Core strength

By Sharon Stephenson

Heard the one about the bank who chose not to upgrade its IT investment in core banking infrastructure?

“Changing core banking systems is like doing open-heart surgery whilst the patient is running a marathon.”

It incurred vast operational costs and inefficiencies, decreased its competitive advantage, irreparably damaged its flexibility and analytical capability, and saw thousands of customers switch to more technologically savvy competitors.

It's no laughing matter, says Peter Scott, Solutions Director for Retail Banking at Misys.

"What really enables banks to build a lasting competitive advantage is their ability to continuously innovate, achieve differentiation and respond quickly to dynamic business challenges. There's no doubt that an efficient and adaptive core banking solution is integral to the business strategy of a bank geared to meet the challenges of new-age banking," says Peter who spearheaded Misys' new generation core banking technology, BankFusion. 

What Peter is talking about are the services provided by a group of networked bank branches or, put simply, the depositing and lending of money to retail and small business customers via deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, Internet banking, and branches.

"This means that the deposits made are reflected immediately on the bank's servers so the customer can withdraw the deposited money from any of the bank's branches throughout the world."

This is in stark contrast to a few decades ago when it used to take at least a day for a transaction to reflect in the account because each branch had its local servers, and the data from the server in each branch was sent in batches to servers in the data centre only at the end of each day.    

But here's the rub: many financial institutions still operate ageing, unwieldy core technology systems - often built on mainframe technology - which are a throwback to the overnight batch-processing day. Not surprisingly, these systems are often woefully inadequate to meet the modern pressures of regulatory compliance, customer service and growing competition.

"These pressures impact the management of effective processes to deliver good services and address regulatory compliance, as well as their ability to provide what we call a 'single customer view', i.e. to be able to see your entire relationship with that customer on one screen," says Peter.

The key to change, he adds, lies in centralising internal and external data and steam-lining systems and processes to provide the necessary business agility that will allow them to address the competitive environment they find themselves in, but also allow regulatory compliance to take place.  

In topping up the core banking war chest, in other words.

It's estimated core banking consumes more than 12% of an average bank's IT budget. Last year, US banks spent around $8 billion on replacing or refreshing core banking systems. And similarly large-scale replacement continues apace across Europe, India, China and Asia/Pacific.    

And although it's an essential fix, it's not an easy one. Peter likens changing core banking systems to conducting open-heart surgery whilst the patient is running a marathon.

"It can be a very complex and lengthy process, particularly if IT systems are heavily siloed. Not to mention being expensive and disruptive to the business. Because it carries all these challenges at an operational level, you'll find that CIOs and CTOs really only want to implement change if they have to, because if they fail, the stakes are high."

Career limiting in fact, he adds, which could account for the numerous CIOs and CTOs around the world who failed to successfully implement core banking replacements and, unfortunately, got fired.       

Hence the need for a process that reduces risk, costs and does it in the most effective way.

"There are essentially two ways to tackle the issue of upgrading core banking applications. The first is what we call 'rip and replace' - i.e. take out the old system and put in an entirely new one. Or, the option that is becoming increasingly popular, renovating the existing system."

The latter approach allows banks to actually amend some of their existing processes without having to take out what's already there. It does this by basically opening up the new application into spaces of existing products and basically laying the new technology on top.

By not "messing with what's already there", the strategy allows banks to keep running their existing offerings under the covers but at the same time to open up new business processes.

Indeed, Misys believes so strongly in the value of this approach that it developed BankFusion, the world's first core banking solution to be commercialised in14 years, which specialises in renovating applications. 

"Historically, business applications have all been parameterized and nobody wanted to build another parameterized solution. So we approached the issue from another direction: if all banking operations start with a process, it makes sense to build an application using a graphic user interface and design tool, which allows users to drag and drop components for business functionality, to build business process work flows and to therefore to build a core banking solution out of that." 

As the ancient Greek historian Herodotus liked to say, "Great deeds are usually wrought at great risks", and the payback from upgrading core banking technology can indeed be major rewards.  

In a presentation entitled Core Banking Systems Technology - the Packaged Solution Breakthrough, business consulting firm McKinsey & Co suggested there may be  evidence to show a correlation between the performance of banks and whether they have successfully implemented new core banking technology.

It's something that Deutsche Bank knows all about. This year the German banking giant embarked upon a multi-year IT project to replace its core banking systems with an all encompassing-SAP (systems application process) platform.

Deutsche Bank's Chief Operating Officer, Hermann-Josef Lamberti, was quoted as saying the project intended to bring standardisation, flexibility and cost-efficiency to the bank's IT through the use of modular tools within a service-oriented architecture (SOA) environment.

"IT is a business driver and catalyst. It needs to be flexible, cost-efficient and scaleable to support business growth," he says.

"We are looking forward to shaping the industry and setting new standards to manage processes and services even more consistently and efficiently with a new core banking system.

Hermann-Josef admits the new set-up, which will use SAP software and comprise partner data, payments, account management and savings applications, is also aimed at boosting profitability and accelerating time to market in rolling out new products and services to better serve the bank's clients.

On the other side of the globe, the Commonwealth Bank of Australia (CBA) has also dipped into its pocket for AUS$730 to upgrade its core banking technology in an initiative that's estimated to take around four years to roll out.

CBA Chief Information Officer Michael Harte hailed the new technology's ability to run 'real time' banking, and says replacing the bank's 40-year-old legacy IT systems with a range of SAP applications will improve the bank's customer service platform, infrastructure and business services, as well as provide significant operational benefits and cost savings.   

For Peter Scott, whose career spans more than X years in corporate finance and banking, the key markets for future core banking technology upgrades, the so called 'rip-and-replace markets', are those in the world's most populous nations.

"The drivers for core banking replacement are probably strongest in those markets where there is underlying, organic growth from the demographic shifts taking place within countries such as China. Places where there are large un-banked populations who now want banking services, and that puts tremendous strain on some of the older legacy applications in those banking systems."

Nor has the global economic meltdown stemmed the tide of change. Banks from both emerging and more established markets are increasingly starting to recognise that in order to change and adapt quickly, large scale IT investment and realignment is required.

The real joke, says Peter, will be on those who don't clamber aboard the core banking technology renovation train...