Core banking

Core banking systems are at the heart of every financial institution’s operations. Yet for the most part they are based on aging mainframe technology, that is rapidly approaching its sell-by-date. FST brought together three industry experts to discuss the benefits and challenges of brining core banking into the 21st Century.

Amit Dua (AD) is regional manager and head of sales, Europe for Finacle at Infosys, responsible for leading the Finacle business across Europe.

Dua has over 13 years of experience in information technology, more than 10 years of which have been in the banking technology space. He brings a wealth of experience from the international business environment having led the Finacle business in regions across the world from South East Asia to Africa before he moved into his present role in Europe.

Dua is a keen strategist and holds a distinct perspective on core banking technology. He has been a regular contributor on the subject in business and IT publications across the globe.

Andrew Derrer (AJD) is Vice President, Global Core Banking at Oracle. Prior to his second term at Oracle, Andrew was CEO at Misys Retail Banking, for two years (2004 -2006) where he led a 900 person software ,development, sales and consulting business.

Derrer was at Oracle between 1997 and 2004, where he was Vice President for EMEA Financial Services for five Years and Vice President for EMEA Applications Consulting for two years.

He joined from EWI Business Consulting, a consulting company he co-founded based in Switzerland and India which became part of Oracle.

Prior to that Andrew, who is a qualified Accountant, held a number of senior finance positions in a variety of major Corporations; Unisys, Control Data, Arco and Mobil. Andrew has also served on the Board of Barclays B2B as an advisor on Technology.

Chetan Uberoi, Global Director, Core Banking Solutions, Hewlett-Packard Company. In his current role in HP, Uberoi is responsible for managing the alliances with the core banking ISVs globally, leveraging the capabilities of all of HP.

Prior to this role, Chetan was responsible for business development in the core banking segment, globally, for Hewlett-Packard. He brings with him a rich experience of more than 17 years in the IT industry, having worked for HP Asia Pacific and HP India before taking on world wide positions. He has in-depth knowledge of the financial industry and has lead teams from sales as well as business development areas.

FST. There has been a lot of talk about upgrading key core banking systems. Can you start by defining what you see as the main areas where banks can improve their CB systems?
AD. It would be relevant to define a ‘core banking system’ before answering the question. The core banking system is the sum of all IT components that allow a bank to develop, process, and manage the bank’s basic financial products and services effectively. These include:

• Basic client data management.
• Deposits.
• Loans and mortgages.
• Payments.
• Workflow and business enablement systems.
• Branch automation (Teller).
• Accounting.

But then whichever way you define it, the core banking system is key in a bank’s quest to flourish in the new, and intensely competitive, ‘flat world’ banking landscape. Flat world dynamics increasingly enable competitors that are nimbler, innovative and more cost effective to play in any market regardless of size or location.

The key business drivers that are transforming core banking systems are operating efficiency, ability to tap into new sources of income, scalability, agility and time-to-market, harmonization of enterprise-wide processes, a proactive approach to risk management and regulatory reporting, and most importantly a lowered total cost of ownership (TCO) of IT infrastructure.

AJD. Banks are currently focusing on growth and want their CB systems to facilitate their high growth business initiatives, providing agility and flexibility for tapping new opportunities. Meeting compliance and regulatory requirements and bringing about operational and process efficiencies are also key considerations for new CB systems.

CU. Core banking systems have more than a 30-year history of development, with stand-alone functional components and batch processing as the norm. Virtually all these components were built as stand-alone applications to process large volumes of transactions; they did not have to communicate with each other.

Today, most of the large financial institutions are still running their antiquated core banking systems with workarounds and wrappers developed over the years to meet the changing needs of the market. There is a limit to which you can extend the life of these systems, which are inflexible, very costly and severely limiting the bank’s ability to compete is today’s fast changing world. Bank’s require a significant review of their existing systems and a plan for core systems renewal to keep ahead of competition, and be agile and operationally efficient. It is imperative that the banks plan the core systems transformation today.

FST. And what are the key benefits of upgrading CB systems?
AJD. New CB systems, based on modern flexible architecture, can support aggressive growth initiatives no matter what the growth strategy (organic, cross-border, acquisition or consolidation). They can provide the necessary agility to adapt to continuously changing business environments, including helping banks to expand their product portfolios and integrating with third party solution providers. In short, bringing solutions to the market ever more quickly.

