Leading financial institutions that put off tough decisions about core IT systems may lose their competitive edge. That’s the conclusion of an ambitious global survey of senior bank executives and bank branch staff sponsored by Accenture and SAP.
“The most sophisticated banks have a high awareness of core banking systems,” says Jean-Marc Ollagnier, global managing partner of Accenture’s Financial Services Solutions Group. “The winners in banking must differentiate in the marketplace, but paradoxically simplify on the inside. In many cases, that means replacing some unnecessary/redundant and complex IT systems. They also need excellence in execution on a day-to-day basis as well as the implementation of their strategic agenda.”
Christian Goeckenjan, vice-president of Financial Services at SAP AG, notes that most banks run on technology from the 1970s and 1980s – “a very inflexible, costly and un-integrated environment”. “There is an awful lot to do,” Mr Goeckenjan says. “Small, ad hoc changes are not keeping pace. This global survey makes a compelling case that we’ve got to redefine core banking systems.”
But while the executive survey found widespread dissatisfaction and unease with aging core systems that underpin nearly all banks and process millions of transactions hourly, it found stark differences in how banks and regional markets are dealing with the inexorable winds of change.
Some banks are aggressively seeking to harness the power of newer IT architecture that is fast, flexible, allows “one version of the truth” throughout a system in real time, and drives customer penetration and market share. They are reaping efficiency gains as well. Large banks that have transformed core systems successfully have, in addition to gaining flexibility and market share, reduced operating expenses by as much as US$250m annually.
Others, for now, are staying with current systems. Indeed, some bank executives confessed to a degree of dread when discussing the topic of changing a core banking system. When asked whether there were any plans to change one institution’s complicated, customised core banking system, an executive replied, “God, I hope not.” Another said: “It’s like a pile-up in a closet. You don’t know what you’re going to find when you start digging.”
The survey was sponsored by Accenture, the global management consulting, technology services and outsourcing company, and SAP, the world’s leading provider of business software solutions, in order to have a better understanding of market conditions. The European Financial Management and Marketing Association (EFMA) also served as a co-operating sponsor.
While other surveys have touched on core banking system issues, this was unique in its global reach, its comparison of the views of business and IT executives versus those of branch employees, and its review of the business impact of IT decisions. It was structured as separate, parallel surveys, conducted from March to July 2005.
The first targeted 147 senior bank executives, including heads of lines of business, chief information officers and their direct reports. Of these, 45% were information technology executives and 55% were line-of-business executives. The executive survey covered 70 banks, including 43 of the world’s largest 100.
The second survey focused on the front lines of banking, involving 1300 interviews with bank branch staff including branch managers, tellers and customer service representatives.
All told, the survey was conducted in 17 countries: Belgium, The Netherlands, Italy, France, Germany, Portugal, Norway, Sweden, Finland, Spain and the United Kingdom in Europe; Canada and the US; and Australia, China, Japan and South Korea in the Asia/Pacific region.
The survey found disagreement over the very definition of core banking. For the purposes of the study, core banking was defined as the sum of all IT components allowing banks to manage basic financial products and services, including data on clients, deposit accounts, loans, mortgages, payment transactions and credit cards.
Branch automation and other delivery channels, as well as customer relationship management (CRM) systems were excluded from the definition of core banking systems.
Business executives tended to take a more expansive view to encompass CRM and the delivery channels. IT executives usually provided definitions matching the one used in the survey.
But there’s little mystery on the shortcomings of core banking systems. When asked about their current problems with core banking systems, the No. 1 item cited by surveyed banks was lack of flexibility (70%).
Flexibility and integration
To understand the importance of flexibility, consider the CIO of a top-tier North American bank who complained that it takes up to 18 months to roll out new products, due to the outdated architecture of a core banking system. A more up-to-date system could get the product to market in days or weeks.
In Europe, a bank executive noted: “The main problem is that our systems were designed for transactions and now we are asking them to give information.”
A similar complaint was heard in Asia. “The system is a big obstacle to developing new products,” said one IT executive from a bank in China. “For each new product we have to design new code.”
There are two basic reasons many core banking systems are inflexible:
• They’re old and have the wrong architecture for the 21st century.
In North America, nearly all the banks surveyed have core banking systems over 15 years old, and a majority have systems dating back to the 1970s through mid-1980s. They typically run on Assembler or COBOL code and were built around products, not customers. Many Asia Pacific banks and some in Europe similarly rely on stable but inflexible workhorses built as long as 30 years ago.
• They’re customised – all too customised.
Heavy customisation stems from chasing one laudable goal or another, but after a number of years, the net result is a system highly resistant to change. Even migrating to a newer version of the same software can become a multi-million-dollar undertaking. “We’ve customised ourselves into a box,” lamented one North American IT executive.
Built in successive layers like geologic strata, these wonders of customisation are enormously complicated. So complicated, said one European IT manager, “Nobody has knowledge of the entire information system, or even of a sufficiently significant part of it.”
Aging technology that has been customised to the hilt, not surprisingly, is hard to mesh with newer technology. That was confirmed as another top concern in the survey. Of those questioned, 47% rated “integration” as a top concern with current systems.
