Tier 1 banks that do not replace core banking systems risk losing out to their competitors – especially in the emerging markets – and falling foul of the regulators. The process may be long and arduous but modular replacement can relieve the pain. Dan Barnes investigates.

The first steps toward core banking system replacement are being made in the Tier 1 banks of developed markets. In recent years, the purchase of core systems has been confined to smaller scale banks and to banks in emerging markets. Core system replacement has long been on the cards for the Tier 1 banks but a combination of increasing competition and regulation are now driving the change.

While the shift is expected to be slow – a modular implementation approach is favoured – it is inevitable. In emerging markets, banks are already ‘leapfrogging’ technologies by taking the latest systems, thus gaining advantage in service levels and cost efficiencies. This provides further pressure, but for major global banks there is still enough cost involved – both financial and risk-based – combined with faith in legacy systems, to resist any rapid changes.

Amit Dua, group manager, Finacle Europe sales at Infosys, says that emerging markets offer some great opportunities for global players if local banks do not step up to the challenge. “In some of the markets, like Russia, China, India and some eastern European markets – like Austria, the Czech Republic, Hungary and Poland – retail banking has boomed. Now it is becoming more competitive. Foreign banks are entering each of these markets, including the Citigroups and ABN AMROs of the world,” he says.

Rising to current challenges

To compete effectively in such a market requires differentiation. Technology offers the possibility of achieving this, Mr Dua says. “Credit spending and consumer spending have significantly taken off. To meet this opportunity, you need retail systems that are very different from the older core banking systems that existed.”

The opportunity to jump ahead of the game through implementation is clear. “In a lot of the markets where we work, such as Russia and the Far East, there is a real cultural drive to leapfrog the market,” says Ian Benn, head of marketing at Misys Retail Banking Systems. “They see this as an opportunity to skip a couple of generations of technology. Just as in some countries they have not bothered with fixed phone lines, they have gone straight to mobile – the same is occurring with banking systems.”

Andreas Andreades, CEO of core systems supplier Temenos, cites Thailand as one example of a market that is resisting the pressure from global players through successful use of technology and innovation. Although he points out that it is not typical of other emerging areas, due to its unusually high level of technology development in recent years, it provides a model for others to follow. “If I go to one of the big Thai banks, to a branch, the products that I’m being offered are not inferior one iota to the products I would get in Europe. I would get product innovation, I would get customer service, I would get technology. I would get a good view of my account via the web, via my mobile phone. I could get innovative card products that may not be available in the West.”

Clearly, such service pushes up the boundary for new entrants “Can an HSBC or a Citibank or a Deutsche walk into the Thai market today? To be honest I don’t think so. They would have to try much harder than 10 years ago. How long will it take for the Russian banks?” asks Mr Andreades.

Quality of service

The real gains for top line growth can be driven by the ability to provide strong customer service through customised systems. David Hamilton-Matthews, vice-president, product strategy at Fiserv, sees the push toward improved customer service as a key driver to core system purchase. “To be a truly customer-centric institution, the bank should be able to price an entire product portfolio based on the customer relationship, they should be able to not only sell, but also service a financial services package as a single unit and not as individual artefacts scattered across the processing systems of the core,” he says.

He sees investment in customer relationship management systems and middleware as being insufficient to deal with the fundamental issue that legacy core systems create for improved service. “Products are processed in silos and cannot be integrated into lifestyle or life-stage packages beyond the initial origination,” he says.

Mr Dua confirms this: “There used to be no concept of a customer information file at the centre of a system. The customer-centricity was never present. We talk about this concept but thought was never given [to it] because the systems were not designed for a retail marketing approach. Banking today is significantly concerned with marketing, it’s as savvy as selling a consumer product. People who sit in the well-run banks today are excellent marketers and marketers need tools. The tool here is information.”

Satisfying the regulators

Where competition is not enough of a carrot for replacement, regulation can often provide the stick. Mr V Senthil Kumar, European CEO of i-flex, the core banking technology provider, stresses that the core systems that banks deploy to assist in compliance are vital if the banks are to satisfy regulators. “Different regulations are causing different problems. Know your customer (KYC) is driving every single retail bank around the world nuts! If just one application is not verified KYC compliant then the whole bank can be blamed,” he says.

