IT in banking

Made in Lebanon solutions

Some business success stories surprise like new gourmet recipes. It occasionally happens that culinary innovations start with ingredients which by and in themselves do not appeal to everyone as superb delights for the senses—for example liverwurst and artichokes, or Brussels sprouts and tofu—but make a winning dish when combined. Likewise, hardcore banking and software development might, each on their own terms, be perceived as stale, boring, and tedious activities. But when the two ingredients are being composed into a menu of refined products in a company like Beirut-based Capital Banking Solutions (CBS) they can excite not only their cooks, but also make money in global markets and entice investors.     

CBS is an 11-year old company that according to CEO Samer Hanna has around 270 employees, half of whom are in Lebanon. He tells Executive that the other half are located in offices in Monaco, Paris, Geneva, Abidjan, New York, and Miami. According to him, the combination of local and global was by design. “Capital Banking has always had the aim to be a global company while relying on Lebanese developers and Lebanese minds,” he says.

Core banking

In terms of its product and services lines, CBS addresses very specific software needs in the banking and financial industry. According to Hanna, CBS is no Fintech player in the sense of the word’s present day usage but “100 percent a software company” that develops its own software, distributes it in the form of software modules and bundles through their own sales team (as well as some third-party channels), and also provides implementation and maintenance. The product scope ranges from a core banking system—the flagship product—to modules/bundles for corporate banking, compliance, risk management, anti-money laundering, digital banking, private and investment banking, Islamic banking, and capital markets.

A core banking system can broadly be defined as the software with which banks in the last 50 or so years increasingly use to support their most common transactions. The system usually entails capabilities for deposit, loan and credit processing, opening and maintaining accounts, and keeping financial records, as well as various interfaces such as those for general ledger systems and reporting tools.

Such a system often represents a very substantial IT investment for a bank, and replacing it involves very lengthy IT procedures and extensive employee training. The life cycle of a core banking system is very sensitive to technological innovation and regulatory change, but high cost and other barriers to change often lead banks to rely on their legacy core banking system for many years, and even decades. Moreover, implementation of core banking is so demanding that successful migrations to a new system are by no means guaranteed. Hanna acknowledges that in the CBS experience there were instances when a project was more challenging than expected and had to be implemented at a financial loss to the company, but he proudly says, “We have not failed in one single implementation in the last 10 years, even if it cost us money, and we had to take it on ourselves to succeed.”     

According to him, CBS serves mostly small to medium-sized banks and sells a core banking system often for $1-1.5 million (which is not a high price, as such systems go). Core banking systems do not account for the largest sales in terms of deals—these are from sales of software modules like anti-money laundering and compliance—but overall are the company’s top revenue generator. CBS released a new version of the system at the end of 2017 under the name CapitalBanker, a version which makes Hanna enthuse that “this system is gorgeous.”

He is more reserved when the question turns to the financial performance of CBS, declaring “I can say that we are a profitable company and growing in double digits every year, by around 15 percent on average, which is very acceptable to us and to our board.” As he does not disclose current performance figures, he only allows that the company holds a “tiny” share of the global core banking software market when compared with leading providers such as Switzerland-based company Temenos, or Oracle Financial Software Services and the EdgeVerve division of Infosys, which are both based in India. Temenos, which claims to be international market leader in software for banking and financial institutions, reported revenues of $735 million and $138 million in net profit for FY 2017. Market research vendors put the global market size and outlook for core banking software as growing toward $10 billion annually.

Global outlook

Hanna reveals, however, that the firm has revenue targets of $50 million in annual sales over the coming few years and is not too far from that point. Moreover, there can be no question that CBS has taken to the global market for making its fortune. As Hanna says, the company derives 8 percent or less of its annual revenue from sales in the Lebanese market and shows no sign of having prioritized its home market for acquisition of new clients, increase of its sales, or even presence in local trade shows. Hanna says, “We did not have a need [to perform in the local market], and still do not feel that the return [from the Lebanese market] is important [enough] to invest the effort, time, and people into exhibiting in the local market. Most of our sales and revenues are generated in Europe, the Middle East, and Africa.”     

As to the background of relative reticence in Lebanon, it also seems conceivable that the company’s connectedness with Bank Audi Group, which is no secret, would discourage some other banks in the local arena from seeking a client relationship. According to Hanna, two of the six board seats at CBS are held by Bank Audi Group, which he explains is a 45 percent shareholder (another seat is held by Berytech Fund II, or BTF II, which was, at time of writing, about to declare a $5 million equity investment and participation in CBS; the three remaining seats are with Hanna and two other executives of the company).

Notes in Bank Audi’s Annual Report for 2016 say under the header Other Operating Income that the group derived $25.1 million in revenues from nonbanking activities, attributed to “Capital Banking Solutions Ltd., a subsidiary.” Another note to the Annual Report states CBS Ltd. to be a company with a registered office in the Dubai International Financial Center in which the group acquired an additional 33 percent share in September 2015, bringing the total ownership stake to 70.5 percent. According to Hanna, the corporate structure of CBS includes, under a Lebanese holding, offshore and onshore corporate units in Beirut, besides the Dubai unit, which was established for the handling of international billing.

A twofold rationale drove CBS to seek an injection of fresh capital from BTF II, which is a venture capital fund that confirms on its website that its funding is sourced from Lebanese banks under the terms of central bank Circular 331. This was, on one hand, the desire to create an extensive sales department in support of CBS’ global footprint. The other aim was to create new products, from investing into an Islamic banking module to developing its cloud-based services. According to Hanna, the state of the Islamic module is about 70 percent of where CBS wants to take it, but the company already achieved sales to banks in Iraq, and the migration to offering banking software as a service in the cloud context is progressing, besides which, he says, “We went crazy on digital; we have a great digital banking module and are now finalizing our mobile banking app.”  While CBS wants “to stay as far away from Bitcoin as possible,” Hanna concedes that the company has tasked a very small team with investigating blockchain and probably creating a process using the distributed ledger concept. As the digital frontier of banking will not wait for the timid, it appears encouraging that a Lebanese software company is standing its ground in technology development markets that, by all rational expectations, will have great importance in the future of banking.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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