While most banks know their core systems are overdue for replacement, the dual obstacles of high cost and high risk are preventing them from taking the plunge.
There’s no mistaking the fact: core systems’ enhancement or replacement is at or near the top of retail bankers’ IT priorities. But more than anything else, two factors stand in the way: risk and cost.
The Banker polled a global sample of retail banks to gauge attitudes and assess approaches to the core banking system question. Questionnaires were sent to 400 retail banks, carved from The Banker’s Top 1000 ranking of the largest banks by Tier 1 capital and filtered to ensure even geographical coverage. A total of 81 replies were received, representing a 20.25% response rate.
The complete findings of the research are represented by charts across the following pages. A number of stand-out observations are worth highlighting.
Client management replaced
Significantly, close to a third of respondents said they had not replaced key elements of their core banking system for more than 10 years. The main exception to this was the client management component, which had been replaced within the past five years in 69% of cases.
The main obstacles preventing replacement are cost and business risk, cited by 44% of respondents in both cases as very important. Seventy per cent of respondents described the risks associated with a core system replacement as very high or high.
Asked what their single greatest retail banking IT priority is, an equal number of respondents put core banking systems replacement and multi-channel distribution technology at the top of the list. Preparing for Basel II and customer relationship management are next in line.
The factors driving IT priorities are, in order of importance:
Banks’ mission critical core systems sit at the centre of their IT priorities, or at least are at the heart of the drivers of these priorities, but it is this importance that makes core systems a yoke of responsibility. Twenty-two per cent of respondents said more than 50% of their IT budget goes to maintaining and enhancing their bank’s core retail system; another 27% said it gobbled up 30%-50% of the budget.
Core banking systems replacement or enhancement is also costly. In 60% of responses, banks said the replacement cost of their core system was more than $5m. In the cases of banks that had not replaced systems in more than 10 years, 83% of respondents said replacement costs would exceed $5m.
Economic uncertainty
Against this backdrop, it is not surprising that two-thirds of respondents said the global economic uncertainty of the past 18 months had made it less likely that they would embark on replacing their core banking system. (Interestingly, 80% of respondents were either very positive or modestly more positive on prospects for retail banking in their region in the next 12 months.)
Implementation of new systems is also time-consuming: 32% of banks said it would take 12-18 months to get a new system up and running; 30% predicted 18 months to two years; and 29% said it would take longer than two years. Again, there was a marked difference in response from banks that had not replaced systems in more than 10 years, with 96% saying a new implementation would take than longer 18 months and 50% saying it would take longer than two years.
The cost-risk equation also had a bearing on the approach to core systems improvement: 52% of respondents said it was unlikely they would opt for full scale replacement; on the flipside 49% said it was likely they would pursue selective component replacement, and 32% of respondents indicated a full-scale core system replacement was likely.
Outsourcing is not a preferred option, according to the research. Just 14% of respondents said it was likely they would go this route, though 44% declared themselves uncertain. More favourable was the creation of an integration layer between front and back-end systems, with half of all respondents saying it was likely they would pursue this approach.
When it comes to choosing a system, functionality was cited near unanimously as very important. Platform, operating system and hardware – in that order – were the variables next considered by banks in their choice of core banking system.
Proven system
On the choice of vendor, the overriding consideration is that a system is proven elsewhere. Banks then consider the supplier’s track record and the risk proposition of the supplier’s system. Professional advice and an existing relationship with a vendor are taken into account; analyst reviews and press reviews appear to serve only as back-up.
Forty-seven per cent of respondents said it was unlikely they would turn to their own in-house IT department to develop a core system solution versus 35% who said they would. In terms of vendor, 50% of respondents said they would look overseas to find their supplier of choice.
In association with CSC