Compliance solution provider Mantas has recently partnered with Fiserv and Temenos to include its technology with their core systems. Simon Moss, CEO of Mantas says that the ‘compliance wall’ is now higher in some places than in others, depending on the level of investment in specific geographies and organisations. Organised criminals will always take the path of least resistance and so those banks that have not invested in preventive measures are likely to become targets. To avoid regulatory problems, enterprise compliance has to be driven from the core. He notes: “This wall is not just of varying heights between institutions it also has varying heights within the institutions themselves.”

Mr Moss believes that, over the next five years, “you’re going to see a lot more firms going out of business” because they fail to perceive the threat and realise the work that will be involved. “A lot of the real issues don’t happen in the city of London, they don’t happen in New York, they happen in emerging markets but it’s still the same institution. You have to have multi-business, multi-geography compliance irrespective of where it’s implemented,” he says.

Where legacy systems can fall down in this area is not due to the age of the technology or the data but, more importantly, the distribution of the data and the bank’s ability to source it. “The challenge is this: the distribution, location and thoroughness of that data. And it’s really linearly correlated. If you have three data sources or one data source for all your clients, that is great. If you have 150 you’re going to have some challenges,” says Mr Moss. Through centralising this source, modern core systems actively assist compliance.

Modular buy-in

In achieving the go-ahead from the board to make such a purchase, the banks are seeking modular replacement: taking pieces of the system bit by bit. Mr Benn says: “Historically it’s been very difficult for a CIO in any industry to say ‘I want to spend one million or 10 million on a new system and when we go live it’s going to do the same thing as the one we’ve already got’.”

Mr Andreades confirms that to avoid risk and expense banks should take on systems in a modular manner. “[Banks] have been talking about component-based systems for some time. The real benefit to a Tier 1 bank is that it can digest the core systems replacement more easily. It also addresses the risk issue. A CEO is more likely to sign off a piece-by-piece core replacement than a big bang, half-a-billion-dollar project,” he says.

For Mr Hamilton-Matthews the purchasing approach for these systems is being dictated by a focus on specific areas of retail business. “We are anticipating a shift in buying behaviour. We believe that larger institutions will focus on specific areas of business pain in transforming their core systems topology,” he says.

“As banks pursue growth in segments of the retail financial services market – such as consumer lending, mortgage financing, investments, etc – this will lead to modular-style replacement programmes designed to enhance the institutions’ competitiveness in a given segment. This modular buying style will require a fundamental change in core-systems architecture.”

Legacy systems

There are still strong attachments to legacy systems and mainframes, however. David Field, managing director of consultants Rule Financial, has worked with retail banks in this area and his experience with technology professionals in the banks leads him to believe that they are still seeing large benefits to the older systems. “Mainframes still give you system management tools that open systems can’t. You may have to take down a piece of your banking network because UNIX doesn’t allow you to tune or take disk drives off-line – it doesn’t have mainframe quality service delivery tools,” he says.

2685.photo.jpg

David Field, managing director of consultants Rule Financial

“It is like a religion,” says Mr Kumar. “Each of the communities has its own balances and beliefs. So in Tier 1, like any enterprise, they have their own beliefs. The mainframe is a religion. UNIX is a religion. The applications on them have their own benefits.”

Although Mr Andreades accepts that “replacement projects are long, they’re risky, they’re expensive”, he also sees very little choice in the matter, as competitiveness overtakes cost-cutting. “Using a COBOL-based mainframe of the 1970s, a bank will run effectively. It may not compete effectively but it will keep running,” he says.

Time to make a start

Jim Wilson, division president of Fidelity Information Systems, sees this realisation hitting home, with a “significant” bank in Germany that is optimistic about core system replacement and the business line replacement approach being looked at in the UK. “I gather from the discussions we are having with our prospects that you can get to a point where you don’t invest – or you have minimal investment – for a certain period of time and you can find yourself in a stymied position. This cost cutting in general, and neglect of IT infrastructure spend specifically, has been a fact of life for bankers and their supporting IT organisations. But they have now come to the realisation that the time has come to begin some of that spend.”

Mr Wilson’s experience is that through replacement in a single line of business, the return on investment can be demonstrated to achieve buy-in at the highest level.

“Now the board is realising that the bank can’t get new products to market as quickly as they would like to, there are new channels that they want to connect to that would provide new service offerings to their customers. Unless they make a change, they will fall behind those who are progressive enough to make that change.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter