Hungarian prime minister Viktor Orbán (right) and central bank governor György Matolcsy at a news conference in Budapest in December 2014, regarding the safety net being drawn around recently acquired MKB Bank
MKB Bank is an unlikely candidate for digital leadership. Three years ago it was still in public ownership after being bailed out by the Hungarian government and was so far behind in technological terms that it didn’t even have a mobile app.
Yet today MKB is positioning itself as one of Hungary’s rising digital banking stars, following the replacement of its core banking system last summer.
The project was part of a comprehensive restructuring initiated by the Hungarian central bank, which took over the management of MKB in late 2014. The troubled top-five lender was bought by the state from its former owner, BayernLB, earlier that year after the German group failed to find a private-sector bidder.
At the time, policymakers were optimistic that the bank could be turned around without the need for further state aid. It quickly became apparent, however, that the financial problems caused by MKB’s pre-crisis penchant for lavish lending to commercial real estate firms and other risky ventures required more drastic remedy.
Adam Balog, MKB
Adam Balog, deputy governor of the central bank, was appointed as chief executive of MKB in July 2015 to oversee a radical clean up. He promptly initiated an overhaul of the bank’s bad-debt portfolios, slashed staff numbers and exited a number of smaller operations in southeastern Europe.
Nevertheless, it was clear that further support would be needed, and at the end of the year Hungarian policymakers received permission from the European Commission to set up a bad bank for MKB.
In early 2016, Ft180 billion ($645 million) of assets were transferred to the fund, the equivalent of more than half the bank’s capital base at the time.
Once the transfer had been completed, MKB was sold – in a process that was criticized for a lack of transparency – to a consortium of local and international private equity funds.
Meanwhile, efforts to find a viable business model for the bank, within the limitations set by the Commission as a condition of the bailout, continued apace. The limitations included a cap on risk-weighted assets (RWA), restrictions on foreign exchange loans and a ban on lending to commercial real estate projects.
Balog puts a positive spin on the Commission’s conditions.
“It’s obviously a limitation, but it’s also a motivation,” he says. “It makes us very creative. We are much more effective in RWA management and cost efficiency than our peers in Hungary, so the restrictions are helping us to do our business better.”
This is where MKB’s digital strategy comes in. Initiated in 2016, the ambitious plan envisaged a complete overhaul of the bank’s technology, including the replacement of its Temenos T24 core banking system with Oracle’s Flexcube.
Mark Hetenyi, who joined MKB as deputy chief executive in early 2015, has been the driving force behind the project, which was the first of its kind in Hungary for more than a decade. He says it was an essential step in the bank’s digital development.
“The market consensus is that if you want to be truly digital you have to deal with the core banking system,” he says. “You can do a lot of things on the periphery of systems, and sometimes those actions will have more immediate results in terms of customer engagement, but eventually you will get to the point where the core banking system becomes a limitation on your digital endeavours.”
He adds that taking the decision to replace the system was made easier by the digital underdevelopment of MKB’s local market.
Hungary has lagged the likes of Poland and Slovakia when it comes to banking technology, partly due to the structure of the market and partly to the heavy burden placed on banks by the Fidesz government in the form of sectoral taxes and compensation for foreign currency borrowers.
For the first couple of months afterwards, you want to let your customers know that, even though heart surgery has been performed, you are still operating as their trusted partner- Mark Hetenyi, MKB
As this has eased, investment in digitalization has picked up, but Hungarian banks are still behind many of their central European peers. Market leader OTP only launched its digital transformation strategy in 2015, while Erste has yet to roll out its new George platform in Hungary.
After two years of preparation, the new system was ready to go live in July last year. The switchover took six days, during which the whole management team slept in the bank’s imposing 19th century headquarters.
“We drank a lot of coffee and Red Bull, and hopefully helped a little,” says Balog. “It was a great team-building exercise.”
|Mark Hetenyi, MKB|
“After such a complex project, where effectively the entire operations of the bank have been moved to a new system, for the first few months what you want is stability,” he says.
He notes that the analogies most commonly used for switching core banking systems are changing the engine of a moving aircraft and performing heart surgery while running a marathon.
