Core system replacement: mastering complexity

Oh, what a tangled web we weave. With the years, or decades, of continuously patching, adapting and adding new functionalities to aging core systems, these systems have become highly integrated and complex. Is it time for core system modernization?

The banking industry is currently facing multiple IT-challenges. Application silos and product centric systems is limiting straight through processing. Multiple core banking systems is resulting in high maintenance and development costs. Lack of a data model capturing an entire customer profile and customer data spread across several core applications is limiting the ability to perform efficient customer relationship management. Inflexible core systems are limiting rapid product launch. With recent market requirements surrounding internet channels and Euro initiatives clearly behind them, many large financial institutions are now experiencing increased pressure on cost efficiency, flexibility, and speed in terms of supporting the different bank business areas. It is becoming apparent for many banks that the target is not achievable within the existing infrastructure, without application consolidation and reduction of complexity. Replacement of significant portions of current legacy systems with new technology will be necessary, in order to reduce duplication of data, to eliminate
sub-optimal work-flows, and to allow straight-through processing of transactions wherever possible.

Currently core banking is one of the few IT areas within the banking industry still dominated by in-house developed systems. This especially holds true in top-tier banks where large IT staff is dedicated to the development and maintenance of legacy applications. Many are looking to solution providers and partners for new technology rather than once again trying to
create core applications in-house.

During the last years IT solution providers has capitalized on technological advances and are now offering standard solutions within the core banking area. A top tier-bank looking for systems in this area should be aware of a number key characteristics, such as;

• Customer focus across all products and channels
• Product factory and configuration across all market areas
• Real-time accounting across all distribution channels
• Multi-bank/Multi-currency/Multi-language capabilities
• Modularization and reuse of functionality and data
• Comprehensive interface architecture
• Component based solution, yet integrated, for both the retail and corporate area

Cost focus should be on business process cost (STP), maintenance cost, and operations cost. A modern core system should protect current investments by offering an unbundled core and front-end, without data duplication and redundancy, and the ability to interface existing systems in a consistent manner. The core banking partner, in cooperation with the bank, should develop a sensible project plan based on a sound business case, with long-term implementation focus imbedded with step-wise short-term benefits. A gradual improvement of existing infrastructure, and not a big-bang, is realistic. Both vertical implementation, by product; or horizontal, by business unit or country, is possible, or a combination of the two.
The usage of an external partner or supplier will allow the financial organization to utilize IT resources on other initiatives, bypass political obstacles, and obtain a core banking solution that has been specifically designed for this purpose.

The modernization of a core system will provide the organisation with a solid platform to address the operational risks of future development requirements, such as Basel II, IAS, SEPA regulatory requirements, future project integrations and capital requirements. As financial institutions continue to face increased pressures to streamline their operations and maximise their return on investment, the aging core applications have now come under intense scrutiny. By renewing core systems, financial institutions will be able to reduce heavy IT development and maintenance costs and increase the value of previous front-end system investments.

The main hesitation about replacing current legacy applications is due to the complexity created by the past, and hence the risk associated with replacing existing interfaces and changing the system integration structures.

This risk consists of different elements such as operational-, cost- and return of investment- factors. With today’s new industry trends and new technology as e.g. Service Oriented Architecture and Business Process Management, a coherent integration strategy is possible to construct coupled with application replacements. It is time to get out the broom and sweep up those cobwebs.