Little wonder. In Asia Pacific banks surveyed, for example, the expense of maintaining these systems has steadily risen, to where it is not unusual for upkeep to account for 70% of core system costs. Moreover, core systems themselves can account for well over 50% of all IT spending, particularly at second tiers. One of these banks reported its core systems took up a whopping 70%-80% of its IT budget.
Upkeep concerns go beyond the purely financial. “There is a growing scarcity of people with the technical skills needed to maintain [the core banking system], and documentation is often inadequate,” stated one North American IT executive.
Maintaining a pool of technicians with the required expertise in these systems – which often means retaining the engineers who actually wrote the code – becomes increasingly difficult with time. Banks in Japan speak of the 2007 problem, referring to the year when the COBOL-trained generation will start entering retirement.
Another cost can catch up with old systems: instability. Although rare, banks have suffered acute pain related to their core systems. Over the last couple of years two major banks have experienced shutdowns that were directly related to core systems issues. These events cannot be taken lightly.
Redundancy, lack of speed, errors
Typical core banking systems are organised in a product-centric manner, with siloed lines of business. From the standpoint of a branch office worker, that means the same information on one customer may have to be re-keyed multiple times. From the standpoint of a customer, this redundancy can lead to errors. For IT executives in Europe, errors in processing were noted 44% of the time – a disturbingly high figure.
According to branch survey participants, a variety of errors is closely tied to or is the result of core system issues. The survey counted as an “error” frequent or unnecessary delay in the process. This was the most common processing error affecting branch staff, cited by 50% of branch respondents. These delays in process render day-to-day business an ongoing challenge. Inconsistent customer data and incorrect understanding of customer needs are also areas that were frequently cited.
Data entry issues also weigh down branch staff. Widespread re-keying of information is a global phenomenon, affecting all regions in this survey. On a worldwide level, this integration issue was cited 27% of the time by banks. The most severely affected region indicated was Asia Pacific at 32%, followed by North America at 24% and Europe at 22%.
Given a heavy reliance on manual processes that hamper productivity, banks in Asia Pacific indicated they spend 48% of their time on back-office activities. North American and European banks also spend a significant amount of time on back-office activities – 36% and 34% respectively. Rather than focus their efforts on customer-facing activities, branch staff spend more than one-third of their days on back-office activities that could be handled by core systems.
Branch interviewees were quite clear regarding system features they felt needed to be improved. Response time (38%) and integration of different applications (38%) ranked highest on the list of areas to be improved. Response time was of particular concern in Europe (50%), while integration of different applications was the primary concern in Asia/Pacific (41%) and North America (38%).
Understanding customer needs
While IT and business executives have a strong desire to better meet customer needs, so do branch workers. Fifty-four per cent of respondents from Asia Pacific banks feel the way to increase business with current customers would be to better understand their needs. If core systems were more efficient, branch staff would be better positioned to anticipate customer needs and identify potential business opportunities.
A significant percentage of respondents worldwide – 31% – indicated that they did not know what should be sold next to the client. The issue is particularly glaring in North America where 39% of respondents indicated that they did not have access to this information.
Most executives surveyed lucidly articulated strategic goals and shortcomings of their current core systems in achieving these goals. The ability to deliver innovative products, to provide unified account and transaction information to internal users and customers, and to excel at consistent, high-level customer service are mantras of the day.
A significant number of banks around the world are planning a major core replacement over the next three to five years. Even though only 22% of North American banks have replacement plans, 57% are still inclined to transform subsystems such as loans and mortgage servicing. The vast majority of European banks are currently investing in functional area improvements such as payments, securities and management information systems.
Currently, the overwhelming majority of large banks in Europe and Asia/ Pacific are running proprietary systems. However, this percentage will see a slight decline over the next three years as banks move towards vendor provided solutions.
Target architecture
Many banks are using middleware to help deal with the shortcomings of their legacy infrastructures. Some top-tier banks are using hub-and-spoke architectures to integrate duplicate systems resulting from merger activity, or to link the back-end core with subsystems and delivery channels. J2EE-based programmes are increasingly being used by banks in these initiatives. Still middleware has its limits.
“You can’t solve everything with middleware. Middleware can’t handle a product if the core banking system doesn’t have the product to begin with,” says a Japanese IT executive.
A very high proportion of IT group interviewees see a componentised Service-Oriented Architecture (SOA) as a key feature of their target IT state. A number of banks have already started to add components to their architectures. While a few interviewees dismissed SOA as just the latest buzzword, even they subscribe to the goals of a SOA: to enable real-time connectivity and sharing of data across disparate systems, based on a flexible, easily modified infrastructure.
Both the executive and branch surveys point to considerable problems with core systems that hamper competitiveness. Flexibility, cost and integration are among the top concerns of banks around the world.
Branch staff grapple with problems tied to core systems: excessive time spent on back-office activities; lack of sales tools to anticipate customer needs and choose the next product to sell; unnecessary processing errors and excessive re-keying of information; response time and integration of different applications.
There is a clear understanding of the destination – what future core systems should look like and deliver – but few have a technology roadmap to get there.
Some banks around the world appear to have unrealistic fears regarding core systems replacement. Risks, costs, past failures and other factors have built up levels of apprehension.
Banks in Asia Pacific, Europe and North America have taken divergent strategies in terms of core systems. European banks have the greatest intent to improve and potentially replace core systems.
While many North American banks are replacing core systems, a majority have invested in work-arounds and extensions of old systems for short-term relief. CHART3: EXECUTIVE SURVEY
