Core issues

Banks are growing increasingly dissatisfied with their aging core banking systems and are seeking to find new solutions that will enable them to stay ahead in an ever more competitive market. Bikash Mathur, Executive Vice President and Business Head EMEA, Polaris and Phillippe De Geyter, Global Head of Payments and Cash Management & Global Transaction Banking IT, Deutsche Leasing get to the core of the problem.

FST. What do banks cite as the main problems with their existing core banking systems?
BM. The key imperative for banks in the highly competitive marketplace is to continuously introduce new service offerings to their end customers and capture a larger share of their business. Evolving technology is providing the catalyst for new offerings and banks are among the early adapters of any new technology wave.

The last technology adoption took place towards the end of the last decade. Changes in customer expectations, modifications in the service offerings and business demands mean replacements are now needed that are more agile, can seamlessly integrate with existing platforms or help migration to newer service platforms – i.e. they need to ride the wave of web services to induce changes that will be far-reaching in terms of ROI.

According to a recent Gartner report, replacement of core banking systems is at its peak in Europe. The key drivers in this are, therefore, changes in the technology landscape and the inability of existing platforms to seamlessly transition to the new requirements.

PG. Modern banks need functionality that is both distributed and centralised. The problem for banks is that existing systems were built as large monoliths. In the past, enterprise applications contained end-to-end processes that were being automated. A single database existed and was the central mechanism of integration. Functionality could not be used outside its specific area of use.

FST. Why are current systems so inflexible and why is that flexibility important?
BM. Earlier systems are based on monolithic, siloed structures, which makes it more challenging to introduce new applications and imperative that banks migrate to technology platforms that can overcome these barriers.

Being platform and technology agnostic is one of the key requirements. New offerings are scattered across different technology areas (.Net, J2EE, etc) and best of breed applications need to come through in a seamless manner – truly making convergence a meaningful proposition. The current systems therefore need to morph to fulfill each of these objectives.

PG. There is currently a need to reuse functionality and more so to transform the process of reuse from an ad hoc event into a formal design based upon the needs of the business process. Even in the more advanced server-based systems, the challenge facing banks is integration of best of breed applications, i.e. ERP, CRM, etc. One way to doing this was through EAI technologies, which allowed the ‘develop once, use multiple’ principle and on a function/process base.

Flexibility is necessary to optimise costs and to improve availability of customer data. Optimal use of customer data will continue to be a competitive advantage, much more than availability of products.

FST. What’s driving banks to reassess their core banking systems?
BM. Due to the business needs and the advent of a new technology wave – SOA – banks need to re-asses their technology platforms. As they morph their business practices to stay fiercely competitive, the banks need to break down the siloes of their old architecture, make processes seamless across functionality and move towards a single customer view.

The need to deliver succinct ROI is driving the consideration towards impending changes. Essentially, it is the manner in which transactions are conducted and the way banks view their return on technology investments that is bringing about the changes.

PG. It is primarily the need to optimise their investment and to seek competitive advantage by optimising use of customer data. The web services era has provided this possibility; they promised a solution to the challenge of connecting applications in a standard way and offered the possibility to break apart layers of the application trapped inside the monolith.

Unfortunately, the old monolith systems are not process or application based, and so cannot take advantage of the possibilities offered by web services – SOA, therefore, cannot be used. Yet, to build or use a series of services that can be recombined each time you need to solve a new problem is not given. Add to this the increasing costs of maintaining the old monolith systems, and its clear that banks are now taking on the task of evaluating the next steps, something they have refused to do in the past.

FST. How do core banking systems implemented today vary from those of the past years – what regulations, requirements and challenges must they address?
BM. The key differences we see in the new wave of technology are re-usability of components, variations in the platforms and the need for all of these to be compliant with the raft of regulations that are coming to the forefront. In addition, banks are closely monitoring cost of implementation and maintenance costs in their decision to implement and selection of new technology.

PG. Components are now reusable, hence limiting costs – this is very similar to car production, where various models of a given brand have up to 80 percent identical components. Components are reusable in its totality or on a sub-process base, data is collected and made variable based on the needs of user servicing part of the customer cycle.

Regulations will not determine the way systems are built going forward, as the banking sector has worldwide common standards. A challenge, however, will be ensuring that new regulations such as BASEL II can be met. This will have a major impact as banks will have to build the environment to collect, evaluate and maintain data for customers in far more detail than previously.

FST. There remains some trepidation amongst bank executives. What are their chief concerns about implementing new systems?
BM. The main concern bank CIOs have is about how pervasive the changes will be and what the process of implementing that change is. There can never be a situation where a bank’s processes are completely shut down for replacement or enhancement. Thus, new applications must be integrated in a seamless, non-pervasive manner and technology aligned with the business needs. The more comprehensively a software vendor is able to address these issues, the better chance is has to position its offerings. Smart legacy modernisation is a priority area for all banks.

PG. The main concern for CIOs is the effort it takes to re-build functionality. The old monoliths were built 25-30 years ago in a, frankly, not always optimal structure, and were usually badly documented. As functions are fully integrated, a re-build is risky, as it does not allow a step-by-step process.

However, within the IT market a large number of professional organisations have specialised in re-building the old functionality using new technology. This is no longer pioneering, but in many cases standard production of new environments. Moreover, the rebuild should allow banks to re-structure and optimise the processes, reduce costs and enhance functionality.

FST. What benefits are organisations realising through global sourcing of their core banking technology?
BM. Global sourcing allows banks to follow best practices from across the globe. What has worked in one particular geography is easily replicable in another, so software vendors are also able to migrate processes which are best-of-breed. Thus, core banking technology is evolving to capture the various nuggets from efficient systems and package these into technology that can rapidly enable transformation in a seamless manner.

PG. Cost-effectiveness is a major factor. Building and maintaining banking systems requires a team of professionals and, in some countries, it is difficult to recruit these professionals, and to retain them long-term when they are on board. Moreover, the labour costs are very high for high skilled IT staff.

Increasingly, ‘standard functionality’ is no longer seen as key for the organisation and outsourcing is one way to reduce costs and maintain a high level of quality. Global sourcing is being recognised as a way to achieve both goals. The fear of loss of key competence is still present; its importance is however diminishing the more organisations use the model.

FST. What trends do you see for the future when it comes to core banking?
BM. Core banking technology will become more sophisticated in terms of re-usability of technology, optimisation of functionality across multiple technology platforms and partnerships in multiple eco-systems. Future developments are likely to be in this direction.

PG. Core banking will become more and more standardised in functionality. Already now, and this specifically within the consumer banking world, customer products and functions are no longer seen as a competitive advantage. Frankly put, all banks offer standardised products and services. Going forward, the collection of and use of customer-related data will be important in improving the knowledge of the customer and allow customer penetration. The data available needs to be complete, non redundant and available to the various groups within the organisation. Collection of and use of data will become the critical factor within banking systems of the future.