By combining a modern CB system with world class, real time data integration and customer analytics, banks gain the capability for ‘just in time’ response to real customer ‘life’ events, as well as the ability to relate those events to the corresponding opportunities and risks they prompt. This real time capability also eases the burden of meeting regulatory and compliance requirements and provides information to improve operational efficiencies and consequently reduces cost.

CU. Upgrading core banking systems is vital to supporting the drivers of sustainable competitive edge. It helps a bank to deliver its strategy to its customer. The benefits will be huge. The banks will be able to meet the growing customer expectations in a seamless manner. They will be able to provide a wide variety of products and personalized customer centric service delivery across multiple channels. There will be a significant improvement in service quality including better customer segmentation.

At the end of the day, the core banking system is the cost of providing service – the new investments will be easily justified by the improved efficiency and cost to income ratios. By moving to the flexibility of an open, adaptive architecture, banks can expect to realize a lower TCO since the fully burdened costs of the new system – including service and support, networking , security, user training and software licensing – will be greatly reduced through the use of industry-standard and off-the-shelf components.

AD. Banks, irrespective of size or geography, must find ways to solve the dual challenge of cutting costs and increasing internal efficiencies, with the ultimate aim of improving margins, which are clearly under strain.

To keep pace with rapidly evolving business and operational requirements along with changing customer demands, banks need to constantly upgrade their banking practices and processes. The scope for such exercise is restricted because of the limitations of legacy platforms in terms of architectural rigidity, complex interfacing needs, considerable manual hand-offs and lack of STP, real-time capabilities as well as high costs of installation and ongoing maintenance.

Transformation of the legacy system can help the following:

• Reducing operating costs and improving operating margins.
• Improving time to market of innovative services and products.
• Ability to serve new and complex customer needs, delight them with superior customer service.
• Cross and upselling of products and services.
• Effectively ensuring compliance to regulatory mandates.
• Achieving high level of process efficiency and further improving service costs.

FST. When addressing CB systems is it benficial to introduce a new system ‘over night’? What are the limitations of addressing CB systems in a more incremental fashion?
AD. Currently most banks have a siloed architecture, where each line of business has its own systems and islands of information, which makes core banking replacement a complex integration exercise. Islands of systems have to be either made redundant or integrated with the new solution based on business requirements and processes.

In such a scenario, the traditional approach of a ‘big bang’ replacement where all systems are replaced at one go is practically infeasible for most large banks. Most banks are evolving a phased approach for replacing legacy core banking solution. Midsized or smaller banks however may find it more beneficial to adopt a big bang approach since the size of their operations is more manageable and conducive to such implementations.

In the last few years some large banks have been successful in adopting a line of business (LOB) oriented migration approach. This involves the bank replacing only those modules of the legacy core system that serve a specific line of business, like demand deposits, personal loans, mortgages, trade operations and cash management. This approach not only reduces the risk of implementation but also enables the bank to experience the benefits of the new core banking solution early in the project. On the other hand, a phased approach may cost in terms of opportunities lost to more aggressive competitors in lines of business that lag in the replacement strategy.

AJD. This would depend on the type of institution. For some small to mid-sized institutions, with modest needs and packaged architectures, a big bang approach to migration may be taken, whereas such an approach is rarely appropriate for a larger institution with a more varied business portfolio, heterogeneous IT environments, a larger customer base and/or possibly more complex geographical operations. Such institutions will take a more evolutionary approach to CB migration to better manage risks, and to leverage as much as possible their existing assets.

While phased approaches have their benefits in terms of managing risks and bettering the chances of success, this should be balanced against longer implementation cycles, and thereby, a longer time to return on investment.

We are seeing different migration strategies including, system-by-system, process-by-process, line-of-business and regional approaches. Banks must be careful to choose the right strategy for their environment. For example a system-by-system approach will not necessarily reap the rewards of more agile or improved business processes.

CU. Core banking replacements are complex, expensive and risky IT projects. The banks can go in with the ‘over night’ typically suited for smaller banks or take the modular approach for gradual transformation that reduces the cost and risk of core systems renewal substantially.

The larger banks will have to adopt adaptive enterprise architecture while coming up with their strategy and plan for core systems renewal. The starting point is the architectural framework, with a focus on improved integration and use of operational data stores to provide real time data for risk management and customer insight applications. This would help them prepare for the core banking system replacement in a phased manner.