“For the first couple of months afterwards, you want to let your customers know that, even though heart surgery has been performed, you are still operating as their trusted partner,” he says. “The tangible benefits will come further down the line in the form of faster and more transparent processes, as well as quicker implementation of digital innovations.”
The core banking system project hasn’t put a total dampener on MKB’s digital development, however. Over the last two and a half years, the bank has launched its first mobile app and introduced online account opening, as well as paperless signatures in branches.
“We had to play catch up with the Hungarian market on digitalization, so we couldn’t put everything on hold while we prepared for the core banking system switch,” says Hetenyi. “It was pretty crazy to do the two things in parallel, but we managed it.”
MKB has also been positioning itself at the forefront of the open-banking revolution by embracing cooperation with fintechs. In 2017 the bank established a programme called Fintechlab, which it claims is Hungary’s first “fintech academy”.
In the first year MKB chose six firms for incubation from the Hungarian market. Last year it looked further afield, picking eight candidates from neighbouring countries, including Romania and Poland.
“When we established Fintechlab, the market in Hungary was still saying that fintechs are our enemy, they will eat our lunch,” says Hetenyi. “We said no, they will become our partners.
“A mid-sized bank like MKB doesn’t have the development resources to import technology from 32 countries, we have to work with what is given to us here. The fact that we can open the gates to fintechs and they bring the development resources to us is a godsend.”
The fintechs that MKB has chosen to work with are focusing on technologies including artificial intelligence, cashflow management apps for corporates and solutions for wealth management and personal finance.
Balog sees the latter as key to leveraging the bank’s existing strength in private banking – a segment in which it ranks in the top three in Hungary – to take advantage of rising domestic wealth levels.
“The net worth of Hungarian households has almost doubled in the last eight years,” says Balog, “so we are getting more and more questions from premium and private banking customers about how to invest money.
“This is a new phenomenon and one that we think offers great opportunities for the deployment of wealth management software.”
Smaller SMEs is a largely undeveloped segment in Hungary. We think there are good opportunities here and that digital solutions could help- Adam Balog, MKB
The two strands of MKB’s digital development came together for the first time in late November, when the bank invited fintechs from across emerging Europe to a hackathon in Budapest. In the first event of its kind in the city, 20 teams were given 36 hours to demonstrate their ability to integrate their products into MKB’s new core banking system using its 1,500 application programming interfaces (APIs). All managed it within the allotted time.
“We’re proud that only a couple of months after the go-live we’re already showing that we can take a leap towards open banking and integrate with fintechs as we said we would,” says Hetenyi.
The hope now is that the combination of a new core system and a first-mover advantage with fintech will allow MKB to not only keep pace with its Hungarian peers but pull ahead over the coming years.
“The aim of our digital strategy is to enable us to become a leading player in the open banking arena,” says Hetenyi. “At the moment we are on a par with the Hungarian market in terms of digitalization, but over the next few years, as our peers become increasingly limited by their old systems, we will have an opportunity to differentiate ourselves.”
By segment, Balog plans to maintain MKB’s traditional focus on corporates, small and medium-sized enterprises, and private banking, as well as increasing its footprint in the mass-affluent retail and small business segments.
“Smaller SMEs is a largely undeveloped segment in Hungary,” he says. “We think there are good opportunities here and that digital solutions could help, so that will be a focus for this year.”
So far, the bank’s new strategy has been more than justified by its results. Despite heavy investment in technology, MKB has been back in the black since 2016; for the last two years, it has posted loan growth and core profitability in line with its Hungarian peers.
The bank is now hoping to sell its story to equity investors. Under EC rules, MKB has to be publicly listed this year – and work on an IPO in Budapest is already underway. If successful, it will mark the end of a remarkable transformation.
“Three years ago, MKB had been a state bank for more than 60 years of its existence and was undergoing a major change in ownership structure,” says Hetenyi. “It was the bad child of Hungarian banking, it had a loan portfolio full of problems and it didn’t have a digital image.
“It wasn’t a bank from which you would have expected a lot of innovation – but we have managed to turn that around completely.”