry. But if the manufacturing industry has been attractive for major software vendors in the past, the banking industry is potentially more attractive. According to our research at Computer Economics, as a percentage of revenue banks typically spend over three times more than manufacturing companies spend on information systems.


• The market is still young. According to industry research, something like 75% of software for core banking applications is internally developed. Whereas few manufacturing companies today would dream of developing their own manufacturing operations software, banks continue to maintain and develop new applications for their core banking operations. Admittedly, banks can be thought of as information businesses and therefore can justify more of a custom development strategy. But one has to believe that there are a lot of things that banking systems do that are common among banks and, therefore, good candidates for packaged software.

Although the market for banking software is fragmented, there are some significant players that Oracle will be competing with, starting with SAP, which already serves this segment. Other players include Misys, Temenos, Accenture's Alnova subsidiary, Fidelity Information Systems, CSC's Hogan suite, Chordiant, Financial Objects, FiServ, Infosys, Jack Henry, Kordoba, Metavante, Polaris, Sanchez, and System Access. The list goes on and on.

With SAP already established in this market, Oracle sees the banking sector as another key battleground in its war with SAP. At $1 billion, Oracle's price to enter the fight is far less than the $11 billion it paid for PeopleSoft. Oracle's move into banking is similar to its move into the retail industry with the acquisition of Retek, which it scooped out from under SAP's friendly takeover. In both cases, Oracle is moving into an industry where there are many opportunities for replacement of legacy systems and there is no concentration of dominant competitors.

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