There are no limitations for banks addressing CB systems in an incrementall fashion, except that it will take more time and is definitely the way forward for larger banks with complex needs and architectures

FST. Technology is only ever half the story. When upgrading CB systems, what other processes or areas do banks need to consider to maximize the advantage of doing so?
CU. No doubt, technology is an integral part of the banking value chain but the CB systems also influence the banks as much from a business process perspective.

Today, we all understand that there are inefficient business processes attached to the antiquated CB systems with a lot of duplication. The core systems transformation is a business issue and should be fully supported by the CXO leadership team. This critical support is required throughout the life of the project from business process analysis, technical and business specifications, customization and change management.

As disaggregation is becoming reality, banks would want to focus on their core strengths on the product side and sell their products through a consolidator or aggregator. Banks should increasingly use outsourcing as a strategy and not as an objective.

AJD. The impact of upgrading CB on banks business processes should not be underestimated. By managing the process changes, these impacts can be steered to accentuate the positive. Many banks already have significant process improvement initiatives underway using Six Sigma or Lean Sigma techniques; there are also a number of banks looking into revamping their governance structures around COSO and COBIT in light of tougher regulatory requirements. It is essential to leverage these initiatives when considering new systems.

In order to support these BPM initiatives, key selection criteria should be to choose CB systems that support an architecture that allows the flexible management of business processes, business service capabilities and business rules. By utilising BPM technologies, such as BPEL, on service oriented architectures (SOA) the bank can take full advantage of these capabilities.

For some years we have been discussing how the ‘branch of the future’ will look and I’m sure these discussions are not over but, no matter how the branch looks, the key challenge is to provide a consistent ‘counter service’ experience to the customer from anywhere and at anytime. Banks can now take advantage of the designed-in multi channel, always-on capabilities for multi-channel integration to help meet this challenge.

AD. Some key issues in core banking system transformation:

Vendor Risk. Analysts stress the importance of vendor relationships in evaluating enterprise software. Given the magnitude of a core banking system replacement, the solution provider should be a partner rather than a vendor. Some important considerations:

• Vendor commitment – it is vital for a vendor to have a lasting commitment to the banking industry and a thorough understanding of the business.
• Vendor strength – is it relatively more immune to acquisitions? Does the vendor have the resources and commitment to make continuous investments into the product?
• Vendor quality – for a software vendor, adherence to quality standards such as SEI CMM Level 5 is paramount.

Solution risk. Regardless of the quality of implementation, at the end of the day banks buy solutions and careful evaluation of the solution is essential. When evaluating a core banking solution, ask yourself:

• What are the strategic differentiators that the solution offers – will it help me offer innovative products and services?
• Will it give me flexibility to quickly adapt to a changing market?
• Can the vendor offer any proof with measurable TCO or ROI?
• Can the solution help launch new products rapidly?
• Does the solution represent and reflect global best practices of banking, which you can leverage to improve your own existing processes?

Implementation and support risk. In many ways, the real challenge comes with carrying a project to successful completion. An experienced vendor has proven implementation credentials – in part because the vendor knows how to overcome deployment obstacles and manage unexpected challenges. Ask yourself:

• Will the vendor make many changes to the source code on-site – making the management of versions a complex mess?
• What implementation methodology does the vendor use? Is it comprehensive and does it meet critical requirements?
• What is the vendor’s track record for implementations and strategy for mitigating risk?
• What type of post implementation support and how many levels of support does the vendor provide?
• How does the vendor handle upgrades and enhancements after the implementation has been completed?
• What do long-standing customers have to say about the vendor’s post-implementation support?

FST. With the onset of SEPA in Europe the customer experience will become ever more unified. Do European banks generally already have common CB systems across European countries, and if they don’t is this now essential?
AJD. With SEPA, customers can finally rely on a common set of payment instruments. This explicitly requires an underlying set of common business practices and consequential technical standards. Today, most European banks do not have a common CB system across multiple countries, and it is not essential in order to support a common payments infrastructure. A common CB system would, however, reduce the complexity of integration and remove chances of inconsistency when implementing the technical standards – thus enabling the cost reduction needed to remain in business post SEPA.

haagenilla.....eega nanna lunch time....naanu hogta iddini adakke.......kelde ashte mam.......naanu hogi baro tanaka irtira taane....? Some European banks have taken the lead and are implementing a common CB system, including payment networks, with the onset of SEPA. The consolidation of multi-country operations on to a common system is the key as the banks will be able to reduce their infrastructure costs by merging their domestic and cross-border payment systems. Payments are a key revenue source for the bank and are becoming a commodity service and the industry is consolidating to offer economies of scale. The banks cannot afford to operate their payment systems in silos and will have to adopt a strategy of centralized payment systems to respond to the changing market environment.

AD. Most European banks do not have common systems across countries. The advent of SEPA has put huge pressure on the revenues that were being made by these banks, especially for cross-border payments and this will force banks to streamline their processes and systems. We are witnessing a major trend towards consolidation of core systems by European banks across their operations in the continent. Many banks are attempting to derive cost efficiencies by consolidating infrastructure and staff in one single data centre. Banks operating in Central and Eastern Europe seem to have picked up the cue and have started consolidating operations under a single core system and this trend is expected to be seen in Western Europe in the near future.

FST. Can you tell us a little about the key strengths of your own CB solutions?
AD. Finacle core banking is a modular consumer, corporate and trade finance solution delivering business agility, minimized risk and lower total cost of ownership (TCO). Finacle has emerged as the world’s most scalable open systems based core-banking solutions and it addresses both the back office and front office requirements of banks in a seamlessly integrated manner.

The customer-centric architecture of the Finacle core banking solution, coupled with the integrated CRM capability, ensures a unified view of the customer, across channels and products. The solution enables banks to effectively manage customer relationship by defining and monitoring service levels, enhancing sales force productivity and creating a differentiating customer experience

With workflows to automate processes and straight through processing (STP) infrastructure to reduce turnaround times, Finacle core banking solution can help banks eliminate nonproductive processes and reduce manual intervention. Additionally, being a true web-enabled application, the solution screens are richer, with integrated web applications like chat, information ticker and e-mail, for quick and seamless knowledge dissemination.

The unique Xtensibility tool kit and services-based architecture of Finacle allow banks to set and change business rules and quickly integrate them with surround applications. Since these modifications do not need a change in the application's source code and can be done by a bank’s IT staff itself, it ensures faster time to market for new products and services.

Finally, Finacle core banking solution is based on open systems and new-generation technologies. It is future-proofed and can be seamlessly integrated with other enterprise applications. With proven scalability in both test and live environments, Finacle ensures protection for banks’ technology investments.

AJD. Through Oracle’s recent acquisitions of Siebel CRM and its investment in i-flex core banking applications Oracle is uniquely positioned to provide a clear route from today to the future of enterprise banking systems.

The i-flex core-banking product, FLEXCUBE, is uniquely positioned to address diverse requirements by offering comprehensive capability across multiple business areas, effectively automating the entire transaction processing function.

The key differentiators of FLEXCUBE are its breadth of functionality and its excellent track record. Since its launch in 1997, more than 280 financial institutions in over 100 countries have chosen FLEXCUBE, and it has been ranked the world’s No. 1 selling core banking solution for four consecutive years – 2002, 2003, 2004 and 2005 – by the UK-based International Banking Systems (IBS).

And it doesn’t stop there; we are in the process of taking this market-leading product to the next generation of enterprise software for banking, based on a fresh approach to delivering end-to-end process views of the steps, procedures, policies and systems. This covers the traditional front, middle and back office process silos, all of which need to be integrated in a seamless manner.

Oracle and i-flex will deliver this next generation utilising process oriented, component based, reusable services. Naturally, for Oracle, all products, Core Banking, CRM, ERP and HCM are available, and will remain available on a highly secure, highly available and high performance technology platform.

CU. HP’s approach to the dilemma of obsolete technology in the antiquated CB systems is to evolve the traditional core banking model from a complex framework that limits options and incurs high costs to a revolutionary new service-oriented architecture (SOA).

SOA is a highly efficient and cost effective way to integrate heterogeneous IT systems and helps banks increase business agility. Hewlett-Packard assists banks through the entire SOA process, from envisioning and assessment to development and governance. HP’s SOA is based on a common service platform called HP Open Bank, which uses SOA principles to integrate multiple channels and legacy so systems that they may be phased out easily and with minimum disruption and expense.

With our strong partner relationships with the best of breed and the most experienced ISVs, end-to-end services and SOA expertise, HP’s core banking renewal strategy aligns closely with the HP Adaptive Enterprise principles of simplification, standardization, modularity and integration. By moving to the flexibility of an open, adaptive architecture, banks can expect to realize a lower TCO since the fully burdened costs of the new system-including implementation, service and support will be greatly reduced through the use of the industry- standard and off-the-shelf components.